10-Q 1 ind9301910-q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2019
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number:  000-51404
 
FEDERAL HOME LOAN BANK OF INDIANAPOLIS
(Exact name of registrant as specified in its charter)
 
Federally Chartered Corporation
 
35-6001443
(State or other jurisdiction of incorporation)
 
(IRS employer identification number)
 
 
 8250 Woodfield Crossing Blvd. Indianapolis, IN
 
46240
(Address of principal executive offices)
 
(Zip code)
(317) 465-0200
(Registrant's telephone number, including area code)
 
Not Applicable
(Former name or former address, if changed since last report.)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
None
None
 
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 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, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
o  Large accelerated filer
o  Accelerated filer
o  Emerging growth company
x Non-accelerated filer
o  Smaller reporting company
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o  Yes            x  No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Shares outstanding
as of October 31, 2019

Class B Stock, par value $100
22,731,680




Table of Contents
Page
 
 
Number
 
Special Note Regarding Forward-Looking Statements
PART I.
FINANCIAL INFORMATION
 
Item 1.
FINANCIAL STATEMENTS (unaudited)
 
 
 
 
 
Statements of Condition as of September 30, 2019 and December 31, 2018
 
 
 
 
Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018
 
 
 
 
Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018
 
 
 
 
Statements of Capital for the Three and Nine Months Ended September 30, 2018 and 2019
 
 
 
 
Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018
 
 
 
 
Notes to Financial Statements:
 
 
Note 1 - Summary of Significant Accounting Policies
 
Note 2 - Recently Adopted and Issued Accounting Guidance
 
Note 3 - Investment Securities
 
Note 4 - Advances
 
Note 5 - Mortgage Loans Held for Portfolio
 
Note 6 - Allowance for Credit Losses
 
Note 7 - Derivatives and Hedging Activities
 
Note 8 - Consolidated Obligations
 
Note 9 - Affordable Housing Program
 
Note 10 - Capital
 
Note 11 - Accumulated Other Comprehensive Income
 
Note 12 - Segment Information
 
Note 13 - Estimated Fair Values
 
Note 14 - Commitments and Contingencies
 
Note 15 - Related Party and Other Transactions
 
 
 
 
Glossary of Terms
 
 
 
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
Presentation
 
Executive Summary
 
Selected Financial Data
 
Results of Operations and Changes in Financial Condition
 
Operating Segments
 
Analysis of Financial Condition
 
Liquidity and Capital Resources
 
Off-Balance Sheet Arrangements
 
Critical Accounting Policies and Estimates
 
Recent Accounting and Regulatory Developments
 
Risk Management
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 4.
CONTROLS AND PROCEDURES
 
 
 
PART II.
OTHER INFORMATION
 
Item 1.
LEGAL PROCEEDINGS
Item 1A.
RISK FACTORS
Item 6.
EXHIBITS




As used in this Form 10-Q, unless the context otherwise requires, the terms "we," "us," "our," and the "Bank" refer to the Federal Home Loan Bank of Indianapolis or its management. We use acronyms and terms throughout that are defined herein or in the Glossary of Terms in Part I Item 1.

Special Note Regarding Forward-Looking Statements
 
Certain statements in this Form 10-Q, including statements describing our objectives, projections, estimates or predictions, may be considered to be "forward-looking statements." These statements may use forward-looking terminology, such as "anticipates," "believes," "could," "estimates," "may," "should," "expects," "will," or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements involve risk or uncertainty and that actual results either could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following:

economic and market conditions, including the timing and volume of market activity, inflation or deflation, changes in the value of global currencies, and changes in the financial condition of market participants;
volatility of market prices, interest rates, and indices or other factors, resulting from the effects of, and changes in, various monetary or fiscal policies and regulations, including those determined by the FRB and the FDIC, or a decline in liquidity in the financial markets, that could affect the value of investments or collateral we hold as security for the obligations of our members and counterparties;
changes in demand for our advances and purchases of mortgage loans resulting from:
changes in our members' deposit flows and credit demands;
federal or state regulatory developments impacting suitability or eligibility of membership classes;
membership changes, including, but not limited to, mergers, acquisitions and consolidations of charters;
changes in the general level of housing activity in the United States and particularly our district states of Michigan and Indiana, the level of refinancing activity and consumer product preferences; and
competitive forces, including, without limitation, other sources of funding available to our members;
changes in mortgage asset prepayment patterns, delinquency rates and housing values or improper or inadequate mortgage originations and mortgage servicing;
ability to introduce and successfully manage new products and services, including new types of collateral securing advances;
political events, including federal government shutdowns, administrative, legislative, regulatory, or other developments, and judicial rulings that affect us, our status as a secured creditor, our members (or certain classes of members), prospective members, counterparties, GSEs generally, one or more of the FHLBanks and/or investors in the consolidated obligations of the FHLBanks;
ability to access the capital markets and raise capital market funding on acceptable terms;
changes in our credit ratings or the credit ratings of the other FHLBanks and the FHLBank System;
changes in the level of government guarantees provided to other United States and international financial institutions;
dealer commitment to supporting the issuance of our consolidated obligations;
ability of one or more of the FHLBanks to repay its portion of the consolidated obligations, or otherwise meet its financial obligations;
ability to attract and retain skilled personnel;
ability to develop, implement and support technology and information systems sufficient to manage our business effectively;
nonperformance of counterparties to uncleared and cleared derivative transactions;
changes in terms of derivative agreements and similar agreements;
loss arising from natural disasters, acts of war or acts of terrorism;
changes in or differing interpretations of accounting guidance; and
other risk factors identified in our filings with the SEC.

Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, additional disclosures may be made through reports filed with the SEC in the future, including our Forms 10-K, 10-Q and 8-K.
 




PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Federal Home Loan Bank of Indianapolis
Statements of Condition
(Unaudited, $ amounts in thousands, except par value)
 
September 30, 2019
 
December 31, 2018
Assets:
 
 
 
Cash and due from banks
$
49,845

 
$
100,735

Interest-bearing deposits
505,672

 
1,210,705

Securities purchased under agreements to resell
3,550,000

 
3,212,726

Federal funds sold
1,415,000

 
3,085,000

Trading securities (Note 3)
4,411,301

 

Available-for-sale securities (Note 3)
8,381,973

 
7,703,596

Held-to-maturity securities (estimated fair values of $4,971,803 and $5,676,145, respectively) (Note 3)
4,961,209

 
5,673,720

Advances (Note 4)
32,487,260

 
32,727,668

Mortgage loans held for portfolio, net of allowance for loan losses of $(450) and $(600), respectively (Notes 5 and 6)
11,104,279

 
11,384,978

Accrued interest receivable
132,566

 
124,611

Premises, software, and equipment, net
36,664

 
37,198

Derivative assets, net (Note 7)
186,871

 
116,764

Other assets
39,128

 
33,998

 
 
 
 
Total assets
$
67,261,768

 
$
65,411,699

 
 
 
 
 
 
 
 
Liabilities:
 

 
 
Deposits
$
713,115

 
$
500,440

Consolidated obligations (Note 8):
 

 
 
Discount notes
15,300,029

 
20,895,262

Bonds
47,168,731

 
40,265,465

Total consolidated obligations, net
62,468,760

 
61,160,727

Accrued interest payable
176,724

 
179,728

Affordable Housing Program payable (Note 9)
37,070

 
40,747

Derivative liabilities, net (Note 7)
4,720

 
21,067

Mandatorily redeemable capital stock (Note 10)
323,712

 
168,876

Other liabilities
451,991

 
289,665

 
 
 
 
Total liabilities
64,176,092

 
62,361,250

 
 
 
 
Commitments and contingencies (Note 14)


 


 
 
 
 
Capital (Note 10):
 

 
 
Capital stock (putable at par value of $100 per share):
 
 
 
Class B-1 issued and outstanding shares:
19,391,457 and 19,306,333, respectively
1,939,146

 
1,930,633

Class B-2 issued and outstanding shares: 3,028 and 3,192, respectively
303

 
319

     Total capital stock
1,939,449

 
1,930,952

Retained earnings:
 
 
 
Unrestricted
849,264

 
855,311

Restricted
241,316

 
222,499

Total retained earnings
1,090,580

 
1,077,810

Total accumulated other comprehensive income (Note 11)
55,647

 
41,687

 
 
 
 
Total capital
3,085,676

 
3,050,449

 
 
 
 
Total liabilities and capital
$
67,261,768

 
$
65,411,699


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

4



Federal Home Loan Bank of Indianapolis
Statements of Income
(Unaudited, $ amounts in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
2019
 
2018
Interest Income:
 
 
 
 
 
 
 
Advances
$
207,226

 
$
197,263

 
$
641,126

 
$
518,802

Interest-bearing deposits
6,923

 
5,801

 
16,610

 
12,880

Securities purchased under agreements to resell
24,212

 
19,868

 
69,872

 
40,680

Federal funds sold
10,163

 
15,239

 
50,678

 
35,160

Trading securities
18,441

 

 
31,896

 

Available-for-sale securities
48,360

 
52,071

 
154,627

 
140,561

Held-to-maturity securities
36,388

 
39,258

 
116,245

 
111,298

Mortgage loans held for portfolio
87,741

 
90,561

 
277,440

 
259,690

Other interest income

 

 

 
17

Total interest income
439,454


420,061

 
1,358,494


1,119,088

 
 
 
 
 
 
 
 
Interest Expense:
 
 
 
 
 
 
 
Consolidated obligation discount notes
110,286

 
113,705

 
368,799

 
274,162

Consolidated obligation bonds
271,639

 
228,610

 
803,497

 
617,906

Deposits
3,655

 
2,932

 
10,170

 
7,542

Mandatorily redeemable capital stock
3,514

 
1,927

 
8,585

 
6,557

Other interest expense
36

 

 
36

 

Total interest expense
389,130

 
347,174

 
1,191,087


906,167

 
 
 
 
 
 
 
 
Net interest income
50,324

 
72,887

 
167,407

 
212,921

Provision for (reversal of) credit losses
(180
)
 
102

 
(166
)
 
(359
)
 
 
 
 
 
 
 
 
Net interest income after provision for credit losses
50,504

 
72,785

 
167,573

 
213,280

 
 
 
 
 
 
 
 
Other Income:
 
 
 
 
 
 
 
Net realized gains from sale of available-for-sale securities

 

 

 
32,407

Net realized losses from sale of held-to-maturity securities

 

 

 
(45
)
Net gains on trading securities
5,601

 

 
26,257

 

Net losses on derivatives and hedging activities
(3,612
)
 
(8,160
)
 
(21,399
)
 
(5,216
)
Service fees
186

 
278

 
581

 
783

Standby letters of credit fees
201

 
123

 
503

 
414

Other, net
410

 
931

 
3,328

 
1,324

Total other income (loss)
2,786

 
(6,828
)
 
9,270

 
29,667

 
 
 
 
 
 
 
 
Other Expenses:
 
 
 
 
 
 
 
Compensation and benefits
12,698

 
12,306

 
40,255

 
38,164

Other operating expenses
7,925

 
7,216

 
21,045

 
20,566

Federal Housing Finance Agency
1,012

 
853

 
3,009

 
2,616

Office of Finance
1,370

 
1,078

 
3,515

 
3,509

Other
1,154

 
975

 
3,526

 
3,859

Total other expenses
24,159

 
22,428

 
71,350

 
68,714

 
 
 
 
 
 
 
 
Income before assessments
29,131

 
43,529

 
105,493

 
174,233

 
 
 
 
 
 
 
 
Affordable Housing Program assessments
3,265

 
4,546

 
11,408

 
18,079

 
 
 
 
 
 
 
 
Net income
$
25,866

 
$
38,983

 
$
94,085

 
$
156,154


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

5



Federal Home Loan Bank of Indianapolis
Statements of Comprehensive Income
(Unaudited, $ amounts in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Net income
$
25,866

 
$
38,983

 
$
94,085

 
$
156,154

 
 
 
 
 
 
 
 
Other Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on available-for-sale securities
(2,139
)
 
9,043

 
16,842

 
19,015

 
 
 
 
 
 
 
 
Net non-credit portion of other-than-temporary impairment losses





 
(29,271
)
 
 
 
 
 
 
 
 
Pension benefits, net
486

 
636

 
(2,882
)
 
(5,580
)
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
(1,653
)

9,679


13,960


(15,836
)
 
 
 
 
 
 
 
 
Total comprehensive income
$
24,213

 
$
48,662

 
$
108,045


$
140,318


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

6



Federal Home Loan Bank of Indianapolis
Statements of Capital
Three Months Ended September 30, 2018 and 2019
(Unaudited, $ amounts and shares in thousands)
 
 
Capital Stock
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Capital
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2018
 
18,922

 
$
1,892,194

 
$
835,888

 
$
206,986

 
$
1,042,874

 
$
85,891

 
$
3,020,959

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
31,187

 
7,796

 
38,983

 
9,679

 
48,662

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of capital stock
 
120

 
12,095

 
 
 
 
 
 
 
 
 
12,095

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redemption/repurchase of capital stock
 

 
(32
)
 
 
 
 
 
 
 
 
 
(32
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares reclassified to mandatorily redeemable capital stock, net
 
(35
)
 
(3,560
)
 
 
 
 
 
 
 
 
 
(3,560
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions on mandatorily redeemable capital stock
 
 
 
 
 
(33
)
 

 
(33
)
 
 
 
(33
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends on capital stock
(4.50% annualized)
 
 
 
 
 
(21,120
)
 

 
(21,120
)
 
 
 
(21,120
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
 
19,007

 
$
1,900,697

 
$
845,922

 
$
214,782

 
$
1,060,704

 
$
95,570

 
$
3,056,971

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
 
20,485

 
$
2,048,523

 
$
856,911

 
$
236,142

 
$
1,093,053

 
$
57,300

 
$
3,198,876

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
20,692

 
5,174

 
25,866

 
(1,653
)
 
24,213

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of capital stock
 
398

 
39,796

 
 
 
 
 
 
 
 
 
39,796

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares reclassified to mandatorily redeemable capital stock, net
 
(1,489
)
 
(148,870
)
 
 
 
 
 
 
 
 
 
(148,870
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions on mandatorily redeemable capital stock
 
 
 
 
 
(692
)
 

 
(692
)
 
 
 
(692
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends on capital stock
(5.50% annualized)
 
 
 
 
 
(27,647
)
 

 
(27,647
)
 
 
 
(27,647
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
 
19,394

 
$
1,939,449

 
$
849,264

 
$
241,316

 
$
1,090,580

 
$
55,647

 
$
3,085,676



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

7



Federal Home Loan Bank of Indianapolis
Statements of Capital
Nine Months Ended September 30, 2018 and 2019
(Unaudited, $ amounts and shares in thousands)
 
 
Capital Stock
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Capital
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
 
18,578

 
$
1,857,766

 
$
792,783

 
$
183,551

 
$
976,334

 
$
111,406

 
$
2,945,506

 
 
 
 
 
 
 
 
 
 

 
 
 
 
Total comprehensive income
 
 
 
 
 
124,923

 
31,231

 
156,154

 
(15,836
)
 
140,318

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of capital stock
 
696

 
69,686

 
 
 
 
 
 
 
 
 
69,686

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Redemption/repurchase of capital stock
 

 
(32
)
 
 
 
 
 
 
 
 
 
(32
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares reclassified to mandatorily redeemable capital stock, net
 
(267
)
 
(26,723
)
 
 
 
 
 
 
 
 
 
(26,723
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions on mandatorily redeemable capital stock
 
 
 
 
 
(38
)
 

 
(38
)
 
 
 
(38
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends on capital stock
(5.16% annualized)
 
 
 
 
 
(71,746
)
 

 
(71,746
)
 
 
 
(71,746
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
 
19,007

 
$
1,900,697

 
$
845,922

 
$
214,782

 
$
1,060,704

 
$
95,570

 
$
3,056,971

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2018
 
19,310

 
$
1,930,952

 
$
855,311

 
$
222,499

 
$
1,077,810

 
$
41,687

 
$
3,050,449

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
75,268

 
18,817

 
94,085

 
13,960

 
108,045

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of capital stock
 
1,594

 
159,476

 
 
 
 
 
 
 
 
 
159,476

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares reclassified to mandatorily redeemable capital stock, net
 
(1,510
)
 
(150,979
)
 
 
 
 
 
 
 
 
 
(150,979
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Distributions on mandatorily redeemable capital stock
 
 
 
 
 
(693
)
 

 
(693
)
 
 
 
(693
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends on capital stock
(5.50% annualized)
 
 
 
 
 
(80,622
)
 

 
(80,622
)
 
 
 
(80,622
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
 
19,394

 
$
1,939,449

 
$
849,264

 
$
241,316

 
$
1,090,580

 
$
55,647

 
$
3,085,676




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

8



Federal Home Loan Bank of Indianapolis
Statements of Cash Flows
(Unaudited, $ amounts in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Operating Activities:
 
 
 
Net income
$
94,085

 
$
156,154

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Amortization and depreciation
61,251

 
50,484

Changes in net derivative and hedging activities
(348,291
)
 
188,223

Provision for (reversal of) credit losses
(166
)
 
(359
)
Net gains on trading securities
(26,257
)
 

Net realized gains from sale of available-for-sale securities

 
(32,407
)
Net realized losses from sale of held-to-maturity securities

 
45

Changes in:
 
 
 
Accrued interest receivable
(8,667
)
 
(17,242
)
Other assets
(736
)
 
1,290

Accrued interest payable
(3,243
)
 
31,439

Other liabilities
16,652

 
49,796

Total adjustments, net
(309,457
)
 
271,269

 
 
 
 
Net cash provided by (used in) operating activities
(215,372
)
 
427,423

 
 
 
 
Investing Activities:
 
 


Net change in:
 
 
 
Interest-bearing deposits
221,363

 
(704,317
)
Securities purchased under agreements to resell
(337,274
)
 
(565,888
)
Federal funds sold
1,670,000

 
(2,118,000
)
Trading securities:
 
 
 
Purchases
(4,385,044
)
 

Available-for-sale securities:
 
 
 
Proceeds from maturities
510,500

 
80,172

Proceeds from sales

 
203,841

Purchases
(610,415
)
 
(773,346
)
Held-to-maturity securities:
 
 
 
Proceeds from maturities
813,026

 
755,770

Proceeds from sales

 
41,226

Purchases
(109,369
)
 
(712,272
)
Advances:
 
 
 
Principal repayments
289,850,757

 
250,517,838

Disbursements to members
(289,182,302
)
 
(250,185,035
)
Mortgage loans held for portfolio:
 
 
 
Principal collections
1,211,661

 
910,622

Purchases from members
(876,635
)
 
(1,874,800
)
Purchases of premises, software, and equipment
(4,596
)
 
(3,989
)
Loans to other Federal Home Loan Banks:
 
 
 
Principal repayments

 
400,000

Disbursements

 
(400,000
)
 
 
 
 
Net cash used in investing activities
(1,228,328
)
 
(4,428,178
)
 



(continued)

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

9



Federal Home Loan Bank of Indianapolis
Statements of Cash Flows, continued
(Unaudited, $ amounts in thousands)
 
Nine Months Ended September 30,
 
2019
 
2018
Financing Activities:
 
 
 
Changes in deposits
128,515

 
38,839

Net payments on derivative contracts with financing elements
185

 
(2,242
)
Net proceeds from issuance of consolidated obligations:
 
 
 
Discount notes
245,285,750

 
254,190,275

Bonds
28,145,595

 
13,074,648

Payments for matured and retired consolidated obligations:
 
 
 
Discount notes
(250,889,998
)
 
(251,909,384
)
Bonds
(21,359,255
)
 
(11,302,290
)
Loans from Other Federal Home Loan Banks:
 
 
 
Proceeds from borrowings
250,000

 

Principal payments
(250,000
)
 

Proceeds from issuance of capital stock
159,476

 
69,686

Proceeds from issuance of mandatorily redeemable capital stock
3,704

 

Payments for redemption/repurchase of capital stock

 
(32
)
Payments for redemption/repurchase of mandatorily redeemable capital stock
(540
)
 
(26,649
)
Dividend payments on capital stock
(80,622
)
 
(71,746
)
 
 
 
 
Net cash provided by financing activities
1,392,810

 
4,061,105

 
 
 
 
Net increase (decrease) in cash and due from banks
(50,890
)
 
60,350

 
 
 
 
Cash and due from banks at beginning of period
100,735

 
55,269

 
 
 
 
Cash and due from banks at end of period
$
49,845

 
$
115,619

 
 
 
 
Supplemental Disclosures:
 
 
 
Interest payments
$
1,158,294

 
$
841,065

Affordable Housing Program payments
15,085

 
12,770

Purchases of AFS securities, traded but not yet settled
54,609

 
44,583

Capitalized interest on certain held-to-maturity securities
3,900

 
3,480

Par value of shares reclassified to mandatorily redeemable capital stock, net
150,979

 
26,723

 

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

10



Federal Home Loan Bank of Indianapolis
Notes to Financial Statements
(Unaudited, $ amounts in thousands unless otherwise indicated)


Note 1 - Summary of Significant Accounting Policies

Unless the context otherwise requires, the terms "we," "us," "our," and "Bank" refer to the Federal Home Loan Bank of Indianapolis or its management. We use acronyms and terms throughout these Notes to Financial Statements that are defined herein or in the Glossary of Terms.

