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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
For the transition period from __________ to __________

Commission File Number: 000-51402
––––––––––––––––––––––––––––––––––––––––––––––––––––––––––
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter) 
 
Federally chartered corporation
 
04-6002575
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. employer identification number)
 
 
 
 
 
 
 
 
 
800 Boylston Street,
Boston
MA
 
02199
 
 
(Address of principal executive offices)
 
(Zip code)
 
(617) 292-9600
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer,” "smaller reporting company," and emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer o
 
 
 
 
 
 
Non-accelerated filer
x
 
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 A Stock, par value
$100
 
zero
Class B Stock, par value
$100
 
17,295,615


Federal Home Loan Bank of Boston
Form 10-Q
Table of Contents

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





2
Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
(unaudited)
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Cash and due from banks
$
20,139

 
$
10,431

Interest-bearing deposits
327,851

 
593,199

Securities purchased under agreements to resell
3,900,000

 
6,499,000

Federal funds sold
—

 
1,500,000

Investment securities:
 
 
 

Trading securities
1,536,880

 
163,038

Available-for-sale securities - includes $3,025 pledged as collateral at December 31, 2018 that may be repledged
6,707,850

 
5,849,944

Held-to-maturity securities - includes $692 and $3,456 pledged as collateral at September 30, 2019, and December 31, 2018, respectively that may be repledged (a)
1,120,439

 
1,295,023

Total investment securities
9,365,169

 
7,308,005

Advances
38,539,591

 
43,192,222

Mortgage loans held for portfolio, net of allowance for credit losses of $500 at September 30, 2019, and December 31, 2018
4,459,120

 
4,299,402

Accrued interest receivable
109,324

 
112,751

Derivative assets, net
122,522

 
22,403

Other assets
80,244

 
55,904

Total Assets
$
56,923,960

 
$
63,593,317

LIABILITIES
 

 
 

Deposits
 
 
 
Interest-bearing
$
565,099

 
$
448,247

Non-interest-bearing
60,774

 
26,631

Total deposits
625,873

 
474,878

Consolidated obligations (COs):
 
 
 

Bonds
25,864,142

 
25,912,684

Discount notes
26,896,215

 
33,065,822

Total consolidated obligations
52,760,357

 
58,978,506

Mandatorily redeemable capital stock
17,107

 
31,868

Accrued interest payable
128,489

 
112,043

Affordable Housing Program (AHP) payable
83,046

 
83,965

Derivative liabilities, net
12,027

 
255,800

Other liabilities
60,634

 
48,898

Total liabilities
53,687,533

 
59,985,958

Commitments and contingencies (Note 18)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 20,317 shares and 25,289 shares issued and outstanding at September 30, 2019, and December 31, 2018, respectively
2,031,651

 
2,528,854

Retained earnings:
 
 
 
Unrestricted
1,085,463

 
1,084,342

Restricted
335,110

 
310,670

Total retained earnings
1,420,573

 
1,395,012

Accumulated other comprehensive loss
(215,797
)
 
(316,507
)
Total capital
3,236,427

 
3,607,359

Total Liabilities and Capital
$
56,923,960

 
$
63,593,317

_______________________________________
(a)   Fair values of held-to-maturity securities were $1,333,568 and $1,528,929 at September 30, 2019, and December 31, 2018, respectively.

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


3
Table of Contents

FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
(unaudited)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
INTEREST INCOME
 
 
 
 
 
 
 
Advances
$
204,511

 
$
226,546

 
$
676,257

 
$
617,916

Prepayment fees on advances, net
329

 
(2
)
 
31,066

 
161

Securities purchased under agreements to resell
28,121

 
20,865

 
104,192

 
44,494

Federal funds sold
8,603

 
29,329

 
46,158

 
81,126

Investment securities:
 
 
 
 
 
 
 
Trading securities
7,918

 
1,934

 
12,165

 
6,947

Available-for-sale securities
27,657

 
35,532

 
70,603

 
113,531

Held-to-maturity securities
16,396

 
19,525

 
52,287

 
57,622

Total investment securities
51,971

 
56,991

 
135,055

 
178,100

Mortgage loans held for portfolio
36,990

 
33,967

 
111,946

 
100,774

Other
7,014

 
1,122

 
16,097

 
2,270

Total interest income
337,539

 
368,818

 
1,120,771

 
1,024,841

INTEREST EXPENSE
 
 
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
 
 
Bonds
152,814

 
142,086

 
458,346

 
397,843

Discount notes
126,465

 
147,463

 
455,657

 
385,804

Total consolidated obligations
279,279

 
289,549

 
914,003

 
783,647

Deposits
1,638

 
1,337

 
5,252

 
3,600

Mandatorily redeemable capital stock
248

 
472

 
814

 
1,427

Other borrowings
—

 
—

 
27

 
38

Total interest expense
281,165

 
291,358

 
920,096

 
788,712

NET INTEREST INCOME
56,374

 
77,460

 
200,675

 
236,129

Provision for credit losses
48

 
—

 
63

 
6

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
56,326

 
77,460

 
200,612

 
236,123

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
Net other-than-temporary impairment losses on investment securities, credit portion
(411
)
 
(71
)
 
(828
)
 
(407
)
Litigation settlements
3

 
12,769

 
3

 
12,769

Loss on early extinguishment of debt
(164
)
 
—

 
(10,029
)
 
—

Service fees
3,438

 
2,719

 
9,731

 
7,538

Net unrealized (losses) gains on trading securities
(162
)
 
(714
)
 
892

 
(3,702
)
Net (losses) gains on derivatives and hedging activities
(657
)
 
487

 
(1,071
)
 
2,085

Other
23

 
(82
)
 
311

 
340

Total other income (loss)
2,070

 
15,108

 
(991
)
 
18,623

OTHER EXPENSE
 
 
 
 
 
 
 
Compensation and benefits
10,151

 
10,309

 
30,338

 
31,085

Other operating expenses
5,928

 
5,818

 
18,464

 
17,992

Federal Housing Finance Agency (the FHFA)
989

 
832

 
2,967

 
2,593

Office of Finance
924

 
911

 
2,541

 
2,538

Other
4,679

 
2,788

 
9,437

 
8,090

Total other expense
22,671

 
20,658

 
63,747

 
62,298

INCOME BEFORE ASSESSMENTS
35,725

 
71,910

 
135,874

 
192,448

AHP assessments
3,597

 
7,238

 
13,669

 
19,387

NET INCOME
$
32,128

 
$
64,672

 
$
122,205

 
$
173,061

 


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

4
Table of Contents

FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
(unaudited)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
32,128

 
$
64,672

 
$
122,205

 
$
173,061

Other comprehensive income:
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
14,367

 
(8,690
)
 
84,725

 
(54,280
)
Net noncredit portion of other-than-temporary impairment recoveries on held-to-maturity securities
 
6,021

 
7,133

 
18,537

 
22,155

Net unrealized gains (losses) relating to hedging activities
 
1,002

 
3,526

 
(2,903
)
 
17,229

Pension and postretirement benefits
 
175

 
(392
)
 
526

 
(1,177
)
Total other comprehensive income (loss)
 
21,565

 
1,577

 
100,885

 
(16,073
)
Comprehensive income
 
$
53,693

 
$
66,249

 
$
223,090

 
$
156,988


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

5
Table of Contents


FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 and 2018
(dollars and shares in thousands)
(unaudited)


 
 
 
 
 
 
 
 
 
Capital Stock Class B – Putable
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, JUNE 30, 2018
24,801

 
$
2,480,110

 
$
1,067,943

 
$
288,994

 
$
1,356,937

 
$
(344,590
)
 
$
3,492,457

Comprehensive income
 
 
 
 
51,738

 
12,934

 
64,672

 
1,577

 
66,249

Proceeds from sale of capital stock
4,356

 
435,553

 
 
 
 
 
 
 
 
 
435,553

Repurchase of capital stock
(4,388
)
 
(438,787
)
 
 
 
 
 
 
 
 
 
(438,787
)
Cash dividends on capital stock
 
 
 
 
(35,143
)
 
 
 
(35,143
)
 
 
 
(35,143
)
BALANCE, SEPTEMBER 30, 2018
24,769

 
$
2,476,876

 
$
1,084,538

 
$
301,928

 
$
1,386,466

 
$
(343,013
)
 
$
3,520,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, JUNE 30, 2019
19,953

 
$
1,995,252

 
$
1,087,641

 
$
328,685

 
$
1,416,326

 
$
(237,362
)
 
$
3,174,216

Comprehensive income
 
 
 
 
25,703

 
6,425

 
32,128

 
21,565

 
53,693

Proceeds from sale of capital stock
5,750

 
574,991

 
 
 
 
 
 
 
 
 
574,991

Repurchase of capital stock
(5,386
)
 
(538,592
)
 
 
 
 
 
 
 
 
 
(538,592
)
Cash dividends on capital stock
 
 
 
 
(27,881
)
 
 
 
(27,881
)
 
 
 
(27,881
)
BALANCE, SEPTEMBER 30, 2019
20,317

 
$
2,031,651

 
$
1,085,463

 
$
335,110

 
$
1,420,573

 
$
(215,797
)
 
$
3,236,427


BALANCE, DECEMBER 31, 2017
22,837

 
$
2,283,721

 
$
1,041,033

 
$
267,316

 
$
1,308,349

 
$
(326,940
)
 
$
3,265,130

Comprehensive income
 
 
 
 
138,449

 
34,612

 
173,061

 
(16,073
)
 
156,988

Proceeds from sale of capital stock
13,115

 
1,311,464

 
 
 
 
 
 
 
 
 
1,311,464

Repurchase of capital stock
(11,180
)
 
(1,118,018
)
 
 
 
 
 
 
 
 
 
(1,118,018
)
Shares reclassified to mandatorily redeemable capital stock
(3
)
 
(291
)
 
 
 
 
 
 
 
 
 
(291
)
Cash dividends on capital stock
 
 
 
 
(94,944
)
 
 
 
(94,944
)
 
 
 
(94,944
)
BALANCE, SEPTEMBER 30, 2018
24,769

 
$
2,476,876

 
$
1,084,538

 
$
301,928

 
$
1,386,466

 
$
(343,013
)
 
$
3,520,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2018
25,289

 
$
2,528,854

 
$
1,084,342

 
$
310,670

 
$
1,395,012

 
$
(316,507
)
 
$
3,607,359

Cumulative effect of change in accounting principle
 
 
 
 
175

 

 
175

 
(175
)
 
—

Comprehensive income
 
 
 
 
97,765

 
24,440

 
122,205

 
100,885

 
223,090

Proceeds from sale of capital stock
14,115

 
1,411,495

 
 
 
 
 
 
 
 
 
1,411,495

Repurchase of capital stock
(19,087
)
 
(1,908,698
)
 
 
 
 
 
 
 
 
 
(1,908,698
)
Cash dividends on capital stock
 
 
 
 
(96,819
)
 
 
 
(96,819
)
 
 
 
(96,819
)
BALANCE, SEPTEMBER 30, 2019
20,317

 
$
2,031,651

 
$
1,085,463

 
$
335,110

 
$
1,420,573

 
$
(215,797
)
 
$
3,236,427


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




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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)


 
For the Nine Months Ended September 30,
 
2019
 
2018
OPERATING ACTIVITIES
 

 
 

Net income
$
122,205

 
$
173,061

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation and amortization
(2,678
)
 
(5,205
)
Provision for credit losses
63

 
6

Net change in derivatives and hedging activities
(339,823
)
 
62,198

Net other-than-temporary impairment losses on investment securities, credit portion
828

 
407

Loss on early extinguishment of debt
10,029

 
—

Other adjustments
4,306

 
4,057

Net change in:
 

 
 
Market value of trading securities
(892
)
 
3,702

Accrued interest receivable
3,427

 
(8,366
)
Other assets
(3,578
)
 
(19,509
)
Accrued interest payable
16,445

 
28,618

Other liabilities
(622
)
 
9,183

Total adjustments
(312,495
)
 
75,091

Net cash (used in) provided by operating activities
(190,290
)
 
248,152

 
 
 
 
INVESTING ACTIVITIES
 

 
 

Net change in:
 

 
 

Interest-bearing deposits
173,526

 
(442,598
)
Securities purchased under agreements to resell
2,599,000

 
(150,000
)
Federal funds sold
1,500,000

 
(2,200,000
)
Loans to other FHLBanks
—

 
400,000

Trading securities:
 

 
 

Proceeds
133,757

 
767,897

Purchases
(1,506,707
)
 
(749,072
)
Available-for-sale securities:
 

 
 

Proceeds
1,323,624

 
979,365

Purchases
(2,019,222
)
 
(3,150
)
Held-to-maturity securities:
 

 
 

Proceeds
209,055

 
283,819

Advances to members:
 

 
 

Repaid
381,261,806

 
508,490,355

Originated
(376,495,340
)
 
(511,902,406
)
Mortgage loans held for portfolio:
 

 
 

Proceeds
367,755

 
320,586

Purchases
(534,974
)
 
(517,010
)
Other investing activities
(518
)
 
1,907

Net cash provided by (used in) investing activities
7,011,762

 
(4,720,307
)
 
 
 
 
FINANCING ACTIVITIES
 

 
 

Net change in deposits
150,755

 
9,013

Net payments on derivatives with a financing element
(73,773
)
 
—

Net proceeds from issuance of consolidated obligations:
 

 
 


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Discount notes
109,846,074

 
149,554,769

Bonds
8,410,772

 
8,128,518

Payments for maturing and retiring consolidated obligations:
 

 
 

Discount notes
(116,012,506
)
 
(143,869,342
)
Bonds
(8,524,303
)
 
(9,661,015
)
Proceeds from issuance of capital stock
1,411,495

 
1,311,464

Payments for repurchase of capital stock
(1,908,698
)
 
(1,118,018
)
Payments for redemption of mandatorily redeemable capital stock
(14,761
)
 
(4,346
)
Cash dividends paid
(96,819
)
 
(94,947
)
Net cash (used in) provided by financing activities
(6,811,764
)
 
4,256,096

Net increase (decrease) in cash and due from banks
9,708

 
(216,059
)
Cash and due from banks at beginning of the period
10,431

 
261,673

Cash and due from banks at end of the period
$
20,139

 
$
45,614

Supplemental disclosures:
 
 
 
Interest paid
$
929,581

 
$
754,566

AHP payments
$
11,995

 
$
13,384

Noncash receipt of trading securities
$
—

 
$
7,130

Noncash transfers of mortgage loans held for portfolio to other assets
$
1,555

 
$
1,413

Lease liabilities arising from obtaining right-of-use assets
$
12,571

 
$
—



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


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FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS

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. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2019. These interim financial statements do not include all the information and footnotes required by GAAP for complete annual financial statements and accordingly should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (the SEC) on March 22, 2019 (the 2018 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.

Note 2 — Summary of Significant Accounting Policies

As of September 30, 2019, we have not made any significant changes to the significant accounting policies described in Item 8 — Financial Statements and Supplementary Data — Note 2 — Summary of Significant Accounting Policies in the 2018 Annual Report other than described below. These changes relate to the Financial Accounting Standards Board (FASB) guidance that became effective January 1, 2019 for Targeted Improvements to Accounting for Hedging Activities as well as for Leases. See Note 3 — Recently Issued and Adopted Accounting Guidance for additional information.

Investment Securities

Available-for-sale. We classify certain investments that are not classified as held-to-maturity or trading as available-for-sale and carry them at fair value. Changes in fair value of available-for-sale securities not being hedged by derivatives, or in an economic hedging relationship, are recorded in other comprehensive income (loss) as net unrealized gains (losses) on available-for-sale securities. For available-for-sale securities that have been hedged under fair-value hedge designations, we record the portion of the change in the fair value of the investment related to the risk being hedged in available-for-sale interest income together with the related change in the fair value of the derivative. Prior to January 1, 2019, this amount was recorded in other income as net gains (losses) on derivatives and hedging activities. The remainder of the change in the fair value of the investment is recorded in other comprehensive income (loss) as net unrealized gains (losses) on available-for-sale securities.

Advances

Advance Modifications. In cases in which we fund a new advance concurrently with or within a short period of time of the prepayment of an existing advance by the same member, we evaluate whether the new advance meets the accounting criteria to qualify as a modification of the existing advance or whether it constitutes a new advance. We compare the present value of cash flows on the new advance with the present value of cash flows remaining on the existing advance. If there is at least a 10 percent difference in the present value of cash flows or if we conclude the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the advance's original contractual terms, the advance is accounted for as a new advance. In all other instances, the new advance is accounted for as a modification.

If a new advance qualifies as a modification of the existing advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized to interest income over the life of the modified advance using the level-yield method. This amortization is recorded in advance-interest income. If the modified advance is hedged, changes in fair value are recorded after the amortization of the basis adjustment in advance interest income. Prior to January 1, 2019, this amortization resulted in offsetting amounts being recorded in net interest income and net gains (losses) on derivatives and hedging activities in other income.

For prepaid advances that were hedged and meet the hedge-accounting requirements, we terminate the hedging relationship upon prepayment and record the prepayment fee net of the hedging fair-value adjustment in the basis of the advance as advance-interest income. If we fund a new advance to a member concurrent with or within a short period of time after the prepayment of a previous advance to that member, we evaluate whether the new advance qualifies as a modification of the original hedged advance. If the new advance qualifies as a modification of the original hedged advance, the hedging fair-value adjustment and the prepayment fee are included in the carrying amount of the modified advance and are amortized in interest

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income over the life of the modified advance using the level-yield method. If the modified advance is also hedged and the hedge meets the hedging criteria, the modified advance is marked to fair value after the modification, and subsequent fair-value changes are recorded in advance interest income. Prior to January 1, 2019, subsequent fair value changes were recorded in other income as net gains (losses) on derivatives and hedging activities.

If a new advance does not qualify as a modification of an existing advance, prepayment of the existing advance is treated as an advance termination and any prepayment fee, net of hedging adjustments, is recorded to advance-interest income in the statement of operations.

Derivatives

Accounting for Fair-Value and Cash-Flow Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for fair-value or cash-flow hedge accounting. For cash-flow hedges, we measure effectiveness using the hypothetical derivative method, which compares the cumulative change in fair value of the actual derivative designated as the hedging instrument to the cumulative change in fair value of a hypothetical derivative having terms that identically match the critical terms of the hedged forecasted transaction.

Derivatives that are used in fair-value hedges are typically executed at the same time as the hedged items, and we designate the hedged item in a qualifying hedge relationship as of the trade date. We then record the changes in fair value of the derivative and the hedged item beginning on the trade date. Beginning January 1, 2019, we adopted new hedge accounting guidance which, among other things, impacts the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges as follows:

•
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.
•
Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge are recorded in other comprehensive income (loss), a component of capital, until the hedged transaction affects earnings.

Prior to January 1, 2019, for both fair-value and cash-flow hedges, any hedge ineffectiveness (which represented 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 or the variability in the cash flows of the forecasted transaction attributable to the hedged risk) was recorded in non-interest income as net gains (losses) on derivatives and hedging activities.

Premises, Software, Equipment and Leases

We record premises, software, and equipment at cost less accumulated depreciation and amortization and compute depreciation on a straight-line basis over estimated useful lives ranging from three years to 10 years. We amortize leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. We capitalize improvements and major renewals but expense ordinary maintenance and repairs when incurred. We include gains and losses on disposal of premises, software, and equipment in other income (loss) on the statement of operations. The cost of purchased software and certain costs incurred in developing computer software for internal use are capitalized and amortized over future periods.

We lease office space and office equipment to run our business operations. For leases with a term of 12 months or less, we have made an accounting policy election to not recognize lease right-of-use assets and lease liabilities. At September 30, 2019, we included in the statement of condition $10.9 million of lease right-of-use assets in other assets as well as $11.1 million of lease liabilities in other liabilities. We have recognized lease costs in the other operating expense line of the statement of operations of $646,000 and $1.9 million for the three and nine months ended September 30, 2019.

Note 3 — Recently Issued and Adopted Accounting Guidance

Effective January 1, 2019

Inclusion of the Overnight Indexed Swap Rate Based on the Secured Overnight Financing Rate (SOFR) as a Benchmark Interest Rate for Hedge Accounting Purposes. On October 25, 2018, the FASB issued amended guidance to permit use of the overnight-index swap (OIS) rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes. This

10
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guidance became effective for us on January 1, 2019. Upon adoption, SOFR became an eligible benchmark interest rate which we may elect to apply to future hedge relationships.

Targeted Improvements to Accounting for Hedging Activities. 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. 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 of how changes in the benchmark interest rate alone 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;
•
For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, an entity can designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method) into a hedging relationship; and
•
An entity can perform subsequent assessments of hedge effectiveness qualitatively in instances where initial quantitative testing is required.

We adopted this guidance effective January 1, 2019. For all cash-flow hedges existing on the date of adoption, this guidance was applied through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the year of adoption. The amended presentation and disclosure guidance were applied prospectively; prior period comparative financial information has not been reclassified to conform to current presentation. The adoption of this guidance did not have a material effect on our financial condition, results of operations, or cash flows. See Note 2 — Summary of Significant Accounting Policies and Note 11 — Derivatives and Hedging Activities for additional information.