Basis of Presentation. The accompanying interim financial statements have been prepared in accordance with GAAP and SEC requirements for interim financial information. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. Certain disclosures that would have substantially duplicated the disclosures in the financial statements, and notes thereto, included in our 2018 Form 10-K have been omitted unless the information contained in those disclosures materially changed. Therefore, these interim financial statements should be read in conjunction with our audited financial statements, and notes thereto, included in our 2018 Form 10-K.

The financial statements contain all adjustments that are, in the opinion of management, necessary for a fair statement of our financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full calendar year or any other interim period.

Our significant accounting policies and certain other disclosures are set forth in our 2018 Form 10-K in Note 1 - Summary of Significant Accounting Policies. See Note 2 - Recently Adopted and Issued Accounting Guidance for the changes effective January 1, 2019.

Use of Estimates. When preparing financial statements in accordance with GAAP, we are required to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant estimates pertain to derivatives and hedging activities, fair value and provision for credit losses. Although the reported amounts and disclosures reflect our best estimates, actual results could differ significantly from these estimates.

Note 2 - Recently Adopted and Issued Accounting Guidance

Recently Adopted Accounting Guidance.

Leases (ASU 2016-02). On February 25, 2016, the FASB issued guidance that requires a lessee, in an operating or finance lease, 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 a lease with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize a lease asset and lease liability. Under previous guidance, a lessee was not required to recognize a lease asset and lease liability arising from an operating lease on the statement of condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within GAAP.

This guidance was effective for the interim and annual periods beginning on January 1, 2019. Upon adoption, we reported higher assets and liabilities as a result of including right-of-use assets and lease liabilities on the statement of condition, but its effect on our financial condition, results of operations, and cash flows was not material.

Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). On March 30, 2017, the FASB issued guidance to shorten the amortization period for certain callable debt securities purchased at a premium. Specifically, the guidance requires the premium to be amortized to the earliest call date. No change is required for securities purchased at a discount, which continue to be amortized to their contractual maturities.

This guidance was effective for the interim and annual periods beginning on January 1, 2019. The adoption of this guidance had no effect on our financial condition, results of operations, or cash flows.




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This guidance requires that, for fair-value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item.

This guidance was effective for the interim and annual periods beginning on January 1, 2019. The adoption of this guidance had no effect on our financial condition, net income, or cash flows. However, the adoption resulted in a prospective change in the statement of income in which the net losses resulting from the changes in the fair value of the hedging instruments and the changes in the fair value of the associated hedged items attributable to the hedged risk for qualifying fair-value hedging relationships for the three and nine months ended September 30, 2019 of $9,058 and $31,509, respectively, are presented in interest income instead of other income.

Inclusion of SOFR OIS Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16). On October 25, 2018, to facilitate the LIBOR to SOFR transition, the FASB issued guidance permitting the use of the OIS rate based on SOFR as an eligible U.S. benchmark interest rate for hedge accounting purposes.

This guidance was effective for the interim and annual periods beginning on January 1, 2019, concurrent with the adoption of ASU 2017-12. The adoption of this guidance had no effect on our financial condition, results of operations, or cash flows.

Recently Issued Accounting Guidance.

Measurement of Credit Losses on Financial Instruments (ASU 2016-13). On June 16, 2016, the FASB issued guidance replacing the current incurred loss model. The guidance requires entities to measure expected credit losses based on consideration of a broad range of relevant information, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount of the financial instrument.

This guidance is effective for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted; however, we plan to adopt this guidance on the effective date. This guidance should be applied using a modified-retrospective approach whereby a cumulative-effect adjustment is recorded to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

The adoption of this guidance is expected to have no effect on our allowance for credit losses for advances, investment securities, securities purchased under agreements to resell, or federal funds sold. The adoption may increase the allowance for loan losses for mortgage loans, primarily due to the requirement to measure expected credit losses for the entire estimated life of the loans, but the effect on our financial condition, results of operations and cash flows is not expected to be material.

Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). On August 28, 2018, the FASB issued guidance to update the disclosure requirements for fair value measurement. This guidance was issued as part of the FASB's disclosure framework project and is intended to improve disclosure effectiveness.

The guidance is effective for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted; however, we plan to adopt this guidance on the effective date. The adoption will have an effect on our disclosures, but will have no effect on our financial condition, results of operations or cash flows.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15). On August 29, 2018, the FASB issued guidance on implementation costs incurred in a hosting arrangement that is a service contract. The guidance aligns the requirements for capitalizing such costs with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license.

This guidance is effective for the interim and annual periods beginning on January 1, 2020. Early adoption is permitted; however, we plan to adopt this guidance on the effective date. The adoption may increase the amount of capitalized costs, but the effect of this guidance on our financial condition, results of operations, and cash flows is not expected to be material.

Note 3 - Investment Securities

Trading Securities.
 
 
 
 
 
In January 2019, the Bank began purchasing U.S. Treasury securities to enhance its liquidity.

Net Gains (Losses) on Trading Securities. The following table presents net gains (losses) on trading securities, excluding any offsetting effect of gains (losses) on the associated derivatives.


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Net gains on trading securities held at period end
 
$
5,601

 
$

 
$
26,257

 
$

Net gains (losses) on trading securities that sold/matured during the period
 

 

 

 

Net gains on trading securities
 
$
5,601

 
$

 
$
26,257

 
$


Available-for-Sale Securities.

Major Security Types. The following table presents our AFS securities by type of security.
 
 
 
 
Gross
 
Gross
 
 
 
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated
September 30, 2019
 
Cost (1)
 
Gains
 
Losses
 
Fair Value
GSE and TVA debentures
 
$
3,919,035

 
$
29,729

 
$

 
$
3,948,764

GSE MBS
 
4,393,110

 
45,511

 
(5,412
)
 
4,433,209

Total AFS securities
 
$
8,312,145

 
$
75,240

 
$
(5,412
)
 
$
8,381,973

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
GSE and TVA debentures
 
$
4,239,622

 
$
37,458

 
$

 
$
4,277,080

GSE MBS
 
3,410,988

 
27,797

 
(12,269
)
 
3,426,516

Total AFS securities
 
$
7,650,610

 
$
65,255

 
$
(12,269
)
 
$
7,703,596


(1) 
Includes adjustments made to the cost basis of an investment for accretion, amortization, collection of principal and, if applicable, fair-value hedging adjustments.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Unrealized Loss Positions. The following table presents impaired AFS securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
12 months or More
 
Total
 
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
September 30, 2019
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
GSE MBS
 
$
591,562

 
$
(3,419
)
 
$
341,999

 
$
(1,993
)
 
$
933,561

 
$
(5,412
)
Total impaired AFS securities
 
$
591,562

 
$
(3,419
)
 
$
341,999

 
$
(1,993
)
 
$
933,561

 
$
(5,412
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
GSE MBS
 
$
1,256,816

 
$
(12,269
)
 
$

 
$

 
$
1,256,816

 
$
(12,269
)
Total impaired AFS securities
 
$
1,256,816


$
(12,269
)

$


$


$
1,256,816


$
(12,269
)
 
 
 
 
 
 
 
 
 
Realized Gains and Losses. There were no sales of AFS securities during the three or nine months ended September 30, 2019. As of September 30, 2019, we had no intention of selling any AFS securities in an unrealized loss position nor did we consider it more likely than not that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost basis.

During the nine months ended September 30, 2018, for strategic, economic and operational reasons, we sold all of our AFS and HTM investments in private-label RMBS and ABS. Of the OTTI AFS securities sold in 2018, none were in an unrealized loss position. Proceeds from the AFS sales totaled $203,841, resulting in realized gains of $32,407 determined by the specific identification method.
 
 
 
 
 
 
 
 
 
Held-to-Maturity Securities.

Major Security Types. The following table presents our HTM securities by type of security.
 
 
 
 
Gross
 
Gross
 
 
 
 
 
 
Unrecognized
 
Unrecognized
 
 
 
 
Amortized
 
Holding
 
Holding
 
Estimated
September 30, 2019
 
Cost (1)
 
Gains
 
Losses
 
 Fair Value
MBS:
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed MBS
 
$
3,172,634

 
$
7,422

 
$
(8,945
)
 
$
3,171,111

GSE MBS
 
1,788,575

 
14,276

 
(2,159
)
 
1,800,692

Total HTM securities
 
$
4,961,209

 
$
21,698

 
$
(11,104
)
 
$
4,971,803

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed MBS
 
$
3,468,882

 
$
11,034

 
$
(1,552
)
 
$
3,478,364

GSE MBS
 
2,204,838

 
7,673

 
(14,730
)
 
2,197,781

Total HTM securities
 
$
5,673,720

 
$
18,707

 
$
(16,282
)
 
$
5,676,145


(1) 
Carrying value equals amortized cost. Includes adjustments made to the cost basis of an investment for accretion, amortization and collection of principal.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Unrealized Loss Positions. The following table presents impaired HTM securities (i.e., in an unrealized loss position), aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 
 
Less than 12 months
 
12 months or More
 
Total
 
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
September 30, 2019
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed MBS
 
$
1,007,929

 
$
(5,522
)
 
$
749,836

 
$
(3,423
)
 
$
1,757,765

 
$
(8,945
)
GSE MBS
 
259,853

 
(375
)
 
305,097

 
(1,784
)
 
564,950

 
(2,159
)
Total impaired HTM securities
 
$
1,267,782

 
$
(5,897
)
 
$
1,054,933

 
$
(5,207
)
 
$
2,322,715

 
$
(11,104
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations - guaranteed MBS
 
$
829,121

 
$
(873
)
 
$
417,952

 
$
(679
)
 
$
1,247,073

 
$
(1,552
)
GSE MBS
 
435,756

 
(890
)
 
716,647

 
(13,840
)
 
1,152,403

 
(14,730
)
Total impaired HTM securities
 
$
1,264,877

 
$
(1,763
)
 
$
1,134,599

 
$
(14,519
)
 
$
2,399,476

 
$
(16,282
)

Realized Gains and Losses. There were no sales of HTM securities during the three or nine months ended September 30, 2019. As of September 30, 2019, we had no intention of selling any HTM securities in an unrealized loss position nor did we consider it more likely than not that we will be required to sell these securities before our anticipated recovery of each security's remaining amortized cost basis.

During the nine months ended September 30, 2018, for strategic, economic and operational reasons, we sold all of our AFS and HTM investments in private-label RMBS and ABS. The amortized cost of the HTM securities sold totaled $41,271. Proceeds from the HTM sales totaled $41,226, resulting in realized losses of $45 determined by the specific identification method. For each of these HTM securities, we had previously collected at least 85% of the principal outstanding at the time of acquisition due to prepayments or scheduled payments over the term. As such, the sales were considered maturities for purposes of security classification.
 
 
 
 
 
 
 
 
 
Other-Than-Temporary Impairment.

Evaluation Process and Results - AFS and HTM Securities.

Other U.S. and GSE Obligations and TVA Debentures. For other U.S. obligations, GSE obligations, and TVA debentures, we determined that, based on current expectations, the strength of the issuers' guarantees through direct obligations of or support from the United States government is sufficient to protect us from any losses. As a result, all of the gross unrealized losses as of September 30, 2019 are considered temporary.
 
 
 
 
 
 
 
 
 




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 4 - Advances

The following table presents advances outstanding by redemption term.
 
 
September 30, 2019
 
December 31, 2018
Redemption Term
 
Amount
 
WAIR %
 
Amount
 
WAIR %
Overdrawn demand and overnight deposit accounts
 
$
247

 
4.33

 
$

 

Due in 1 year or less
 
11,821,848

 
2.21

 
15,595,985

 
2.47

Due after 1 year through 2 years
 
2,616,817

 
2.17

 
2,957,861

 
2.19

Due after 2 years through 3 years
 
2,150,675

 
2.13

 
2,444,486

 
2.46

Due after 3 years through 4 years
 
2,632,466

 
2.47

 
2,139,695

 
2.36

Due after 4 years through 5 years
 
4,246,300

 
2.28

 
1,977,925

 
2.76

Thereafter
 
8,692,553

 
2.10

 
7,713,409

 
2.41

Total advances, par value
 
32,160,906

 
2.20

 
32,829,361

 
2.44

Fair-value hedging adjustments, net
 
324,581

 
 

 
(106,499
)
 
 

Unamortized swap termination fees associated with modified advances, net of deferred prepayment fees
 
1,773

 
 

 
4,806

 
 

Total advances
 
$
32,487,260

 
 

 
$
32,727,668

 
 


The following table presents advances outstanding by the earlier of the redemption date or the next call date and next put date.
 
 
Earlier of Redemption
or Next Call Date
 
Earlier of Redemption
or Next Put Date
 
 
September 30,
2019
 
December 31,
2018
 
September 30,
2019
 
December 31,
2018
Overdrawn demand and overnight deposit accounts
 
$
247

 
$

 
$
247

 
$

Due in 1 year or less
 
18,513,769

 
22,574,897

 
14,243,948

 
15,595,985

Due after 1 year through 2 years
 
2,091,893

 
2,061,411

 
3,601,317

 
3,682,461

Due after 2 years through 3 years
 
1,936,975

 
1,356,186

 
2,952,475

 
3,660,486

Due after 3 years through 4 years
 
1,901,276

 
1,581,905

 
2,832,571

 
2,547,995

Due after 4 years through 5 years
 
2,628,800

 
1,425,525

 
4,034,300

 
2,633,030

Thereafter
 
5,087,946

 
3,829,437

 
4,496,048

 
4,709,404

Total advances, par value
 
$
32,160,906

 
$
32,829,361

 
$
32,160,906

 
$
32,829,361


Credit Risk Exposure and Security Terms. At September 30, 2019 and December 31, 2018, our top five borrowers held 39% and 40%, respectively, of total advances outstanding, at par. As security for the advances to these and our other borrowers, we held, or had access to, collateral with an estimated fair value at September 30, 2019 and December 31, 2018 that was well in excess of the advances outstanding on those dates, respectively. For information related to our credit risk on advances and allowance methodology for credit losses, see Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 5 - Mortgage Loans Held for Portfolio

The following tables present information on mortgage loans held for portfolio by term, type and product.
Term
 
September 30, 2019
 
December 31, 2018
Fixed-rate long-term mortgages
 
$
9,958,205

 
$
10,145,476

Fixed-rate medium-term (1) mortgages
 
907,741

 
992,059

Total mortgage loans held for portfolio, UPB
 
10,865,946

 
11,137,535

Unamortized premiums
 
240,803

 
251,778

Unamortized discounts
 
(2,254
)
 
(2,415
)
Fair-value hedging adjustments, net
 
234

 
(1,320
)
Allowance for loan losses
 
(450
)
 
(600
)
Total mortgage loans held for portfolio, net
 
$
11,104,279

 
$
11,384,978


(1) 
Defined as a term of 15 years or less at origination.
Type
 
September 30, 2019
 
December 31, 2018
Conventional
 
$
10,530,469

 
$
10,769,980

Government-guaranteed or -insured
 
335,477

 
367,555

Total mortgage loans held for portfolio, UPB
 
$
10,865,946

 
$
11,137,535


Product
 
September 30, 2019
 
December 31, 2018
MPP
 
$
10,631,563

 
$
10,875,079

MPF Program
 
234,383

 
262,456

Total mortgage loans held for portfolio, UPB
 
$
10,865,946

 
$
11,137,535


For information related to our credit risk on mortgage loans and allowance methodology for loan losses, see Note 6 - Allowance for Credit Losses.

Note 6 - Allowance for Credit Losses

A description of the allowance methodologies for our portfolio segments as well as our policy for impairing financing receivables and charging them off when necessary is disclosed in Note 1 - Summary of Significant Accounting Policies and Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.

Conventional Mortgage Loans.
 
 
 
 
 
 
 
Conventional MPP. The following table presents the activity in the LRA, which is reported in other liabilities.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
LRA Activity
 
2019
 
2018
 
2019
 
2018
Liability, beginning of period
 
$
180,074

 
$
161,339

 
$
174,096

 
$
148,715

Additions
 
3,402

 
8,667

 
10,392

 
22,138

Claims paid
 
(64
)
 
(61
)
 
(206
)
 
(310
)
Distributions to PFIs
 
(823
)
 
(98
)
 
(1,693
)
 
(696
)
Liability, end of period
 
$
182,589

 
$
169,847

 
$
182,589

 
$
169,847

 
 
 
 
 
 
 
 
 
 
 
 
 




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Credit Quality Indicators. The tables below present the key credit quality indicators for our mortgage loans held for portfolio.
 
 
 
 
 
 
 
 
 
Delinquency Status as of September 30, 2019
 
Conventional
 
Government
 
Total
Past due:
 
 
 
 
 
 
30-59 days
 
$
40,395

 
$
7,854

 
$
48,249

60-89 days
 
9,700

 
2,051

 
11,751

90 days or more
 
11,283

 
2,282

 
13,565

Total past due
 
61,378

 
12,187

 
73,565

Total current
 
10,751,347

 
328,801

 
11,080,148

Total mortgage loans, recorded investment (1)
 
$
10,812,725

 
$
340,988

 
$
11,153,713

 
 
 
 
 
 
 
Delinquency Status as of December 31, 2018
 
 
 
 
 
 
Past due:
 
 
 
 
 
 
30-59 days
 
$
36,594

 
$
9,352

 
$
45,946

60-89 days
 
7,904

 
2,870

 
10,774

90 days or more
 
13,764

 
1,697

 
15,461

Total past due
 
58,262

 
13,919

 
72,181

Total current
 
11,003,243

 
359,758

 
11,363,001

Total mortgage loans, recorded investment (1)
 
$
11,061,505

 
$
373,677

 
$
11,435,182


Other Delinquency Statistics as of September 30, 2019
 
Conventional
 
Government
 
Total
In process of foreclosure (2)
 
$
2,942

 
$

 
$
2,942

Serious delinquency rate (3)
 
0.10
%
 
0.67
%
 
0.12
%
Past due 90 days or more still accruing interest (4)
 
$
10,352

 
$
2,282

 
$
12,634

On non-accrual status
 
$
1,383

 
$

 
$
1,383

 
 
 
 
 
 
 
Other Delinquency Statistics as of December 31, 2018
 
 
 
 
 
 
In process of foreclosure (2)
 
$
6,836

 
$

 
$
6,836

Serious delinquency rate (3)
 
0.12
%
 
0.45
%
 
0.14
%
Past due 90 days or more still accruing interest (4)
 
$
12,849

 
$
1,697

 
$
14,546

On non-accrual status
 
$
1,762

 
$

 
$
1,762


(1) 
The recorded investment in a loan is the UPB of the loan, adjusted for accrued interest, net of any deferred loan fees or costs, unamortized premiums or discounts (which may include the basis adjustment related to any gain or loss on a delivery commitment prior to being funded) and direct charge-offs. The recorded investment is not net of any valuation allowance.
(2) 
Includes loans for which the decision of foreclosure or similar alternative, such as pursuit of deed-in-lieu of foreclosure, has been reported. Loans in process of foreclosure are included in past due categories depending on their delinquency status, but are not necessarily considered to be on non-accrual status.
(3) 
Represents loans 90 days or more past due (including loans in process of foreclosure) expressed as a percentage of the total recorded investment in mortgage loans. The percentage excludes principal and interest amounts previously paid in full by the servicers on conventional loans that are pending resolution of potential loss claims. Our servicers repurchase seriously delinquent government loans, including FHA loans, when certain criteria are met.
(4) 
Although our past due scheduled/scheduled MPP loans are classified as loans past due 90 days or more based on the loan's delinquency status, we do not consider these loans to be on non-accrual status.