Leases. On February 25, 2016, the FASB issued guidance that requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. In particular, 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. However, 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. The guidance became effective for us on January 1, 2019. Upon adoption of the new guidance, we recognized right-of-use assets and lease liabilities of approximately $11.9 million and $12.5 million, respectively, on the statement of condition. See Note 2 — Summary of Significant Accounting Policies for additional information.

Becoming effective January 1, 2020

Financial Instruments - Credit Losses. 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 over the contractual term of the financial asset(s). The guidance also requires, among other things, that we:

•
Reflect in the statement of operations 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.

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•
Determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are 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.
•
Record credit losses relating to available-for-sale 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.
•
Further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination.

This guidance is effective for us for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018; however, we do not intend to adopt the new guidance early. This guidance is required to 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. In addition, entities are required to use a prospective transition approach for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination and for debt securities for which an other-than-temporary impairment had been recognized before the effective date.
The overall effect on our financial condition, results of operations, and cash flows will depend upon the composition of our financial assets held at the date of adoption as well as the economic conditions and forecasts at that time. However, based on our preliminary assessment, the adoption of this guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows.
Note 4 — Trading Securities

Table 4.1 - Trading Securities by Major Security Type
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Corporate bonds
$
6,211

 
$
6,102

U.S. Treasury obligations
1,508,289

 
—

 
1,514,500

 
6,102

 
 
 
 
Mortgage backed securities (MBS)
 

 
 
U.S. government-guaranteed – single-family
4,371

 
5,344

Government sponsored enterprise (GSE) – single-family
96

 
148

GSE – multifamily
17,913

 
151,444

 
22,380

 
156,936

Total
$
1,536,880

 
$
163,038



Net unrealized gains or losses on trading securities for the nine months ended September 30, 2019 and 2018, amounted to net gains of $892 thousand and net losses of $3.7 million, respectively.

We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.

Note 5 — Available-for-Sale Securities


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Table 5.1 - Available-for-Sale Securities by Major Security Type
(dollars in thousands)

 
September 30, 2019
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
State housing-finance-agency obligations (HFA securities)
$
59,720

 
$
—

 
$
(3,855
)
 
$
55,865

Supranational institutions
440,326

 
—

 
(15,216
)
 
425,110

U.S. government-owned corporations
339,744

 
—

 
(33,785
)
 
305,959

GSE
136,707

 
—

 
(8,612
)
 
128,095

 
976,497

 
—

 
(61,468
)
 
915,029

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
63,632

 
10

 
(1,650
)
 
61,992

U.S. government guaranteed – multifamily
318,310

 
—

 
(1,425
)
 
316,885

GSE – single-family
2,889,264

 
6,585

 
(12,164
)
 
2,883,685

GSE – multifamily
2,528,380

 
4,473

 
(2,594
)
 
2,530,259

 
5,799,586

 
11,068

 
(17,833
)
 
5,792,821

Total
$
6,776,083

 
$
11,068

 
$
(79,301
)
 
$
6,707,850

 
 
December 31, 2018
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
HFA securities
$
55,500

 
$
—

 
$
(5,899
)
 
$
49,601

Supranational institutions
419,222

 
—

 
(14,067
)
 
405,155

U.S. government-owned corporations
297,729

 
—

 
(24,560
)
 
273,169

GSE
122,423

 
—

 
(6,796
)
 
115,627

 
894,874

 
—

 
(51,322
)
 
843,552

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
79,075

 
20

 
(3,437
)
 
75,658

U.S. government guaranteed – multifamily
368,103

 
—

 
(6,969
)
 
361,134

GSE – single-family
3,649,964

 
681

 
(88,486
)
 
3,562,159

GSE – multifamily
1,010,886

 
168

 
(3,613
)
 
1,007,441

 
5,108,028

 
869

 
(102,505
)
 
5,006,392

Total
$
6,002,902

 
$
869

 
$
(153,827
)
 
$
5,849,944

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.


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Table 5.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position
(dollars in thousands)

 
September 30, 2019
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
12,605

 
$
(1,265
)
 
$
43,260

 
$
(2,590
)
 
$
55,865

 
$
(3,855
)
Supranational institutions
—

 
—

 
425,110

 
(15,216
)
 
425,110

 
(15,216
)
U.S. government-owned corporations
—

 
—

 
305,959

 
(33,785
)
 
305,959

 
(33,785
)
GSE
—

 
—

 
128,095

 
(8,612
)
 
128,095

 
(8,612
)
 
12,605

 
(1,265
)
 
902,424

 
(60,203
)
 
915,029

 
(61,468
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
12,130

 
(7
)
 
48,463

 
(1,643
)
 
60,593

 
(1,650
)
U.S. government guaranteed – multifamily
—

 
—

 
316,885

 
(1,425
)
 
316,885

 
(1,425
)
GSE – single-family
43,825

 
(64
)
 
1,733,458

 
(12,100
)
 
1,777,283

 
(12,164
)
GSE – multifamily
966,554

 
(1,852
)
 
184,846

 
(742
)
 
1,151,400

 
(2,594
)
 
1,022,509

 
(1,923
)
 
2,283,652

 
(15,910
)
 
3,306,161

 
(17,833
)
Total temporarily impaired
$
1,035,114

 
$
(3,188
)
 
$
3,186,076


$
(76,113
)

$
4,221,190


$
(79,301
)

 
December 31, 2018
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
11,118

 
$
(1,682
)
 
$
38,483

 
$
(4,217
)
 
$
49,601

 
$
(5,899
)
Supranational institutions
—

 
—

 
405,155

 
(14,067
)
 
405,155

 
(14,067
)
U.S. government-owned corporations
—

 
—

 
273,169

 
(24,560
)
 
273,169

 
(24,560
)
GSE
—

 
—

 
115,627

 
(6,796
)
 
115,627

 
(6,796
)
 
11,118

 
(1,682
)
 
832,434

 
(49,640
)
 
843,552

 
(51,322
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
—

 
—

 
57,679

 
(3,437
)
 
57,679

 
(3,437
)
U.S. government guaranteed – multifamily
—

 
—

 
361,134

 
(6,969
)
 
361,134

 
(6,969
)
GSE – single-family
53,122

 
(388
)
 
3,417,076

 
(88,098
)
 
3,470,198

 
(88,486
)
GSE – multifamily
902,850

 
(3,613
)
 
—

 
—

 
902,850

 
(3,613
)
 
955,972

 
(4,001
)
 
3,835,889

 
(98,504
)
 
4,791,861

 
(102,505
)
Total temporarily impaired
$
967,090

 
$
(5,683
)
 
$
4,668,323


$
(148,144
)
 
$
5,635,413

 
$
(153,827
)



14
Table of Contents

Table 5.3 - Available-for-Sale Securities by Contractual Maturity
(dollars in thousands)
 
September 30, 2019
 
December 31, 2018
Year of Maturity
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
$
7,600

 
$
7,511

 
$
—

 
$
—

Due after one year through five years
47,900

 
44,632

 
55,500

 
49,601

Due after five years through 10 years
493,829

 
477,098

 
465,248

 
450,102

Due after 10 years
427,168

 
385,788

 
374,126

 
343,849

 
976,497

 
915,029

 
894,874

 
843,552

MBS (1)
5,799,586

 
5,792,821

 
5,108,028

 
5,006,392

Total
$
6,776,083

 
$
6,707,850

 
$
6,002,902

 
$
5,849,944

_______________________
(1)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.

Note 6 — Held-to-Maturity Securities

Table 6.1 - Held-to-Maturity Securities by Major Security Type
(dollars in thousands)

 
September 30, 2019
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
HFA securities
$
91,460

 
$
—

 
$
91,460

 
$
—

 
$
(4,860
)
 
$
86,600

 


 


 


 


 


 


MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
7,258

 
—

 
7,258

 
140

 
—

 
7,398

GSE – single-family
329,147

 
—

 
329,147

 
6,072

 
(195
)
 
335,024

GSE – multifamily
200,961

 
—

 
200,961

 
1,363

 
—

 
202,324

Private-label
602,230

 
(110,617
)
 
491,613

 
212,405

 
(1,796
)
 
702,222

 
1,139,596

 
(110,617
)
 
1,028,979

 
219,980

 
(1,991
)
 
1,246,968

Total
$
1,231,056

 
$
(110,617
)
 
$
1,120,439

 
$
219,980

 
$
(6,851
)
 
$
1,333,568



15
Table of Contents

 
December 31, 2018
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
208

 
$
—

 
$
208

 
$
—

 
$
—

 
$
208

HFA securities
104,465

 
—

 
104,465

 
4

 
(4,612
)
 
99,857

 
104,673

 
—

 
104,673

 
4

 
(4,612
)
 
100,065

MBS
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – single-family
8,173

 
—

 
8,173

 
158

 
—

 
8,331

GSE – single-family
412,639

 
—

 
412,639

 
6,861

 
(1,389
)
 
418,111

GSE – multifamily
209,786

 
—

 
209,786

 
1,728

 
—

 
211,514

Private-label
688,905

 
(129,153
)
 
559,752

 
234,083

 
(2,927
)
 
790,908

 
1,319,503

 
(129,153
)
 
1,190,350

 
242,830

 
(4,316
)
 
1,428,864

Total
$
1,424,176

 
$
(129,153
)
 
$
1,295,023

 
$
242,834

 
$
(8,928
)
 
$
1,528,929



Table 6.2 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position
(dollars in thousands)

 
September 30, 2019
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
6,196

 
$
(9
)
 
$
80,404

 
$
(4,851
)
 
$
86,600

 
$
(4,860
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSE – single-family
16,059

 
(39
)
 
19,769

 
(156
)
 
35,828

 
(195
)
Private-label
11,232

 
(145
)
 
89,083

 
(2,936
)
 
100,315

 
(3,081
)
 
27,291

 
(184
)
 
108,852

 
(3,092
)
 
136,143

 
(3,276
)
Total
$
33,487

 
$
(193
)
 
$
189,256

 
$
(7,943
)
 
$
222,743

 
$
(8,136
)

 
December 31, 2018
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
6,196

 
$
(9
)
 
$
92,822

 
$
(4,603
)
 
$
99,018

 
$
(4,612
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSE – single-family
69,377

 
(580
)
 
52,237

 
(809
)
 
121,614

 
(1,389
)
Private-label
25,680

 
(331
)
 
114,937

 
(4,587
)
 
140,617

 
(4,918
)
 
95,057

 
(911
)
 
167,174

 
(5,396
)
 
262,231

 
(6,307
)
Total
$
101,253

 
$
(920
)
 
$
259,996

 
$
(9,999
)
 
$
361,249

 
$
(10,919
)


16
Table of Contents

Table 6.3 - Held-to-Maturity Securities by Contractual Maturity
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Year of Maturity
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
$
—

 
$
—

 
$
—

 
$
1,043

 
$
1,043

 
$
1,047

Due after one year through five years
6,205

 
6,205

 
6,196

 
6,205

 
6,205

 
6,196

Due after five years through 10 years
16,145

 
16,145

 
15,922

 
16,865

 
16,865

 
16,639

Due after 10 years
69,110

 
69,110

 
64,482

 
80,560

 
80,560

 
76,183

 
91,460

 
91,460

 
86,600

 
104,673

 
104,673

 
100,065

MBS (2)
1,139,596

 
1,028,979

 
1,246,968

 
1,319,503

 
1,190,350

 
1,428,864

Total
$
1,231,056

 
$
1,120,439

 
$
1,333,568

 
$
1,424,176

 
$
1,295,023

 
$
1,528,929

_______________________
(1)
Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss.
(2)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.

Note 7 — Other-Than-Temporary Impairment

We evaluate our individual available-for-sale and held-to-maturity securities for other-than-temporary impairment each quarter.

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at September 30, 2019. At September 30, 2019, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security.

Held-to-Maturity Securities

HFA Securities and Agency MBS. We have reviewed our investments in HFA securities and agency MBS and have determined that all unrealized losses are temporary. We do not intend to sell the investments nor is it more likely than not that we will be required to sell the investments before recovery of the amortized cost basis, and we do not consider these investments to be other-than-temporarily impaired at September 30, 2019.

Private-Label Residential MBS and Asset-Backed Securities (ABS) Backed by Home Equity Loans. For those securities for which a credit loss was recognized during the three months ended September 30, 2019, Table 7.1 presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted average of Alt-A other-than-temporarily impaired private-label residential MBS.


17
Table of Contents

Table 7.1 - Significant Inputs and Current Credit Enhancement for Securities with a Current Period Credit Loss
(dollars in thousands)

 
 
 
 
Weighted Average of Significant Inputs
 
Weighted Average Current
Credit Enhancement
Private-label MBS by Classification
 
Par Value
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Private-label residential MBS - Alt-A (1)
 
$
45,287

 
12.9
%
 
23.7
%
 
57.9
%
 
3.8
%
_______________________
(1)
Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.

Table 7.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security
(dollars in thousands)

 
September 30, 2019
Other-Than-Temporarily Impaired Investment (1)
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
20,881

 
$
17,751

 
$
14,089

 
$
19,541

Private-label residential MBS – Alt-A
715,269

 
511,623

 
404,682

 
611,578

ABS backed by home equity loans – Subprime
143

 
135

 
121

 
135

Total other-than-temporarily impaired securities
$
736,293

 
$
529,509

 
$
418,892

 
$
631,254


_______________________
(1)
Securities are classified based on the classifications of their underlying loan composition at the time of issuance. We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.

Table 7.3 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings
(dollars in thousands)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
407,947

 
$
437,315

 
$
422,035

 
$
452,523

Additions:
 
 
 
 
 
 
 
Credit losses for which other-than-temporary impairment was not previously recognized
—

 
—

 
128

 
—

Additional credit losses for which an other-than-temporary impairment charge was previously recognized
411

 
71

 
700

 
407

Reductions:
 
 
 
 
 
 
 
Securities matured during the period
—

 
—

 
(485
)
 
—

Portion of increase in cash flows expected to be collected over the remaining life of the security that are recognized in the current period as interest income
(6,881
)
 
(7,997
)
 
(20,901
)
 
(23,541
)
Balance at end of period
$
401,477

 
$
429,389

 
$
401,477

 
$
429,389



Note 8 — Advances

18
Table of Contents


General Terms. At September 30, 2019, and December 31, 2018, we had advances outstanding with interest rates ranging from (0.19) percent to 7.72 percent and 0.00 percent to 7.72 percent. Advances with negative interest rates contain embedded interest-rate features that have met the requirements to be separated from the host contract and are recorded as stand-alone derivatives, and which we economically hedge with derivatives containing offsetting interest-rate features.

Table 8.1 - Advances Outstanding by Year of Contractual Maturity
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
379

 
2.35
%
 
$
12,332

 
2.88
%
Due in one year or less
25,276,169

 
2.27

 
24,029,592

 
2.48

Due after one year through two years
5,778,629

 
2.38

 
11,413,640

 
2.55

Due after two years through three years
2,942,922

 
2.35

 
2,832,290

 
2.47

Due after three years through four years
1,960,276

 
2.74

 
1,648,076

 
2.37

Due after four years through five years
1,510,908

 
2.34

 
1,980,468

 
2.24

Thereafter
1,032,468

 
2.84

 
1,351,987

 
2.99

Total par value
38,501,751

 
2.33
%
 
43,268,385

 
2.50
%
Premiums
14,699

 
 

 
13,347

 
 

Discounts
(39,007
)
 
 

 
(38,036
)
 
 

Fair value of bifurcated derivatives (1)
36,864

 
 
 
13,051

 
 
Hedging adjustments
25,284

 
 

 
(64,525
)
 
 

Total
$
38,539,591

 
 

 
$
43,192,222

 
 


_________________________
(1)
At September 30, 2019, and December 31, 2018, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives.

Table 8.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Overdrawn demand-deposit accounts
$
379

 
$
12,332

Due in one year or less
28,864,944

 
32,748,467

Due after one year through two years
3,278,629

 
3,913,640

Due after two years through three years
2,723,322

 
2,672,290

Due after three years through four years
1,510,076

 
1,261,176

Due after four years through five years
1,113,833

 
1,362,468

Thereafter
1,010,568

 
1,298,012

Total par value
$
38,501,751

 
$
43,268,385




19
Table of Contents

Table 8.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date
(dollars in thousands)

Year of Contractual Maturity or Next Put Date, Par Value
September 30, 2019
 
December 31, 2018
Overdrawn demand-deposit accounts
$
379

 
$
12,332

Due in one year or less
26,448,169

 
25,199,892

Due after one year through two years
5,843,629

 
11,652,840

Due after two years through three years
2,809,922

 
2,834,790

Due after three years through four years
1,121,776

 
1,367,576

Due after four years through five years
1,404,908

 
1,152,468

Thereafter
872,968

 
1,048,487

Total par value
$
38,501,751

 
$
43,268,385



Table 8.4 - Advances by Current Interest Rate Terms
(dollars in thousands)

Par value of advances
September 30, 2019
 
December 31, 2018
Fixed-rate
$
33,894,397

 
$
33,570,278

Variable-rate
4,607,354

 
9,698,107

Total par value
$
38,501,751

 
$
43,268,385



Credit-Risk Exposure and Security Terms. Our potential credit risk from advances is principally concentrated in commercial banks, insurance companies, savings institutions, and credit unions. At September 30, 2019, and December 31, 2018, we had $14.6 billion and $16.4 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to five and six borrowers at September 30, 2019, and December 31, 2018, representing 38.0 percent and 37.9 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 10 — Allowance for Credit Losses.

Prepayment Fees.

Table 8.5 - Advances Prepayment Fees
(dollars in thousands)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Prepayment fees received from borrowers
 
$
206

 
$
8

 
$
29,061

 
$
73

Hedging fair-value adjustments on prepaid advances
 
(90
)
 
150

 
1,836

 
248

Net (premiums) discounts associated with prepaid advances
 
—

 
(160
)
 
157

 
(160
)
Deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications
 
—

 
—

 
(201
)
 
—

Prepayment fees recognized in income on advance restructurings deemed to be extinguishments
 
213

 
—

 
213

 
—

Advance prepayment fees recognized in income, net
 
$
329

 
$
(2
)
 
$
31,066

 
$
161



Note 9 — Mortgage Loans Held for Portfolio


20
Table of Contents

We invest in mortgage loans through the Mortgage Partnership Finance (MPF) program. These mortgage loans are either guaranteed or insured by federal agencies, as is the case with government mortgage loans, or are credit-enhanced, directly or indirectly, by the related entity that sold the loan (a participating financial institution), as is the case with conventional mortgage loans. All such investments are held for portfolio.

Table 9.1 - Mortgage Loans Held for Portfolio
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Real estate
 

 
 

Fixed-rate 15-year single-family mortgages
$
350,088

 
$
392,128

Fixed-rate 20- and 30-year single-family mortgages
4,039,538

 
3,839,078

Premiums
67,533

 
67,671

Discounts
(1,680
)
 
(1,800
)
Deferred derivative gains, net
4,141

 
2,825

Total mortgage loans held for portfolio
4,459,620

 
4,299,902

Less: allowance for credit losses
(500
)
 
(500
)
Total mortgage loans, net of allowance for credit losses
$
4,459,120

 
$
4,299,402



Table 9.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type
(dollars in thousands)


 
September 30, 2019
 
December 31, 2018
Conventional mortgage loans
$
4,086,247

 
$
3,902,555

Government mortgage loans
303,379

 
328,651

Total par value
$
4,389,626

 
$
4,231,206



See Note 10 — Allowance for Credit Losses for information related to our credit risk from our investments in mortgage loans and allowance for credit losses based on these investments.

"Mortgage Partnership Finance," and "MPF" are registered trademarks of the Federal Home Loan Bank of Chicago.

Note 10 — Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 11 — Allowance for Credit Losses in the 2018 Annual Report.

Secured Member Credit Products

We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower's financial condition, and collateral and lending policies that are intended to limit risk of loss while balancing borrowers' needs for a reliable source of funding.

At September 30, 2019, and December 31, 2018, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to secured member credit products during the nine months ended September 30, 2019, and 2018.


21
Table of Contents

Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at September 30, 2019, and December 31, 2018. At September 30, 2019, and December 31, 2018, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 18 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

Government Mortgage Loans Held for Portfolio

Due to government guarantees or insurance on our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of September 30, 2019, and December 31, 2018. Additionally, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 11 — Allowance for Credit Losses in the 2018 Annual Report.

Conventional Mortgage Loans Held for Portfolio

For information on conventional mortgage loans held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 11 — Allowance for Credit Losses in the 2018 Annual Report.

Credit Quality Indicators. Key credit quality indicators for mortgage loans include past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. Table 10.1 sets forth certain key credit quality indicators for our investments in mortgage loans at September 30, 2019, and December 31, 2018 (dollars in thousands):

Table 10.1 - Recorded Investment in Delinquent Mortgage Loans
(dollars in thousands)

 
September 30, 2019
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
27,042

 
$
11,857

 
$
38,899

Past due 60-89 days delinquent
6,217

 
3,310

 
9,527

Past due 90 days or more delinquent
8,540

 
5,498

 
14,038

Total past due
41,799

 
20,665

 
62,464

Total current loans
4,129,846

 
290,450

 
4,420,296

Total mortgage loans
$
4,171,645

 
$
311,115

 
$
4,482,760

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
3,212

 
$
2,222

 
$
5,434

Serious delinquency rate (2)
0.21
%
 
1.77
%
 
0.32
%
Past due 90 days or more still accruing interest
$
—

 
$
5,498

 
$
5,498

Loans on nonaccrual status (3)
$
9,605

 
$
—

 
$
9,605

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.


22
Table of Contents

 
December 31, 2018
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
23,045

 
$
10,884

 
$
33,929

Past due 60-89 days delinquent
7,019

 
3,344

 
10,363

Past due 90 days or more delinquent
7,384

 
6,670

 
14,054

Total past due
37,448

 
20,898

 
58,346

Total current loans
3,947,096

 
316,285

 
4,263,381

Total mortgage loans
$
3,984,544

 
$
337,183

 
$
4,321,727

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
3,467

 
$
2,086

 
$
5,553

Serious delinquency rate (2)
0.20
%
 
1.98
%
 
0.34
%
Past due 90 days or more still accruing interest
$
—

 
$
6,670

 
$
6,670

Loans on nonaccrual status (3)
$
7,975

 
$
—

 
$
7,975

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

Credit Enhancements.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 11 — Allowance for Credit Losses in the 2018 Annual Report.

Allowance for Credit Losses on Mortgage Loans. Table 10.2 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the three and nine months ended September 30, 2019 and 2018, as well as the recorded investment in mortgage loans by impairment methodology at September 30, 2019 and 2018. The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.


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Table 10.2 - Allowance for Credit Losses on Conventional Mortgage Loans
(dollars in thousands)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Allowance for credit losses
 
 
 
 
 
 
 
Balance, beginning of period
$
500

 
$
500

 
$
500

 
$
500

Charge-offs
(48
)
 
—

 
(63
)
 
(6
)
Provision for credit losses
48

 
—

 
63

 
6

Balance, end of period
$
500

 
$
500

 
$
500

 
$
500

Ending balance, individually evaluated for impairment
$
—

 
$
—

 
$
—

 
$
—

Ending balance, collectively evaluated for impairment
$
500

 
$
500

 
$
500

 
$
500

Recorded investment, end of period (1)
 
 
 
 
 
 
 
Individually evaluated for impairment
$
14,952

 
$
15,671

 
$
14,952

 
$
15,671

Collectively evaluated for impairment
$
4,156,693

 
$
3,852,352

 
$
4,156,693

 
$
3,852,352

_________________________
(1)
These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio.

Note 11 — Derivatives and Hedging Activities

Table 11.1 - Fair Value of Derivative Instruments
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

 
 
 
 
 
 
Interest-rate swaps
$
11,975,948

 
$
8,537

 
$
(14,994
)
 
$
11,980,699

 
$
12,811

 
$
(296,324
)
Forward-start interest-rate swaps
44,000

 
1

 
(6
)
 
282,000

 
—

 
(753
)
Total derivatives designated as hedging instruments
12,019,948

 
8,538

 
(15,000
)
 
12,262,699

 
12,811

 
(297,077
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
2,210,800

 
80

 
(37,526
)
 
927,800

 
682

 
(12,475
)
Mortgage-delivery commitments (1)
38,486

 
65

 
(22
)
 
50,773

 
339

 
—

Total derivatives not designated as hedging instruments
2,249,286

 
145

 
(37,548
)
 
978,573

 
1,021

 
(12,475
)
Total notional amount of derivatives
$
14,269,234

 
 

 
 

 
$
13,241,272

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
8,683

 
(52,548
)
 
 
 
13,832

 
(309,552
)
Netting adjustments and cash collateral, including related accrued interest (2)
 

 
113,839

 
40,521

 
 
 
8,571

 
53,752

Derivative assets and derivative liabilities
 

 
$
122,522

 
$
(12,027
)
 
 
 
$
22,403

 
$
(255,800
)

_______________________

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(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $154.6 million and $62.8 million at September 30, 2019, and December 31, 2018, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $231 thousand and $471 thousand at September 30, 2019, and December 31, 2018, respectively.

Beginning on January 1, 2019, changes in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair-value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. For designated cash-flow hedges, the entire change in the fair value of the hedging instrument (assuming it is included in the assessment of hedge effectiveness) is reported in other comprehensive income until the hedged transaction affects earnings. At that time, this amount is reclassified from other comprehensive income and recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for both fair value and cash-flow hedges, any hedge ineffectiveness (which represented 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 or the variability in the cash flows of the forecasted transaction attributable to the hedged risk) was recorded in noninterest income as net gains (losses) on derivatives and hedging activities.

Tables 11.2 and 11.3 presents the net gains (losses) on qualifying fair-value and cash flow hedging relationships. Beginning on January 1, 2019, gains (losses) on derivatives include unrealized changes in fair value as well as net interest settlements.

Table 11.2 - Net Gains (Losses) on Fair Value Hedging Relationships
(dollars in thousands)

 
 
For the Three Months Ended September 30, 2019
 
 
Advances
 
Available-for-sale Securities
 
CO Bonds
Total interest income (expense) in the statements of operations
 
$
204,511

 
$
27,657

 
$
(152,814
)
 
 
 
 
 
 
 
Gains (losses) on fair value hedging relationships
 
 
 
 
 
 
Changes in fair value:
 
 
 
 
 
 
Derivatives
 
$
(16,059
)
 
$
(63,779
)
 
$
3,064

Hedged items
 
15,487

 
61,961

 
(2,623
)
Net changes in fair value before price alignment interest
 
(572
)
 
(1,818
)
 
441

Price alignment interest(1)
 
852

 
1,046

 
(7
)
Net interest settlements on derivatives(2)(3)
 
8,304

 
(4,856
)
 
(2,706
)
Net gains (losses) on qualifying fair-value hedging relationships
 
8,584

 
(5,628
)
 
(2,272
)
Amortization/accretion of discontinued fair-value hedging relationships
 
(562
)
 
—

 
690

Net gains (losses) on derivatives and hedging activities recorded in net interest income
 
$
8,022

 
$
(5,628
)
 
$
(1,582
)


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For the Three Months Ended September 30, 2018
 
 
Advances
 
Available-for-sale Securities
 
CO Bonds
Total income (expense) in the statements of operations
 
$
226,546

 
$
35,532

 
$
(142,086
)
 
 
 
 
 
 
 
Gains (losses) on fair value hedging relationships
 
 
 
 
 
 
Changes in fair value:
 
 
 
 
 
 
Derivatives
 
$
(1,975
)
 
$
19,287

 
$
(3,069
)
Hedged items
 
1,855

 
(18,832
)
 
3,479

Net changes in fair value
 
(120
)
 
455

 
410

Net interest settlements on derivatives(2)(3)
 
15,769

 
(6,200
)
 
(8,787
)
Amortization/accretion of active hedging relationships
 
(188
)
 
—

 
—

Net gains (losses) on qualifying fair-value hedging relationships
 
15,461

 
(5,745
)
 
(8,377
)
Amortization/accretion of discontinued fair-value hedging relationships
 
(343
)
 
—

 
1,003

Less: net changes in fair value(4)
 
120

 
(455
)
 
(411
)
Net gains (losses) on derivatives and hedging activities recorded in net interest income
 
$
15,238

 
$
(6,200
)
 
$
(7,785
)


 
 
For the Nine Months Ended September 30, 2019
 
 
Advances
 
Available-for-sale Securities
 
CO Bonds
Total interest income (expense) in the statements of operations
 
$
676,257

 
$
70,603

 
$
(458,346
)
 
 
 
 
 
 
 
Gains (losses) on fair value hedging relationships
 
 
 
 
 
 
Changes in fair value:
 
 
 
 
 
 
Derivatives
 
$
(89,199
)
 
$
(118,501
)
 
$
72,386

Hedged items
 
89,809

 
112,346

 
(73,192
)
Net changes in fair value before price alignment interest
 
610

 
(6,155
)
 
(806
)
Price alignment interest(1)
 
470

 
2,618

 
(98
)
Net interest settlements on derivatives(2)(3)
 
37,057

 
(16,406
)
 
(18,074
)
Net gains (losses) on qualifying fair-value hedging relationships
 
38,137

 
(19,943
)
 
(18,978
)
Amortization/accretion of discontinued fair-value hedging relationships
 
(1,612
)
 
—

 
1,984

Net gains (losses) on derivatives and hedging activities recorded in net interest income
 
$
36,525

 
$
(19,943
)
 
$
(16,994
)


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For the Nine Months Ended September 30, 2018
 
 
Advances
 
Available-for-sale Securities
 
CO Bonds
Total income (expense) in the statements of operations
 
$
617,916

 
$
113,531

 
$
(397,843
)
 
 
 
 
 
 
 
Gains (losses) on fair value hedging relationships
 
 
 
 
 
 
Changes in fair value:
 
 
 
 
 
 
Derivatives
 
$
46,793

 
$
68,879

 
$
(51,171
)
Hedged items
 
(45,039
)
 
(67,270
)
 
49,683

Net changes in fair value
 
1,754

 
1,609

 
(1,488
)
Net interest settlements on derivatives(2)(3)
 
36,001

 
(19,975
)
 
(20,317
)
Amortization/accretion of active hedging relationships
 
266

 
—

 
—

Net gains (losses) on qualifying fair-value hedging relationships
 
38,021

 
(18,366
)
 
(21,805
)
Amortization/accretion of discontinued fair-value hedging relationships
 
(1,161
)
 
—

 
3,324

Less: net changes in fair value(4)
 
(1,754
)
 
(1,609
)
 
1,488

Net gains (losses) on derivatives and hedging activities recorded in net interest income
 
$
35,106

 
$
(19,975
)
 
$
(16,993
)
_______________________
(1)
Relates to derivatives for which variation margin payments are characterized as daily settled contracts.
(2)
Represents interest income/expense on derivatives in qualifying fair-value hedging relationships. Net interest settlements on derivatives that are not in qualifying fair-value hedging relationships are reported in other income.
(3)
Excludes the interest income/expense of the respective hedged items recorded in net interest income.
(4)
In 2018, net changes in fair value were recorded in net (losses) gains on derivatives and hedging activities in other income.

Table 11.3 - Net Gains (losses) on Cash Flow Hedging Relationships
(dollars in thousands)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Forward-start interest rate swaps - CO Bonds
 
 
 
 
 
 
 
 
Losses reclassified from accumulated other comprehensive loss into interest expense
 
$
(1,570
)
 
$
(537
)
 
$
(3,487
)
 
$
(2,485
)
(Losses) gains recognized in other comprehensive income
 
(568
)
 
2,985

 
(6,390
)
 
14,733

Gains recognized in net (losses) gains on derivatives and hedging activities
 
 
 
83

 
 
 
244

For the nine months ended September 30, 2019 and 2018, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of September 30, 2019, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is two years.

As of September 30, 2019, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash-flow hedges expected to be reclassified to earnings during the next 12 months is $7.0 million.


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Table 11.4 - Cumulative Basis Adjustments for Fair-Value Hedges
(dollars in thousands)

 
 
September 30, 2019
Line Item in Statement of Condition of Hedged Item
 
Amortized Cost of Hedged Asset/ (Liability)(1)
 
Basis Adjustments for Active Hedging Relationships Included in Amortized Cost
 
Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost
 
Cumulative Amount of Fair Value Hedging Basis Adjustments
Advances
 
$
5,250,997

 
$
62,148

 
$
10,656

 
$
72,804

Available-for-sale securities
 
2,966,722

 
315,379

 
—

 
315,379

Consolidated bonds
 
(4,265,384
)
 
(12,261
)
 
(37,573
)
 
(49,834
)
_______________________
(1)
Includes only the portion of amortized cost representing the hedged items in fair-value hedging relationships.

Table 11.5 - Net Gains and Losses on Derivatives and Hedging Activities
(dollars in thousands)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Total net gains related to fair-value hedges(1)
 
 
 
$
557

 
 
 
$
2,140

Total net gains related to cash-flow hedges(2)
 
 
 
83

 
 
 
244

Total net gains related to derivatives designated as hedging instruments
 
 
 
640

 
 
 
2,384

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
Interest-rate swaps
 
$
(1,044
)
 
7

 
$
(2,531
)
 
729

Mortgage-delivery commitments
 
375

 
131

 
1,445

 
(336
)
Total net (losses) gains related to derivatives not designated as hedging instruments
 
(669
)
 
138

 
(1,086
)
 
393

 
 
 
 
 
 
 
 
 
Other(3)
 
12

 
(291
)
 
15

 
(692
)
 
 
 
 
 
 
 
 
 
Net (losses) gains on derivatives and hedging activities
 
$
(657
)
 
$
487

 
$
(1,071
)
 
$
2,085

______________________
(1)
Consists of interest-rate swaps.
(2)
Consists of forward-start interest-rate swaps.
(3)
Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

Termination of Derivatives and Impact on Statement of Cash Flows. During the nine months ended September 30, 2019, we terminated certain uncleared interest-rate exchange agreements with a total notional amount of $611.9 million and were indexed to three-month London Interbank Offered Rate (LIBOR) on the floating leg of the swaps. The net fair value of these derivative transactions, from our perspective, was $(251.5) million, which was transferred to the bilateral counterparty upon termination, and securities collateral that we had pledged against this obligation was returned to us. This cash payment is included in net change in derivatives and hedging activities, within the operating activities section of the statement of cash flows for the nine months ended September 30, 2019.
Simultaneously with the termination of these derivatives, we entered into replacement interest-rate exchange agreements (the replacement derivatives) having the same notional amount of $611.9 million and which are indexed to the OIS rate based on the federal funds effective rate on the floating leg of the swaps. Upon settlement of the replacement derivatives, the Bank received

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an initial upfront payment of $251.5 million. The replacement derivatives are cleared through a derivatives clearing organization (DCO), which called for variation margin to be delivered. Because the replacement derivatives include off-market terms and this large initial upfront payment, all payments for the replacement derivatives are classified as net payments on derivative contracts with a financing element, within the financing activities section of the statement of cash flows.
Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a DCO, our counterparty for such derivatives. We also enter into derivatives that are not cleared (uncleared derivatives) under master-netting agreements. Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's Investors Services (Moody's) or Standard & Poor's Rating Service (S&P) to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net liability position. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at September 30, 2019, was $46.1 million for which we had delivered collateral with a post-haircut value of $46.0 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting arrangements. Table 11.5 sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at September 30, 2019.

Table 11.6 - Post Haircut Value of Incremental Collateral to be Delivered as of September 30, 2019
(dollars in thousands)

Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral
AA+
 
AA or AA-
 
$
526

AA-
 
A+, A or A-
 
—

A-
 
below A-
 
6,098

_______________________
(1)
Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used.

Cleared Derivatives. For cleared derivatives, the DCO is our counterparty. The DCO notifies the clearing member of the required initial and variation margin and our agent (clearing member) in turn notifies us. We utilize two DCOs, for all cleared derivative transactions, CME Inc. and LCH Ltd. Based upon their rulebooks, we characterize variation margin payments as daily settlement payments, rather than as collateral. At both DCOs, posted initial margin is considered collateral. We post initial margin and exchange variation margin through a clearing member which acts as our agent to the DCO and which guarantees our performance to the DCO, subject to the terms of relevant agreements. These arrangements expose us to credit risk in the event that one of our clearing members or one of the DCOs fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because the DCO, which is fully secured at all times through margin received from its clearing members, is substituted for the credit risk exposure of individual counterparties in uncleared derivatives, and collateral is posted at least once daily for changes in the fair value of cleared derivatives through a clearing member.

For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are U.S. Commodity Futures Trading Commission (the CFTC)-registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at September 30, 2019.

Offsetting of Certain Derivatives. We present derivatives, any related cash collateral received or pledged, and associated accrued interest, on a net basis by counterparty.

We have analyzed the rights, rules, and regulations governing our cleared and non-cleared derivatives and determined that those rights, rules, and regulations should result in a net claim with each of our counterparties (which, in the context of cleared derivatives is through each of our clearing members with the related DCO) upon an event of default (solely in the case of non-cleared derivatives) or the bankruptcy, insolvency or a similar proceeding involving our counterparty (and/or one of our

29
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clearing members, in the case of cleared derivatives). For this purpose, "net claim" generally means a single net amount reflecting the aggregation of all amounts indirectly owed by us to the relevant counterparty and indirectly payable to us from the relevant counterparty.

Table 11.7 presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master-netting arrangements or similar agreements as of September 30, 2019, and December 31, 2018, and the fair value of derivatives that are not subject to such netting. Derivatives subject to netting include any related cash collateral received from or pledged to counterparties.

Table 11.7 - Netting of Derivative Assets and Derivative Liabilities
(dollars in thousands)

 
September 30, 2019
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
Non-cash Collateral (Received) or Pledged Not Offset(2)
 
 
 
Gross Recognized Amount
Gross Amounts of Netting Adjustments (1)
 
Mortgage Delivery Commitments
 
Total Derivative Assets and Total Derivative Liabilities
 
Can Be Sold or Repledged
Cannot Be Sold or Repledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
7,126

$
(5,241
)
 
$
65

 
$
1,950

 
$
(1,197
)
$
—

 
$
753

Cleared
1,492

119,080

 
 
 
120,572

 
—

—

 
120,572

Total
 
 
 
 
 
$
122,522

 
 
 
 
$
121,325

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
(51,795
)
$
39,790

 
$
(22
)
 
$
(12,027
)
 
$
617

$
10,620

 
$
(790
)
Cleared
(732
)
732

 
 
 
—

 
—

—

 
—

Total
 
 
 
 
 
$
(12,027
)
 
 
 
 
$
(790
)
_______________________
(1)
Includes gross amounts of netting adjustments and cash collateral.
(2)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At September 30, 2019, we had additional net credit exposure of $381 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

 
December 31, 2018
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
Non-cash Collateral (Received) or Pledged Not Offset(2)
 
 
 
Gross Recognized Amount
Gross Amounts of Netting Adjustments (1)
 
Mortgage Delivery Commitments
 
Total Derivative Assets and Total Derivative Liabilities
 
Can Be Sold or Repledged
Cannot Be Sold or Repledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
12,861

$
(11,885
)
 
$
339

 
$
1,315

 
$
(396
)
$
—

 
$
919

Cleared
631

20,457

 
 
 
21,088

 
—

—

 
21,088

Total
 
 
 
 
 
$
22,403

 
 
 
 
$
22,007

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
(306,848
)
$
51,048

 
$
—

 
$
(255,800
)
 
$
6,104

$
237,054

 
$
(12,642
)
Cleared
(2,704
)
2,704

 
 
 
—

 
—

—

 
—

Total
 
 
 
 
 
$
(255,800
)
 
 
 
 
$
(12,642
)
_______________________
(1)
Includes gross amounts of netting adjustments and cash collateral.

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Table of Contents

(2)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2018, we had additional net credit exposure of $639 thousand due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 12 — Deposits

We offer demand, overnight and term deposits for members and qualifying nonmembers. Members that service mortgage loans may deposit funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans, which we classify as "other" in the following table.

Table 12.1 - Deposits
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Interest-bearing
 

 
 
Demand and overnight
$
562,601

 
$
444,486

Term
800

 
800

Other
1,698

 
2,961

Noninterest-bearing
 

 
 

Other
60,774

 
26,631

Total deposits
$
625,873

 
$
474,878



Note 13 — Consolidated Obligations

CO Bonds. CO bonds for which we have received issuance proceeds and are primarily liable were as follows:

Table 13.1 - CO Bonds Outstanding by Contractual Maturity
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate (1)
 
Amount
 
Weighted
Average
Rate (1)
Due in one year or less
$
10,775,295

 
2.13
%
 
$
9,638,270

 
2.01
%
Due after one year through two years
5,731,555

 
2.19

 
5,375,845

 
2.24

Due after two years through three years
3,126,265

 
2.15

 
3,864,560

 
2.17

Due after three years through four years
1,381,205

 
2.38

 
1,891,975

 
2.20

Due after four years through five years
1,152,205

 
2.55

 
1,338,515

 
2.39

Thereafter
3,606,070

 
3.24

 
3,792,150

 
3.25

Total par value
25,772,595

 
2.33
%
 
25,901,315

 
2.30
%
Premiums
92,577

 
 

 
88,434

 
 

Discounts
(13,291
)
 
 

 
(16,133
)
 
 

Hedging adjustments
12,261

 
 

 
(60,932
)
 
 

 
$
25,864,142

 
 

 
$
25,912,684

 
 

_______________________
(1)
The CO bonds' weighted-average rate excludes concession fees.


31
Table of Contents

Table 13.2 - CO Bonds Outstanding by Call Feature
(dollars in thousands)

Par Value of CO bonds
September 30, 2019
 
December 31, 2018
Noncallable and nonputable
$
21,987,595

 
$
20,419,315

Callable
3,785,000

 
5,482,000

Total par value
$
25,772,595

 
$
25,901,315



Table 13.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date
(dollars in thousands)

Year of Contractual Maturity or Next Call Date
 
September 30, 2019
 
December 31, 2018
Due in one year or less
 
$
13,317,295

 
$
13,435,270

Due after one year through two years
 
5,661,555

 
5,602,845

Due after two years through three years
 
2,666,265

 
2,802,560

Due after three years through four years
 
1,351,205

 
1,366,975

Due after four years through five years
 
945,205

 
1,156,515

Thereafter
 
1,831,070

 
1,537,150

Total par value
 
$
25,772,595

 
$
25,901,315



Table 13.4 - CO Bonds by Interest-Rate Payment Type
(dollars in thousands)

Par Value of CO bonds
September 30, 2019
 
December 31, 2018
Fixed-rate
$
18,824,595

 
$
21,216,315

Simple variable-rate
5,738,000

 
2,853,000

Step-up
1,210,000

 
1,832,000

Total par value
$
25,772,595

 
$
25,901,315



CO Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows:
Table 13.5 - CO Discount Notes Outstanding
(dollars in thousands)

 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
September 30, 2019
$
26,896,215

 
$
26,958,676

 
2.01
%
December 31, 2018
$
33,065,822

 
$
33,147,065

 
2.37
%
_______________________
(1)
The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 14 — Affordable Housing Program


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Table of Contents

Table 14.1 - AHP Liability
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Balance at beginning of period
$
83,965

 
$
81,600

AHP expense for the period
13,669

 
24,299

AHP direct grant disbursements
(11,995
)
 
(17,729
)
AHP subsidy for AHP advance disbursements
(2,617
)
 
(4,360
)
Return of previously disbursed grants and subsidies
24

 
155

Balance at end of period
$
83,046

 
$
83,965



Note 15 — Capital

We are subject to capital requirements under our capital plan, the FHLBank Act, FHFA regulations and guidance:

1.
Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.