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Allowance for Loan Losses on Mortgage Loans. The following table presents the components of the allowance for loan losses, including the credit enhancement waterfall for MPP.
Components of Allowance for Loan Losses
 
September 30, 2019
 
December 31, 2018
MPP estimated incurred losses remaining after borrower's equity, before credit enhancements (1)
 
$
4,955

 
$
3,505

Portion of estimated incurred losses recoverable from credit enhancements:
 
 
 
 
PMI
 
(861
)
 
(627
)
LRA (2)
 
(2,770
)
 
(1,137
)
SMI
 
(939
)
 
(1,256
)
Total portion recoverable from credit enhancements
 
(4,570
)
 
(3,020
)
Allowance for unrecoverable PMI/SMI
 
15

 
15

Allowance for MPP loan losses
 
400

 
500

Allowance for MPF Program loan losses
 
50

 
100

Allowance for loan losses
 
$
450


$
600


(1) 
Based on a loss emergence period of 24 months.
(2) 
Amounts recoverable are limited to (i) the estimated losses remaining after borrower's equity and PMI and (ii) the remaining balance in each pool's portion of the LRA. The remainder of the total LRA balance is available to cover any losses not yet incurred and to distribute any excess funds to the PFIs.

The tables below present a rollforward of our allowance for loan losses, the allowance for loan losses by impairment methodology, and the recorded investment in mortgage loans by impairment methodology.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Rollforward of Allowance for Loan Losses
 
2019
 
2018
 
2019
 
2018
Balance, beginning of period
 
$
600

 
$
600

 
$
600

 
$
850

Charge-offs
 
(26
)
 
(117
)
 
(101
)
 
(300
)
Recoveries
 
56

 
15

 
117

 
409

Provision for (reversal of) loan losses
 
(180
)
 
102

 
(166
)
 
(359
)
Balance, end of period
 
$
450

 
$
600

 
$
450

 
$
600


Allowance for Loan Losses by Impairment Methodology
 
September 30, 2019
 
December 31, 2018
Conventional loans collectively evaluated for impairment
 
$
383

 
$
563

Conventional loans individually evaluated for impairment (1)
 
67

 
37

Total allowance for loan losses
 
$
450

 
$
600

 
 
 
 
 
 
 
 
 
 
Recorded Investment by Impairment Methodology
 
September 30, 2019
 
December 31, 2018
Conventional loans collectively evaluated for impairment
 
$
10,798,449

 
$
11,048,075

Conventional loans individually evaluated for impairment (1)
 
14,276

 
13,430

Total recorded investment in conventional loans
 
$
10,812,725

 
$
11,061,505


(1) 
The recorded investment in our MPP conventional loans individually evaluated for impairment excludes principal previously paid in full by the servicers as of September 30, 2019 and December 31, 2018 of $1,139 and $1,552, respectively, that remains subject to potential claims by those servicers for any losses resulting from past or future liquidations of the underlying properties. However, the MPP allowance for loan losses as of September 30, 2019 and December 31, 2018 includes $19 and $16, respectively, for these potential claims.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 7 - Derivatives and Hedging Activities

Managing Credit Risk on Derivatives. We are subject to credit risk due to the risk of nonperformance by the counterparties to our derivative transactions.

Uncleared Derivatives. For certain of our uncleared derivatives, we have credit support agreements that contain provisions requiring us to post additional collateral with our counterparties if there is deterioration in our credit rating. If our credit rating is lowered by an NRSRO, we could be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate estimated fair value of all uncleared derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest on cash collateral) at September 30, 2019 was $1,314, for which we have posted collateral in cash, including accrued interest, of $995 in the normal course of business. If our credit rating had been lowered by an NRSRO (from an S&P equivalent of AA+ to AA), we would not have been required to deliver additional collateral to our uncleared derivative counterparties at September 30, 2019.

Cleared Derivatives. The clearinghouse determines margin requirements which are generally not based on credit ratings. However, clearing agents may require additional margin to be posted by us based on credit considerations, including but not limited to any credit rating downgrades. At September 30, 2019, we were not required by our clearing agents to post any additional margin.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Financial Statement Effect and Additional Financial Information.

Derivative Notional Amounts. We record derivative instruments, related cash collateral received or pledged/posted and associated accrued interest on a net basis, by clearing agent and/or by counterparty when the netting requirements have been met. The following table presents the notional amount and estimated fair value of derivative assets and liabilities.
 
 
 
 
Estimated Fair Value
 
Estimated Fair Value
 
 
Notional
 
of Derivative
 
of Derivative
September 30, 2019
 
Amount
 
Assets
 
Liabilities
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest-rate swaps
 
$
39,847,680

 
$
32,322

 
$
462,001

Total derivatives designated as hedging instruments
 
39,847,680

 
32,322

 
462,001

Derivatives not designated as hedging instruments:
 
 

 
 

 
 

Interest-rate swaps
 
5,947,750

 
454

 
319

Swaptions
 
1,350,000

 
33

 

Interest-rate caps/floors
 
668,500

 
198

 

Interest-rate forwards
 
87,400

 
70

 
15

MDCs
 
88,923

 
126

 
55

Total derivatives not designated as hedging instruments
 
8,142,573

 
881

 
389

Total derivatives before adjustments
 
$
47,990,253

 
33,203

 
462,390

Netting adjustments and cash collateral (1)
 
 
 
153,668

 
(457,670
)
Total derivatives, net
 
 

 
$
186,871

 
$
4,720

 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest-rate swaps
 
$
35,135,617

 
$
174,990

 
$
123,331

Total derivatives designated as hedging instruments
 
35,135,617

 
174,990

 
123,331

Derivatives not designated as hedging instruments:
 
 

 
 

 
 

Interest-rate swaps
 
965,930

 
562

 
106

Swaptions
 
950,000

 
105

 

Interest-rate caps/floors
 
679,500

 
999

 

Interest-rate forwards
 
44,100

 

 
202

MDCs
 
43,753

 
146

 
23

Total derivatives not designated as hedging instruments
 
2,683,283

 
1,812

 
331

Total derivatives before adjustments
 
$
37,818,900

 
176,802

 
123,662

Netting adjustments and cash collateral (1)
 
 
 
(60,038
)
 
(102,595
)
Total derivatives, net
 
 

 
$
116,764

 
$
21,067


(1) 
Represents the application of the netting requirements that allow us to settle (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed, with the same clearing agent and/or counterparty. Cash collateral pledged to counterparties at September 30, 2019 and December 31, 2018, including accrued interest, totaled $612,334 and $127,952, respectively. Cash collateral received from counterparties and held at September 30, 2019 and December 31, 2018, including accrued interest, totaled $995 and $85,395, respectively. At September 30, 2019 and December 31, 2018, no securities were pledged as collateral.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

The following table presents separately the estimated fair value of derivative instruments meeting and not meeting netting requirements, including the effect of the related collateral held or pledged.
 
 
September 30, 2019
 
December 31, 2018
 
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Derivative instruments meeting netting requirements:
 
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
 
Uncleared
 
$
30,797

 
$
460,764

 
$
174,725

 
$
106,333

Cleared
 
2,210

 
1,556

 
1,931

 
17,104

Total gross recognized amount
 
33,007

 
462,320

 
176,656

 
123,437

Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Uncleared
 
(27,869
)
 
(456,114
)
 
(168,426
)
 
(85,491
)
Cleared
 
181,537

 
(1,556
)
 
108,388

 
(17,104
)
Total gross amounts of netting adjustments and cash collateral
 
153,668

 
(457,670
)
 
(60,038
)
 
(102,595
)
Net amounts after netting adjustments and cash collateral
 
 
 
 
 
 
 
 
Uncleared
 
2,928

 
4,650

 
6,299

 
20,842

Cleared
 
183,747

 

 
110,319

 

Total net amounts after netting adjustments and cash collateral
 
186,675

 
4,650

 
116,618

 
20,842

Derivative instruments not meeting netting requirements (1)
 
196

 
70

 
146

 
225

   Total derivatives, at estimated fair value
 
$
186,871

 
$
4,720

 
$
116,764

 
$
21,067


(1) 
Includes MDCs and certain interest-rate forwards.

The following table presents the components of net gains (losses) on derivatives and hedging activities reported in other income.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Type of Hedge
 
2019
 
2018
 
2019
 
2018
Net gain (loss) related to fair-value hedge ineffectiveness:
 
 
 
 
 
 
 
 
Interest-rate swaps
 
$


$
(6,096
)
 
$

 
$
513

Total net gain (loss) related to fair-value hedge ineffectiveness
 


(6,096
)
 

 
513

Net gain (loss) on derivatives not designated as hedging instruments:
 
 

 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
Interest-rate swaps
 
(2,550
)
 
2,518

 
(14,636
)
 
4,103

Swaptions
 
(430
)
 
(170
)
 
(1,023
)
 
(405
)
Interest-rate caps/floors
 
(799
)
 
(122
)
 
(801
)
 
43

Interest-rate forwards
 
(268
)
 
560

 
(1,487
)
 
1,521

Net interest settlements
 
127

 
(2,695
)
 
(4,961
)
 
(5,099
)
MDCs
 
308

 
(669
)
 
1,509

 
(2,339
)
Total net gain (loss) on derivatives not designated as hedging instruments
 
(3,612
)
 
(578
)
 
(21,399
)
 
(2,176
)
Price alignment interest (1)
 

 
(1,486
)
 

 
(3,553
)
Net gains (losses) on derivatives and hedging activities in other income
 
$
(3,612
)
 
$
(8,160
)
 
$
(21,399
)
 
$
(5,216
)

(1) 
Relates to derivatives for which variation margin payments are characterized as daily settled contracts. For 2019, the portion related to derivatives not designated as hedging instruments is allocated to the applicable type of derivative.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Net gain (loss) related to fair-value hedge ineffectiveness previously presented in other income is presented in net interest income for the three and nine months ended September 30, 2019. Prior period amounts presented have not been reclassified. See Note 2 - Recently Adopted and Issued Accounting Guidance for more details.

The following table presents, by type of hedged item, the net gains (losses) on derivatives and the related hedged items in qualifying fair-value hedging relationships and the impact on net interest income.
Three Months Ended September 30, 2019
 
Advances
 
Investments
 
CO Bonds
 
Total
Changes in fair value:
 
 
 
 
 
 
 
 
Hedged items
 
$
101,809

 
$
140,243

 
$
(10,308
)
 
$
231,744

Derivatives
 
(96,264
)
 
(150,320
)
 
5,782

 
(240,802
)
Net changes in fair value before price alignment interest
 
5,545

 
(10,077
)
 
(4,526
)
 
(9,058
)
Price alignment interest (1)
 
782

 
201

 
(147
)
 
836

Net interest settlements on derivatives (2) (3)
 
13,271

 
6,556

 
(3,967
)
 
15,860

Amortization/accretion of gains (losses) on active hedging relationships
 

 
117

 
187

 
304

Net gains (losses) on qualifying fair-value hedging relationships
 
19,598

 
(3,203
)
 
(8,453
)
 
7,942

Amortization/accretion of gains (losses) on discontinued fair-value hedging relationships
 
2

 

 
(514
)
 
(512
)
Net gains (losses) on derivatives and hedging activities in net interest income (3)
 
$
19,600

 
$
(3,203
)
 
$
(8,967
)
 
$
7,430

Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
Changes in fair value:
 
 
 
 
 
 
 
 
Hedged items
 
$
(25,144
)
 
$
(59,236
)
 
$
7,399

 
$
(76,981
)
Derivatives
 
22,872

 
52,810

 
(4,797
)
 
70,885

Net changes in fair value (4)
 
(2,272
)
 
(6,426
)
 
2,602

 
(6,096
)
Net interest settlements on derivatives (2) (3)
 
16,512

 
7,398

 
(14,650
)
 
9,260

Amortization/accretion of gains (losses) on active hedging relationships
 

 
60

 
78

 
138

Net gains (losses) on qualifying fair-value hedging relationships
 
14,240

 
1,032

 
(11,970
)
 
3,302

Add: amortization/accretion of gains (losses) on discontinued fair-value hedging relationships
 
(12
)
 

 
(2,321
)
 
(2,333
)
Less: net changes in fair value (4)
 
2,272

 
6,426

 
(2,602
)
 
6,096

Net gains (losses) on derivatives and hedging activities in net interest income (3)
 
$
16,500

 
$
7,458

 
$
(16,893
)
 
$
7,065





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Nine Months Ended September 30, 2019
 
Advances
 
Investments
 
CO Bonds
 
Total
Changes in fair value:
 
 
 
 
 
 
 
 
Hedged items
 
$
432,419

 
$
507,397

 
$
(109,183
)
 
$
830,633

Derivatives
 
(431,365
)
 
(535,526
)
 
104,749

 
(862,142
)
Net changes in fair value before price alignment interest
 
1,054

 
(28,129
)
 
(4,434
)
 
(31,509
)
Price alignment interest (1)
 
477

 
(877
)
 
(153
)
 
(553
)
Net interest settlements on derivatives (2) (3)
 
56,729

 
32,167

 
(34,564
)
 
54,332

Amortization/accretion of gains (losses) on active hedging relationships
 

 
293

 
372

 
665

Net gains (losses) on qualifying fair-value hedging relationships
 
58,260

 
3,454

 
(38,779
)
 
22,935

Amortization/accretion of gains (losses) on discontinued fair-value hedging relationships
 

 

 
(6,678
)
 
(6,678
)
Net gains (losses) on derivatives and hedging activities in net interest income (3)
 
$
58,260

 
$
3,454

 
$
(45,457
)
 
$
16,257

Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
Changes in fair value:
 
 
 
 
 
 
 
 
Hedged items
 
$
(147,659
)
 
$
(255,067
)
 
$
106,237

 
$
(296,489
)
Derivatives
 
148,815

 
251,901

 
(103,714
)
 
297,002

Net changes in fair value (4)
 
1,156

 
(3,166
)
 
2,523

 
513

Net interest settlements on derivatives (2) (3)
 
31,416

 
8,575

 
(25,896
)
 
14,095

Amortization/accretion of gains (losses) on active hedging relationships
 

 
200

 
259

 
459

Net gains (losses) on qualifying fair-value hedging relationships
 
32,572

 
5,609

 
(23,114
)
 
15,067

Add: amortization/accretion of gains (losses) on discontinued fair-value hedging relationships
 
(35
)
 

 
(4,619
)
 
(4,654
)
Less: net changes in fair value (4)
 
(1,156
)
 
3,166

 
(2,523
)
 
(513
)
Net gains (losses) on derivatives and hedging activities in net interest income (3)
 
$
31,381

 
$
8,775

 
$
(30,256
)
 
$
9,900


(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) 
Net changes in fair value were not reported in net interest income in the prior year periods, but are presented herein to conform to the presentation of the current period amounts.

The following table presents the amortized cost of, and the related cumulative basis adjustments on, hedged items in qualifying fair-value hedging relationships.
September 30, 2019
 
Advances
 
Investments
 
CO Bonds
Amortized cost of hedged items (1)
 
$
16,579,430

 
$
8,312,145

 
$
16,610,150

 
 
 
 
 
 
 
Cumulative basis adjustments included in amortized cost:
 
 
 
 
 
 
For active fair-value hedging relationships
 
$
324,581

 
$
271,947

 
$
13,131

For discontinued fair-value hedging relationships
 

 

 
(72
)
Total cumulative fair-value hedging basis adjustments on hedged items (2)
 
$
324,581

 
$
271,947

 
$
13,059


(1) 
Includes only the portion of the amortized cost of the hedged items in qualifying fair-value hedging relationships.
(2) 
Excludes any offsetting effect of the net fair value of the associated derivatives.




Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 8 - Consolidated Obligations

In addition to being the primary obligor for all consolidated obligations issued on our behalf, we are jointly and severally liable with each of the other FHLBanks for the payment of the principal and interest on all of the FHLBanks' outstanding consolidated obligations. The par values of the FHLBanks' outstanding consolidated obligations totaled $1.0 trillion at both September 30, 2019 and December 31, 2018. As provided by the Bank Act and Finance Agency regulations, consolidated obligations are backed only by the financial resources of all FHLBanks.

Discount Notes. The following table presents our discount notes outstanding, all of which are due within one year of issuance.
Discount Notes
 
September 30, 2019
 
December 31, 2018
Book value
 
$
15,300,029

 
$
20,895,262

Par value
 
$
15,332,360

 
$
20,952,650

 
 
 
 
 
Weighted average effective interest rate
 
2.10
%
 
2.34
%

CO Bonds. The following table presents our CO bonds outstanding by contractual maturity.
 
 
September 30, 2019
 
December 31, 2018
Year of Contractual Maturity
 
Amount
 
WAIR%
 
Amount
 
WAIR%
Due in 1 year or less
 
$
26,034,220

 
1.73

 
$
18,456,870

 
2.07

Due after 1 year through 2 years
 
7,741,800

 
1.72

 
8,823,285

 
2.30

Due after 2 years through 3 years
 
4,294,790

 
2.26

 
2,640,620

 
2.42

Due after 3 years through 4 years
 
1,985,775

 
2.30

 
3,024,000

 
2.33

Due after 4 years through 5 years
 
1,251,100

 
2.28

 
998,375

 
2.54

Thereafter
 
5,800,850

 
3.13

 
6,431,700

 
3.21

Total CO bonds, par value
 
47,108,535

 
1.99

 
40,374,850

 
2.36

Unamortized premiums
 
71,381

 
 

 
23,493

 
 

Unamortized discounts
 
(13,658
)
 
 

 
(15,992
)
 
 

Unamortized concessions
 
(10,586
)
 
 
 
(14,085
)
 
 
Fair-value hedging adjustments, net
 
13,059

 
 

 
(102,801
)
 
 

Total CO bonds
 
$
47,168,731

 
 

 
$
40,265,465

 
 


The following tables present our CO bonds outstanding by redemption feature and the earlier of the year of contractual maturity or next call date.
Redemption Feature
 
September 30, 2019
 
December 31, 2018
Non-callable / non-putable
 
$
30,911,035

 
$
27,462,850

Callable
 
16,197,500

 
12,912,000

Total CO bonds, par value
 
$
47,108,535

 
$
40,374,850

Year of Contractual Maturity or Next Call Date
 
September 30, 2019
 
December 31, 2018
Due in 1 year or less
 
$
39,063,220


$
30,331,870

Due after 1 year through 2 years
 
3,897,300

 
6,069,285

Due after 2 years through 3 years
 
668,790

 
1,043,620

Due after 3 years through 4 years
 
789,775

 
626,000

Due after 4 years through 5 years
 
360,600

 
503,375

Thereafter
 
2,328,850

 
1,800,700

Total CO bonds, par value
 
$
47,108,535

 
$
40,374,850






Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 9 - Affordable Housing Program

The following table summarizes the activity in our AHP funding obligation.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
AHP Activity
 
2019
 
2018
 
2019
 
2018
Liability at beginning of period
 
$
40,247

 
$
35,634

 
$
40,747

 
$
32,166

Assessment (expense)
 
3,265

 
4,546

 
11,408

 
18,079

Subsidy usage, net (1)
 
(6,442
)
 
(2,705
)
 
(15,085
)
 
(12,770
)
Liability at end of period
 
$
37,070

 
$
37,475

 
$
37,070

 
$
37,475


(1) 
Subsidies disbursed are reported net of returns/recaptures of previously disbursed subsidies.