2.
Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock.

3.
Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.

The FHFA has authority to require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

Table 15.1 - Regulatory Capital Requirements
(dollars in thousands)

Risk-Based Capital Requirements
September 30,
2019
 
December 31,
2018
 
 
 
 
Permanent capital
 

 
 

Class B capital stock
$
2,031,651

 
$
2,528,854

Mandatorily redeemable capital stock
17,107

 
31,868

Retained earnings
1,420,573

 
1,395,012

Total permanent capital
$
3,469,331

 
$
3,955,734

 
 
 
 
Risk-based capital requirement
 

 
 

Credit-risk capital
$
263,821

 
$
289,080

Market-risk capital
128,345

 
187,183

Operations-risk capital
117,650

 
142,879

Total risk-based capital requirement
$
509,816

 
$
619,142

 
 
 
 
Permanent capital in excess of risk-based capital requirement
$
2,959,515

 
$
3,336,592


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Table of Contents

 
 
September 30, 2019
 
December 31, 2018
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
509,816

 
$
3,469,331

 
$
619,142

 
$
3,955,734

Total regulatory capital
 
$
2,276,958

 
$
3,469,331

 
$
2,543,733

 
$
3,955,734

Total capital-to-asset ratio
 
4.0
%
 
6.1
%
 
4.0
%
 
6.2
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
2,846,198

 
$
5,203,997

 
$
3,179,666

 
$
5,933,601

Leverage capital-to-assets ratio
 
5.0
%
 
9.1
%
 
5.0
%
 
9.3
%


We are a cooperative whose members own most of our capital stock. Former members (including certain nonmembers that own our capital stock as a result of merger or acquisition, relocation, or involuntary termination of membership) own the remaining capital stock to support business transactions still carried on our statement of condition. Shares of capital stock cannot be purchased or sold except between us and our members at $100 per share par value. We have only issued Class B stock and each member is required to purchase Class B stock equal to the sum of 0.20 percent of certain member assets eligible to secure advances under the FHLBank Act (the membership stock investment requirement), and 3.00 percent for overnight advances, 4.00 percent for all other advances, and 0.25 percent for outstanding letters of credit (collectively, the activity-based stock-investment requirement). Prior to January 16, 2019, the membership stock investment requirement was equal to 0.35 percent of certain member assets eligible to secure advances under the FHLBank Act.

Note 16 — Accumulated Other Comprehensive Loss

34
Table of Contents

Table 16.1 - Accumulated Other Comprehensive Loss
(dollars in thousands)
 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Gain (Loss) Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total
Balance, June 30, 2018
 
$
(167,921
)
 
$
(143,196
)
 
$
(26,733
)
 
$
(6,740
)
 
$
(344,590
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(8,690
)
 
—

 
2,985

 
—

 
(5,705
)
Accretion of noncredit loss
 
—

 
7,127

 
—

 
—

 
7,127

Net actuarial loss
 
—

 
—

 
—

 
(729
)
 
(729
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
6

 
—

 
—

 
6

Amortization - hedging activities (2)
 
—

 
—

 
541

 
—

 
541

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
337

 
337

Other comprehensive (loss) income
 
(8,690
)
 
7,133

 
3,526

 
(392
)
 
1,577

Balance, September 30, 2018
 
$
(176,611
)
 
$
(136,063
)
 
$
(23,207
)
 
$
(7,132
)
 
$
(343,013
)
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
 
$
(82,600
)
 
$
(116,638
)
 
$
(33,199
)
 
$
(4,925
)
 
$
(237,362
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
14,367

 
—

 
(568
)
 
—

 
13,799

Accretion of noncredit loss
 
—

 
5,646

 
—

 
—

 
5,646

Net actuarial gain
 
—

 
—

 
—

 
10

 
10

Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
375

 
—

 
—

 
375

Amortization - hedging activities (4)
 
—

 
—

 
1,570

 
—

 
1,570

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
165

 
165

Other comprehensive income
 
14,367

 
6,021

 
1,002

 
175

 
21,565

Balance, September 30, 2019
 
$
(68,233
)
 
$
(110,617
)
 
$
(32,197
)
 
$
(4,750
)
 
$
(215,797
)
_______________________
(1)
Recorded in net other-than-temporary impairment losses in investment securities, credit portion in the statement of operations.
(2)
Amortization of hedging activities includes $537 thousand recorded in CO bond interest expense and $4 thousand recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Recorded in CO bond interest expense.


35
Table of Contents

Table 16.1 - Accumulated Other Comprehensive Loss
(dollars in thousands)
 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Gain (Loss) Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total
Balance, December 31, 2017
 
$
(122,331
)
 
$
(158,218
)
 
$
(40,436
)
 
$
(5,955
)
 
$
(326,940
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(54,280
)
 
—

 
14,733

 
—

 
(39,547
)
Accretion of noncredit loss
 
—

 
21,945

 
—

 
—

 
21,945

Net actuarial loss
 
—

 
—

 
—

 
(2,189
)
 
(2,189
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
210

 
—

 
—

 
210

Amortization - hedging activities (2)
 
—

 
—

 
2,496

 
—

 
2,496

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
1,012

 
1,012

Other comprehensive (loss) income
 
(54,280
)
 
22,155

 
17,229

 
(1,177
)
 
(16,073
)
Balance, September 30, 2018
 
$
(176,611
)
 
$
(136,063
)
 
$
(23,207
)
 
$
(7,132
)
 
$
(343,013
)
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
$
(152,958
)
 
$
(129,154
)
 
$
(29,119
)
 
$
(5,276
)
 
$
(316,507
)
Cumulative effect of change in accounting principle
 
—

 
—

 
(175
)
 
—

 
(175
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
84,725

 
—

 
(6,390
)
 
—

 
78,335

Noncredit other-than-temporary impairment losses
 
—

 
(181
)
 
—

 
—

 
(181
)
Accretion of noncredit loss
 
—

 
18,125

 
—

 
—

 
18,125

Net actuarial gain
 
—

 
—

 
—

 
29

 
29

Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
593

 
—

 
—

 
593

Amortization - hedging activities (4)
 
—

 
—

 
3,487

 
—

 
3,487

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
497

 
497

Other comprehensive income (loss)
 
84,725

 
18,537

 
(2,903
)
 
526

 
100,885

Balance, September 30, 2019
 
$
(68,233
)
 
$
(110,617
)
 
$
(32,197
)
 
$
(4,750
)
 
$
(215,797
)
_______________________
(1)
Recorded in net other-than-temporary impairment losses in investment securities, credit portion in the statement of operations.
(2)
Amortization of hedging activities includes $2.5 million recorded in CO bond interest expense and $11 thousand recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Recorded in CO bond interest expense.

Note 17 — Fair Values

A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 8 — Financial

36
Table of Contents

Statements and Supplementary Data — Note 19 — Fair Values in the 2018 Annual Report. There have been no material changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the three months ended September 30, 2019.

Table 17.1 presents the carrying value, fair value, and fair value hierarchy of our financial assets and liabilities at September 30, 2019, and December 31, 2018. We record trading securities, available-for-sale securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain private-label MBS, certain mortgage loans, and certain other assets on a non-recurring basis. We record all other financial assets and liabilities at amortized cost. Refer to Table 17.2 for further details about the financial assets and liabilities held at fair value on either a recurring or nonrecurring basis.

Table 17.1 - Fair Value Summary
(dollars in thousands)

 
September 30, 2019
 
Carrying Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral(2)
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
20,139

 
$
20,139

 
$
20,139

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
327,851

 
327,851

 
327,851

 
—

 
—

 
—

Securities purchased under agreements to resell
3,900,000

 
3,900,066

 
—

 
3,900,066

 
—

 
—

Trading securities(1)
1,536,880

 
1,536,880

 
—

 
1,536,880

 
—

 
—

Available-for-sale securities(1)
6,707,850

 
6,707,850

 
—

 
6,651,985

 
55,865

 
—

Held-to-maturity securities
1,120,439

 
1,333,568

 
—

 
544,746

 
788,822

 
—

Advances
38,539,591

 
38,691,821

 
—

 
38,691,821

 
—

 
—

Mortgage loans, net
4,459,120

 
4,600,479

 
—

 
4,579,972

 
20,507

 
—

Accrued interest receivable
109,324

 
109,324

 
—

 
109,324

 
—

 
—

Derivative assets(1)
122,522

 
122,522

 
—

 
8,683

 
—

 
113,839

Other assets (1)
30,963

 
30,963

 
12,029

 
18,934

 
—

 
—

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(625,873
)
 
(625,854
)
 
—

 
(625,854
)
 
—

 
—

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(25,864,142
)
 
(26,230,966
)
 
—

 
(26,230,966
)
 
—

 
—

Discount notes
(26,896,215
)
 
(26,899,037
)
 
—

 
(26,899,037
)
 
—

 
—

Mandatorily redeemable capital stock
(17,107
)
 
(17,107
)
 
(17,107
)
 
—

 
—

 
—

Accrued interest payable
(128,489
)
 
(128,489
)
 
—

 
(128,489
)
 
—

 
—

Derivative liabilities(1)
(12,027
)
 
(12,027
)
 
—

 
(52,548
)
 
—

 
40,521

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(2,163
)
 
—

 
(2,163
)
 
—

 
—

Standby letters of credit
(1,498
)
 
(1,498
)
 
—

 
(1,498
)
 
—

 
—




37
Table of Contents

 
December 31, 2018
 
Carrying Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral(2)
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
10,431

 
$
10,431

 
$
10,431

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
593,199

 
593,199

 
593,199

 
—

 
—

 
—

Securities purchased under agreements to resell
6,499,000

 
6,499,078

 
—

 
6,499,078

 
—

 
—

Federal funds sold
1,500,000

 
1,500,002

 
—

 
1,500,002

 
—

 
—

Trading securities(1)
163,038

 
163,038

 
—

 
163,038

 
—

 
—

Available-for-sale securities(1)
5,849,944

 
5,849,944

 
—

 
5,800,343

 
49,601

 
—

Held-to-maturity securities
1,295,023

 
1,528,929

 
—

 
638,164

 
890,765

 
—

Advances
43,192,222

 
43,167,700

 
—

 
43,167,700

 
—

 
—

Mortgage loans, net
4,299,402

 
4,238,087

 
—

 
4,217,487

 
20,600

 
—

Accrued interest receivable
112,751

 
112,751

 
—

 
112,751

 
—

 
—

Derivative assets(1)
22,403

 
22,403

 
—

 
13,832

 
—

 
8,571

Other assets(1)
25,059

 
25,059

 
9,988

 
15,071

 
—

 
—

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(474,878
)
 
(474,848
)
 
—

 
(474,848
)
 
—

 
—

COs:
 
 
 
 
 
 
 
 
 
 
 
Bonds
(25,912,684
)
 
(25,843,163
)
 
—

 
(25,843,163
)
 
—

 
—

Discount notes
(33,065,822
)
 
(33,062,585
)
 
—

 
(33,062,585
)
 
—

 
—

Mandatorily redeemable capital stock
(31,868
)
 
(31,868
)
 
(31,868
)
 
—

 
—

 
—

Accrued interest payable
(112,043
)
 
(112,043
)
 
—

 
(112,043
)
 
—

 
—

Derivative liabilities(1)
(255,800
)
 
(255,800
)
 
—

 
(309,552
)
 
—

 
53,752

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(4,164
)
 
—

 
(4,164
)
 
—

 
—

Standby letters of credit
(1,257
)
 
(1,257
)
 
—

 
(1,257
)
 
—

 
—


_______________________
(1)
Carried at fair value and measured on a recurring basis.
(2)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

Fair Value Measured on a Recurring and Nonrecurring Basis.


38
Table of Contents

Table 17.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis
(dollars in thousands)

 
September 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
$
—

 
$
6,211

 
$
—

 
$
—

 
$
6,211

U.S. Treasury obligations
—

 
1,508,289

 
—

 
—

 
1,508,289

U.S. government-guaranteed – single-family MBS
—

 
4,371

 
—

 
—

 
4,371

GSE – single-family MBS
—

 
96

 
—

 
—

 
96

GSE – multifamily MBS
—

 
17,913

 
—

 
—

 
17,913

Total trading securities
—

 
1,536,880

 
—

 
—

 
1,536,880

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

HFA securities
—

 
—

 
55,865

 
—

 
55,865

Supranational institutions
—

 
425,110

 
—

 
—

 
425,110

U.S. government-owned corporations
—

 
305,959

 
—

 
—

 
305,959

GSE
—

 
128,095

 
—

 
—

 
128,095

U.S. government guaranteed – single-family MBS
—

 
61,992

 
—

 
—

 
61,992

U.S. government guaranteed – multifamily MBS
—

 
316,885

 
—

 
—

 
316,885

GSE – single-family MBS
—

 
2,883,685

 
—

 
—

 
2,883,685

GSE – multifamily MBS
—

 
2,530,259

 
—

 
—

 
2,530,259

Total available-for-sale securities
—

 
6,651,985

 
55,865

 
—

 
6,707,850

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
8,618

 
—

 
113,839

 
122,457

Mortgage delivery commitments
—

 
65

 
—

 
—

 
65

Total derivative assets
—

 
8,683

 
—

 
113,839

 
122,522

Other assets
12,029

 
18,934

 
—

 
—

 
30,963

Total assets carried at fair value on a recurring basis
$
12,029

 
$
8,216,482

 
$
55,865

 
$
113,839

 
$
8,398,215

Carried at fair value on a nonrecurring basis(2)
 
 
 
 
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
6,856

 
$
—

 
$
6,856

Mortgage loans held for portfolio
—

 
—

 
774

 
—

 
774

REO
—

 
—

 
80

 
—

 
80

Total assets carried at fair value on a nonrecurring basis
$
—

 
$
—

 
$
7,710

 
$
—

 
$
7,710

Liabilities:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(52,526
)
 
$
—

 
$
40,521

 
$
(12,005
)
Mortgage delivery commitments
—

 
(22
)
 
—

 
—

 
(22
)
Total liabilities carried at fair value on a recurring basis
$
—

 
$
(52,548
)
 
$
—

 
$
40,521

 
$
(12,027
)




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Table of Contents

 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustments and Cash Collateral  (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
$
—

 
$
6,102

 
$
—

 
$
—

 
$
6,102

U.S. government-guaranteed – single-family MBS
—

 
5,344

 
—

 
—

 
5,344

GSE – single-family MBS
—

 
148

 
—

 
—

 
148

GSE – multifamily MBS
—

 
151,444

 
—

 
—

 
151,444

Total trading securities
—

 
163,038

 
—

 
—

 
163,038

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

HFA securities
—

 
—

 
49,601

 
—

 
49,601

Supranational institutions
—

 
405,155

 
—

 
—

 
405,155

U.S. government-owned corporations
—

 
273,169

 
—

 
—

 
273,169

GSE
—

 
115,627

 
—

 
—

 
115,627

U.S. government guaranteed – single-family MBS
—

 
75,658

 
—

 
—

 
75,658

U.S. government guaranteed – multifamily MBS
—

 
361,134

 
—

 
—

 
361,134

GSE – single-family MBS
—

 
3,562,159

 
—

 
—

 
3,562,159

GSE – multifamily MBS
—

 
1,007,441

 
—

 
—

 
1,007,441

Total available-for-sale securities
—

 
5,800,343

 
49,601

 
—

 
5,849,944

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
13,493

 
—

 
8,571

 
22,064

Mortgage delivery commitments
—

 
339

 
—

 
—

 
339

Total derivative assets
—

 
13,832

 
—

 
8,571

 
22,403

Other assets
9,988

 
15,071

 
—

 
—

 
25,059

Total assets carried at fair value on a recurring basis
$
9,988

 
$
5,992,284

 
$
49,601

 
$
8,571

 
$
6,060,444

Carried at fair value on a nonrecurring basis(2)
 
 
 
 
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
1,668

 
$
—

 
$
1,668

Mortgage loans held for portfolio
—

 
—

 
1,144

 
—

 
1,144

REO
—

 
—

 
361

 
—

 
361

Total assets carried at fair value on a nonrecurring basis
$
—

 
$
—

 
$
3,173

 
$
—

 
$
3,173

Liabilities:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(309,552
)
 
$
—

 
$
53,752

 
$
(255,800
)
Total liabilities carried at fair value on a recurring basis
$
—

 
$
(309,552
)
 
$
—

 
$
53,752

 
$
(255,800
)

_______________________
(1)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.
(2)
We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and real estate owned property (REO) at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security). The fair values presented are as of the date the fair value adjustment was recorded.

Table 17.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2019 and 2018.


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Table 17.3 - Roll Forward of Level 3 Available-for-Sale Securities
(dollars in thousands)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
 
$
51,560

 
$
37,600

 
$
49,601

 
$
37,683

Purchases
 
4,220

 
3,150

 
4,220

 
3,150

Unrealized gains (losses) included in other comprehensive income
 
85

 
(413
)
 
2,044

 
(496
)
Balance at end of period
 
$
55,865

 
$
40,337

 
$
55,865

 
$
40,337



Note 18 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of September 30, 2019, and through the filing of this report, we do not believe it is likely that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by the FHLBank Act, as implemented by FHFA regulations, and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at September 30, 2019, and December 31, 2018. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $957.5 billion and $972.6 billion at September 30, 2019, and December 31, 2018, respectively. See Note 13 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

Table 18.1 - Off-Balance Sheet Commitments
(dollars in thousands)

 
 
September 30, 2019
 
December 31, 2018
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
7,993,979

 
$
229,526

 
$
8,223,505

 
$
6,028,851

 
$
226,438

 
$
6,255,289

Commitments for unused lines of credit - advances (2)
 
1,163,754

 
—

 
1,163,754

 
1,177,377

 
—

 
1,177,377

Commitments to make additional advances
 
14,016

 
57,395

 
71,411

 
159,401

 
59,894

 
219,295

Commitments to invest in mortgage loans
 
38,486

 
—

 
38,486

 
50,773

 
—

 
50,773

Unsettled CO bonds, at par
 
81,000

 
—

 
81,000

 
105,400

 
—

 
105,400

Unsettled CO discount notes, at par
 
—

 
—

 
—

 
600,000

 
—

 
600,000

__________________________

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(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At September 30, 2019, and December 31, 2018, these amounts totaled $195.1 million and $32.6 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $675 thousand at December 31, 2018.
(2)
Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.

Standby Letters of Credit. We issue standby letters of credit on behalf of our members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances. 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 state and local government agencies. Standby letters of credit are executed for members for a fee. If we are required to make payment for a beneficiary's draw, our strategy is to take prompt action to recover the funds paid to the third-party beneficiary, including converting the payment amount into a collateralized advance to the primary obligor, withdrawing the payment amount from the primary obligor's demand deposit account with us, or selling collateral pledged by the primary obligor in a commercially reasonable manner to offset the payment amount. Historically, standby letters of credit usually expire without being drawn upon. The terms of these standby letters of credit have original expiration periods of up to 20 years, currently expiring no later than 2027. Currently, we offer new standby letters of credit with expiration periods of up to 10 years. Unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $1.5 million and $1.3 million at September 30, 2019, and December 31, 2018, respectively.

Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.

Pledged Collateral. We have pledged securities as collateral, related to derivatives. See Note 11 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.

Legal Proceedings. We are subject to various legal proceedings arising in the normal course of business from time to time. We would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition, results of operations, or cash flows.

Note 19 — Transactions with Shareholders

Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding at any time during the period.

Table 19.1 - Shareholder Concentrations, Balance Sheet
(dollars in thousands)

 
Capital 
Stock
Outstanding
 
Percent
of Total Capital Stock
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of September 30, 2019
 
 
 
 
 
 
 
 
 
 
 
State Street Bank and Trust Company
$
250,000

 
12.2
%
 
$
6,000,000

 
15.6
%
 
$
3,434

 
6.1
%
Citizens Bank, N.A.
149,219

 
7.3

 
3,205,868

 
8.3

 
1,908

 
3.4

 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
State Street Bank and Trust Company
$
105,000

 
4.1
%
 
$
2,000,000

 
4.6
%
 
$
893

 
1.5
%
Citizens Bank, N.A.
339,003

 
13.2

 
7,656,146

 
17.7

 
5,005

 
8.3



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We held sufficient collateral to support the advances to the above institution such that we do not expect to incur any credit losses on these advances.

Table 19.2 - Shareholder Concentrations, Income Statement
(dollars in thousands)

 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
State Street Bank and Trust Company
 
 
 
 
 
 
 
 
Interest income on advances
 
$
4,629

 
$
—

 
$
6,929

 
$
—

 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
 
 
 
 
 
 
 
 
Interest income on advances
 
$
16,534

 
$
33,144

 
$
77,605

 
$
89,228

Fees on letters of credit
 
1,486

 
1,257

 
5,005

 
3,338



Transactions with Directors' Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors. In accordance with FHFA regulations, transactions with directors' institutions are conducted on the same terms as those with any other member.

Table 19.3 - Transactions with Directors' Institutions
(dollars in thousands)

 
Capital Stock
Outstanding
 
Percent
of Total Capital Stock
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of September 30, 2019
$
80,975

 
4.0
%
 
$
1,617,743

 
4.2
%
 
$
2,912

 
5.2
%
As of December 31, 2018
113,337

 
4.4

 
2,147,602

 
5.0

 
3,576

 
6.0



Note 20 — Subsequent Events

On October 25, 2019, the board of directors declared a cash dividend at an annualized rate of 5.73 percent based on capital stock balances outstanding during the third quarter of 2019. The dividend, including dividends classified as interest on mandatorily redeemable capital stock, amounted to $26.2 million and was paid on November 4, 2019.




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Table of Contents

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

Index to Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report includes statements describing anticipated developments, projections, estimates, or predictions of ours that are “forward-looking statements.” These statements may involve matters related to, but not limited to, projections of revenues, income, earnings, capital expenditures, dividends, capital structure, or other financial items; repurchases of excess stock, our minimum retained earnings target, or the interest-rate environment in which we do business; statements of management’s plans or objectives for future operations; expectations of future economic performance; or statements of assumptions underlying certain of the foregoing types of statements. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors in the 2018 Annual Report and Part II — Item 1A — Risk Factors of this quarterly report along with the risks set forth below. Actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.

Some of the risks and uncertainties that could affect our forward-looking statements include the following:

•
the effects of economic, financial, credit, and market conditions on our financial and regulatory condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, employment rates, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, members’ deposit flows, liquidity needs, and loan demand; changes in benchmark interest rates, including but not limited to the anticipated cessation of the LIBOR benchmark rate, the development of alternative rates, including SOFR, and the adverse consequences these could have for market participants, including the Bank and its members; changes in the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government; the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments; the condition of the capital markets on our COs;
•
issues and events across the FHLBank System and in the political arena that may lead to executive branch, legislative, regulatory, judicial, or other developments impacting the scope of our business, investor demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, our counterparties, the manner in which we operate, or the organization and structure of the FHLBank System;
•
our ability to declare and pay dividends consistent with past practices as well as any plans to repurchase excess capital stock;
•
competitive forces including, without limitation, other sources of funding available to our members and other entities borrowing funds in the capital markets;
•
changes in the value and liquidity of collateral we hold as security for obligations of our members and counterparties;
•
the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules;

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Table of Contents

•
changes in the fair value and economic value of, impairments of, and risks, including risks related to changes in or cessation of benchmark interest rates, associated with the Bank’s investments in mortgage loans and MBS or other assets and the related credit enhancement protections;
•
membership conditions and changes, including changes resulting from member failures, mergers or changing financial health, changes due to member eligibility, changes in the principal place of business of members, or the addition of new members;
•
external events, such as general economic and financial instabilities, political instability, wars and natural disaster, including disasters caused by significant climate change, which could damage the facilities of our members, damage or destroy collateral that members have pledged to secure advances or mortgages that we hold for our portfolio, and which could cause us to experience losses or be exposed to a greater risk that pledged collateral would be inadequate in the event of a default;
•
the pace of technological change and our 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, failures, interruptions, or security breaches (including cyber-attacks); and
•
our ability to attract and retain skilled employees.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2018 Annual Report.

EXECUTIVE SUMMARY

Net income for the quarter ending September 30, 2019, was $32.1 million, compared with net income of $64.7 million for the same period in 2018. The decrease in net income was primarily due to a decrease of $21.1 million in net interest income after provision for credit losses and a $12.8 million decrease in litigation settlement income. The $21.1 million decrease in net interest income after provision for credit losses was mainly a result of an $8.7 billion decrease in average earning assets, as well as higher premium amortization on U.S. Agency mortgage-backed securities resulting from higher expected mortgage refinancing activity due to a significant drop in mortgage rates during the third quarter of 2019. Our return on average equity was 4.28 percent for three months ended September 30, 2019, compared with 7.56 percent for the three months ended September 30, 2018, a decrease of 328 basis points. Advances balances dropped $4.7 billion to $38.5 billion during the period. Our business model is designed to allow for variability in demand for advances and changes in interest rates. While the decrease in advances balances and lower interest rates contributed to reduced net income, our financial condition continued to strengthen with retained earnings of $1.4 billion at September 30, 2019, a surplus of $720.6 million over our minimum retained earnings target, as we continued to satisfy all regulatory capital requirements as of September 30, 2019. On October 25, 2019, our board of directors declared a cash dividend that was equivalent to an annual yield of 5.73 percent, the approximate daily average three-month LIBOR yield for the third quarter of 2019 plus 350 basis points.

Net Interest Margin

For the three months ended September 30, 2019, net interest margin was 0.43 percent, a decrease of seven basis points from the three months ended September 30, 2018. The decrease in net interest margin reflects the negative impact of higher premium amortization on U.S. Agency mortgage-backed securities as long-term interest rates dropped, having risen during the prior-year period.

Advances Balances

We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled $38.5 billion at September 30, 2019, compared to $43.2 billion at December 31, 2018. The decrease in advances was primarily concentrated in variable-rate advances.

Accretable yields from investments in private-label MBS

For the three months ended September 30, 2019 and 2018, we recognized $6.9 million and $8.0 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition in the 2018 Annual Report.


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Table of Contents

The amortized cost of our total investments in private-label MBS has declined to $602.2 million at September 30, 2019. Other-than-temporary impairment credit losses were $411 thousand for the three months ended September 30, 2019.

Regulatory Developments

The FHFA has issued regulatory guidance during the quarter as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact the way we satisfy our mission as well as the value of our membership.

LIBOR Transition Preparations

In July 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced its intention to stop persuading or compelling the major banks that sustain LIBOR to submit rate quotations after 2021. We recognize that the discontinuance of LIBOR as an interest rate benchmark and the transition to alternative reference rates, including SOFR, present significant risks and challenges that could affect our business. Many of our assets and liabilities are indexed to LIBOR, and we continue to assess legacy contracts across products and monitor risks to determine the effect of LIBOR discontinuance. Under a steering committee comprised of members of senior management and a working group of representatives from departments across the Bank, we have developed and continue to implement a multi-year plan and initiative to transition from LIBOR. We are also working with the other FHLBanks and the Office of Finance as we transition our floating-rate note issuance from LIBOR. We are updating our operational processes and models to support new alternative reference rate activity. For further details see Item 1A — Risk Factors — Market and Liquidity Risks — Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations, as well as, Operational Risks — We use derivatives to manage interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms in the 2018 Annual Report. Additional information is provided in — Legislative and Regulatory Developments as well as in Financial Condition — Transition of LIBOR to Alternative Reference Rates.

ECONOMIC CONDITIONS

Economic Environment

The labor market continued to strengthen in the third quarter of 2019. The national unemployment rate decreased from 3.7 percent in June 2019 to 3.5 percent in September 2019. Jobs gains were strong and averaged a net gain of 157,000 jobs per month during the third quarter. The New England region also continued to see improvements in the labor market. The August 2019 unemployment rate for the six New England states as a whole was 3.0 percent, a 0.1 percent decrease from May 2019. In August 2019, year-over-year job gains were positive in all six New England states.

Interest-Rate Environment
On October 30, 2019, the Federal Open Market Committee (FOMC) lowered the target range for the federal funds rate by 25 basis points to 1.50 percent to 1.75 percent, citing the implications of global developments for economic outlook and muted inflation. The FOMC stated that it views sustained economic expansion, strong labor market conditions, and inflation near the FOMC’s 2.0 percent objective to be the most likely scenario going forward. During the third quarter, the yield curve remained in an inverted position with an average 10-year/3-month Treasury spread of negative 23 basis points during the quarter. These trends caused prepayment expectations for fixed-rate residential mortgages to increase during the quarter ending September 30, 2019.


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Table of Contents

Table 1 - Key Interest Rates

 
Three Month Average
 
Nine Month Average
 
Ending Rate
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
September 30, 2018
 
September 30, 2019
 
December 31, 2018
Federal funds effective rate
2.20%
 
1.92%
 
2.33%
 
1.70%
 
1.90%
 
2.40%
3-month LIBOR
2.20%
 
2.34%
 
2.46%
 
2.20%
 
2.09%
 
2.81%
3-month U.S. Treasury yield
2.01%
 
2.06%
 
2.25%
 
1.83%
 
1.81%
 
2.37%
2-year U.S. Treasury yield
1.68%
 
2.66%
 
2.10%
 
2.43%
 
1.62%
 
2.49%
5-year U.S. Treasury yield
1.63%
 
2.80%
 
2.07%
 
2.70%
 
1.54%
 
2.51%
10-year U.S. Treasury yield
1.79%
 
2.92%
 
2.25%
 
2.87%
 
1.66%
 
2.69%
________________
Source: Bloomberg

SELECTED FINANCIAL DATA

The following financial highlights for the statement of condition and statement of operations for December 31, 2018, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.


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Table of Contents

Table 2 - Selected Financial Data
(dollars in thousands)

 
 
September 30, 2019
 
June 30, 2019
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
Statement of Condition
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
56,923,960

 
$
55,779,532

 
$
52,327,612

 
$
63,593,317

 
$
64,693,803

Investments(1)
 
13,593,020

 
13,963,431

 
15,543,790

 
15,900,204

 
19,321,695

Advances
 
38,539,591

 
37,096,797

 
32,152,009

 
43,192,222

 
40,927,639

Mortgage loans held for portfolio, net(2)
 
4,459,120

 
4,421,028

 
4,368,333

 
4,299,402

 
4,192,425

Deposits and other borrowings
 
625,873

 
594,848

 
555,031

 
474,878

 
484,761

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
Bonds
 
25,864,142

 
25,292,490

 
24,913,714

 
25,912,684

 
26,741,036

Discount notes
 
26,896,215

 
26,424,978

 
23,585,929

 
33,065,822

 
33,431,980

Total consolidated obligations
 
52,760,357

 
51,717,468

 
48,499,643

 
58,978,506

 
60,173,016

Mandatorily redeemable capital stock
 
17,107

 
17,107

 
17,413

 
31,868

 
31,868

Class B capital stock outstanding-putable(3)
 
2,031,651

 
1,995,252

 
1,830,240

 
2,528,854

 
2,476,876

Unrestricted retained earnings
 
1,085,463

 
1,087,641

 
1,090,811

 
1,084,342

 
1,084,538

Restricted retained earnings
 
335,110

 
328,685

 
321,561

 
310,670

 
301,928

Total retained earnings
 
1,420,573

 
1,416,326

 
1,412,372

 
1,395,012

 
1,386,466

Accumulated other comprehensive loss
 
(215,797
)
 
(237,362
)
 
(278,808
)
 
(316,507
)
 
(343,013
)
Total capital
 
3,236,427

 
3,174,216

 
2,963,804

 
3,607,359

 
3,520,329

Results of Operations
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for (reduction of) credit losses
 
$
56,326

 
$
57,721

 
$
86,565

 
$
76,021

 
$
77,460

Net impairment losses on held-to-maturity securities recognized in earnings
 
(411
)
 
(314
)
 
(103
)
 
(125
)
 
(71
)
Litigation settlements
 
3

 
—

 
—

 
—

 
12,769

Other income (loss), net
 
2,478

 
3,989

 
(6,633
)
 
2,328

 
2,410

Other expense
 
22,671

 
21,789

 
19,287

 
29,604

 
20,658

AHP assessments
 
3,597

 
3,987

 
6,085

 
4,912

 
7,238

Net income
 
$
32,128

 
$
35,620

 
$
54,457

 
$
43,708

 
$
64,672

Other Information
 

 

 



 

Dividends declared
 
$
27,881

 
$
31,666

 
$
37,272

 
$
35,162

 
$
35,143

Dividend payout ratio
 
86.78
%
 
88.90
%
 
68.44
%
 
80.45
%
 
54.34
%
Weighted-average dividend rate(4)
 
6.04

 
6.22

 
6.17

 
5.87

 
5.87

Return on average equity(5)
 
4.28

 
4.77

 
6.94

 
5.04

 
7.56

Return on average assets
 
0.24

 
0.27

 
0.37

 
0.28

 
0.42

Net interest margin(6)
 
0.43

 
0.43

 
0.59

 
0.49

 
0.50

Average equity to average assets
 
5.66

 
5.57

 
5.33

 
5.56

 
5.55

Total regulatory capital ratio(7)
 
6.09

 
6.15

 
6.23

 
6.22

 
6.02

_______________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
(2)
The allowance for credit losses amounted to $500 thousand for each of the quarters ended September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018, and September 30, 2018.
(3)
Capital stock is putable at the option of a member upon five years' written notice, subject to applicable restrictions.
(4)
Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends.
(5)
Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss and total retained earnings.
(6)
Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.

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Table of Contents

(7)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 1 — Notes to Financial Statements — Note 15 — Capital.

RESULTS OF OPERATIONS

Net Income

Third Quarter of 2019 Compared with Third Quarter of 2018

Net income decreased to $32.1 million for the three months ended September 30, 2019, from $64.7 million for the same period in 2018. The reasons for the decrease are discussed under — Executive Summary.

Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018

Net income decreased to $122.2 million for the nine months ended September 30, 2019, from $173.1 million for the same period in 2018. The decrease is primarily due to a $35.5 million decrease in net interest income after provision for credit losses, a $12.8 million decrease in litigation settlement income, and a $10.0 million increase in losses on early extinguishment of debt, partially offset by a $4.6 million increase in net unrealized gains on trading securities.

Net Interest Income

Third Quarter of 2019 Compared with Third Quarter of 2018

Net interest income after provision for credit losses for the quarter ending September 30, 2019, was $56.3 million, compared with $77.5 million for the same period in 2018. The $21.1 million decrease in net interest income after provision for credit losses was mainly a result of an $8.7 billion decrease in average earning assets, as well as higher premium amortization on U.S. Agency mortgage-backed securities resulting from an expected increase in mortgage refinancing activity following a significant drop in mortgage rates during the third quarter of 2019. The decrease in average earning assets primarily consisted of a $6.5 billion decrease in average advances, a $2.7 billion decrease in average short-term investments, and a $1.1 billion decrease in average mortgage-backed securities. These decreases were partially offset by a $1.4 billion increase in average U.S. Treasury Notes. For additional information see — Rate and Volume Analysis.

Net interest spread was 0.30 percent for the three months ended September 30, 2019, an eight basis point decrease from the same period in 2018, and net interest margin was 0.43 percent, a seven basis point decrease from the same period in 2018. The decrease in net interest spread reflects a 16 basis point increase in the average yield on earning assets and a 24 basis point increase in the average yield on interest-bearing liabilities. The decreases in both net interest spread and net interest margin mainly reflect the negative impact of higher premium amortization on U.S. Agency mortgage-backed securities.

Nine Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018

Net interest income after provision for credit losses for the nine months ended September 30, 2019, was $200.6 million, compared with $236.1 million for the same period in 2018. The $35.5 million decrease in net interest income after provision for credit losses was mainly a result of a $6.6 billion decrease in average earning assets as well as higher premium amortization on U.S. Agency mortgage-backed securities resulting from a significant drop in mortgage rates during the nine months ended September 30, 2019. The decrease in average earning assets primarily consisted of a $5.2 billion decrease in average advances and a $1.6 billion decrease in average mortgage-backed securities. This decrease in net interest income after provision for credit losses was partially offset by an increase in prepayment fees on advances from $161 thousand in the nine months ended September 30, 2018 to $31.1 million for the same period in 2019.

Net interest spread was 0.35 percent for the nine months ended September 30, 2019, a five basis point decrease from the same period in 2018, and net interest margin was 0.49 percent, a two basis point decrease from 2018. The decrease in net interest spread reflects a 50 basis point increase in the average yield on earning assets and a 55 basis point increase in the average yield on interest-bearing liabilities. The decrease in net interest spread reflects the negative impact of higher premium amortization on U.S. Agency mortgage-backed securities, partially offset by the prepayment fees on advances discussed above.

Table 3 presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.


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Table of Contents

Table 3 - Net Interest Spread and Margin
(dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended September 30,
 
 
2019
 
2018
 
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
31,728,922

 
$
204,840

 
2.56
%
 
$
38,229,447

 
$
226,544

 
2.35
%
 
Securities purchased under agreements to resell
 
4,922,283

 
28,121

 
2.27

 
4,211,500

 
20,865

 
1.97

 
Federal funds sold
 
1,510,793

 
8,603

 
2.26

 
5,973,043

 
29,329

 
1.95

 
Investment securities(2)
 
8,405,222

 
51,971

 
2.45

 
8,147,357

 
56,991

 
2.78

 
Mortgage loans
 
4,441,996

 
36,990

 
3.30

 
4,135,495

 
33,967

 
3.26

 
Other earning assets
 
1,250,354

 
7,014

 
2.23

 
237,482

 
1,122

 
1.87

 
Total interest-earning assets
 
52,259,570

 
337,539

 
2.56

 
60,934,324

 
368,818

 
2.40

 
Other non-interest-earning assets
 
214,909

 
 
 
 
 
279,700

 
 
 
 
 
Fair-value adjustments on investment securities
 
97,521

 
 
 
 
 
(117,303
)
 
 
 
 
 
Total assets
 
$
52,572,000

 
$
337,539

 
2.55
%
 
$
61,096,721

 
$
368,818

 
2.39
%
 
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
22,810,011

 
$
126,465

 
2.20
%
 
$
29,484,044

 
$
147,463

 
1.98
%
 
Bonds
 
25,865,100

 
152,814

 
2.34

 
27,064,773

 
142,086

 
2.08

 
Deposits
 
570,627

 
1,638

 
1.14

 
506,073

 
1,337

 
1.05

 
Mandatorily redeemable capital stock
 
17,107

 
248

 
5.75

 
31,867

 
472

 
5.87

 
Total interest-bearing liabilities
 
49,262,845

 
281,165

 
2.26

 
57,086,757

 
291,358

 
2.02

 
Other non-interest-bearing liabilities
 
332,667

 
 
 
 
 
617,491

 
 
 
 
 
Total capital
 
2,976,488

 
 
 
 
 
3,392,473

 
 
 
 
 
Total liabilities and capital
 
$
52,572,000

 
$
281,165

 
2.12
%
 
$
61,096,721

 
$
291,358

 
1.89
%
 
Net interest income
 
 

 
$
56,374

 
 
 
 

 
$
77,460

 
 
 
Net interest spread
 
 

 
 

 
0.30
%
 
 

 
 

 
0.38
%
 
Net interest margin
 
 

 
 

 
0.43
%
 
 

 
 

 
0.50
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
 
2019
 
2018
 
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield(1)
 
Assets
 
 

 
 

 
 

 
 

 
 

 
 

 
Advances
 
$
33,878,481

 
$
707,323

 
2.79
%
 
$
39,047,542

 
$
618,077

 
2.12
%
 
Securities purchased under agreements to resell
 
5,801,264

 
104,192

 
2.40

 
3,423,542

 
44,494

 
1.74

 
Federal funds sold
 
2,574,674

 
46,158

 
2.40

 
6,302,960

 
81,126

 
1.72

 
Investment securities(2)
 
7,490,130

 
135,055

 
2.41

 
8,639,490

 
178,100

 
2.76

 
Mortgage loans
 
4,394,636

 
111,946

 
3.41

 
4,066,300

 
100,774

 
3.31

 
Other earning assets
 
915,252

 
16,097

 
2.35

 
182,585

 
2,270

 
1.66

 
Total interest-earning assets
 
55,054,437

 
1,120,771

 
2.72
%
 
61,662,419

 
1,024,841

 
2.22
%
 
Other non-interest-earning assets
 
255,398

 
 
 
 
 
276,428

 
 
 
 
 
Fair-value adjustments on investment securities
 
10,573

 
 
 
 
 
(102,651
)
 
 
 
 
 