Note 10 - Capital
    
Mandatorily Redeemable Capital Stock. The following table presents the activity in our MRCS.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
MRCS Activity
 
2019
 
2018
 
2019
 
2018
Liability at beginning of period
 
$
174,193

 
$
180,913

 
$
168,876

 
$
164,322

Reclassification from capital stock
 
148,870

 
3,560

 
150,979

 
26,723

Proceeds from issuance (1)
 

 

 
3,704

 

Redemptions/repurchases
 
(43
)
 
(20,072
)
 
(540
)
 
(26,649
)
Accrued distributions
 
692

 
33

 
693

 
38

Liability at end of period
 
$
323,712

 
$
164,434

 
$
323,712

 
$
164,434


(1) 
Represents a purchase of capital stock by a captive insurance company member, which is considered mandatorily redeemable as a result of the Final Membership Rule.

The following table presents MRCS by contractual year of redemption. The year of redemption is the later of (i) the final year of the five-year redemption period, or (ii) the first year in which a non-member no longer has an activity-based stock requirement.
MRCS Contractual Year of Redemption
 
September 30, 2019
 
December 31, 2018
Year 1 (1)
 
$
1,490

 
$
1,316

Year 2
 
8,649

 

Year 3
 

 
8,649

Year 4
 
26,723

 

Year 5
 
150,958

 
26,723

Thereafter (2)
 
135,892

 
132,188

Total MRCS
 
$
323,712

 
$
168,876


(1) 
Balances at September 30, 2019 and December 31, 2018 include $798 and $1,304, respectively, of Class B stock that had reached the end of the five-year redemption period but will not be redeemed until the associated credit products and other obligations are no longer outstanding.
(2) 
Represents the five-year redemption period of Class B stock held by certain captive insurance companies which begins immediately upon their respective terminations of membership no later than February 19, 2021, in accordance with the Final Membership Rule. However, upon their respective terminations, we currently intend to repurchase their excess stock (if any) in accordance with our capital plan, the balances of which at September 30, 2019 and December 31, 2018 totaled $61,642 and $57,938, respectively.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

The following table presents the distributions related to MRCS.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
MRCS Distributions
 
2019
 
2018
 
2019
 
2018
Recorded as interest expense
 
$
3,514

 
$
1,927

 
$
8,585

 
$
6,557

Recorded as distributions from retained earnings
 
692

 
33

 
693

 
38

Total
 
$
4,206

 
$
1,960

 
$
9,278

 
$
6,595


Capital Requirements. We are subject to three capital requirements under our capital plan and Finance Agency regulations as disclosed in Note 13 - Capital in our 2018 Form 10-K. As presented in the following table, we were in compliance with those requirements at September 30, 2019 and December 31, 2018.
 
 
September 30, 2019
 
December 31, 2018
Regulatory Capital Requirements
 
Required
 
Actual
 
Required
 
Actual
Risk-based capital
 
$
652,463

 
$
3,353,741

 
$
786,925

 
$
3,177,638

 
 
 
 
 
 
 
 
 
Total regulatory capital
 
$
2,690,471

 
$
3,353,741

 
$
2,616,468

 
$
3,177,638

Total regulatory capital-to-asset ratio
 
4.00
%
 
4.99
%
 
4.00
%
 
4.86
%
 
 
 
 
 
 
 
 
 
Leverage capital
 
$
3,363,088

 
$
5,030,612

 
$
3,270,585

 
$
4,766,457

Leverage ratio
 
5.00
%
 
7.48
%
 
5.00
%
 
7.29
%

Note 11 - Accumulated Other Comprehensive Income

The following tables present a summary of the changes in the components of AOCI.
 
 
 
 
 
 
 
 
 
 
 
AOCI Rollforward
 
Unrealized Gains (Losses) on AFS Securities
 
Non-Credit OTTI on AFS Securities
 
Non-Credit OTTI on HTM Securities
 
Pension Benefits
 
Total AOCI
Balance, June 30, 2018
 
$
102,491

 
$

 
$

 
$
(16,600
)
 
$
85,891

 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications:
 
 
 
 
 
 
 
 
 

Net change in unrealized gains (losses)
 
9,043

 

 

 

 
9,043

Reclassifications from OCI to net income:
 
 
 
 
 
 
 
 
 

Pension benefits, net
 

 

 

 
636

 
636

Total other comprehensive income (loss)
 
9,043

 

 

 
636

 
9,679

 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
 
$
111,534

 
$

 
$

 
$
(15,964
)
 
$
95,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, June 30, 2019
 
$
71,967

 
$

 
$

 
$
(14,667
)
 
$
57,300

 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications:
 
 
 
 
 
 
 
 
 

Net change in unrealized gains (losses)
 
(2,139
)
 

 

 

 
(2,139
)
Reclassifications from OCI to net income:
 
 
 
 
 
 
 
 
 

Pension benefits, net
 

 

 

 
486

 
486

Total other comprehensive income (loss)
 
(2,139
)
 

 

 
486

 
(1,653
)
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
 
$
69,828

 
$

 
$

 
$
(14,181
)
 
$
55,647






Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)


AOCI Rollforward
 
Unrealized Gains (Losses) on AFS Securities
 
Non-Credit OTTI on AFS Securities
 
Non-Credit OTTI on HTM Securities
 
Pension Benefits
 
Total AOCI
Balance, December 31, 2017
 
$
92,519

 
$
29,322

 
$
(51
)
 
$
(10,384
)
 
$
111,406

 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses)
 
19,015

 
392

 

 

 
19,407

Net change in fair value
 

 
2,693

 

 

 
2,693

Accretion of non-credit losses
 

 

 
51

 

 
51

Reclassifications from OCI to net income:
 
 
 
 
 
 
 
 
 


Net realized gains from sale of AFS securities
 

 
(32,407
)
 

 

 
(32,407
)
Pension benefits, net
 

 

 

 
(5,580
)
 
(5,580
)
Total other comprehensive income (loss)
 
19,015

 
(29,322
)
 
51

 
(5,580
)
 
(15,836
)
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
 
$
111,534

 
$

 
$

 
$
(15,964
)
 
$
95,570

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Balance, December 31, 2018
 
$
52,986

 
$

 
$

 
$
(11,299
)
 
$
41,687

 
 
 
 
 
 
 
 
 
 
 
OCI before reclassifications:
 
 
 
 
 
 
 
 
 

Net change in unrealized gains (losses)
 
16,842

 

 

 

 
16,842

Reclassifications from OCI to net income:
 
 
 
 
 
 
 
 
 

Pension benefits, net
 

 

 

 
(2,882
)
 
(2,882
)
Total other comprehensive income (loss)
 
16,842

 

 

 
(2,882
)
 
13,960

 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2019
 
$
69,828

 
$

 
$

 
$
(14,181
)
 
$
55,647






Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 12 - Segment Information

The following table presents our financial performance by operating segment.
 
 
Three Months Ended September 30, 2019
 
Three Months Ended September 30, 2018
 
 
Traditional
 
Mortgage Loans
 
Total
 
Traditional
 
Mortgage Loans
 
Total
Net interest income
 
$
38,149

 
$
12,175

 
$
50,324

 
$
56,700

 
$
16,187

 
$
72,887

Provision for (reversal of) credit losses
 

 
(180
)
 
(180
)
 

 
102

 
102

Other income (loss)
 
2,678

 
108

 
2,786

 
(6,571
)
 
(257
)
 
(6,828
)
Other expenses
 
20,636

 
3,523

 
24,159

 
18,979

 
3,449

 
22,428

Income before assessments
 
20,191

 
8,940

 
29,131

 
31,150

 
12,379

 
43,529

Affordable Housing Program assessments
 
2,371

 
894

 
3,265

 
3,308

 
1,238

 
4,546

Net income
 
$
17,820

 
$
8,046

 
$
25,866

 
$
27,842

 
$
11,141

 
$
38,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019
 
Nine Months Ended September 30, 2018
 
 
Traditional
 
Mortgage Loans
 
Total
 
Traditional
 
Mortgage Loans
 
Total
Net interest income
 
$
121,594

 
$
45,813

 
$
167,407

 
$
162,696

 
$
50,225

 
$
212,921

Provision for (reversal of) credit losses
 

 
(166
)
 
(166
)
 

 
(359
)
 
(359
)
Other income (loss)
 
9,078

 
192

 
9,270

 
30,829

 
(1,162
)
 
29,667

Other expenses
 
61,012

 
10,338

 
71,350

 
58,228

 
10,486

 
68,714

Income before assessments
 
69,660

 
35,833

 
105,493

 
135,297

 
38,936

 
174,233

Affordable Housing Program assessments
 
7,825

 
3,583

 
11,408

 
14,185

 
3,894

 
18,079

Net income
 
$
61,835

 
$
32,250

 
$
94,085

 
$
121,112

 
$
35,042

 
$
156,154


The following table presents the asset balances by operating segment.
By Date
 
Traditional
 
Mortgage Loans
 
Total
September 30, 2019
 
$
56,157,489

 
$
11,104,279

 
$
67,261,768

December 31, 2018
 
54,026,721

 
11,384,978

 
65,411,699






Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 13 - Estimated Fair Values

The following tables present the carrying value and estimated fair value of each of our financial instruments. The total of the estimated fair values does not represent an estimate of our overall market value as a going concern, which would take into account, among other considerations, future business opportunities and the net profitability of assets and liabilities.
 
 
September 30, 2019
 
 
 
 
Estimated Fair Value
 
 
Carrying
 
 
 
 
 
 
 
 
 
Netting
Financial Instruments
 
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Adjustments (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
49,845

 
$
49,845

 
$
49,845

 
$

 
$

 
$

Interest-bearing deposits
 
505,672

 
505,672

 
505,475

 
197

 

 

Securities purchased under agreements to resell
 
3,550,000

 
3,550,000

 

 
3,550,000

 

 

Federal funds sold
 
1,415,000

 
1,415,000

 

 
1,415,000

 

 

Trading securities
 
4,411,301

 
4,411,301

 

 
4,411,301

 

 

AFS securities
 
8,381,973

 
8,381,973

 

 
8,381,973

 

 

HTM securities
 
4,961,209

 
4,971,803

 

 
4,971,803

 

 

Advances
 
32,487,260

 
32,406,173

 

 
32,406,173

 

 

Mortgage loans held for portfolio, net
 
11,104,279

 
11,225,212

 

 
11,218,454

 
6,758

 

Accrued interest receivable
 
132,566

 
132,566

 

 
132,566

 

 

Derivative assets, net
 
186,871

 
186,871

 

 
33,203

 

 
153,668

Grantor trust assets (2)
 
24,595

 
24,595

 
24,595

 

 

 

 
 
 
 


 
 
 
 
 
 
 
 
Liabilities:
 
 
 


 
 
 
 
 
 
 
 
Deposits
 
713,115

 
713,115

 

 
713,115

 

 

Consolidated obligations:
 
 
 


 
 
 
 
 
 
 
 
Discount notes
 
15,300,029

 
15,302,483

 

 
15,302,483

 

 

Bonds
 
47,168,731

 
47,562,928

 

 
47,562,928

 

 

Accrued interest payable
 
176,724

 
176,724

 

 
176,724

 

 

Derivative liabilities, net
 
4,720

 
4,720

 

 
462,390

 

 
(457,670
)
MRCS
 
323,712

 
323,712

 
323,712

 

 

 






Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

 
 
December 31, 2018
 
 
 
 
Estimated Fair Value
 
 
Carrying
 
 
 
 
 
 
 
 
 
Netting
Financial Instruments
 
Value
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Adjustments (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
100,735

 
$
100,735

 
$
100,735

 
$

 
$

 
$

Interest-bearing deposits
 
1,210,705

 
1,210,705

 
1,210,039

 
666

 

 

Securities purchased under agreements to resell
 
3,212,726

 
3,212,728

 

 
3,212,728

 

 

Federal funds sold
 
3,085,000

 
3,085,000

 

 
3,085,000

 

 

AFS securities
 
7,703,596

 
7,703,596

 

 
7,703,596

 

 

HTM securities
 
5,673,720

 
5,676,145

 

 
5,676,145

 

 

Advances
 
32,727,668

 
32,669,145

 

 
32,669,145

 

 

Mortgage loans held for portfolio, net
 
11,384,978

 
11,212,978

 

 
11,202,984

 
9,994

 

Accrued interest receivable
 
124,611

 
124,611

 

 
124,611

 

 

Derivative assets, net
 
116,764

 
116,764

 

 
176,802

 

 
(60,038
)
Grantor trust assets (2)
 
21,122

 
21,122

 
21,122

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
500,440

 
500,440

 

 
500,440

 

 

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
20,895,262

 
20,895,446

 

 
20,895,446

 

 

Bonds
 
40,265,465

 
40,137,791

 

 
40,137,791

 

 

Accrued interest payable
 
179,728

 
179,728

 

 
179,728

 

 

Derivative liabilities, net
 
21,067

 
21,067

 

 
123,662

 

 
(102,595
)
MRCS
 
168,876

 
168,876

 
168,876

 

 

 


(1) 
Represents the application of the netting requirements that allow the settlement of (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed, with the same clearing agent and/or counterparty.
(2) 
Included in other assets on the statement of condition.

Summary of Valuation Techniques and Significant Inputs. A description of the valuation techniques, significant inputs, and levels of fair value hierarchy is disclosed in Note 17 - Estimated Fair Values in our 2018 Form 10-K. No changes have been made in the current year.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Estimated Fair Value Measurements. The following tables present, by level within the fair value hierarchy, the estimated fair value of our financial assets and liabilities that are recorded at estimated fair value on a recurring or non-recurring basis on our statement of condition.
 
 
 
 
 
 
 
 
 
 
Netting
September 30, 2019
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Adjustments (1)
Trading securities:
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
4,411,301

 
$

 
$
4,411,301

 
$

 
$

Total trading securities
 
4,411,301

 

 
4,411,301

 

 

AFS securities:
 
 
 
 
 
 
 
 
 
 
GSE and TVA debentures
 
3,948,764

 

 
3,948,764

 

 

GSE MBS
 
4,433,209

 

 
4,433,209

 

 

Total AFS securities
 
8,381,973

 

 
8,381,973

 

 

Derivative assets:
 
 

 
 

 
 

 
 

 
 

Interest-rate related
 
186,675

 

 
33,007

 

 
153,668

Interest-rate forwards
 
70

 

 
70

 

 

MDCs
 
126

 

 
126

 

 

Total derivative assets, net
 
186,871

 

 
33,203

 

 
153,668

Grantor trust assets (2)
 
24,595

 
24,595

 

 

 

Total assets at recurring estimated fair value
 
$
13,004,740

 
$
24,595

 
$
12,826,477

 
$

 
$
153,668

 
 
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

 
 

Interest-rate related
 
$
4,650

 
$

 
$
462,320

 
$

 
$
(457,670
)
Interest-rate forwards
 
15

 

 
15

 

 

MDCs
 
55

 

 
55

 

 

Total derivative liabilities, net
 
4,720

 

 
462,390

 

 
(457,670
)
Total liabilities at recurring estimated fair value
 
$
4,720

 
$

 
$
462,390

 
$

 
$
(457,670
)
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans held for portfolio (3)
 
$
1,706

 
$

 
$

 
$
1,706

 
$

Total assets at non-recurring estimated fair value
 
$
1,706

 
$

 
$

 
$
1,706

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
AFS securities:
 
 
 
 
 
 
 
 
 
 
GSE and TVA debentures
 
$
4,277,080

 
$

 
$
4,277,080

 
$

 
$

GSE MBS
 
3,426,516

 

 
3,426,516

 

 

Total AFS securities
 
7,703,596

 

 
7,703,596

 

 

Derivative assets:
 
 

 
 

 
 

 
 

 
 

Interest-rate related
 
116,618

 

 
176,656

 

 
(60,038
)
MDCs
 
146

 

 
146

 

 

Total derivative assets, net
 
116,764

 

 
176,802

 

 
(60,038
)
Grantor trust assets (2)
 
21,122

 
21,122

 

 

 

Total assets at recurring estimated fair value
 
$
7,841,482

 
$
21,122

 
$
7,880,398

 
$

 
$
(60,038
)
 
 
 

 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

 
 

Interest-rate related
 
$
20,842

 
$

 
$
123,437

 
$

 
$
(102,595
)
Interest-rate forwards
 
202

 

 
202

 

 

MDCs
 
23

 

 
23

 

 

Total derivative liabilities, net
 
21,067

 

 
123,662

 

 
(102,595
)
Total liabilities at recurring estimated fair value
 
$
21,067

 
$

 
$
123,662

 
$

 
$
(102,595
)
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans held for portfolio (4)
 
$
1,734

 
$

 
$

 
$
1,734

 
$

Total assets at non-recurring estimated fair value
 
$
1,734

 
$

 
$

 
$
1,734

 
$





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

(1) 
Represents the application of the netting requirements that allow us to settle (i) positive and negative positions and (ii) cash collateral and related accrued interest held or placed with the same clearing agent and/or counterparty.
(2) 
Included in other assets on the statement of condition.
(3) 
Amounts are as of the date the fair value adjustment was recorded during the nine months ended September 30, 2019.
(4) 
Amounts are as of the date the fair value adjustment was recorded during the year ended December 31, 2018.
 
 
 
Note 14 - Commitments and Contingencies

The following table presents our off-balance-sheet commitments at their notional amounts.
 
 
September 30, 2019
Type of Commitment
 
Expire within one year
 
Expire after one year
 
Total
Letters of credit outstanding 
 
$
292,631

 
$
116,101

 
$
408,732

Unused lines of credit (1)
 
1,003,342

 

 
1,003,342

Commitments to fund additional advances (2)
 
71,350

 

 
71,350

Commitments to fund or purchase mortgage loans, net (3)
 
88,923

 

 
88,923

Unsettled CO bonds, at par
 
550,000

 

 
550,000


(1) 
Maximum line of credit amount per member is $50,000.
(2) 
Generally for periods up to six months.
(3) 
Generally for periods up to 91 days.

Legal Proceedings. We are subject to legal proceedings arising in the normal course of business. We record an accrual for a loss contingency when it is probable that a loss for which we could be liable has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these proceedings could have a material effect on our financial condition, results of operations or cash flows.

Additional discussion of other commitments and contingencies is provided in Note 4 - Advances; Note 5 - Mortgage Loans Held for Portfolio; Note 7 - Derivatives and Hedging Activities; Note 8 - Consolidated Obligations; Note 10 - Capital; and Note 13 - Estimated Fair Values.





Notes to Financial Statements, continued
(Unaudited, $ amounts in thousands unless otherwise indicated)




(Unaudited, $ amounts in thousands unless otherwise indicated)

Note 15 - Related Party and Other Transactions

Transactions with Related Parties. The following table presents the aggregate outstanding balances of capital stock and advances for directors' financial institutions and their balances as a percent of the total balances on our statement of condition.
 
 
September 30, 2019
 
December 31, 2018
Balances with Directors' Financial Institutions
 
Par value
 
% of Total
 
Par value
 
% of Total
Capital stock
 
$
44,912

 
2
%
 
$
43,315

 
2
%
Advances
 
703,563

 
2
%
 
600,869

 
2
%

The par values at September 30, 2019 reflect changes in the composition of directors' financial institutions effective January 1, 2019, due to changes in board membership resulting from the 2018 director election, and a change in a director's affiliation.