Total assets
 
$
55,320,408

 
$
1,120,771

 
2.71
%
 
$
61,836,196

 
$
1,024,841

 
2.22
%
 
Liabilities and capital
 
 
 
 
 
 
 
 

 
 

 
 

 
Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

 
Discount notes
 
$
25,704,322

 
$
455,657

 
2.37
%
 
$
29,809,249

 
$
385,804

 
1.73
%
 

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Table of Contents

Bonds
 
25,568,810

 
458,346

 
2.40

 
27,477,005

 
397,843

 
1.94

 
Deposits
 
521,474

 
5,252

 
1.35

 
507,186

 
3,600

 
0.95

 
Mandatorily redeemable capital stock
 
18,110

 
814

 
6.01

 
33,333

 
1,427

 
5.72

 
Other borrowings
 
1,459

 
27

 
2.47

 
3,022

 
38

 
1.68

 
Total interest-bearing liabilities
 
51,814,175

 
920,096

 
2.37
%
 
57,829,795

 
788,712

 
1.82
%
 
Other non-interest-bearing liabilities
 
456,512

 
 
 
 
 
625,328

 
 
 
 
 
Total capital
 
3,049,721

 
 
 
 
 
3,381,073

 
 
 
 
 
Total liabilities and capital
 
$
55,320,408

 
$
920,096

 
2.22
%
 
$
61,836,196

 
$
788,712

 
1.71
%
 
Net interest income
 
 

 
$
200,675

 
 
 
 

$
236,129

 
 
 
Net interest spread
 
 

 
 

 
0.35
%
 
 

 
 

 
0.40
%
 
Net interest margin
 
 

 
 

 
0.49
%
 
 

 
 

 
0.51
%
 
_________________________
(1)
Yields are annualized.
(2)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 4 summarizes changes in interest income and interest expense for the three and nine months ended September 30, 2019 and 2018. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

Table 4 - Rate and Volume Analysis
(dollars in thousands)

 
 
For the Three Months Ended
 September 30, 2019 vs. 2018
 
For the Nine Months Ended
September 30, 2019 vs. 2018
 
 
Increase (Decrease) due to
 
Increase (Decrease) due to
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 

 
 

 
 

Advances
 
$
(40,780
)
 
$
19,076

 
$
(21,704
)
 
$
(89,475
)
 
$
178,721

 
$
89,246

Securities purchased under agreements to resell
 
3,804

 
3,452

 
7,256

 
38,517

 
21,181

 
59,698

Federal funds sold
 
(24,793
)
 
4,067

 
(20,726
)
 
(59,316
)
 
24,348

 
(34,968
)
Investment securities
 
1,759

 
(6,779
)
 
(5,020
)
 
(22,165
)
 
(20,880
)
 
(43,045
)
Mortgage loans
 
2,547

 
476

 
3,023

 
8,306

 
2,866

 
11,172

Other earning assets
 
5,644

 
248

 
5,892

 
12,532

 
1,295

 
13,827

Total interest income
 
(51,819
)
 
20,540

 
(31,279
)
 
(111,601
)
 
207,531

 
95,930

Interest expense
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
(35,829
)
 
14,831

 
(20,998
)
 
(58,458
)
 
128,311

 
69,853

Bonds
 
(6,504
)
 
17,232

 
10,728

 
(29,114
)
 
89,617

 
60,503

Deposits
 
179

 
122

 
301

 
104

 
1,548

 
1,652

Mandatorily redeemable capital stock
 
(214
)
 
(10
)
 
(224
)
 
(681
)
 
68

 
(613
)
Other borrowings
 
—

 
—

 
—

 
(25
)
 
14

 
(11
)
Total interest expense
 
(42,368
)
 
32,175

 
(10,193
)
 
(88,174
)
 
219,558

 
131,384

Change in net interest income
 
$
(9,451
)
 
$
(11,635
)
 
$
(21,086
)
 
$
(23,427
)
 
$
(12,027
)
 
$
(35,454
)

Average Balance of Advances Outstanding


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Table of Contents

The average balance of total advances decreased $5.2 billion, or 13.2 percent, for the nine months ended September 30, 2019, compared with the same period in 2018. We cannot predict whether this trend will continue.

For the nine months ended September 30, 2019 and 2018, net prepayment fees on advances were $31.1 million and $161 thousand, respectively. Prepayment-fee income is unpredictable and inconsistent from period to period, occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates, and generally when prevailing reinvestment yields are lower than those of the prepaid advances. For additional information see Note 2 — Summary of Significant Accounting Policies — Advances in the 2018 Annual Report.

Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, decreased $617.9 million, or 6.2 percent, for the nine months ended September 30, 2019, compared with the same period in 2018. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold increased from 1.72 percent during the nine months ended September 30, 2018 to 2.40 percent during the nine months ended September 30, 2019, while average yields on securities purchased under agreements to resell increased from 1.74 percent for the nine months ended September 30, 2018 to 2.40 percent for the nine months ended September 30, 2019. These investments are used for liquidity management.

Average investment-securities balances decreased $1.1 billion, or 13.3 percent for the nine months ended September 30, 2019, compared with the same period in 2018, a decrease consisting primarily of $1.6 billion in MBS, offset by an increase in average U.S. Treasury obligations of $460.8 million.

Average Balance of COs

Average CO balances decreased $6.0 billion, or 10.5 percent, for the nine months ended September 30, 2019, compared with the same period in 2018, resulting from our decreased funding needs principally due to the decrease in our average advances and investments balances. This overall decrease consisted of a decline of $4.1 billion in CO discount notes and a decrease of $1.9 billion in CO bonds.

The average balance of CO discount notes represented approximately 50.1 percent of total average COs during the nine months ended September 30, 2019, compared with 52.0 percent of total average COs during the nine months ended September 30, 2018. The average balance of CO bonds represented 49.9 percent and 48.0 percent of total average COs outstanding during the nine months ended September 30, 2019 and 2018, respectively.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. Beginning January 1, 2019, the fair value gains and losses of derivatives and hedged items designated in fair-value hedge relationships are also recognized as interest income or interest expense. Prior to January 1, 2019, the portion of fair value gains and losses of derivatives and hedged items representing hedge ineffectiveness were recorded in non-interest income. We enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and achieve our risk-management objectives. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy.


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Table of Contents

Table 5 - Effect of Derivative and Hedging Activities
(dollars in thousands)

 
 
For the Three Months Ended September 30, 2019
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities (1)
 
$
(562
)
 
$
—

 
$
(155
)
 
$
(880
)
 
$
—

 
$
(1,597
)
Gains (losses) on designated fair-value hedges
 
280

 
(772
)
 
—

 
434

 
—

 
(58
)
Net interest settlements on derivatives(2)
 
8,304

 
(4,856
)
 
—

 
(2,706
)
 
—

 
742

Total effect on net interest income
 
8,022

 
(5,628
)
 
(155
)
 
(3,152
)
 
—

 
(913
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Losses on derivatives not receiving hedge accounting
 
(29
)
 
(1,015
)
 
—

 
—

 
—

 
(1,044
)
Mortgage delivery commitments
 
—

 
—

 
375

 
—

 
—

 
375

Price alignment amount(3)
 
—

 
—

 
—

 
—

 
12

 
12

Net (losses) gains on derivatives and hedging activities
 
(29
)
 
(1,015
)
 
375

 
—

 
12

 
(657
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
7,993

 
(6,643
)
 
220

 
(3,152
)
 
12

 
(1,570
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities(4)
 
—

 
(111
)
 
—

 
—

 
—

 
(111
)
Total net effect of derivatives and hedging activities
 
$
7,993

 
$
(6,754
)
 
$
220

 
$
(3,152
)
 
$
12

 
$
(1,681
)
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.
(4)
Includes only those gains (losses) on trading securities that have an assigned economic derivative.




53
Table of Contents

 
 
For the Three Months Ended September 30, 2018
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities(1)
 
$
(343
)
 
$
—

 
$
(102
)
 
$
466

 
$
—

 
$
21

Net interest settlements included(2)
 
15,769

 
(6,200
)
 
—

 
(8,787
)
 
—

 
782

Total net interest income
 
15,426

 
(6,200
)
 
(102
)
 
(8,321
)
 
—

 
803

 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(308
)
 
455

 
—

 
410

 
—

 
557

Gains on cash-flow hedges
 
—

 
—

 
—

 
83

 
—

 
83

Gains (losses) on derivatives not receiving hedge accounting
 
17

 
(10
)
 
—

 
—

 
—

 
7

Mortgage delivery commitments
 
—

 
—

 
131

 
—

 
—

 
131

Price alignment amount(3)
 
—

 
—

 
—

 
—

 
(291
)
 
(291
)
Net (losses) gains on derivatives and hedging activities
 
(291
)
 
445

 
131

 
493

 
(291
)
 
487

 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
15,135

 
(5,755
)
 
29

 
(7,828
)
 
(291
)
 
1,290

 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities(4)
 
—

 
(1,006
)
 
—

 
—

 
—

 
(1,006
)
Total net effect of derivatives and hedging activities
 
$
15,135

 
$
(6,761
)
 
$
29

 
$
(7,828
)
 
$
(291
)
 
$
284

_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.
(4)
Includes only those gains (losses) on trading securities that have an assigned economic derivative.

 
 
For the Nine Months Ended September 30, 2019
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities (1)
 
$
(1,612
)
 
$
—

 
$
(419
)
 
$
(1,503
)
 
$
—

 
$
(3,534
)
Gains (losses) on designated fair-value hedges
 
1,080

 
(3,537
)
 
—

 
(904
)
 
—

 
(3,361
)
Net interest settlements on derivatives(2)
 
37,057

 
(16,406
)
 
—

 
(18,074
)
 
—

 
2,577

Total effect on net interest income
 
36,525

 
(19,943
)
 
(419
)
 
(20,481
)
 
—

 
(4,318
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Losses on derivatives not receiving hedge accounting
 
(87
)
 
(2,444
)
 
—

 
—

 
—

 
(2,531
)
Mortgage delivery commitments
 
—

 
—

 
1,445

 
—

 
—

 
1,445

Price alignment amount(3)
 
—

 
—

 
—

 
—

 
15

 
15

Net (losses) gains on derivatives and hedging activities
 
(87
)
 
(2,444
)
 
1,445

 
—

 
15

 
(1,071
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
36,438

 
(22,387
)
 
1,026

 
(20,481
)
 
15

 
(5,389
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities(4)
 
—

 
(863
)
 
—

 
—

 
—

 
(863
)
Total net effect of derivatives and hedging activities
 
$
36,438

 
$
(23,250
)
 
$
1,026

 
$
(20,481
)
 
$
15

 
$
(6,252
)

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_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.
(4)
Includes only those gains (losses) on trading securities that have an assigned economic derivative.

 
 
For the Nine Months Ended September 30, 2018
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities(1)
 
$
(1,161
)
 
$
—

 
$
(294
)
 
$
839

 
$
—

 
$
(616
)
Net interest settlements included(2)
 
36,001

 
(19,975
)
 
—

 
(20,317
)
 
—

 
(4,291
)
Total net interest income
 
34,840

 
(19,975
)
 
(294
)
 
(19,478
)
 
—

 
(4,907
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
2,020

 
1,608

 
—

 
(1,488
)
 
—

 
2,140

Gains on cash-flow hedges
 
—

 
—

 
—

 
244

 
—

 
244

(Losses) gains on derivatives not receiving hedge accounting
 
(22
)
 
751

 
—

 
—

 
—

 
729

Mortgage delivery commitments
 
—

 
—

 
(336
)
 
—

 
—

 
(336
)
Price alignment amount(3)
 
—

 
—

 
—

 
—

 
(692
)
 
(692
)
Net gains (losses) on derivatives and hedging activities
 
1,998

 
2,359

 
(336
)
 
(1,244
)
 
(692
)
 
2,085

 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
36,838

 
(17,616
)
 
(630
)
 
(20,722
)
 
(692
)
 
(2,822
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities(4)
 
—

 
(3,753
)
 
—

 
—

 
 
 
(3,753
)
Total net effect of derivatives and hedging activities
 
$
36,838

 
$
(21,369
)
 
$
(630
)
 
$
(20,722
)
 
$
(692
)
 
$
(6,575
)
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.
(4)
Includes only those gains (losses) on trading securities that have an assigned economic derivative.

FINANCIAL CONDITION

Advances

At September 30, 2019, the advances portfolio totaled $38.5 billion, a decrease of $4.7 billion compared with $43.2 billion at December 31, 2018.

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Table 6 - Advances Outstanding by Product Type
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
 
Par Value
 
Percent of Total
 
Par Value
 
Percent of Total
Fixed-rate advances
 

 
 

 
 

 
 

Short-term
$
16,735,216

 
43.5
%
 
$
15,325,612

 
35.4
%
Long-term
13,206,520

 
34.3

 
13,415,001

 
31.0

Overnight
1,884,646

 
4.9

 
3,075,277

 
7.1

Putable
1,231,500

 
3.2

 
791,700

 
1.9

Amortizing
826,515

 
2.1

 
920,088

 
2.1

All other fixed-rate advances
10,000

 
—

 
42,600

 
0.1

 
33,894,397

 
88.0

 
33,570,278

 
77.6

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable (1)
4,448,775

 
11.6

 
8,908,875

 
20.6

Putable
99,500

 
0.3

 
733,300

 
1.7

All other variable-rate indexed advances
59,079

 
0.1

 
55,932

 
0.1

 
4,607,354

 
12.0

 
9,698,107

 
22.4

Total par value
$
38,501,751

 
100.0
%
 
$
43,268,385

 
100.0
%
_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

See Item 1 — Notes to Financial Statements — Note 8 — Advances for disclosures relating to redemption terms of the advances portfolio.

Advances Credit Risk

We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance, as applicable, based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral. We have never experienced a credit loss on an advance.

We assign each non-insurance company borrower to one of the following three credit status categories based on our assessment of the borrower's overall financial condition and other factors:

•
Category-1: members that are generally in satisfactory financial condition;
•
Category-2: members that show financial weakness or weakening financial trends in key financial indices and/or regulatory findings; and
•
Category-3: members with financial weaknesses that present an elevated level of concern.

We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral.


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Table 7 - Advances Outstanding by Borrower Credit Status Category
(dollars in thousands)

 
As of September 30, 2019
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
248

 
$
34,013,680

 
$
106,707,699

 
313.7
%
Category-2
14

 
338,035

 
888,647

 
262.9

Category-3
20

 
405,737

 
598,070

 
147.4

Insurance companies
20

 
3,744,299

 
4,696,082

 
125.4

Total
302

 
$
38,501,751

 
$
112,890,498

 
293.2
%

The method by which a borrower pledges collateral is dependent upon the type of borrower (depository vs. non-depository), the category to which the borrower is assigned, and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are permitted to specifically list and identify single-family owner-occupied residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.

The Bank may adjust the credit status category of a member from time to time based on the financial reviews and other conditions of the members. The Bank requires Category-3 members (as well as all non-depository members) to deliver collateral to the Bank or its custodian, and all securities collateral is delivered, regardless of a member's Category.

We have not recorded any allowance for credit losses on advances at September 30, 2019, and December 31, 2018, for the reasons discussed in Item 1 — Notes to Financial Statements — Note 10 — Allowance for Credit Losses.

Table 8 - Top Five Advance-Borrowing Institutions
(dollars in thousands)

 
 
September 30, 2019
 
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Three Months Ended September 30, 2019
Advances Interest Income for the
Nine Months Ended September 30, 2019
State Street Bank and Trust Company
 
$
6,000,000

 
15.6
%
 
2.33
%
 
$
4,629

$
6,929

Citizens Bank, N.A.
 
3,205,868

 
8.3

 
2.41

 
16,534

77,605

People's United Bank, N.A.
 
2,934,303

 
7.6

 
2.18

 
13,851

40,009

Webster Bank, N.A.
 
1,392,849

 
3.6

 
2.13

 
5,910

19,834

Mass Mutual Life Insurance Company
 
1,100,000

 
2.9

 
2.34

 
6,671

19,709

Total of top five advance-borrowing institutions
 
$
14,633,020

 
38.0
%
 
 
 
$
47,595

$
164,086

_______________________
(1)
Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments.

Investments

At September 30, 2019, investment securities and short-term money-market instruments totaled $13.6 billion, a decrease from $15.9 billion at December 31, 2018.

Short-term money-market investments decreased $4.4 billion to $4.2 billion at September 30, 2019, compared with December 31, 2018. The decrease was attributable to a $2.6 billion decline in securities purchased under agreements to resell, a decrease of $1.5 billion in federal funds sold, and a $265.3 million decrease in interest bearing deposits.

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Investment securities increased $2.1 billion to $9.4 billion at September 30, 2019, compared with December 31, 2018. The increase was attributable to purchases of $1.5 billion of U.S. Treasury obligations as well as an increase of $490.5 million in MBS.

Investments Credit Risk

We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning one year and under to maturity and currently only consisting of overnight risk) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. Currently we place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis. All of these placements currently either expire within one day or are payable upon demand.

In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.

We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, and sovereign support as well as related market signals such as credit default swap spreads. We may reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.


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Table 9 - Credit Ratings of Investments at Carrying Value
(dollars in thousands)

 
 
As of September 30, 2019
 
 
Long-Term Credit Rating
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money-market instruments: (1)
 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$
—

 
$
170

 
$
327,681

 
$
—

 
$
—

 
$
—

Securities purchased under agreements to resell
 
—

 
500,000

 
1,900,000

 
1,500,000

 
—

 
—

Total money-market instruments
 
—

 
500,170

 
2,227,681

 
1,500,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. Treasury obligations
 
—

 
1,508,289

 
—

 
—

 
—

 
—

Corporate bonds
 
—

 
—

 
—

 
—

 
—

 
6,211

U.S. government-owned corporations
 
—

 
305,959

 
—

 
—

 
—

 
—

GSE
 
—

 
128,095

 
—

 
—

 
—

 
—

Supranational institutions
 
425,110

 
—

 
—

 
—

 
—

 
—

HFA securities
 
37,348

 
62,892

 
11,920

 
35,165

 
—

 
—

Total non-MBS
 
462,458

 
2,005,235

 
11,920

 
35,165

 
—

 
6,211

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family (2)
 
—

 
73,621

 
—

 
—

 
—

 
—

U.S. government guaranteed - multifamily(2)
 
—

 
316,885

 
—

 
—

 
—

 
—

GSE – single-family (2)
 
—

 
3,212,928

 
—

 
—

 
—

 
—

GSE – multifamily (2)
 
—

 
2,749,133

 
—

 
—

 
—

 
—

Private-label
 
4,180

 
19,522

 
14,393

 
18,547

 
386,408

 
48,563

Total MBS
 
4,180

 
6,372,089

 
14,393

 
18,547

 
386,408

 
48,563


 


 


 
 
 
 
 
 
 
 
Total investment securities
 
466,638

 
8,377,324

 
26,313

 
53,712

 
386,408

 
54,774

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
466,638

 
$
8,877,494

 
$
2,253,994

 
$
1,553,712

 
$
386,408

 
$
54,774

_______________________
(1)
The counterparty rating is used for money-market instruments. Counterparty ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of September 30, 2019. If a rating is on negative credit watch, the rating in the next lower rating category is substituted. If there is a split rating, the lowest rating is used. In certain instances where a counterparty is unrated, the Bank may assign a deemed rating to the counterparty and that deemed rating is used.
(2)
The issue rating is used for investment securities. Issue ratings are obtained from Moody’s, Fitch, and S&P. If there is a split rating, the lowest rating is used.


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Table of Contents

Table 10 - Unsecured Money-Market Instruments and Debentures by Carrying Value
(dollars in thousands)

 
 
Carrying Value
 
 
September 30, 2019
 
December 31, 2018
Interest-bearing deposits
 
$
327,851

 
$
593,199

U.S. Treasury obligations
 
1,508,289

 
—

Supranational institutions
 
425,110

 
405,155

U.S. government-owned corporations
 
305,959

 
273,169

Federal funds sold
 
—

 
1,500,000

GSE
 
128,095

 
115,627

U.S. agency obligations
 
—

 
208


Private-Label MBS

Table 11 provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The table sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS. Average current credit enhancements as of September 30, 2019, reflect the percentage of subordinated class outstanding balances as of September 30, 2019, to our senior class outstanding balances as of September 30, 2019, weighted by the par value of our respective senior class securities. Average current credit enhancements as of September 30, 2019, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.


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Table of Contents

Table 11 - Private-Label Residential MBS and Home Equity ABS
(dollars in thousands)

 
September 30, 2019
Par value by credit rating
 

Triple-A
$
4,180

Double-A
19,522

Single-A
15,593

Triple-B
18,546

Below Investment Grade
 
Double-B
11,488

Single-B
19,428

Triple-C
372,664

Double-C
218,635

Single-C
4,600

Single-D
52,876

Unrated
71,499

Total par value
$
809,031

 
 
Amortized cost
$
602,230

Gross unrealized gains
103,073

Gross unrealized losses
(3,081
)
Fair value
$
702,222

 
 
Weighted average percentage of fair value to par value
86.80
%
Original weighted average credit support
27.93

Weighted average credit support
7.28

Weighted average collateral delinquency (1)
16.25

_______________________
(1)
Represents loans that are 60 days or more delinquent.

Mortgage Loans

We invest in mortgages through the MPF program. The MPF program is further described under — Mortgage Loans Credit Risk and in Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2018 Annual Report.