The following table presents transactions with directors' financial institutions, taking into account the beginning and ending dates of the directors' terms, merger activity and other changes in the composition of directors' financial institutions.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Transactions with Directors' Financial Institutions
 
2019
 
2018
 
2019
 
2018
Net capital stock issuances (redemptions and repurchases)
 
$
268

 
$
532

 
$
4,836

 
$
1,378

Net advances (repayments)
 
57,019

 
46,150

 
142,464

 
(46,750
)
Mortgage loan purchases
 
7,954

 
11,289

 
19,282

 
28,078


Transactions with Other FHLBanks. Occasionally, we loan or borrow short-term funds to/from other FHLBanks. The following table presents the loans to/borrowings from other FHLBanks.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Loans to other FHLBanks
 
2019
 
2018
 
2019
 
2018
Disbursements
 
$

 
$

 
$

 
$
(400,000
)
Principal repayments
 

 

 

 
400,000

 
 
 
 
 
 
 
 
 
Borrowings from other FHLBanks
 
 
 
 
 
 
 
 
Proceeds from borrowings
 
$
250,000

 
$

 
$
250,000

 
$

Principal repayments
 
(250,000
)
 

 
(250,000
)
 


There were no loans to or borrowings from other FHLBanks outstanding at September 30, 2019 or December 31, 2018.






GLOSSARY OF TERMS

ABS: Asset-Backed Securities
Advance: Secured loan to members, former members or Housing Associates
AFS: Available-for-Sale
Agency: GSE and Ginnie Mae
AHP: Affordable Housing Program
AMA: Acquired Member Assets
AOCI: Accumulated Other Comprehensive Income (Loss)
Bank Act: Federal Home Loan Bank Act of 1932, as amended
bps: basis points
CDFI: Community Development Financial Institution
CE: Credit Enhancement
CFI: Community Financial Institution, an FDIC-insured depository institution with average total assets below an annually-adjusted limit established by the Director based on the Consumer Price Index
CFPB: Bureau of Consumer Financial Protection
CFTC: United States Commodity Futures Trading Commission
Clearinghouse: A United States Commodity Futures Trading Commission-registered derivatives clearing organization
CME: CME Clearing
CMO: Collateralized Mortgage Obligation
CO bond: Consolidated Obligation bond
DB Plan: Pentegra Defined Benefit Pension Plan for Financial Institutions, as amended
DC Plan: Pentegra Defined Contribution Retirement Savings Plan for Financial Institutions, as amended
DDCP: Directors' Deferred Compensation Plan
Director: Director of the Federal Housing Finance Agency
Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended
Exchange Act: Securities Exchange Act of 1934, as amended
Fannie Mae: Federal National Mortgage Association
FASB: Financial Accounting Standards Board
FDIC: Federal Deposit Insurance Corporation
FHA: Federal Housing Administration
FHLBank: A Federal Home Loan Bank
FHLBanks: The 11 Federal Home Loan Banks or a subset thereof
FHLBank System: The 11 Federal Home Loan Banks and the Office of Finance
FICO®: Fair Isaac Corporation, the creators of the FICO credit score
Final Membership Rule: Final Rule on FHLBank Membership issued by the Federal Housing Finance Agency effective February 19, 2016
Finance Agency: Federal Housing Finance Agency, successor to Finance Board
Finance Board: Federal Housing Finance Board, predecessor to Finance Agency
FLA: First Loss Account
FOMC: Federal Open Market Committee
Form 8-K: Current Report on Form 8-K as filed with the SEC under the Exchange Act
Form 10-K: Annual Report on Form 10-K as filed with the SEC under the Exchange Act
Form 10-Q: Quarterly Report on Form 10-Q as filed with the SEC under the Exchange Act
FRB: Federal Reserve Board
Freddie Mac: Federal Home Loan Mortgage Corporation
GAAP: Generally Accepted Accounting Principles in the United States of America
Ginnie Mae: Government National Mortgage Association
GLB Act: Gramm-Leach-Bliley Act of 1999, as amended
GSE: United States Government-Sponsored Enterprise
HERA: Housing and Economic Recovery Act of 2008, as amended
Housing Associate: Approved lender under Title II of the National Housing Act of 1934 that is either a government agency or is chartered under federal or state law with rights and powers similar to those of a corporation
HTM: Held-to-Maturity
HUD: United States Department of Housing and Urban Development
JCE Agreement: Joint Capital Enhancement Agreement, as amended, among the 11 FHLBanks
LCH: LCH.Clearnet LLC
LIBOR: London Interbank Offered Rate
LRA: Lender Risk Account



LTV: Loan-to-Value
MAP-21: Moving Ahead for Progress in the 21st Century Act, enacted on July 6, 2012
MBS: Mortgage-Backed Securities
MCC: Master Commitment Contract
MDC: Mandatory Delivery Commitment
Moody's: Moody's Investor Services
MPF: Mortgage Partnership Finance®
MPP: Mortgage Purchase Program, including Original and Advantage unless indicated otherwise
MRCS: Mandatorily Redeemable Capital Stock
MVE: Market Value of Equity
NRSRO: Nationally Recognized Statistical Rating Organization
OCC: Office of the Comptroller of the Currency
OCI: Other Comprehensive Income (Loss)
OIS: Overnight-Indexed Swap
ORERC: Other Real Estate-Related Collateral
OTTI: Other-Than-Temporary Impairment or -Temporarily Impaired (as the context indicates)
PFI: Participating Financial Institution
PMI: Primary Mortgage Insurance
REMIC: Real Estate Mortgage Investment Conduit
REO: Real Estate Owned
RMBS: Residential Mortgage-Backed Securities
S&P: Standard & Poor's Rating Service
Safety and Soundness Act: Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended
SEC: Securities and Exchange Commission
Securities Act: Securities Act of 1933, as amended
SERP: Federal Home Loan Bank of Indianapolis 2005 Supplemental Executive Retirement Plan and/or a similar frozen plan
SETP: Federal Home Loan Bank of Indianapolis 2016 Supplemental Executive Thrift Plan, as amended
SMI: Supplemental Mortgage Insurance
SOFR: Secured Overnight Financing Rate
TBA: To Be Announced, a forward contract for the purchase or sale of MBS at a future agreed-upon date for an established price
TDR: Troubled Debt Restructuring
TVA: Tennessee Valley Authority
UPB: Unpaid Principal Balance
VaR: Value at Risk
VIE: Variable Interest Entity
WAIR: Weighted-Average Interest Rate






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

Presentation 

This discussion and analysis by management of the Bank's financial condition and results of operations should be read in conjunction with our 2018 Form 10-K and the interim Financial Statements and related Notes to Financial Statements contained in Item 1. Financial Statements.

Unless otherwise stated, amounts disclosed in this Item are rounded to the nearest million; therefore, dollar amounts of less than one million may not be reflected or, due to rounding, may not appear to agree to the amounts presented in thousands in the Financial Statements and related Notes to Financial Statements. Amounts used to calculate dollar and percentage changes are based on numbers in the thousands. Accordingly, calculations based upon the disclosed amounts (millions) may not produce the same results.

Executive Summary
 
Overview. We are a regional wholesale bank that serves as a financial intermediary between the capital markets and our members. We primarily make secured loans in the form of advances to our members and purchase whole mortgage loans from our members. Additionally, we purchase other investments and provide other financial services to our members. As an FHLBank, we are generally designed to expand and contract in asset size as the needs of our members and their communities change over time.

Our principal source of funding is the proceeds from the sale to the public of FHLBank debt instruments, called consolidated obligations, which are the joint and several obligation of all FHLBanks. We obtain additional funds from deposits, other borrowings, and the issuance of capital stock to our members.

Our primary source of revenue is interest earned on advances, mortgage loans, and long- and short-term investments.
 
Our net interest income is primarily determined by the spread between the interest rate earned on our assets and the interest rate paid on our share of consolidated obligations. We use funding and hedging strategies to manage the related interest-rate risk.

Due to our cooperative structure and wholesale nature, we typically earn a narrow interest spread. Accordingly, our net income is relatively low compared to our total assets and capital.

We group our products and services within two operating segments: traditional and mortgage loans.

Economic Environment. The Bank’s financial performance is influenced by a number of regional and national economic and market factors, including the level and volatility of market interest rates, inflation or deflation, monetary policies, and the strength of housing markets.

The U.S. economy continued to grow through the end of the third quarter of 2019. The current economic expansion remains at a record length at 123 months of growth, compared to the average expansion of 48 months since 1900. As of September 30, 2019, the Federal Funds target was set at a range of 1.75%-2.00% after the 25 bps cut at the FOMC meeting in September. This was the second rate cut after nine increases from December 2015 - December 2018. On October 30, 2019, the FOMC reduced the target range by an additional 25 bps, with a statement indicating this may be the final mid-cycle cut. Monetary stimulus has been introduced to combat some indications of slowing economic growth. Central Banks globally have shifted to a more accommodative stance through the first three quarters of the year.

Yields on U.S. Treasuries decreased during the third quarter of 2019 relative to the prevailing yields at the end of the first and second quarters. Additionally, spreads between the two-year and ten-year U.S. Treasuries have been quite low throughout the year, even going negative during one point in the third quarter, indicating a flat (and a short-term inverted) yield curve. This is often a leading indicator that economic growth is deteriorating.





During the second quarter of 2019, the U.S. Gross Domestic Product (GDP) increased at an annualized rate of 2.0%, down from 3.1% in the first quarter of 2019. According to the U.S. Department of Commerce, slowing growth in GDP can be primarily attributed to a deceleration in inventory investment, exports, and nonresidential fixed investment. The advance GDP figure for the third quarter of 2019 showed a continued marginal decline in growth. According to the Department of Commerce, third quarter GDP increased at an annualized rate of 1.9%, driven by inventory accumulation and a rebound in the housing market.

Labor markets remained very strong, with unemployment rates near record lows, though the decline appears to be leveling off. In September 2019, the Bureau of Labor Statistics reported an unemployment rate of 3.5%. Employment growth, as measured by increases in non-farm payrolls, has generally been lower in the second and third quarters of 2019 than growth throughout 2018. The unemployment rate has generally declined consistently since peaking at 10% in October 2009.

Both the manufacturing and service sectors have expanded domestically for several quarters, though both are beginning to show signs of deceleration. The September 2019 Manufacturing ISM Survey showed new orders, production, and employment contracting. The index was 47.8, down from 49.1 in August. A reading above 50 indicates manufacturing expansion, while a reading below 50 indicates contraction. The ISM Service Index grew for the 116th consecutive month in September 2019, with a reading of 52.6, down from 56.4 in August. Though the Index remains above 50, it has trended downward throughout 2019.

Led by accommodative monetary and fiscal policy, low interest rates, and strong consumer demand, global economic growth and corporate earnings remained solid. Tempering the strong labor and economic reports of prior months is the potential of a continued and expanded global trade war, tight labor markets and other supply costs and constraints, along with the repricing of assets and debt.

The housing market remains positive, but higher home prices have begun to impact overall sales despite the strength in the overall economy. The Mortgage Bankers Association (MBA) expects housing demand to remain strong, combined with wage growth and home price growth moderation, leading to favorable housing conditions. In the second quarter of 2019, refinance applications increased 30% from the first quarter and, in the first two weeks of August, refinance applications surged another 50%, which is expected to lead to higher than anticipated origination volume for the third and fourth quarters of 2019. The MBA has revised its full year forecast for refinance originations to an increase of 38%. The MBA also expects moderate growth in home purchase mortgage originations in the coming years, with dollar volume increasing approximately 5%.

In other developments, a series of overnight rates in the financial markets spiked during the week of Monday, September 16, 2019. Overnight repo rates surged to as high as 10.0% while the Federal Funds benchmark rate traded above the top end of the range that the Federal Reserve had set as the target. The Federal Reserve has responded by repurchasing securities through persistent open market operations, which has provided liquidity and stabilized lending conditions in the overnight markets. We routinely lend in the overnight federal funds and repurchase markets, and also borrow overnight funds in the FHLBank discount bond market. The short-lived disruption did not impact our operations or our liquidity targets.

Impact on Operating Results. Market interest rates and trends affect yields and margins on earning assets, including advances, purchased mortgage loans, and our investment portfolio, which contribute to our overall profitability. Additionally, market interest rates drive mortgage origination and prepayment activity, which can lead to both favorable and unfavorable net interest margin volatility in our MPP and MBS portfolios. A flat or inverted yield curve, in which the difference between short-term interest rates and long-term interest rates is low, or negative, respectively, can have an unfavorable impact on our net interest margins.

Lending and investing activity by our member institutions is a key driver for our balance sheet and income growth. Such activity is a function of both prevailing interest rates and economic activity, including local economic factors, particularly relating to the housing and mortgage markets. Positive economic trends could drive interest rates higher, which could impair growth of the mortgage market. A less active mortgage market could affect demand for advances and activity levels in our Advantage MPP. However, borrowing patterns between our insurance company and depository members tend to differ during various economic and market conditions, thereby easing the potential magnitude of core business fluctuations during business cycles. Member demand for liquidity during stressed market conditions can lead to advances growth.
 





Selected Financial Data
 
The following table presents a summary of selected financial information ($ amounts in millions).
 
 
As of and for the Three Months Ended
 
 
September 30,
2019
 
June 30,
2019
 
March 31,
2019
 
December 31,
2018
 
September 30,
2018
Statement of Condition:
 
 
 
 
 
 
 
 
 
 
Advances
 
$
32,487

 
$
33,891

 
$
32,830

 
$
32,728

 
$
33,567

Mortgage loans held for portfolio, net
 
11,104

 
11,364

 
11,398

 
11,385

 
11,294

Cash and short-term investments
 
5,521

 
7,840

 
6,787

 
7,610

 
8,056

Investment securities
 
17,754

 
16,677

 
14,985

 
13,378

 
13,240

Total assets
 
67,262

 
70,150

 
66,383

 
65,412

 
66,472

 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
15,300

 
22,645

 
21,254

 
20,895

 
22,650

CO bonds
 
47,169

 
42,727

 
40,376

 
40,266

 
39,564

Total consolidated obligations
 
62,469

 
65,372

 
61,630

 
61,161

 
62,214

 
 
 
 
 
 
 
 
 
 
 
MRCS
 
324

 
174

 
174

 
169

 
164

 
 
 
 
 
 
 
 
 
 
 
Capital stock
 
1,939

 
2,049

 
1,985

 
1,931

 
1,901

Retained earnings
 
1,091

 
1,093

 
1,084

 
1,078

 
1,061

AOCI
 
56

 
57

 
70

 
42

 
95

Total capital
 
3,086

 
3,199

 
3,139

 
3,051

 
3,057

 
 
 
 
 
 
 
 
 
 
 
Statement of Income:
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
50

 
$
60

 
$
57

 
$
75

 
$
73

Provision for (reversal of) credit losses
 

 

 

 

 

Other income (loss)
 
3

 
3

 
3

 
(9
)
 
(7
)
Other expenses
 
24

 
24

 
23

 
23

 
23

AHP assessments
 
3

 
4

 
4

 
4

 
4

Net income
 
$
26

 
$
35

 
$
33

 
$
39

 
$
39

 
 
 
 
 
 
 
 
 
 
 
Selected Financial Ratios:
 
 
 
 
 
 
 
 
 
 
Net interest margin (1)
 
0.29
%
 
0.35
%
 
0.36
%
 
0.46
%
 
0.44
%
Return on average equity (2)
 
3.31
%
 
4.45
%
 
4.37
%
 
5.01
%
 
5.05
%
Return on average assets (2)
 
0.15
%
 
0.20
%
 
0.21
%
 
0.24
%
 
0.23
%
 
 
 
 
 
 
 
 
 
 
 
Weighted average dividend rate (3)
 
5.50
%
 
5.50
%
 
5.50
%
 
4.50
%
 
4.50
%
Dividend payout ratio (4)
 
106.89
%
 
75.44
%
 
79.99
%
 
55.66
%
 
54.18
%
 
 
 
 
 
 
 
 
 
 
 
Total capital ratio (5)
 
4.59
%
 
4.56
%
 
4.73
%
 
4.66
%
 
4.60
%
Total regulatory capital ratio (6)
 
4.99
%
 
4.73
%
 
4.89
%
 
4.86
%
 
4.70
%
Average equity to average assets
 
4.55
%
 
4.59
%
 
4.75
%
 
4.70
%
 
4.62
%

(1) 
Annualized net interest income expressed as a percentage of average interest-earning assets.
(2) 
Annualized, as appropriate.
(3) 
Annualized dividends paid in cash during the period divided by the average amount of Class B capital stock eligible for dividends under our capital plan, excluding MRCS.
(4) 
Dividends paid in cash during the period divided by net income for the period. By dividing dividends paid in cash during the period by the net income for the prior period, the dividend payout ratios for each of the three months ended September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018 would be 79%, 80%, 69%, 55% and 31%, respectively.
(5) 
Capital stock plus retained earnings and AOCI expressed as a percentage of total assets.
(6) 
Capital stock plus retained earnings and MRCS expressed as a percentage of total assets.




Results of Operations and Changes in Financial Condition
 
Results of Operations for the Three and Nine Months Ended September 30, 2019 and 2018. The following table presents the comparative highlights of our results of operations ($ amounts in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Condensed Statements of Comprehensive Income
 
2019
 
2018
 
$ Change
 
% Change
 
2019
 
2018
 
$ Change
 
% Change
Net interest income
 
$
50

 
$
73

 
$
(23
)
 
(31
%)
 
$
167

 
$
213

 
$
(46
)
 
(21
%)
Provision for (reversal of) credit losses
 

 

 

 
 
 

 

 

 
 
Net interest income after provision for credit losses
 
50

 
73

 
(23
)
 
(31
%)
 
167


213

 
(46
)
 
(21
%)
Other income (loss)
 
3

 
(7
)
 
10

 
 
 
9

 
30

 
(21
)
 
 
Other expenses
 
24

 
23

 
1

 
 
 
71

 
69

 
2

 
 
Income before assessments
 
29

 
43

 
(14
)
 
(33
%)
 
105


174

 
(69
)
 
(39
%)
AHP assessments
 
3

 
4

 
(1
)
 
 
 
11

 
18

 
(7
)
 
 
Net income
 
26

 
39

 
(13
)
 
(34
%)
 
94


156

 
(62
)
 
(40
%)
Total other comprehensive income (loss)
 
(2
)
 
10

 
(12
)
 
 
 
14

 
(16
)
 
30

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
 
$
24

 
$
49

 
$
(25
)
 
(50
%)
 
$
108

 
$
140

 
$
(32
)
 
(23
%)

The decrease in net income for the three months ended September 30, 2019 compared to the corresponding period in the prior year was substantially due to lower spreads on the Bank's interest-earnings assets.

The decrease in net income for the nine months ended September 30, 2019 compared to the corresponding period in the prior year was primarily due to the non-recurring net realized gain in 2018 on the sale of all of the Bank's private-label MBS and higher net losses resulting from derivatives and hedging activities. In general, we hold the derivatives and associated hedged items to the maturity, call, or put date. As a result, we expect to recover nearly all of the net losses on these financial instruments over the remaining contractual terms of the hedged items.





Changes in Financial Condition for the Nine Months Ended September 30, 2019. The following table presents the comparative highlights of our changes in financial condition ($ amounts in millions).
Condensed Statements of Condition
 
September 30, 2019
 
December 31, 2018
 
$ Change
 
% Change
Advances
 
$
32,487

 
$
32,728

 
$
(241
)
 
(1
%)
Mortgage loans held for portfolio, net
 
11,104

 
11,385

 
(281
)
 
(2
%)
Cash and short-term investments (1)
 
5,521

 
7,610

 
(2,089
)
 
(27
%)
Investment securities and other assets (2)
 
18,150

 
13,689

 
4,461

 
33
%
Total assets
 
$
67,262

 
$
65,412

 
$
1,850

 
3
%
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
$
62,469

 
$
61,161

 
$
1,308

 
2
%
MRCS
 
324

 
169

 
155

 
92
%
Other liabilities
 
1,383

 
1,031

 
352

 
34
%
Total liabilities
 
64,176

 
62,361

 
1,815

 
3
%
 
 
 
 
 
 
 
 
 
Capital stock
 
1,939

 
1,931

 
8

 
%
Retained earnings (3)
 
1,091

 
1,078

 
13

 
1
%
AOCI
 
56

 
42

 
14

 
33
%
Total capital
 
3,086

 
3,051

 
35

 
1
%
 
 
 
 
 
 
 
 
 
Total liabilities and capital
 
$
67,262

 
$
65,412

 
$
1,850

 
3
%
 
 
 
 
 
 
 
 
 
Total regulatory capital (4)
 
$
3,354

 
$
3,178

 
$
176

 
6
%

(1) 
Includes cash, interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold.
(2) 
Includes trading, AFS and HTM securities.
(3) 
Includes restricted retained earnings at September 30, 2019 and December 31, 2018 of $242 million and $222 million, respectively.
(4) 
Total capital less AOCI plus MRCS.