As of September 30, 2019, our mortgage loan investment portfolio totaled $4.5 billion, an increase of $159.7 million from December 31, 2018. We expect continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities.

Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2018 Annual Report.

Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in Table 12.


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Table of Contents

Table 12 - State Concentrations by Outstanding Principal Balance

 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
 
September 30, 2019
 
December 31, 2018
 
 

 
 

Massachusetts
58
%
 
57
%
Maine
10

 
10

Connecticut
9

 
10

All others
23

 
23

Total
100
%
 
100
%

We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is excluded from interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis.

Table 13 - Delinquent Mortgage Loans
(dollars in thousands)

 
September 30, 2019
 
December 31, 2018
Total par value of government loans past due 90 days or more and still accruing interest
$
5,317

 
$
6,433

Nonaccrual loans, par value
9,564

 
7,960

Troubled debt restructurings (not included above)
6,812

 
7,199


Mortgage Insurance Companies. We are exposed to credit risk from primary mortgage insurance coverage (PMI) on individual loans. As of September 30, 2019, we were the beneficiary of PMI coverage of $144.6 million on $553.5 million of conventional mortgage loans. These amounts relate to loans originated with PMI and for which current loan-to-value ratios exceed 78 percent (determined by recalculating the original loan-to-value ratio using the current unpaid principal balance divided by the appraised home value at the time of origination).

We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time.

Deposits

At September 30, 2019, and December 31, 2018, deposits totaled $625.9 million and $474.9 million, respectively.

Table 14 - Term Deposits Greater Than $100,000
(dollars in thousands)

 
 
September 30, 2019
 
December 31, 2018
Term deposits by maturity
 
Amount
 
Weighted Average Rate
 
Amount
 
Weighted Average Rate
Three months or less
 
$
—

 
—
%
 
$
—

 
—
%
Over three months through six months
 
800

 
1.82

 
—

 
—

Over six months through 12 months
 
—

 
—

 
800

 
2.34

Greater than 12 months
 
—

 
—

 
—

 
—

Total par value
 
$
800

 
1.82
%
 
$
800

 
2.34
%

Consolidated Obligations


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Table of Contents

See — Liquidity and Capital Resources for information regarding our COs.

Derivative Instruments

All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Bilateral and cleared derivatives outstanding are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $122.5 million and $22.4 million as of September 30, 2019, and December 31, 2018, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $12.0 million and $255.8 million as of September 30, 2019, and December 31, 2018, respectively.

The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of September 30, 2019, and December 31, 2018. The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk.

Table 15 - Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)

 
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
Hedged Item
 
Derivative
 
Designation(2)
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
5,178,193

 
$
(9,077
)
 
$
5,343,804

 
$
5,773

 
 
Swaps
 
Economic
 
710,800

 
(37,022
)
 
769,800

 
(13,144
)
Total associated with advances
 
 
 
 
 
5,888,993

 
(46,099
)
 
6,113,604

 
(7,371
)
Available-for-sale securities
 
Swaps
 
Fair value
 
2,582,205

 
6,389

 
611,915

 
(228,905
)
Trading securities
 
Swaps
 
Economic
 
1,500,000

 
(1,812
)
 
158,000

 
(487
)
COs
 
Swaps
 
Fair value
 
4,215,550

 
(7,171
)
 
6,024,980

 
(54,791
)
 
 
Forward starting swaps
 
Cash Flow
 
44,000

 
(6
)
 
282,000

 
(753
)
Total associated with COs
 
 
 
 
 
4,259,550

 
(7,177
)
 
6,306,980

 
(55,544
)
Total
 
 
 
 
 
14,230,748

 
(48,699
)
 
13,190,499

 
(292,307
)
Mortgage delivery commitments
 
 
 
 
 
38,486

 
43

 
50,773

 
339

Total derivatives
 
 
 
 
 
$
14,269,234

 
(48,656
)
 
$
13,241,272

 
(291,968
)
Accrued interest
 
 
 
 
 
 

 
4,791

 
 

 
(3,752
)
Cash collateral, including related accrued interest
 
 
 
 
 
 
 
154,360

 
 
 
62,323

Net derivatives
 
 
 
 
 
 

 
$
110,495

 
 

 
$
(233,397
)
Derivative asset
 
 
 
 
 
 

 
$
122,522

 
 

 
$
22,403

Derivative liability
 
 
 
 
 
 

 
(12,027
)
 
 

 
(255,800
)
Net derivatives
 
 
 
 
 
 

 
$
110,495

 
 

 
$
(233,397
)
 _______________________
(1)
As of September 30, 2019 and December 31, 2018, embedded derivatives separated from the advance contract with notional amounts of $710.8 million and $769.8 million, respectively, and fair values of $36.9 million and $13.1 million, respectively, are not included in the table.
(2)
The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is either LIBOR or the OIS rate based on the federal funds effective rate. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents derivative hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not designated for fair-value or cash-flow hedge accounting but are acceptable hedging strategies under our risk-management policy.

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Tables 16 and 17 provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $9.4 billion, representing 65.8 percent of all derivatives outstanding as of September 30, 2019. Economic hedges and cash-flow hedges are not included within the two tables below.

Table 16 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity
(dollars in thousands)

 
As of September 30, 2019
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (4)
 
Derivatives
 
Advances(2)
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value(1)
 
Hedged Amount
 
Fair-Value Adjustment(3)
 
Advances
 
Receive Floating Rate
 
Pay Fixed Rate
 
Net Receive Result
Due in one year or less
$
1,861,165

 
$
1,468

 
$
1,861,165

 
$
(1,307
)
 
1.88
%
 
2.73
%
 
1.61
%
 
3.00
%
Due after one year through two years
1,188,213

 
(2,070
)
 
1,188,213

 
2,114

 
2.16

 
2.30

 
1.75

 
2.71

Due after two years through three years
1,293,115

 
(9,805
)
 
1,293,115

 
9,626

 
2.20

 
2.75

 
1.77

 
3.18

Due after three years through four years
349,700

 
(7,498
)
 
349,700

 
7,408

 
2.34

 
2.39

 
2.01

 
2.72

Due after four years through five years
293,750

 
(6,075
)
 
293,750

 
5,973

 
2.28

 
4.45

 
1.71

 
5.02

Thereafter
192,250

 
(1,557
)
 
192,250

 
1,470

 
1.74

 
2.12

 
1.15

 
2.71

Total
$
5,178,193

 
$
(25,537
)
 
$
5,178,193

 
$
25,284

 
2.07
%
 
2.69
%
 
1.70
%
 
3.06
%
_______________________
(1)
Not included in the fair value is $16.5 million of variation margin paid for daily settled contracts.
(2)
Included in the advances hedged amount are $641.2 million of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(3)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, which is either LIBOR or OIS based on the federal funds effective rate.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2019.

Table 17 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity
(dollars in thousands)

 
As of September 30, 2019
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (4)
 
Derivatives
 
CO Bonds (2)
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value(1)
 
Hedged Amount
 
Fair-Value Adjustment(3)
 
CO Bonds
 
Receive Fixed Rate
 
Pay Floating Rate
 
Net Pay Result
Due in one year or less
$
1,227,485

 
$
1,701

 
$
1,227,485

 
$
(1,837
)
 
2.01
%
 
2.06
%
 
2.18
%
 
2.13
%
Due after one year through two years
1,039,990

 
2,141

 
1,039,990

 
(1,945
)
 
1.62

 
1.97

 
2.35

 
2.00

Due after two years through three years
1,007,220

 
6,418

 
1,007,220

 
(6,512
)
 
1.92

 
1.98

 
2.21

 
2.15

Due after three years through four years
160,000

 
196

 
160,000

 
(286
)
 
2.06

 
2.15

 
2.25

 
2.16

Due after four years through five years
120,000

 
(233
)
 
120,000

 
214

 
1.87

 
2.00

 
2.12

 
1.99

Thereafter
660,855

 
1,656

 
660,855

 
(1,980
)
 
2.65

 
1.86

 
2.20

 
2.99

Total
$
4,215,550

 
$
11,879

 
$
4,215,550

 
$
(12,346
)
 
1.99
%
 
1.99
%
 
2.23
%
 
2.23
%
_______________________
(1)
Not included in the fair value is $19.1 million of variation margin received for daily settled contracts.
(2)
Included in the CO bonds hedged amount are $2.0 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.

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(3) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, which is either LIBOR or OIS based on the federal funds effective rate, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2019.

Derivative Instruments Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative contract. The amount of unsecured credit exposure to derivative counterparty default is the amount by which the replacement cost of the defaulted derivative contract exceeds the value of any collateral held by us (if the counterparty is the net obligor on the derivative contract) or is exceeded by the value of collateral pledged by us to counterparties (if we are the net obligor on the derivative contract). We accept cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives (principal-to-principal derivatives that are not centrally cleared) from counterparties with whom we are in a current positive fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. The resulting net exposure at fair value is reflected in Table 18 below. We pledge cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives to counterparties with whom we are in a current negative fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty.

From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied to securities, we pledge to counterparties cash or securities collateral whose fair value is greater than the current net negative fair-value of derivative positions outstanding with them adjusted for any applicable exposure threshold. Similarly, from time to time, due to timing differences or derivatives valuation differences, we receive from counterparties cash or securities collateral whose fair value is less than the current net positive fair-value of derivatives positions outstanding with them adjusted for any applicable exposure threshold. We pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member.


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Table 18 - Credit Exposure to Derivatives Counterparties
(dollars in thousands)

 
 
As of September 30, 2019
Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged to Counterparty
 
Non-cash Collateral Pledged to Counterparty
 
Net Credit Exposure to Counterparties
Asset positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
$
251,500

 
$
1,249

 
$
—

 
$
(1,197
)
 
$
52

Cleared derivatives
 
6,446,755

 
856

 
85,091

 
—

 
85,947

 
 
 
 
 
 
 
 
 
 
 
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
142,000

 
$
(4,927
)
 
$
4,939

 
$
—

 
$
12

Single-A
 
2,170,900

 
(31,858
)
 
21,777

 
10,921

 
840

Triple-B
 
276,000

 
(783
)
 
250

 
698

 
165

Cleared derivatives
 
4,011,603

 
(95
)
 
34,720

 
—

 
34,625

Total derivative positions with counterparties to which we had credit exposure
 
13,298,758

 
(35,558
)
 
146,777

 
10,422

 
121,641

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
38,486

 
65

 
—

 
—

 
65

Total
 
$
13,337,244

 
$
(35,493
)
 
$
146,777

 
$
10,422

 
$
121,706

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
Single-A
 
$
801,200

 
 
 
 
 
 
 
 
Triple-B
 
130,790

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
931,990

 

 
 
 
 
 
 
_______________________
(1)
Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.
(2)
Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3)
Represents derivatives positions with counterparties for which we are in a net liability position and for which we have delivered collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.

For information on our approach to the credit risks arising from our use of derivatives, see Item 7 — Management’s Discussion and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit Risk in the 2018 Annual Report.

Transition of LIBOR to Alternative Reference Rates

In July 2017, the United Kingdom's Financial Conduct Authority, the regulator for LIBOR, announced that after 2021 it will no longer persuade or compel the major banks that sustain LIBOR to submit rates for the calculation of LIBOR. The Alternative Reference Rates Committee (ARRC), which was established in 2014 by the Federal Reserve Board and the Federal Reserve

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Bank of New York to help ensure a successful transition in the U.S. from LIBOR, recommended SOFR as the alternative reference rate to U.S. Dollar LIBOR. 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. The Federal Reserve Bank of New York began publishing SOFR in the second quarter of 2018.

Many of our assets and liabilities are indexed to LIBOR, with exposure extending beyond December 31, 2021. We are currently evaluating and planning for the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. As a result, we have developed a LIBOR transition plan, which addresses considerations such as LIBOR exposure, contract “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, as well as contingencies for the potential unavailability of the index prior to December 31, 2021.

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 advances agreements with members, and the FHLBank System has added fallback language to consolidated obligations. We continue to monitor market-wide efforts to address fallbacks related to LIBOR-based derivatives and investment securities as well as fallback language for other financial instruments. We are in the process of assessing our operational readiness, to include updating processes and information technology systems to support the transition from LIBOR to an alternative reference rate.

The Bank participated in the FHLBank System’s first issuance of SOFR-indexed COs in November 2018, and we have continued to participate in SOFR-indexed CO issuances throughout 2019 as our funding needs required. Market activity in SOFR-indexed financial instruments continues to increase. During the nine months ended September 30, 2019, we have issued $3.9 billion in SOFR-indexed COs. In October 2019, the Bank began to offer a SOFR-based advance.

In March 2019, the Bank began to implement OIS based on the federal funds effective rate as an alternative interest rate hedging strategy for certain financial instruments, rather than using LIBOR when entering into new derivative transactions. In addition, a SOFR-based derivative market has begun to emerge.

On September 27, 2019, the FHFA issued a Supervisory Letter (the Supervisory Letter) that limits certain activities of the FHLBanks with respect to new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021. See Legislative and Regulatory Developments for more information on the Supervisory Letter.

We have exposures to advances, investment securities, COs, and derivatives with interest rates indexed to LIBOR. Table 19 presents exposure to LIBOR-indexed advances, investment securities, COs, and derivatives at September 30, 2019.

Table 19 - LIBOR-Indexed Variable Rate Financial Instruments at September 30, 2019
dollars in thousands

 
 
Due Prior to December 31, 2021
 
Due After December 31, 2021
Advances, par amount by redemption term(1)
 
$
397,100

 
$
—

Investment securities, par amount by contractual maturity
 
 
 
 
Non-MBS
 
6,205

 
89,857

MBS(2)
 
12,137

 
2,795,562

Total investment securities
 
18,342

 
2,885,419

Consolidated bonds, par amount by contractual maturity
 
1,820,000

 
—

Total financial instruments
 
$
2,235,442

 
$
2,885,419

 
 
 
 
 
Derivatives, notional amount by contractual termination date(3)
 
$
5,787,068

 
$
2,609,400

_______________________
(1)
For advances that have a conversion from a floating rate indexed to LIBOR to a fixed rate, the LIBOR exposure is considered to be due by the date which the financial instrument converts to a fixed rate.
(2)
Contractual maturity will likely differ from the expected maturity because borrowers of the underlying loans or securities are subject to a call right or prepayment right, with or without call or prepayment fees.

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(3)
Contractual termination date for derivatives does not take into account optional early termination provisions that may exist in certain derivative contracts.

The following table presents our variable rate advances, investment securities, consolidated bonds, and derivatives by interest-rate index.

Table 20 - Variable Rate Financial Instruments by Interest-Rate Index
dollars in thousands

 
 
Par Value of Advances
 
Par Value of Non-MBS
 
Par Value of MBS
 
Par Value of CO Bonds
 
Notional Amount of Derivatives
LIBOR
 
$
397,100

 
$
96,062

 
$
2,807,699

 
$
1,820,000

 
$
8,396,468

SOFR
 
—

 
—

 
—

 
3,918,000

 
—

OIS-Federal Funds
 
—

 
—

 
—

 
—

 
5,834,280

Other
 
4,210,254

 
—

 
135,295

 
—

 
—

Total
 
$
4,607,354

 
$
96,062

 
$
2,942,994

 
$
5,738,000

 
$
14,230,748


LIQUIDITY AND CAPITAL RESOURCES

Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Item 1 — Business — Consolidated Obligations of the 2018 Annual Report. Outstanding COs and the condition of the market for COs are discussed below under — Debt Financing — Consolidated Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.

Liquidity

We are required to maintain liquidity in accordance with the FHLBank Act, FHFA regulations and guidance, and policies established by our management and board of directors. We seek to be in a position to meet the credit and liquidity needs of our members and to meet all current and future financial commitments by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of our assets and liabilities.

We may not be able to predict future trends in member credit needs because they are driven by complex interactions among a number of factors, including members' asset growth or reductions, deposit growth or reductions, and the attractiveness of advances compared to other wholesale borrowing alternatives. We regularly monitor current trends and anticipate future debt issuance needs and maintain a portfolio of highly liquid assets in an effort to be prepared to fund our members' credit needs and our investment opportunities. We are able to expand our CO debt issuance in response to our members' increased credit needs for advances and to increase our acquisitions of mortgage loans. Alternatively, in response to reduced member credit needs, we may allow our COs to mature without replacement, transfer debt to another FHLBank, or repurchase and retire outstanding COs, allowing our balance sheet to shrink.

Sources and Uses of Liquidity. Our primary sources of liquidity are proceeds from the issuance of COs and advance repayments, as well as cash and investment holdings that are primarily high-quality short- and intermediate-term financial instruments.

During the nine months ended September 30, 2019, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. Our short-term funding was generally driven by member demand and was achieved primarily through the issuance of discount notes and short-term CO bonds. Access to short-term debt markets has been reliable because investors continue to view our short-term debt as an asset of choice, which has led to consistently low funding costs compared to those of other high-quality issuers and increased utilization of debt maturing in one year or less.

Our primary uses of liquidity are advance originations and consolidated obligation payments. Other uses of liquidity are mortgage loan and investment purchases, dividend payments, and other contractual payments. We also maintain liquidity to

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redeem or repurchase excess capital stock, through our daily excess stock repurchases, upon the request of a member or as required under our capital plan.

Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under the FHLBank Act, the U.S. Treasury may purchase up to $4 billion of COs of the FHLBanks. The terms, conditions, and interest rates in such a purchase would be determined by the U.S. Treasury. This authority may be exercised at the discretion of the U.S. Treasury with the agreement of the FHFA only if alternative means cannot be effectively employed to permit the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasury during the nine months ended September 30, 2019.

Our contingency liquidity plans, as discussed further below, are intended to ensure that we are able to meet our obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets.

For information and discussion of our guarantees and other commitments we may have, see — Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations below, and for further information and discussion of the joint and several liability for FHLBank COs, see — Debt Financing — Consolidated Obligations below.

Internal Liquidity Sources / Liquidity Management

We have developed a methodology and policies by which we measure and manage the Bank’s short-term liquidity needs based on projected net cash flow and contingent obligations.

Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.

Liquidity Management Action Triggers. We maintain a liquidity management action trigger pertaining to net cash flow: if projected net cash flow falls below zero on or before the 21st day following the measurement date, then management of the Bank is notified and determines whether any corrective action is necessary. We did not exceed this threshold at any time during the nine months ended September 30, 2019.


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Table 21 - Projected Net Cash Flow
(dollars in thousands)

 
 
As of September 30, 2019
 
 
21 Days
Uses of funds
 
 
Interest payable
 
$
38,917

Maturing liabilities
 
6,457,990

Committed asset settlements
 
5,066

Capital outflow
 
85,565

MPF delivery commitments
 
38,486

Other
 
2,079

Gross uses of funds
 
6,628,103

 
 
 
Sources of funds
 
 
Interest receivable
 
98,664

Maturing or projected amortization of assets
 
17,023,064

Committed liability settlements
 
81,323

Cash and due from banks and interest bearing deposits
 
347,087

Gross sources of funds
 
17,550,138

 
 
 
Projected net cash flow
 
$
10,922,035


Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:

•
marketable securities with a maturity greater than one week and less than one year that can be sold;
•
self-liquidating assets with a maturity of seven days or less;
•
assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and
•
irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.

We complied with this regulatory requirement at all times during the nine months ended September 30, 2019. As of September 30, 2019 and December 31, 2018, we held a surplus of $16.3 billion and $17.4 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO issuance.


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Table 22 - Contingency Liquidity
(dollars in thousands)

 
 
As of September 30, 2019
 
 
5 Business Days
Cumulative uses of funds
 
 
Interest payable
 
$
11,001

Maturing liabilities
 
1,623,985

Committed asset settlements
 
5,066

Drawdown of standby letters of credit
 
239,055

Other
 
2,079

Gross uses of funds
 
1,881,186

 
 
 
Cumulative sources of funds
 
 
Interest receivable
 
64,305

Maturing or amortizing advances
 
9,751,716

Committed liability settlements
 
81,323

Gross sources of funds
 
9,897,344

 
 
 
Plus: sources of contingency liquidity
 
 
Marketable securities
 
951,079

Self-liquidating assets
 
3,400,000

Cash and due from banks and interest bearing deposits
 
347,087

Marketable securities available for repo
 
3,620,379

Total sources of contingency liquidity
 
8,318,545

 
 
 
Net contingency liquidity
 
$
16,334,703


Base Case Liquidity Requirement. On August 27, 2018, the FHFA issued new guidance on liquidity, Advisory Bulletin 2018-07 (Liquidity Guidance AB), which communicates the FHFA’s expectations with respect to the maintenance of sufficient liquidity to enable us to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources. The Liquidity Guidance AB, which outlines a phased-in compliance approach, rescinded the 2009 liquidity guidance issued by the FHFA. Contemporaneously with the issuance of the Liquidity Guidance AB, the FHFA issued a supervisory letter that identifies initial thresholds for measures of liquidity. For additional information, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments in the 2018 Annual Report.

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

With respect to base case liquidity, the FHFA revised previous guidance that required the FHLBanks to assume a 5-day period without access to capital markets and rollover of maturing and called advances for all members except very large, highly rated members due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, FHLBanks are required to hold positive cash flow while rolling over maturing advances to all members and assuming no access to capital markets for an increased period of between 10 and 30 calendar days, with a specific measurement period set forth in the supervisory letter. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to standby letters of credit, the guidance states that FHLBanks should maintain a liquidity reserve of between one percent and 20 percent of its outstanding standby letters of credit commitments, as specified in the supervisory letter.


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We were in compliance with these additional liquidity requirements at all times during the nine months ended September 30, 2019.

Balance Sheet Funding Gap Policy. We may use a portion of the short-term COs issued to fund assets with longer terms, including longer-term floating-rate assets. Funding longer-term floating-rate assets with shorter-term liabilities generally does not expose us to significant interest-rate risk because the interest rates on both the floating-rate assets and liabilities typically reset similarly (either through rate resets or re-issuance of the obligations). However, deviations in the cost of our short-term liabilities relative to resetting assets can cause fluctuations in our net interest margin.

Additionally, the Bank is exposed to refinancing risk due to the fact that over certain time horizons, it has more liabilities than assets maturing. In order to manage the Bank’s refinancing risk, we maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month and one-year time horizons inclusive of projected mortgage-related prepayment activity. We measure this difference, or gap, as a percentage of total assets under two different measurement horizons - three months and one year. In conformity with the provisions of the Liquidity Guidance AB, the Bank has instituted a limit and management action trigger framework around these metrics as follows:

Table 23 - Funding Gap Metric

Funding Gap Metric (1)
 
Limit
 
Management Action Trigger
 
Three-Month Average
 September 30, 2019
 
Three-Month Average
December 31, 2018
 
 
 
 
 
 
 
 
 
3-month Funding Gap
 
15%
 
13%
 
5.3
%
 
10.6
%
 
 
 
 
 
 
 
 
 
1-year Funding Gap
 
30%
 
25%
 
7.1
%
 
12.9
%
_______________________
(1)
The funding gap metric is a positive value when maturing liabilities exceed maturing assets, as defined, within the given time period. Compliance with Limits and Management Action Triggers are evaluated against the rolling 3-month average of the month end gaps.

External Sources of Liquidity

Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. Under the terms of that agreement, in the event we do not fund our principal and interest payments due with respect to any CO within deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. We would then be required to repay the funding FHLBanks. We have never drawn funding under this agreement.

Debt Financing — Consolidated Obligations

At September 30, 2019, and December 31, 2018, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $52.8 billion and $59.0 billion, respectively. CO bonds outstanding for which we are primarily liable at September 30, 2019, and December 31, 2018, include issued callable bonds totaling $3.8 billion and $5.5 billion, respectively.

CO discount notes comprised 51.0 percent and 56.1 percent of the outstanding COs for which we are primarily liable at September 30, 2019, and December 31, 2018, respectively, but accounted for 92.9 percent and 94.8 percent of the proceeds from the issuance of such COs during the nine months ended September 30, 2019 and 2018, respectively.

Overall, we continued to experience steady demand for COs among investors and our issuance costs during the period covered by this report were consistent with those of recent quarters, reflecting continued high demand for all tenors of COs with the strongest demand for short-term COs. We participated in the FHLBank System’s first SOFR-indexed CO in November 2018, and we have continued to participate in SOFR-indexed CO issuances throughout 2019 as our funding needs required. We have

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been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. In the first nine months of 2019, COs continued to be issued at yields that were generally at or below equivalent-maturity U.S. dollar LIBOR interest rate swap yields for debt maturing in less than two years, while longer-term issues bore funding costs that were typically higher than equivalent maturity LIBOR swap yields. During the first nine months of 2019, CO yields generally moved downward with U.S. dollar interest rate swaps and comparable U.S. Treasury yields, though minor spread fluctuations occurred between these series. We believe that the market’s reaction to recent and expected changes in FOMC monetary policies, including recent intervention through daily repurchase agreement offerings and announced purchases of U.S. Treasury Bills, is a potentially important factor that could continue to shape investor demand for debt, including COs, in 2019. Moreover, potential increases in U.S. Treasury security issuance in response to higher fiscal deficits or any change or roll back of regulations governing money market investors may also have an impact on our funding costs.

Capital

Total capital at September 30, 2019, was $3.2 billion compared with $3.6 billion at year-end 2018.

Capital stock decreased $497.2 million from December 31, 2018 to $2.0 billion at September 30, 2019, resulting from capital stock repurchases of $1.9 billion offset by the issuance of $1.4 billion of capital stock to support new advances borrowings by members. The decrease in capital stock was primarily attributable to the decrease in advances and a reduction in membership stock investment requirement.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at September 30, 2019, as discussed in Item 1 — Notes to Financial Statements — Note 15 — Capital.

Subject to applicable law, following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Notes to Financial Statements — Note 2 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2018 Annual Report.

Table 24 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period
(dollars in thousands)

 
 
September 30, 2019
 
December 31, 2018
Past redemption date (1)
 
$
3,765

 
$
4,076

Due in one year or less
 
13,200

 
27,379

Due after one year through two years
 
—

 
—

Due after two years through three years
 
92

 
—

Due after three years through four years
 
30

 
363

Due after four years through five years
 
10

 
40

Thereafter (2)
 
10

 
10

Total
 
$
17,107

 
$
31,868

_______________________
(1)
Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption-notice period but the member-related activity (for example, advances) remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.
(2)
Amount represents reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for 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.

Capital Rule


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The FHFA’s regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated September 25, 2019, the Director of the FHFA notified us that, based on June 30, 2019 financial information, we met the definition of adequately capitalized under the Capital Rule.

Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.

Targeted Capital Ratio Operating Range

We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.1 percent at September 30, 2019.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must be at least equal to the sum of four percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of September 30, 2019, this internal minimum capital requirement equaled $2.8 billion, which was satisfied by our actual regulatory capital of $3.5 billion.

Minimum Retained Earnings Target

At September 30, 2019, we had total retained earnings of $1.4 billion compared with our minimum retained earnings target of $700.0 million. We generally view our minimum retained earnings target as a floor for retained earnings rather than as a retained earnings limit and expect to continue to grow our retained earnings modestly even though we exceed the target.

For information on limitations on dividends, including limitations when we are under our minimum retained earnings target, see Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in the 2018 Annual Report.

Reduction of Membership Stock Investment Requirement

Effective January 16, 2019, the membership stock investment requirement (MSIR) was reduced from 0.35 percent to 0.20 percent of the value of certain member assets eligible to secure advances, subject to a minimum balance of $10,000 and a maximum balance of $10.0 million. We reduced our MSIR in an effort to gain efficiency in our capital structure, as we currently exceed internal and regulatory minimum capital requirements.

Repurchases of Excess Stock

We have the authority, but are not obligated, to repurchase excess stock, as discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2018 Annual Report as well as below.

Table 25 - Capital Stock Requirements and Excess Capital Stock
(dollars in thousands)

 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock Investment
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
September 30, 2019
$
420,902

 
$
1,542,270

 
$
1,963,193

 
$
2,048,758

 
$
85,565

December 31, 2018
755,723

 
1,716,251

 
2,471,996

 
2,560,722

 
88,726

_______________________

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(1)
Total stock investment requirement is rounded up to the nearest $100 on an individual member basis.
(2) 
Class B capital stock outstanding includes mandatorily redeemable capital stock.

As discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2018 Annual Report, we currently conduct daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000. We plan to continue with this practice, subject to regulatory requirements and our anticipated capital needs, although continued repurchases remain at our sole discretion.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations

Our significant off-balance-sheet arrangements consist of the following:

•
commitments that obligate us for additional advances;
 •
standby letters of credit;
 •
commitments for unused lines-of-credit advances; and
 •
unsettled COs.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to Financial Statements — Note 20 — Commitments and Contingencies in the 2018 Annual Report.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

We have identified three accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, and accounting for deferred premiums and discounts on prepayable assets. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2018 Annual Report.

As of September 30, 2019, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.

RECENT ACCOUNTING DEVELOPMENTS

See Item 1 — Notes to Financial Statements — Note 3 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Advisory Bulletin (AB 2019-03) - Capital Stock Management. On August 14, 2019, the FHFA 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 FHFA 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.

The Bank does not expect the AB to have a material impact on the Bank’s capital management practices, financial condition, or results of operations.


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FHFA Supervisory Letter - Planning for LIBOR Phase-Out. On September 27, 2019, the FHFA issued a Supervisory Letter to the FHLBanks that the FHFA 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. The FHLBanks are expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021 by the deadlines specified in the Supervisory Letter, subject to limited exceptions granted by the FHFA under the Supervisory Letter for LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives.

Prior to the issuance of the Supervisory Letter, the Bank had suspended entering into LIBOR-indexed derivatives that terminate after December 31, 2021. The Bank had ceased purchasing investments that reference LIBOR and mature after December 31, 2021 prior to the issuance of the letter, also. Finally, early in 2019, the Bank limited the maturities of certain advances that are linked to LIBOR to December 31, 2021. See Financial Condition — Transition of LIBOR to Alternative Reference Rates for additional information.

The Bank does not expect the Supervisory Letter to have a material impact on the Bank’s financial condition or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sources and Types of Market and Interest-Rate Risk

Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. The majority of our balance sheet is comprised of assets that can be funded individually or collectively without imposing significant residual interest-rate risk on ourselves. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Sources and Types of Market and Interest-Rate Risk in the 2018 Annual Report.

Strategies to Manage Market and Interest-Rate Risk

General

We use various strategies and techniques in an effort to manage our market and interest-rate risk including the following and combinations of the following:

•
the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at September 30, 2019, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $14.0 billion, compared with $14.9 billion at December 31, 2018);
•
the issuance of COs with embedded call options to mitigate interest-rate risk of our debt (at September 30, 2019, fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.8 billion compared with $2.1 billion at December 31, 2018);
•
the issuance of CO bonds together with interest-rate swaps that receive a coupon rate that offsets the bond coupon rate and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements was $4.2 billion, or 16.4 percent of our total outstanding CO bonds at September 30, 2019, compared with $6.0 billion, or 23.2 percent of total outstanding CO bonds, at December 31, 2018);
•
the issuance of advances together with interest-rate swaps that pay a coupon rate that offsets the advance coupon rate and any optionality embedded in the advance, thereby effectively creating a floating-rate asset (total advances used in conjunction with interest-rate-exchange agreements, including both fair-value hedge relationships and economic hedge relationships, was $5.9 billion, or 15.3 percent of our total outstanding advances at September 30, 2019, compared with $6.1 billion, or 14.1 percent of total outstanding advances, at December 31, 2018);
•
the purchase of available-for-sale securities together with interest-rate swaps that pay a coupon rate that offsets the security’s coupon rate and any optionality embedded in the security, thereby effectively creating a floating-rate asset (total available-for-sale securities used in conjunction with interest-rate-exchange agreements was $2.6 billion, or 40.6 percent of

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our total outstanding available-for-sale securities at September 30, 2019, compared with $611.9 million, or 10.7 percent of total outstanding available-for-sale securities, at December 31, 2018);
•
contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity;
•
the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments; and
•
the use of derivatives to hedge the interest-rate risk of anticipated future CO debt issuance (at September 30, 2019, forward starting interest-rate swaps hedging the anticipated future issuance of CO debt was $44.0 million compared to $282.0 million at December 31, 2018).

Our strategies and techniques are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Strategies to Manage Market and Interest-Rate Risk in the 2018 Annual Report.

Measurement of Market and Interest-Rate Risk and Related Policy Constraints

We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure VaR, duration of equity, MVE sensitivity, and the other metrics discussed below.

MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the estimated market value of our assets and the estimated market value of our liabilities.

MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, these valuations may not be fully representative of future realized prices. Valuations are based on market curves and prices of individual assets, liabilities, and derivatives, and therefore embed elements of option, credit, and liquidity risk which may not be representative of future net income to be earned from the spread between asset yields and funding costs. Further, MVE does not consider future new business activities, or income or expense derived from sources other than financial assets or liabilities. For purposes of measuring this ratio, the BVE is equal to the par value of capital stock including mandatorily redeemable capital stock, retained earnings, and accumulated other comprehensive loss.

We measure our exposure to market and interest-rate risk using several metrics, including:

•
the ratio of MVE to BVE;
•
the ratio of MVE to the par value of our Class B Stock (Par Stock), which we refer to as the MVE to Par Stock ratio;
•
the ratio of MVE to the market value of assets, which we refer to as the economic capital ratio;
•
VaR, which measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR Stress Scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992;
•
duration of equity, which is calculated as the estimated percentage change to MVE for a 100 basis point parallel shift in rates;
•
MVE sensitivity, which is the estimated percent change in MVE in various shocked interest rate scenarios vs. base case MVE;
•
the duration gap of our assets and liabilities, which is the difference between the estimated durations (percentage change in market value for a 100 basis point shift in rates) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities are matched; and
•
the use of an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and basis changes to our funding curve and LIBOR.

We maintain limits and management action triggers in connection with some of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints in the 2018 Annual Report.

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Table 26 - Interest Rate / Market-Rate Risk Metrics

Interest/Market-Rate Risk Metric
 
September 30, 2019
 
December 31, 2018
 
Target, Limit or Management Action Trigger
MVE
 
$3.4 billion
 
$3.9 billion
 
None
MVE/BVE
 
105%
 
107%
 
None
MVE/Par Stock
 
166%
 
152%
 
Maintain above 130% (management action trigger) with a floor of 125%
Economic Capital Ratio
 
5.9%
 
6.1%
 
Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR
 
$128.3 million
 
$187.2 million
 
Maintain below $275.0 million (management action trigger) and $350.0 million (limit)
Duration of Equity
 
-0.65 years
 
-0.32 years
 
Maintain between +/- 3.5 years (management action trigger) and +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock
 
(3.7)%
 
(5.9)%
 
Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap
 
-0.46 months
 
-0.23 months
 
None

Value at Risk. The table below presents the historical simulation VaR estimate as of September 30, 2019, and December 31, 2018, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 6-month time horizon that is measured monthly beginning with the most current month-end and going back to 1992.
 
Table 27 - Value-at-Risk
(dollars in millions)

 
 
Value-at-Risk
(Gain) Loss Exposure (1)
 
 
September 30, 2019
 
December 31, 2018
Confidence Level
 
% of
MVE (2)
 
Amount
 
% of
MVE (2)
 
Amount
50%
 
(0.09
)%
 
$
(3.0
)
 
0.16
%
 
$
6.4

75%
 
0.51

 
17.4

 
1.08

 
41.9

95%
 
1.62

 
55.1

 
3.25

 
126.4

99%
 
3.77

 
128.3

 
4.81

 
187.2

_______________________
(1)
To be consistent with FHFA guidance, we have excluded VaR stress scenarios prior to 1992 because market-risk stress conditions are effectively captured in those scenarios beginning in 1992 and therefore properly present our current VaR exposure.
(2)
Loss exposure is expressed as a percentage of base MVE.

Income Simulation and Repricing Gaps. To provide an additional perspective on market and interest-rate risks, we have an income-simulation model that projects adjusted net income over the ensuing 12-month period using a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to our funding curve and LIBOR. The income simulation metric is based on projections of adjusted net income divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings. Projections of adjusted net income exclude a) projected prepayment penalties; b) loss on early extinguishment of debt; and c) changes in fair values from hedging activities. The changes in fair values of trading securities are included in the projections of adjusted net income. The simulations are solely based on simulated movements in the swap and the CO curve and do not reflect potential impacts of credit events, including, but not limited to, potential, additional other-than-temporary impairment charges.

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Management has put in place management action triggers whereby senior management is explicitly informed of instances where our projected base case return on regulatory capital (RORC) would fall below the average yield on three-month LIBOR over a 12-month horizon in a variety of assumed interest-rate shock scenarios. The results of this analysis for September 30, 2019, showed that in the base case our RORC was 206 basis points over three-month LIBOR, and in the worst case fell 56 basis points to 150 basis points over three-month LIBOR in the down 200 basis point scenario. For December 31, 2018, the results of this analysis showed that in the base case our RORC was 203 basis points over three-month LIBOR, and in the worst case fell 117 basis points to 86 basis points over three-month LIBOR in the down 300 basis point scenario. In both the nine months ended September 30, 2019 and throughout 2018, our RORC spread to three-month LIBOR remained positive in all projected interest rate shock scenarios that were modeled and subject to management action triggers.

Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios

We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios (dollars in millions).

Table 28 - Market and Interest-Rate Risk Metrics
(dollars in millions)

 
 
September 30, 2019
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,374
 
$3,364
 
$3,323
 
$3,401
 
$3,370
 
$3,274
 
$3,161
Percent change in MVE from base
 
(0.8)%
 
(1.1)%
 
(2.3)%
 
—%
 
(0.9)%
 
(3.7)%
 
(7.1)%
MVE/BVE
 
104%
 
103%
 
102%
 
105%
 
104%
 
101%
 
97%
MVE/Par Stock
 
165%
 
164%
 
162%
 
166%
 
165%
 
160%
 
154%
Duration of Equity
 
+0.03 years
 
+2.52 years
 
-2.27 years
 
-0.65 years
 
+2.14 years
 
+3.20 years
 
+3.68 years
Return on Regulatory Capital less 3-month LIBOR
 
1.61%
 
1.50%
 
1.52%
 
2.06%
 
2.26%
 
2.21%
 
2.05%
Net income percent change from base
 
(57.58)%
 
(59.87)%
 
(40.99)%
 
—%
 
31.86%
 
57.20%
 
79.56%
____________________________
(1)
In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.

 
 
December 31, 2018
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,628
 
$3,661
 
$3,829
 
$3,891
 
$3,869
 
$3,819
 
$3,755
Percent change in MVE from base
 
(6.8)%
 
(5.9)%
 
(1.6)%
 
—%
 
(0.6)%
 
(1.9)%
 
(3.5)%
MVE/BVE
 
100%
 
101%
 
105%
 
107%
 
106%
 
105%
 
103%
MVE/Par Stock
 
142%
 
143%
 
150%
 
152%
 
151%
 
149%
 
147%
Duration of Equity
 
- 0.61 years
 
-5.50 years
 
-3.03 years
 
-0.32 years
 
+1.05 years
 
+1.50 years
 
+1.90 years
Return on Regulatory Capital less 3-month LIBOR
 
0.86%
 
1.01%
 
1.67%
 
2.03%
 
2.13%
 
2.10%
 
2.01%
Net income percent change from base
 
(82.41)%
 
(64.03)%
 
(29.11)%
 
—%
 
23.63%
 
44.57%
 
64.22%
____________________________
(1)
In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.

ITEM 4. CONTROLS AND PROCEDURES


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Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

Our management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer and chief financial officer, as of September 30, 2019. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2019.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We describe our private-label MBS litigation in Item 3 - Legal Proceedings in the 2018 Annual Report and in Part II, Item 1 - Legal Proceedings in the Quarterly Report on Form 10-Q (i) for the quarter ended March 31, 2019, filed with the SEC on May 9, 2019 and (ii) for the quarter ended June 30, 2019, filed with the SEC on August 8, 2019.

We continue our private-label MBS litigation against the following entities and/or their affiliates and subsidiaries and/or entities under their control or controlled by affiliates or subsidiaries thereof: Credit Suisse (USA), Inc. (Credit Suisse); Nomura Holding America, Inc. (Nomura); and RBS Holdings USA Inc. On August 20, 2019, a Massachusetts Superior Court denied in part and granted in part Nomura’s and Credit Suisse’s motions for summary judgment. In addition, our action against Moody’s Investors Service, Inc. and Moody’s Corporation relating to certain of our private label MBS holdings is ongoing. In that action, on March 26, 2019, an order of the New York Supreme Court was entered granting in part and denying in part the defendants’ motion to dismiss. On October 17, 2019, the New York Supreme Court Appellate Division affirmed the order of the New York Supreme Court denying the defendants’ motion to dismiss.

From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

In addition to the information presented in this report, readers should carefully consider the risk factors set forth in the 2018 Annual Report, which could materially impact our business, financial condition, or future results. These risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None


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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS
Number
 
Exhibit Description
Reference
10.1
 
Federal Home Loan Bank of Boston Endorsement Split-Dollar Agreement between Frank Nitkiewicz and the Federal Home Loan Bank of Boston dated May 24, 2005*
10.2
 
Federal Home Loan Bank of Boston Endorsement Split-Dollar Agreement between M. Susan Elliott and the Federal Home Loan Bank of Boston dated May 24, 2005*
10.3
 
2020 Director Compensation Policy*
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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
 
Inline XBRL Taxonomy Extension Schema Document
Filed within this Form 10-Q
101.CAL
 
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Filed within this Form 10-Q
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document
Filed within this Form 10-Q
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Filed within this Form 10-Q
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document
Filed within this Form 10-Q
104
 
The cover page of the Bank’s Quarterly report on Form 10-Q, formatted in Inline XBRL
Included within the Exhibit 101 attachments
*    Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


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Table of Contents

Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
November 8, 2019
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
November 8, 2019
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer


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