The increase in total assets at September 30, 2019 compared to December 31, 2018 was primarily driven by additions to our liquidity portfolio, which includes trading securities.

The increase in total liabilities at September 30, 2019 compared to December 31, 2018 was attributable to a net increase in consolidated obligations to support the Bank's growth in assets.

The increase in total capital at September 30, 2019 compared to December 31, 2018 was primarily due to additional capital stock issued and net income, substantially offset by capital stock reclassified to MRCS and dividends paid to shareholders, respectively.

Analysis of Results of Operations for the Three and Nine Months Ended September 30, 2019 and 2018.

Net Interest Income. The decrease in net interest income for the three and nine months ended September 30, 2019 compared to the corresponding periods in 2018 was primarily due to hedging losses resulting from derivatives in a fair-value relationship as well as lower spreads. In accordance with an amendment to accounting guidance effective January 1, 2019, hedging gains (losses) on qualifying fair-value hedging relationships are reported prospectively in net interest income instead of other income. As a result, net interest income after provision for credit losses for the three and nine months ended September 30, 2019 was reduced by $9 million and $31 million, respectively. In general, we hold the derivatives and associated hedged items to the maturity, call, or put date. As a result, we expect to recover nearly all of the net losses on these financial instruments over the remaining contractual terms of the hedged items.





The following table presents average daily balances, interest income/expense, and average yields of our major categories of interest-earning assets and their funding sources ($ amounts in millions).
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
2019
 
2018
 
Average
Balance
 
Interest
Income/
Expense (6)
 
Average
Yield (1) (6)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$
5,944

 
$
34

 
2.29
%
 
$
7,119

 
$
35

 
1.96
%
Investment securities (2)
17,430

 
104

 
2.35
%
 
13,079

 
91

 
2.77
%
Advances (3)
32,100

 
207

 
2.56
%
 
32,943

 
198

 
2.38
%
Mortgage loans held for portfolio (3)
11,275

 
87

 
3.09
%
 
11,143

 
90

 
3.22
%
Other assets (interest-earning) (4)
1,298

 
7

 
2.12
%
 
1,238

 
6

 
1.86
%
Total interest-earning assets
68,047

 
439

 
2.56
%
 
65,522

 
420

 
2.54
%
Other assets (5)
(6
)
 
 
 
 
 
458

 
 
 
 
Total assets
$
68,041

 
 
 
 
 
$
65,980

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Capital:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
743

 
4

 
1.95
%
 
$
650

 
3

 
1.79
%
Discount notes
19,185

 
110

 
2.28
%
 
22,916

 
114

 
1.97
%
CO bonds (3)
43,996

 
271

 
2.45
%
 
38,574

 
229

 
2.35
%
MRCS
273

 
4

 
5.10
%
 
163

 
1

 
4.70
%
Other borrowings
6

 

 
2.28
%
 

 

 
%
Total interest-bearing liabilities
64,203

 
389

 
2.40
%
 
62,303

 
347

 
2.21
%
Other liabilities
740

 
 
 
 
 
632

 
 
 
 
Total capital
3,098

 
 
 
 
 
3,045

 
 
 
 
Total liabilities and capital
$
68,041

 
 
 
 
 
$
65,980

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
50

 

 
 
 
$
73

 

 
 
 
 
 
 
 
 
 
 
 
 
Net spread on interest-earning assets less interest-bearing liabilities (6)
 
 
 
 
0.16
%
 
 
 
 
 
0.33
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin (6) (7)
 
 
 
 
0.29
%
 
 
 
 
 
0.44
%
 
 
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets to interest-bearing liabilities
1.06

 
 
 
 
 
1.05

 
 
 
 
 




 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2019
 
2018
 
Average
Balance
 
Interest
Income/
Expense (6)
 
Average
Yield (1) (6)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield (1)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell
$
6,697

 
$
120

 
2.41
%
 
$
5,708

 
$
76

 
1.78
%
Investment securities (2)
15,848

 
303

 
2.55
%
 
12,985

 
252

 
2.59
%
Advances (3)
32,077

 
641

 
2.67
%
 
32,962

 
519

 
2.10
%
Mortgage loans held for portfolio (3)
11,355

 
277

 
3.27
%
 
10,745

 
259

 
3.23
%
Other assets (interest-earning) (4)
1,011

 
17

 
2.20
%
 
1,044

 
13

 
1.65
%
Total interest-earning assets
66,988

 
1,358

 
2.71
%
 
63,444

 
1,119

 
2.36
%
Other assets (5)
218

 
 
 
 
 
460

 
 
 
 
Total assets
$
67,206

 
 
 
 
 
$
63,904

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Capital:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
647

 
10

 
2.10
%
 
$
640

 
8

 
1.58
%
Discount notes
20,586

 
369

 
2.40
%
 
21,425

 
274

 
1.71
%
CO bonds (3)
41,870

 
803

 
2.57
%
 
38,113

 
618

 
2.17
%
MRCS
207

 
9

 
5.54
%
 
169

 
6

 
5.18
%
Other borrowings
2

 

 
2.31
%
 

 

 
%
Total interest-bearing liabilities
63,312

 
1,191

 
2.51
%
 
60,347

 
906

 
2.01
%
Other liabilities
783

 
 
 
 
 
535

 
 
 
 
Total capital
3,111

 
 
 
 
 
3,022

 
 
 
 
Total liabilities and capital
$
67,206

 
 
 
 
 
$
63,904

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
$
167

 


 
 
 
$
213

 


 
 
 
 
 
 
 
 
 
 
 
 
Net spread on interest-earning assets less interest-bearing liabilities (6)
 
 
 
 
0.20
%
 
 
 
 
 
0.35
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin (6) (7)
 
 
 
 
0.33
%
 
 
 
 
 
0.45
%
 
 
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets to interest-bearing liabilities
1.06

 
 
 
 
 
1.05

 
 
 
 

(1) 
Annualized. 
(2) 
Consists of trading, AFS and HTM securities. The average balances of AFS securities are based on amortized cost; therefore, the resulting yields do not reflect changes in the estimated fair value that are a component of OCI. Interest income/expense includes the effects of associated derivative transactions.
(3) 
Interest income/expense and average yield include all other components of interest, including the impact of net interest payments or receipts on derivatives in qualifying hedge relationships, amortization of hedge accounting adjustments, and prepayment fees on advances.
(4) 
Consists of interest-bearing deposits and loans to other FHLBanks (if applicable). Includes the rights or obligations to cash collateral, except for variation margin payments characterized as daily settled contracts.
(5) 
Includes changes in the estimated fair value of AFS securities, grantor trust assets, and in 2018, the effect of OTTI-related non-credit losses on AFS and HTM securities.
(6) 
In accordance with an amendment to accounting guidance effective January 1, 2019, hedging gains (losses) on qualifying fair-value hedging relationships are reported prospectively in net interest income instead of other income.
(7)
Annualized net interest income expressed as a percentage of the average balance of interest-earning assets.





Yields. The average yield on total interest-earning assets for the three months ended September 30, 2019 was 2.56%, an increase of 2 bps compared to the corresponding period in 2018, resulting primarily from increases in market interest rates that led to higher yields on advances, federal funds sold, and securities purchased under agreements to resell. Including the hedging losses from derivatives in fair-value relationships prospectively in interest income caused a decrease in the average yield of 5 bps. The average cost of total interest-bearing liabilities was 2.40%, an increase of 19 bps due to higher funding costs on consolidated obligations. The net effect was a decrease in the net interest spread of 17 bps to 0.16% for the three months ended September 30, 2019 from 0.33% for the corresponding period in 2018.

The average yield on total interest-earning assets for the nine months ended September 30, 2019 was 2.71%, an increase of 35 bps compared to the corresponding period in 2018, resulting primarily from increases in market interest rates that led to higher yields on advances, federal funds sold, and securities purchased under agreements to resell. Including the hedging losses from derivatives in fair-value relationships prospectively in interest income caused a decrease in the average yield of 6 bps. The average cost of total interest-bearing liabilities was 2.51%, an increase of 50 bps due to higher funding costs on consolidated obligations. The net effect was a decrease in the net interest spread of 15 bps to 0.20% for the nine months ended September 30, 2019 from 0.35% for the corresponding period in 2018.

Average Balances. The average balances outstanding of interest-earning assets for the three months ended September 30, 2019 increased by 4% compared to the corresponding period in 2018. The average balance of investment securities increased by 33% due to purchases of trading securities to enhance liquidity and purchases of AFS securities. The increase in average interest-bearing liabilities was due to an increase in consolidated obligations outstanding to fund the increases in interest-earning assets.

The average balances outstanding of interest-earning assets for the nine months ended September 30, 2019 increased by 6% compared to the corresponding period in 2018. The average balance of short-term investments increased by 17% in light of new liquidity guidance from the Finance Agency. The average balance of investment securities increased by 22% due to purchases of trading securities to enhance liquidity and purchases of AFS securities. The average balance of mortgage loans held for portfolio increased by 6% in spite of higher principal prepayments due to demand by our members for Advantage MPP. These increases were partially offset by a decrease in the average balance of advances of 3%, generally driven by member funding needs. The increase in average interest-bearing liabilities was due to an increase in consolidated obligations outstanding to fund the increases in interest-earning assets.

Provision for Credit Losses. The change in the provision for (reversal of) credit losses for the three and nine months ended September 30, 2019 compared to the corresponding periods in 2018 was insignificant.

Other Income. The following table presents a comparison of the components of other income ($ amounts in millions). 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Components
 
2019
 
2018
 
2019
 
2018
Net realized gains from sale of available-for-sale securities
 
$

 
$

 
$

 
$
32

Net realized losses from sale of held-to-maturity securities
 

 

 

 

Net gains on trading securities
 
6

 

 
26

 

Net gains (losses) on derivatives not designated as hedging instruments
 
(4
)
 
(2
)
 
(21
)
 
(6
)
Net gains (losses) related to fair-value hedge ineffectiveness
 

 
(6
)
 

 
1

Other
 
1

 
1

 
4

 
3

 
 
 
 
 
 
 
 
 
Total other income (loss)
 
$
3

 
$
(7
)
 
$
9

 
$
30


The increase in total other income for the three months ended September 30, 2019 compared to the corresponding period in 2018 was due to net gains on trading securities and the prospective reporting of hedging gains (losses) on qualifying fair-value hedging relationships in net interest income in 2019 instead of other income in 2018. The decrease in total other income for the nine months ended September 30, 2019 was substantially due to the non-recurring net realized gain in the second quarter of 2018 on the sale of all of the Bank's private-label MBS. See Notes to Financial Statements - Note 3 - Investment Securities for more information. The net gains on trading securities for the three and nine months ended September 30, 2019 were substantially offset by net losses on the associated derivatives.




Net Gains (Losses) on Trading Securities. In January 2019, the Bank began purchasing fixed-rate U.S. Treasury securities to enhance liquidity. Those securities are classified as trading securities and are recorded at fair value, with changes in fair value reported in other income. There are a number of factors that affect the fair value of these securities, including changes in interest rates, the passage of time, and volatility. These trading securities are being economically hedged, so that over time the gains (losses) on these securities will be generally offset by the change in fair value of the associated derivatives.

Net Gains (Losses) on Derivatives and Hedging Activities. In prior periods, for qualifying fair-value hedging relationships, the differences between the change in the estimated fair value of the hedged items attributable to the hedged risk and the change in the estimated fair value of the associated interest-rate swaps, i.e., hedge ineffectiveness, were reported in other income. Beginning January 1, 2019, such differences are reported in net interest income. See Notes to Financial Statements - Note 2 - Recently Adopted and Issued Accounting Guidance for more information. As a result, the net gains (losses) on derivatives and hedging activities reported in other income in 2019 substantially consist of gains (losses) on derivatives not designated as hedging instruments.

The table below presents the effect of derivatives and hedging activities that are reported in either net interest income or other income ($ amounts in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Components
 
2019
 
2018
 
2019
 
2018
Net changes in fair value (1)
 
$
(9
)
 
$
(6
)
 
$
(31
)
 
$
1

Price alignment interest (2)
 
1

 
(2
)
 

 
(4
)
Amortization/accretion of gains (losses) on hedging relationships
 

 
(2
)
 
(6
)
 
(4
)
Net gains on trading securities, net of losses on associated derivatives
 
3

 

 
6

 

Other economic hedging gains (losses)
 
(1
)
 
2

 
3

 
3

 
 
 
 
 
 
 
 
 
Total gains (losses) from derivatives and hedging activities before net interest settlements
 
(6
)
 
(8
)
 
(28
)
 
(4
)
Net interest settlements on derivatives (3)
 
16

 
7

 
49

 
9

 
 
 
 
 
 
 
 
 
Total gains (losses) from derivatives and hedging activities
 
$
10

 
$
(1
)
 
$
21

 
$
5


(1) 
Relates to derivatives and hedged items in qualifying fair-value hedging relationships.
(2) 
Relates to derivatives for which variation margin payments are characterized as daily settled contracts.
(3) 
Represents interest income/expense on derivatives. Excludes interest income/expense on associated hedged items.

The changes in fair value for the three and nine months ended September 30, 2019 and 2018 were primarily due to marginal mismatches in durations on, and the increase in volume of, swapped GSE MBS, particularly Fannie Mae Delegated Underwriting and Servicing (DUS) MBS. As a result of issuing floating rate notes to fund these MBS purchases instead of swapped fixed-rate notes, the funding and operational costs have been reduced but there is less offsetting hedge impact, resulting in higher hedging gains or losses.

However, since we generally hold derivatives and hedged items to the maturity, call or put date, we expect to recover nearly all of the net hedging losses on our financial instruments over the remaining contractual terms of the hedged items.





Other Expenses. The following table presents a comparison of the components of other expenses ($ amounts in millions).
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Components
 
2019
 
2018
 
2019
 
2018
Compensation and benefits
 
$
12

 
$
12

 
$
40

 
$
38

Other operating expenses
 
8

 
8

 
21

 
21

Finance Agency and Office of Finance
 
3

 
2

 
7

 
6

Other
 
1

 
1

 
3

 
4

 
 
 
 
 
 
 
 
 
Total other expenses
 
$
24

 
$
23

 
$
71

 
$
69


The increase in total other expenses for the nine months ended September 30, 2019 compared to the corresponding period in 2018 was due to increases in compensation, primarily driven by salary increases and higher head count.

Total Other Comprehensive Income (Loss). Total OCI for the three and nine months ended September 30, 2019 primarily consisted of unrealized losses and gains, respectively, on AFS securities. Total OCI for the three months ended September 30, 2018 consisted substantially of unrealized gains on AFS securities. Total OCI for the nine months ended September 30, 2018 consisted substantially of the reduction in AOCI as a result of the recognition of the gain on the sale of our private-label MBS, partially offset by unrealized gains on AFS securities.

Operating Segments
 
Our products and services are grouped within two operating segments: traditional and mortgage loans.
 
Traditional. The traditional segment consists of (i) credit products (including advances, letters of credit, and lines of credit), (ii) investments (including federal funds sold, securities purchased under agreements to resell, interest-bearing demand deposit accounts, and investment securities), and (iii) correspondent services and deposits. The following table presents the financial performance of our traditional segment ($ amounts in millions). 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Traditional
 
2019
 
2018
 
2019
 
2018
Net interest income
 
$
38

 
$
57

 
$
121

 
$
163

Provision for (reversal of) credit losses
 

 

 

 

Other income (loss)
 
3

 
(6
)
 
9

 
31

Other expenses
 
21

 
20

 
61

 
59

Income before assessments
 
20

 
31

 
69

 
135

AHP assessments
 
2

 
3

 
7

 
14

 
 
 
 
 
 
 
 
 
Net income
 
$
18

 
$
28

 
$
62

 
$
121


The decrease in net income for the traditional segment for the three months ended September 30, 2019 compared to the corresponding period in 2018 was primarily due to lower net interest income due to lower spreads and net losses resulting from derivatives and hedging activities. The decrease in net income for the traditional segment for the nine months ended September 30, 2019 compared to the corresponding period in 2018 was primarily due to lower net interest income, due to lower spreads and net losses resulting from derivatives and hedging activities, and the non-recurring net realized gain on the sale of all of the Bank's private-label MBS in 2018. In general, we hold the derivatives and associated hedged items to the maturity, call, or put date. As a result, we expect to recover nearly all of the net losses on these financial instruments over the remaining contractual terms of the hedged items.





Mortgage Loans. The mortgage loans segment includes (i) mortgage loans purchased from our members through our MPP and (ii) participating interests purchased in 2012 - 2014 from the FHLBank of Topeka in mortgage loans originated by certain of its PFIs under the MPF Program. The following table presents the financial performance of our mortgage loans segment ($ amounts in millions). 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Mortgage Loans 
 
2019
 
2018
 
2019
 
2018
Net interest income
 
$
12

 
$
16

 
$
46

 
$
50

Provision for (reversal of) credit losses
 

 

 

 

Other income (loss)
 

 
(1
)
 

 
(1
)
Other expenses
 
3

 
3

 
10

 
10

Income before assessments
 
9

 
12

 
36

 
39

AHP assessments
 
1

 
1

 
4

 
4

 
 
 
 
 
 
 
 
 
Net income
 
$
8

 
$
11

 
$
32

 
$
35


The decrease in net income for the mortgage loans segment for the three and nine months ended September 30, 2019 compared to the corresponding periods in 2018 was due to lower net interest income, due primarily to an increase in amortization of purchase premium resulting from higher prepayments and an increase in amortization of concession fees on called consolidated obligations.

Analysis of Financial Condition
 
Total Assets. The table below presents the comparative highlights of our major asset categories ($ amounts in millions).
 
 
September 30, 2019
 
December 31, 2018
Major Asset Categories
 
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
Advances
 
$
32,487

 
48
%
 
$
32,728

 
50
%
Mortgage loans held for portfolio, net
 
11,104

 
17
%
 
11,385

 
17
%
Cash and short-term investments
 
5,521

 
8
%
 
7,610

 
12
%
Trading securities
 
4,411

 
7
%
 

 
%
Other investment securities
 
13,343

 
20
%
 
13,378

 
21
%
Other assets (1)
 
396

 
%
 
311

 
%
 
 
 
 
 
 
 
 
 
Total assets
 
$
67,262

 
100
%
 
$
65,412

 
100
%

(1) 
Includes accrued interest receivable, premises, software and equipment, derivative assets and other miscellaneous assets.

Total assets were $67.3 billion as of September 30, 2019, a net increase of $1.9 billion, or 3%, compared to December 31, 2018, primarily driven by additions to our liquidity portfolio. The liquidity portfolio comprised 15% of total assets at September 30, 2019, compared to 12% at December 31, 2018.

Advances. Advances at carrying value totaled $32.5 billion at September 30, 2019, a net decrease of $241 million, or 1%, compared to December 31, 2018.
 
The par value of advances to depository institutions, comprising commercial banks, savings institutions and credit unions, and insurance companies each decreased by 2%. Advances to depository institutions, as a percent of total advances outstanding at par value, were 53% at September 30, 2019, while advances to insurance companies were 47%.





The table below presents advances outstanding by type of financial institution ($ amounts in millions).
 
 
September 30, 2019
 
December 31, 2018
Borrower Type
 
Par Value
 
% of Total
 
Par Value
 
% of Total
Depository institutions:
 
 
 
 
 
 
 
 
Commercial banks and savings institutions
 
$
11,929

 
37
%
 
$
14,019

 
43
 %
Credit unions
 
2,854

 
9
%
 
3,099

 
10
 %
Former members - depositories
 
2,312

 
7
%
 
268

 
 %
Total depository institutions
 
17,095

 
53
%
 
17,386

 
53
 %
 
 
 
 
 
 
 
 
 
Insurance companies:
 
 
 
 
 
 
 
 
Captive insurance companies (1)
 
2,726

 
9
%
 
2,936

 
9
 %
Other insurance companies
 
12,334

 
38
%
 
12,491

 
38
 %
Former members - insurance
 
6

 
%
 
16

 
 %
Total insurance companies
 
15,066

 
47
%
 
15,443

 
47
 %
 
 
 
 
 
 
 
 
 
Total advances
 
$
32,161

 
100
%
 
$
32,829

 
100
 %

(1)  
Memberships must terminate no later than February 19, 2021. See certain restrictions on and maturities of advances in Notes to Financial Statements - Note 5 - Advances in the 2018 Form 10-K.

Our advance portfolio is well-diversified with advances to commercial banks and savings institutions, credit unions, and insurance companies. Borrowing patterns between our insurance company and depository members tend to differ during various economic and market conditions, thereby easing the potential magnitude of core business fluctuations during business cycles.

Our advance portfolio includes fixed- and variable-rate advances, as well as callable or prepayable and putable advances. Prepayable advances may be prepaid on specified dates without incurring repayment or termination fees. All other advances may only be prepaid by the borrower paying a fee that is sufficient to make us financially indifferent to the prepayment of the advance.




The following table presents the par value of advances outstanding by product type and redemption term, some of which contain call or put options ($ amounts in millions).
 
 
September 30, 2019
 
December 31, 2018
Product Type and Redemption Term
 
Par Value
 
% of Total
 
Par Value
 
% of Total
Fixed-rate:
 
 
 
 
 
 
 
 
Fixed-rate (1)
 
 
 
 
 
 
 
 
Due in 1 year or less
 
$
11,101

 
35
%
 
$
14,670

 
45
%
Due after 1 year
 
7,915

 
25
%
 
6,927

 
21
%
Total
 
19,016

 
60
%
 
21,597

 
66
%
 
 
 
 
 
 
 
 
 
Callable or prepayable
 
 
 
 
 
 
 
 
Due in 1 year or less
 

 
%
 
10

 
%
Due after 1 year
 
49

 
%
 
39

 
%
Total
 
49

 
%
 
49

 
%
 
 
 
 
 
 
 
 
 
Putable
 
 
 
 
 
 
 
 
Due in 1 year or less
 

 
%
 

 
%
Due after 1 year
 
5,558

 
17
%
 
3,103

 
10
%
Total
 
5,558

 
17
%
 
3,103

 
10
%
 
 
 
 
 
 
 
 
 
Other (2)
 
 
 
 
 
 
 
 
Due in 1 year or less
 
127

 
%
 
133

 
%
Due after 1 year
 
120

 
%
 
140

 
%
Total
 
247

 
%
 
273

 
%
 
 
 
 
 
 
 
 
 
Total fixed-rate
 
24,870

 
77
%
 
25,022

 
76
%
 
 
 
 
 
 
 
 
 
Variable-rate:
 
 
 
 
 
 
 
 
Variable-rate (1)
 
 
 
 
 
 
 
 
Due in 1 year or less
 
53

 
%
 
349

 
1
%
Due after 1 year
 

 
%
 

 
%
Total
 
53

 
%
 
349

 
1
%
 
 
 
 
 
 
 
 
 
Callable or prepayable
 
 
 
 
 
 
 
 
Due in 1 year or less
 
541

 
2
%
 
435

 
1
%
Due after 1 year
 
6,697

 
21
%
 
7,023

 
22
%
Total
 
7,238

 
23
%
 
7,458

 
23
%
 
 
 
 
 
 
 
 
 
Total variable-rate
 
7,291

 
23
%
 
7,807

 
24
%
 
 
 
 
 
 
 
 
 
Overdrawn demand and overnight deposit accounts
 

 
%
 

 
%
 
 
 
 
 
 
 
 
 
Total advances
 
$
32,161

 
100
%
 
$
32,829

 
100
%

(1)  
Includes advances without call or put options.
(2) 
Includes hybrid, fixed-rate amortizing/mortgage matched advances.
 
 
 
 
 
 
 
 
 
Advances due in one year or less decreased from 47% of the total outstanding, at par, at December 31, 2018 to 37% of the total outstanding, at par, at September 30, 2019, reflecting members' increased demand for long-term funding. See Notes to Financial Statements - Note 4 - Advances for additional information.





Mortgage Loans Held for Portfolio. A breakdown of mortgage loans held for portfolio by primary product type is presented below ($ amounts in millions).
 
 
September 30, 2019
 
December 31, 2018
Product Type
 
UPB
 
% of Total
 
UPB
 
% of Total
MPP:
 
 
 
 
 
 
 
 
Conventional Advantage
 
$
9,751

 
90
%
 
$
9,874

 
89
%
Conventional Original
 
595

 
5
%
 
688

 
6
%
FHA
 
286

 
3
%
 
314

 
3
%
Total MPP
 
10,632

 
98
%
 
10,876

 
98
%
 
 
 
 
 
 
 
 
 
MPF Program:
 
 
 
 
 
 
 
 
Conventional
 
185

 
2
%
 
208

 
2
%
Government
 
49

 
%
 
54

 
%
Total MPF Program
 
234

 
2
%
 
262

 
2
%
 
 
 
 
 
 
 
 
 
Total mortgage loans held for portfolio
 
$
10,866

 
100
%
 
$
11,138

 
100
%

The decrease in the UPB of mortgage loans held for portfolio was due to repayments of outstanding MPP and MPF Program loans exceeding purchases under Advantage MPP. Over time, the outstanding balance of mortgage loans purchased under our original MPP and the MPF Program will continue to decrease.

We have established and maintain an allowance for loan losses based on our best estimate of probable losses over the loss emergence period, which we have estimated to be 24 months. Our estimate of MPP losses remaining after borrower's equity, but before credit enhancements, was $5 million at September 30, 2019 and $4 million at December 31, 2018. After consideration of the portion recoverable under the associated credit enhancements, the resulting allowance for MPP loan losses was less than $1 million at both September 30, 2019 and December 31, 2018. For more information, see Notes to Financial Statements - Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.

Cash and Investments. The following table presents a comparison of the components of our cash and investments at carrying value ($ amounts in millions).
Components
 
September 30, 2019
 
December 31, 2018
 
Change
Cash and short-term investments:
 
 
 
 
 
 
Cash and due from banks
 
$
50

 
$
101

 
$
(51
)
Interest-bearing deposits
 
506

 
1,211

 
(705
)
Securities purchased under agreements to resell
 
3,550

 
3,213

 
337

Federal funds sold
 
1,415

 
3,085

 
(1,670
)
Total cash and short-term investments
 
5,521

 
7,610

 
(2,089
)
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
U.S. Treasury obligations
 
4,411

 

 
4,411

Total trading securities
 
4,411

 

 
4,411

 
 
 
 
 
 
 
Other investment securities:
 
 
 
 
 
 
AFS securities:
 
 
 
 
 
 
GSE and TVA debentures
 
3,949

 
4,277

 
(328
)
GSE MBS
 
4,433

 
3,427

 
1,006

Total AFS securities
 
8,382

 
7,704

 
678

 
 
 
 
 
 
 
HTM securities:
 
 

 
 

 
 
Other U.S. obligations - guaranteed MBS
 
3,173

 
3,469

 
(296
)
GSE MBS
 
1,788

 
2,205

 
(417
)
Total HTM securities
 
4,961

 
5,674

 
(713
)
 
 
 
 
 
 
 
Total other investment securities
 
13,343

 
13,378

 
(35
)
 
 
 
 
 
 
 
Total cash and investments, carrying value
 
$
23,275

 
$
20,988

 
$
2,287





Cash and Short-Term Investments. Cash and short-term investments totaled $5.5 billion at September 30, 2019, a decrease of 27% compared to December 31, 2018. Cash and short-term investments as a percent of total assets totaled 8% at September 30, 2019, compared to 12% at December 31, 2018.

Trading Securities. In January 2019, the Bank began purchasing U.S. Treasury securities as trading securities to enhance its liquidity in light of new liquidity guidance from the Finance Agency. Such securities totaled $4.4 billion at September 30, 2019, of which $3.4 billion is due in one year or less and $1.0 billion is due after one year through two years.

As a result, the liquidity portfolio at September 30, 2019 totaled $9.9 billion, an increase of $2.3 billion, or 31%, from December 31, 2018. Additionally, the mix has changed, with U.S. Treasuries representing 44% of the liquidity portfolio at September 30, 2019.

Other Investment Securities. AFS securities totaled $8.4 billion at September 30, 2019, a net increase of 9% compared to $7.7 billion at December 31, 2018. The increase resulted from purchases of GSE MBS to maintain a ratio of MBS and ABS to total regulatory capital of up to 300%.

Net unrealized gains on AFS securities totaled $70 million at September 30, 2019, a net increase of $17 million compared to December 31, 2018, primarily due to changes in interest rates, credit spreads and volatility.

HTM securities totaled $5.0 billion at September 30, 2019, a net decrease of 13% compared to $5.7 billion at December 31, 2018. At September 30, 2019, the estimated fair value of our HTM securities totaled $5.0 billion, of which $2.3 billion was in an unrealized loss position, a decrease of 3% from $2.4 billion at December 31, 2018, primarily due to changes in interest rates, credit spreads and volatility. The associated unrealized losses decreased from $16 million at December 31, 2018 to $11 million at September 30, 2019.

Interest-Rate Payment Terms. Our AFS and HTM securities are presented below at amortized cost by interest-rate payment terms ($ amounts in millions).    
 
 
September 30, 2019
 
December 31, 2018
Interest-Rate Payment Terms
 
Amortized Cost
 
% of Total
 
Amortized Cost
 
% of Total
AFS Securities:
 
 
 
 
 
 
 
 
Total non-MBS fixed-rate
 
$
3,919

 
47
%
 
$
4,240

 
55
%
Total MBS fixed-rate
 
4,393

 
53
%
 
3,411

 
45
%
 
 
 
 
 
 
 
 
 
Total AFS securities
 
$
8,312

 
100
%
 
$
7,651

 
100
%
 
 
 
 
 
 
 
 
 
HTM Securities:
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
Fixed-rate
 
$
857

 
17
%
 
$
936

 
16
%
Variable-rate
 
4,104

 
83
%
 
4,738

 
84
%
Total MBS
 
4,961

 
100
%
 
5,674

 
100
%
 
 
 
 
 
 
 
 
 
Total HTM securities
 
$
4,961

 
100
%
 
$
5,674

 
100
%
 
 
 
 
 
 
 
 
 
Total other investment securities:
 
 
 
 
 
 
 
 
Total fixed-rate
 
$
9,169

 
69
%
 
$
8,587

 
64
%
Total variable-rate
 
4,104

 
31
%
 
4,738

 
36
%
 
 
 
 
 
 
 
 
 
Total other investment securities
 
$
13,273

 
100
%
 
$
13,325

 
100
%

The mix of fixed- vs. variable-rate AFS and HTM securities at September 30, 2019 was slightly higher compared to December 31, 2018, primarily due to purchases of fixed-rate MBS. However, all of the fixed-rate AFS securities are swapped to effectively create variable-rate securities, consistent with our balance sheet strategies to manage interest-rate risk.





Total Liabilities. Total liabilities were $64.2 billion at September 30, 2019, a net increase of $1.8 billion, or 3%, compared to December 31, 2018, substantially due to an increase in consolidated obligations.

Deposits (Liabilities). Total deposits were $713 million at September 30, 2019, a net increase of $213 million, or 42%, compared to December 31, 2018. These deposits represent a relatively small portion of our funding. The balances of these accounts can fluctuate from period to period and vary depending upon such factors as the attractiveness of our deposit pricing relative to the rates available on alternative money market instruments, members' preferences with respect to the maturity of their investments, and members' liquidity.

Consolidated Obligations. The carrying value of consolidated obligations outstanding at September 30, 2019 totaled $62.5 billion, a net increase of $1.3 billion, or 2%, from December 31, 2018. This increase supported the Bank's growth in assets.

The following table presents a breakdown by term of our consolidated obligations outstanding ($ amounts in millions).
 
 
September 30, 2019
 
December 31, 2018
By Term
 
Par Value
 
% of Total
 
Par Value
 
% of Total
Consolidated obligations due in 1 year or less:
 
 
 
 
 
 
 
 
Discount notes
 
$
15,332

 
24
%
 
$
20,953

 
34
%
CO bonds
 
26,034

 
42
%
 
18,457

 
30
%
Total due in 1 year or less
 
41,366

 
66
%
 
39,410

 
64
%
Long-term CO bonds
 
21,074

 
34
%
 
21,918

 
36
%
 
 
 
 
 
 
 
 
 
Total consolidated obligations
 
$
62,440

 
100
%
 
$
61,328

 
100
%

The percentage due in 1 year or less increased from 64% at December 31, 2018 to 66% at September 30, 2019 as a result of seeking to maintain a sufficient liquidity and funding balance between our financial assets and financial liabilities. Additionally, the FHLBanks work collectively to manage FHLB System-wide liquidity and funding and jointly monitor System-wide refinancing risk. In managing and monitoring the amounts of assets that require refunding, the FHLBanks may consider contractual maturities of the financial assets, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments and scheduled amortizations). For more detailed information regarding contractual maturities of certain of our financial assets and liabilities, see Notes to Financial Statements - Note 3 - Investment Securities, Note 4 - Advances, and Note 8 - Consolidated Obligations.
 
 
 
 
 
Derivatives. The volume of derivative hedges is often expressed in terms of notional amounts, which is the amount upon which interest payments are calculated. The following table presents the notional amounts by type of hedged item whether or not it is in a qualifying hedge relationship ($ amounts in millions).
Hedged Item
 
September 30, 2019
 
December 31, 2018
Advances
 
$
16,255

 
$
13,980

Investments
 
13,113

 
8,562

Mortgage loans
 
1,526

 
1,038

CO bonds
 
17,096

 
14,239

 
 
 
 
 
Total notional
 
$
47,990

 
$
37,819


The increase in the total notional amount during the nine months ended September 30, 2019 of 27% was primarily due to purchases of U.S. Treasuries in economic hedging relationships.

The following table presents the cumulative impact of fair-value hedging basis adjustments on our statement of condition ($ amounts in millions).
September 30, 2019
 
Advances
 
Investments
 
CO Bonds
 
Total
Cumulative fair-value hedging basis adjustments on hedged items
 
$
325

 
$
272

 
$
(13
)
 
$
584

Estimated fair value of associated derivatives, net
 
(317
)
 
(323
)
 
10

 
(630
)
 
 
 
 
 
 
 
 
 
Net cumulative fair-value hedging basis adjustments
 
$
8

 
$
(51
)
 
$
(3
)
 
$
(46
)





Total Capital. Total capital at September 30, 2019 was $3.1 billion, a net increase of $35 million, or 1%, compared to December 31, 2018, primarily due to additional capital stock issued and net income, substantially offset by capital stock reclassified to MRCS and dividends paid to shareholders, respectively.

The following table presents a percentage breakdown of the components of GAAP capital.
Components
 
September 30, 2019
 
December 31, 2018
Capital stock
 
63
%
 
63
%
Retained earnings
 
35
%
 
36
%
AOCI
 
2
%
 
1
%
Total GAAP capital
 
100
%
 
100
%

The components of GAAP capital were relatively unchanged at September 30, 2019 compared to December 31, 2018.

The following table presents a reconciliation of GAAP capital to regulatory capital ($ amounts in millions).
Reconciliation
 
September 30, 2019
 
December 31, 2018
Total GAAP capital
 
$
3,086

 
$
3,051

Exclude: AOCI
 
(56
)
 
(42
)
Add: MRCS
 
324

 
169

Total regulatory capital
 
$
3,354

 
$
3,178

 
Liquidity and Capital Resources
 
Liquidity. Our primary sources of liquidity are holdings of liquid assets, comprised of cash, short-term investments, and trading securities, as well as the issuance of consolidated obligations.

Our cash and short-term investments totaled $5.5 billion at September 30, 2019. Our short-term investments generally consist of high-quality financial instruments, many of which mature overnight. Our trading securities totaled $4.4 billion at September 30, 2019 and consisted solely of U.S. Treasury securities. As a result, our liquidity portfolio at September 30, 2019 totaled $9.9 billion or 15% of total assets.

During the nine months ended September 30, 2019, we maintained sufficient access to funding; our net proceeds from the issuance of consolidated obligations totaled $273.4 billion. However, to protect against temporary disruptions in access to the debt markets, the Finance Agency currently requires us to: (i) maintain contingent liquidity sufficient to cover, at a minimum, 10 calendar days of inability to issue consolidated obligations; (ii) have available at all times an amount greater than or equal to our members' current deposits invested in specific assets; (iii) maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to our participation in total consolidated obligations outstanding; and (iv) maintain, through short-term investments, an amount at least equal to our anticipated cash outflows under hypothetical adverse scenarios.

In 2018, the Finance Agency issued an Advisory Bulletin on FHLBank liquidity that communicates the Finance Agency's expectations with respect to the maintenance of sufficient liquidity. The Bank has fully implemented such liquidity guidance on a timely basis. After December 31, 2019, the standard will increase from 10 to 20 calendar days of liquidity sufficient to cover an inability to issue consolidated obligations. We anticipate that the Bank will meet or exceed the December 31, 2019 standard at that time and thereafter. For information concerning the Finance Agency’s liquidity guidance, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Recent Accounting and Regulatory Developments - Legislative and Regulatory Developments - Advisory Bulletin in our 2018 Form 10-K.

New or amended regulatory guidance from the Finance Agency could continue to increase the amount and change the characteristics of liquidity that we are required to maintain. We have not identified any other trends, demands, commitments, or events that are likely to materially increase or decrease our liquidity.





Changes in Cash Flow. Net cash used in operating activities for the nine months ended September 30, 2019 was $215 million, compared to net cash provided by operating activities for the nine months ended September 30, 2018 of $427 million. The decrease of $642 million was substantially due to the fluctuation in variation margin payments on cleared derivatives. Such payments are treated by the clearinghouses as daily settled contracts.

Capital Resources.

Total Regulatory Capital. The following table provides a breakdown of our outstanding capital stock and MRCS ($ amounts in millions).
 
 
September 30, 2019
 
December 31, 2018
By Type of Member Institution
 
Amount
 
% of Total
 
Amount
 
% of Total
Capital Stock:
 
 
 
 
 
 
 
 
Depository institutions:
 
 
 
 
 
 
 
 
Commercial banks and savings institutions
 
$
933

 
42
%
 
$
985

 
47
%
Credit unions
 
275

 
12
%
 
263

 
12
%
Total depository institutions
 
1,208

 
54
%
 
1,248

 
59
%
Insurance companies
 
731

 
32
%
 
683

 
33
%
CDFIs
 

 
%
 

 
%
Total capital stock, putable at par value
 
1,939

 
86
%
 
1,931

 
92
%
 
 
 
 
 
 
 
 
 
MRCS:
 
 
 
 
 
 
 
 
Captive insurance companies
 
136

 
6
%
 
132

 
6
%
Former members (1)
 
188

 
8
%
 
37

 
2
%
Total MRCS
 
324

 
14
%
 
169

 
8
%
 
 
 
 
 
 
 
 
 
Total regulatory capital stock
 
$
2,263

 
100
%
 
$
2,100

 
100
%

(1) 
Balances at both September 30, 2019 and December 31, 2018 include $1 million of MRCS that had reached the end of the five-year redemption period but will not be redeemed until the associated credit products and other obligations are no longer outstanding.

Excess Capital Stock. The following table presents the composition of our excess capital stock ($ amounts in millions).
Components
 
September 30, 2019
 
December 31, 2018
Member capital stock not subject to outstanding redemption requests
 
$
513

 
$
450

Member capital stock subject to outstanding redemption requests
 
1

 
1

MRCS
 
93

 
25

 
 
 
 
 
Total excess capital stock
 
$
607

 
$
476

 
 
 
 
 
Excess stock as a percentage of regulatory capital stock
 
27
%
 
23
%

The increase in excess stock during the nine months ended September 30, 2019 resulted from advance activity.

Capital Distributions. On October 24, 2019, our board of directors declared a cash dividend of 4.75% (annualized) on our Class B-1 capital stock and 3.80% (annualized) on our Class B-2 capital stock.





Adequacy of Capital. We must maintain sufficient permanent capital to meet the combined credit risk, market risk and operations risk components of the risk-based capital requirement. As presented in the following table, we were in compliance with the risk-based capital requirement at September 30, 2019 and December 31, 2018 ($ amounts in millions).
 
 
 
 
 
Risk-Based Capital Components
 
September 30, 2019
 
December 31, 2018
Credit risk
 
$
300

 
$
307

Market risk
 
202

 
298

Operations risk
 
150

 
182

 
 
 
 
 
Total risk-based capital requirement
 
$
652

 
$
787

 
 
 
 
 
Permanent capital
 
$
3,354

 
$
3,178


The decrease in the total risk-based capital requirement was primarily caused by a decrease in the market risk component due to changes in the market environment, including interest rates, spreads, volatility and changes in balance sheet composition. Our permanent capital at September 30, 2019 remained well in excess of our total risk-based capital requirement.

Off-Balance Sheet Arrangements

At September 30, 2019, principal previously paid in full by our MPP servicers totaling $1 million remains subject to potential claims by those servicers for any losses resulting from past or future liquidations of the underlying properties. An estimate of the losses is included in the MPP allowance for loan losses. For more information, see Notes to Financial Statements - Note 7 - Allowance for Credit Losses in our 2018 Form 10-K.
 
 
 
Critical Accounting Policies and Estimates
 
We determined that three of our accounting policies and estimates are critical because they require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions. These accounting policies pertain to:

Derivatives and hedging activities (see Notes to Financial Statements - Note 7 - Derivatives and Hedging Activities for more detail);
Fair value estimates (see Notes to Financial Statements - Note 13 - Estimated Fair Values for more detail); and
Provision for credit losses (see Notes to Financial Statements - Note 6 - Allowance for Credit Losses for more detail).

A full discussion of our critical accounting policies and estimates is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates in our 2018 Form 10-K. See below for additional information regarding certain of these policies.

Provision for Credit Losses.

Mortgage Loans Acquired under the MPP. Our allowance for loan losses incorporates our analysis of delinquent conventional MPP loans, using the estimated fair value of the underlying collateral, further reduced by estimated liquidation costs.

As part of our loan loss analysis at December 31, 2018, we considered an adverse scenario whereby we used a haircut on our underlying collateral values of 20% for delinquent conventional loans, including individually evaluated loans. We consider such a haircut to represent the most distressed scenario that is reasonably possible to occur over the loss emergence period of 24 months. In this distressed scenario, while holding all other assumptions constant, our estimated incurred losses remaining after borrowers' equity, but before credit enhancements, would increase by approximately $2.2 million. However, such increase would be substantially offset by credit enhancements. Based upon subsequent changes in underlying collateral values, we would not expect this amount to have significantly changed at September 30, 2019. Therefore, the allowance for loan losses continues to be based upon our best estimate of the probable losses over the loss emergence period that would not be recovered from the credit enhancements.





Recent Accounting and Regulatory Developments
 
Accounting Developments. For a description of how recent accounting developments may impact our financial condition, results of operations or cash flows, see Notes to Financial Statements - Note 2 - Recently Adopted and Issued Accounting Guidance.

Legislative and Regulatory Developments.

Advisory Bulletin (AB 2019-03) - Capital Stock Management. On August 14, 2019, the Finance Agency issued Advisory Bulletin 2019-03 ("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.

We do not expect the AB to have a material impact on our capital management practices, financial condition, or results of operations.

FHFA Supervisory Letter - Planning for LIBOR Phase-Out. On September 27, 2019, the Finance Agency issued a Supervisory Letter ("Supervisory Letter") to the FHLBanks, 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 December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. In addition, 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, subject to limited exceptions granted by the Finance Agency for LIBOR-linked products that serve compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives. These phase-out dates do not apply to collateral accepted by the FHLBanks. However, the Supervisory Letter directs the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020 to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021.

We have already suspended the issuance of LIBOR-indexed debt with maturities beyond 2021. As a result of the Supervisory Letter, before December 31, 2019, we will cease purchasing investments that reference LIBOR and mature after December 31, 2021. In addition, beginning December 31, 2019, we will no longer enter into derivatives with swaps, caps, or floors indexed to LIBOR that terminate after December 31, 2021. Also, beginning March 31, 2020, we expect to suspend transactions in certain structured advances and advances with terms directly linked to LIBOR that mature after December 31, 2021. We continue to evaluate the potential impact of the Supervisory Letter on our financial condition and results of operations.





Risk Management

We have exposure to a number of risks in pursuing our business objectives. These risks may be broadly classified as market, credit, liquidity, operational, and business. Market risk is discussed in Item 3. Quantitative and Qualitative Disclosures about Market Risk. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management in our 2018 Form 10-K for more information.

Credit Risk Management. We face credit risk on advances and other credit products, investments, mortgage loans, derivative financial instruments, and AHP grants.

Advances and Other Credit Products. New or renewed credit extensions to captive insurance companies that became members prior to September 12, 2014 are subject to certain regulatory restrictions relating to maturity dates and cannot exceed 40% of the member's total assets. As of September 30, 2019, one such captive insurance company member's total outstanding balance of credit products exceeded the percentage limit. Therefore, no new or renewed credit extensions have been extended to this member. We may impose additional restrictions on extensions of credit to our members, including captive insurance companies, at our discretion.

Concentration. Our credit risk is magnified due to the concentration of advances in a few borrowers. As of September 30, 2019, our top borrower held 11% of total advances outstanding, at par, and our top five borrowers held 39% of total advances outstanding, at par. As a result of this concentration, we perform frequent credit and collateral reviews on our largest borrowers. In addition, we analyze the implications to our financial management and profitability if we were to lose the business of one or more of these borrowers.

One such depository institution with an outstanding balance of advances at September 30, 2019 totaling $2.0 billion, or 6% of total advances outstanding, at par value, merged with a non-member depository institution effective August 1, 2019. Of these advances outstanding, $1.4 billion has been repaid and an additional $0.3 billion is scheduled to mature before December 31, 2019. We do not expect a material impact on our profitability as a result of the repayment of these advances.

Investments. We are also exposed to credit risk through our investment portfolios. Our policies restrict the acquisition of investments to high-quality, short-term money market instruments and high-quality long-term securities.

The following table presents the unsecured investment credit exposure to private counterparties, categorized by the domicile of the counterparty's ultimate parent, based on the lowest of the counterparty's NRSRO long-term credit ratings, stated in terms of the S&P equivalent. The table does not reflect the foreign sovereign government's credit rating ($ amounts in millions).
 
 
 
 
 
September 30, 2019
 
A
 
Total
Domestic
 
$
1,606

 
$
1,606

Canada
 
315

 
315

Total unsecured credit exposure
 
$
1,921

 
$
1,921


A Finance Agency regulation provides that the total amount of our investments in MBS and ABS, calculated using amortized historical cost, must not exceed 300% of our total regulatory capital, as of the day we purchase the securities, based on the capital amount most recently reported to the Finance Agency. At September 30, 2019 these investments totaled 272% of total regulatory capital. Generally, our goal is to maintain these investments near the 300% limit in order to enhance earnings and capital for our members and diversify our revenue stream.





The following table presents the carrying values of our investments, excluding accrued interest, grouped by credit rating and investment category. Applicable rating levels are determined using the lowest relevant long-term rating from S&P, Moody's and Fitch Ratings, Inc., each stated in terms of the S&P equivalent. Rating modifiers are ignored when determining the applicable rating level for a given counterparty or investment. Amounts reported do not reflect any subsequent changes in ratings, outlook, or watch status ($ amounts in millions).
 









Below


 









Investment


September 30, 2019

AAA

AA

A

BBB

Grade

Total 
Short-term investments:





 








Interest-bearing deposits

$


$


$
506


$


$


$
506

Securities purchased under agreements to resell



3,550








3,550

Federal funds sold





1,415






1,415

Total short-term investments



3,550


1,921






5,471

Long-term investments:


















U.S. Treasury obligations
 

 
4,411

 

 

 

 
4,411

GSE and TVA debentures



3,949








3,949

GSE MBS



6,221








6,221

Other U.S. obligations - guaranteed RMBS



3,173








3,173

Total long-term investments



17,754








17,754




















Total investments, carrying value

$


$
21,304


$
1,921


$


$


$
23,225




















Percentage of total

%

92
%

8
%

%

%

100
%



















December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 

 
 
 
 
 
 
Interest-bearing deposits
 
$

 
$
1

 
$
1,210

 
$

 
$

 
$
1,211

Securities purchased under agreements to resell
 

 
3,213

 

 

 

 
3,213

Federal funds sold
 

 
1,630

 
1,455

 

 

 
3,085

Total short-term investments
 

 
4,844

 
2,665

 

 

 
7,509

Long-term investments:
 
 
 
 
 
 
 
 
 
 
 
 
GSE and TVA debentures
 

 
4,277

 

 

 

 
4,277

GSE MBS
 

 
5,632

 

 

 

 
5,632

Other U.S. obligations - guaranteed RMBS
 

 
3,469

 

 

 

 
3,469

Total long-term investments
 

 
13,378

 

 

 

 
13,378

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments, carrying value
 
$

 
$
18,222

 
$
2,665

 
$

 
$

 
$
20,887

 
 
 
 
 
 
 
 
 
 
 
 
 
Percentage of total
 
%
 
87
%
 
13
%
 
%
 
%
 
100
%





Mortgage Loans Held for Portfolio. The following table presents the changes in the LRA for original MPP and Advantage MPP ($ amounts in millions).
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2019
LRA Activity
 
Original
 
Advantage
 
Total
Liability, beginning of period
 
$
7

 
$
173

 
$
180

Additions
 

 
3

 
3

Claims paid
 

 

 

Distributions to PFIs
 

 

 

Liability, end of period
 
$
7

 
$
176

 
$
183

 
 
Nine Months Ended September 30, 2019
LRA Activity
 
Original
 
Advantage
 
Total
Liability, beginning of period
 
$
7

 
$
167

 
$
174

Additions
 

 
10

 
10

Claims paid
 

 

 

Distributions to PFIs
 

 
(1
)
 
(1
)
Liability, end of period
 
$
7

 
$
176

 
$
183


Derivatives. The following table presents key information on derivative positions with counterparties on a settlement date basis using the lowest credit ratings from S&P or Moody's, stated in terms of the S&P equivalent ($ amounts in millions).
September 30, 2019
 
Notional
Amount
 
Net Estimated Fair Value
Before Collateral
 
Cash Collateral
Pledged To (From)
Counterparties
 
Net Credit
Exposure
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives - A
 
$
37

 
$

 
$

 
$

Cleared derivatives (1)
 
15,696

 
1

 
97

 
98

Liability positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives - A
 
11,776

 
(248
)
 
251

 
3

Cleared derivatives (1)
 
7,840

 

 
86

 
86

Total derivative positions with credit exposure to non-member counterparties
 
35,349

 
(247
)
 
434

 
187

Total derivative positions with credit exposure to member institutions (2)
 
55

 

 

 

Subtotal - derivative positions with credit exposure
 
35,404

 
$
(247
)
 
$
434

 
$
187

Derivative positions without credit exposure
 
12,586

 

 

 


 
 
 
 
 
 
 
 
 
Total derivative positions
 
$
47,990

 


 


 



(1) 
Represents derivative transactions cleared by two clearinghouses (one rated AA- and the other unrated).
(2) 
Includes MDCs from member institutions under our MPP.





Business Risk Management.

Replacement of the LIBOR Benchmark Interest Rate. In July 2017, the Financial Conduct Authority ("FCA"), a regulator of financial services firms and financial markets in the UK, announced that it will plan for a phase-out of regulatory oversight of LIBOR interest rate indices. The FCA indicated that it will cease persuading or compelling banks to submit rates for the calculation of LIBOR after 2021, and that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The Alternative Reference Rates Committee has proposed SOFR as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018.

Most of our advances, investments, consolidated obligation bonds, derivative assets, derivative liabilities, and related collateral are indexed to LIBOR. Some of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. As a result, we are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement on an ongoing basis. We have also developed an evolving transition plan that will change with market developments and member needs. The key components of our LIBOR replacement plan are: exposure, fallback language, information technology systems preparation, and balance sheet strategy. We have assessed our current exposure to LIBOR including completing an inventory of all financial instruments impacted and identifying financial instruments and contracts that may require adding or adjusting fallback language. We are assessing our operational readiness including potential effects on core Bank systems and replacing LIBOR references in policies and procedures. From a balance sheet management perspective, we have participated in the issuance of SOFR-indexed debt and suspended the issuance of LIBOR-indexed debt with maturities beyond 2021. Additionally, we have implemented OIS as an alternative interest rate hedging strategy for certain financial instruments.

The following table presents our LIBOR-rate indexed financial instruments outstanding at September 30, 2019 by year of maturity ($ amounts in millions).
 
 
 
 
 
 
 
 
 
LIBOR-rate indexed financial instruments
Financial Instruments
 
Due in 2019 through 2021
 
Due in 2022 and thereafter
 
Total LIBOR-rate indexed
Advances by redmption term
 
$
499

 
$
3,866

 
$
4,365

 
 
 
 
 
 
 
MBS by contractual maturity (1)
 
36

 
4,061

 
4,097

 
 
 
 
 
 
 
CO bonds by contractual maturity
 
13,155

 

 
13,155

 
 
 
 
 
 
 
Total principal
 
$
13,690

 
$
7,927

 
$
21,617

 
 
 
 
 
 
 
Total notional of derivatives by termination date
 
$
20,687

 
$
22,489

 
$
43,176


(1) 
Year of redemption on our MBS is based on contractual maturity. Their actual maturities will likely differ from
contractual maturities as borrowers have the right to prepay their obligations with or without prepayment fees.

See Item 1A. Risk Factors - Changes to or Replacement of the LIBOR Benchmark Interest Rate Could Adversely Affect Our Business, Financial Condition and Results of Operations in our 2018 Form 10-K for more information.





Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Measuring Market Risks
 
To evaluate market risk, we utilize multiple risk measurements, including duration of equity, duration gap, convexity, VaR, earnings at risk, and changes in MVE. Periodically, we conduct stress tests to measure and analyze the effects that extreme movements in the level of interest rates and the shape of the yield curve would have on our risk position.

As part of our overall interest-rate risk management process, we continue to evaluate strategies to manage interest-rate risk. Certain strategies, if implemented, could have an adverse impact on future earnings.
 
Market Risk-Based Capital Requirement. When calculating the risk-based capital requirement, the VaR comprising the first factor of the market risk component is defined as the potential dollar loss from adverse market movements, for a holding period of 120 business days, with a 99% confidence interval, based on those historical prices and market rates. The table below presents the VaR ($ amounts in millions).
Date
 
VaR
September 30, 2019
 
$
202

December 31, 2018
 
298


Market Value of Equity. MVE represents the difference between the estimated market value of total assets and the estimated market value of total liabilities, including any off-balance sheet positions. It measures, in present value terms, the long-term economic value of current capital and the long-term level and volatility of net interest income.

We also monitor the sensitivities of MVE to potential interest-rate scenarios. We measure potential changes in the market value to book value of equity based on the current month-end level of rates versus large parallel shifts in rates. Our board of directors determines acceptable ranges for the change in MVE for 200 bps shock scenario.

Key Metrics. The following table presents certain market and interest-rate metrics under different interest-rate scenarios ($ amounts in millions).
September 30, 2019
 
Down 200 (1)
 
Down 100 (1)
 
Base
 
Up 100
 
Up 200
MVE
 
$
3,221

 
$
3,151

 
$
3,113

 
$
3,049

 
$
3,113

Percent change in MVE from base
 
3.5
%
 
1.2
%
 
%
 
(2.0
)%
 
%
MVE/Book value of equity
 
94.5
%
 
92.4
%
 
91.3
%
 
89.4
 %
 
91.3
%
Duration of equity (2)
 
0.8

 
1.8

 
2.4

 
(0.5
)
 
(2.1
)
December 31, 2018 (3)
 
 
 
 
 
 
 
 
 
 
MVE
 
$
3,240

 
$
3,191

 
$
3,120

 
$
3,024

 
$
2,995

Percent change in MVE from base
 
3.8
%
 
2.3
%
 
0
%
 
(3.1
)%
 
(4.0
)%
MVE/Book value of equity
 
100.7
%
 
99.1
%
 
96.9
%
 
93.9
 %
 
93.0
 %
Duration of equity (2)
 
1.4
 
1.7
 
2.9
 
2.5
 
(0.3)

(1) 
Given the low interest rates in the short-to-medium term points of the yield curves, downward rate shocks are constrained to prevent rates from becoming negative.
(2) 
We use interest-rate shocks in 50 bps increments to determine duration of equity.
(3) 
Metrics previously presented have been revised.

The changes in these key metrics from December 31, 2018 resulted primarily from the change in market value of the assets and liabilities in response to changes in the market environment, changes in portfolio composition, and our hedging strategies.

Duration Gap. The base case duration gap was 0.08% and 0.09% at September 30, 2019 and December 31, 2018, respectively.

For information about our use of derivative hedges see, Item 7A. Quantitative and Qualitative Disclosures About Market Risk - Use of Derivative Hedges in our 2018 Form 10-K.





Item 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in our reports filed under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms; and (b) accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, to allow timely decisions regarding required disclosures.

As of September 30, 2019, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (the principal executive officer), Chief Financial Officer (the principal financial officer) and Chief Accounting Officer (the principal accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.
 
Internal Control Over Financial Reporting

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting, as defined in rules 13a-15(f) and 15(d)-15(f) of the Exchange Act, that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls. We do not expect that our disclosure controls and procedures and other internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can only be reasonable assurance that any design will succeed in achieving its stated goals under all potential future conditions. Additionally, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS

In the ordinary course of business, we may from time to time become a party to lawsuits involving various business matters. We are unaware of any lawsuits presently pending which, individually or in the aggregate, could have a material effect on our financial condition or results of operations.

Item 1A. RISK FACTORS
 
There have been no material changes in the risk factors described in Item 1A. Risk Factors of our 2018 Form 10-K.






Item 6. EXHIBITS
 
EXHIBIT INDEX
Exhibit Number
 
Description
 
 
 
3.1*
 
 
 
 
3.2*
 
 
 
 
4.0*
 
 
 
 
10.1*
 
 
 
 
10.2*
 
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
31.3
 
 
 
 
32
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document


* These documents are incorporated by reference.





SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 
FEDERAL HOME LOAN BANK
OF INDIANAPOLIS
 
 
November 7, 2019
By:
/s/ CINDY L. KONICH
 
Name:
Cindy L. Konich
 
Title:
President - Chief Executive Officer
 
 
 
November 7, 2019
By:
/s/ GREGORY L. TEARE
 
Name:
Gregory L. Teare
 
Title:
Executive Vice President - Chief Financial Officer
 
 
 
November 7, 2019
By:
/s/ K. LOWELL SHORT, JR.
 
Name:
K. Lowell Short, Jr.
 
Title:
Senior Vice President - Chief Accounting Officer