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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, 2018
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

Commission File Number: 000-51999
 

FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
42-6000149
(I.R.S. employer identification number)
 
 
 
 
 
 
 
909 Locust Street
Des Moines, IA
(Address of principal executive offices)
 


50309
(Zip code)
 

Registrant’s telephone number, including area code: (515) 412-2100
 

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

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. o

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, 2018
 
Class B Stock, par value $100
 
56,298,366
 
 
 
 
 
 
 
 
 




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in millions, except capital stock par value)
(Unaudited)
 
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
 
Cash and due from banks
 
$
155

 
$
503

Interest-bearing deposits
 
1

 
1

Securities purchased under agreements to resell
 
5,100

 
4,600

Federal funds sold
 
6,390

 
4,250

Investment securities
 
 
 
 
Trading securities (Note 3)
 
903

 
1,177

Available-for-sale securities (Note 4)
 
19,630

 
20,796

Held-to-maturity securities (fair value of $3,131 and $3,686) (Note 5)
 
3,115

 
3,628

Total investment securities
 
23,648

 
25,601

Advances (includes $15 and $0 at fair value under the fair value option) (Note 7)
 
100,787

 
102,613

Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $2 (Notes 8 and 9)
 
7,549

 
7,096

Accrued interest receivable
 
286

 
223

Derivative assets, net (Note 10)
 
70

 
100

Other assets
 
109

 
112

TOTAL ASSETS
 
$
144,095

 
$
145,099

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
756

 
$
1,013

Non-interest-bearing
 
79

 
94

Total deposits
 
835

 
1,107

Consolidated obligations (Note 11)
 
 
 
 
Discount notes
 
42,101

 
36,682

Bonds
 
92,998

 
98,893

Total consolidated obligations
 
135,099

 
135,575

Borrowings from other FHLBanks
 

 
600

Mandatorily redeemable capital stock (Note 12)
 
277

 
385

Accrued interest payable
 
243

 
210

Affordable Housing Program payable
 
154

 
142

Derivative liabilities, net (Note 10)
 
4

 
6

Other liabilities
 
178

 
53

TOTAL LIABILITIES
 
136,790

 
138,078

Commitments and contingencies (Note 14)
 

 

CAPITAL (Note 12)
 
 
 
 
Capital stock - Class B putable ($100 par value); 52 and 51 issued and outstanding shares
 
5,163

 
5,068

Retained earnings
 
 
 
 
Unrestricted
 
1,612

 
1,504

Restricted
 
407

 
335

Total retained earnings
 
2,019

 
1,839

Accumulated other comprehensive income (loss)
 
123

 
114

TOTAL CAPITAL
 
7,305

 
7,021

TOTAL LIABILITIES AND CAPITAL
 
$
144,095

 
$
145,099

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

3

Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
633

 
$
451

 
$
1,761

 
$
1,165

Interest-bearing deposits
 

 

 
1

 
1

Securities purchased under agreements to resell
 
21

 
14

 
49

 
30

Federal funds sold
 
34

 
26

 
79

 
53

Trading securities
 
7

 
12

 
23

 
35

Available-for-sale securities
 
132

 
98

 
364

 
266

Held-to-maturity securities
 
22

 
20

 
65

 
60

Mortgage loans held for portfolio
 
64

 
59

 
185

 
176

Total interest income
 
913

 
680


2,527

 
1,786

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
212

 
163

 
506

 
396

Consolidated obligations - Bonds
 
535

 
338

 
1,517

 
877

Deposits
 
4

 
1

 
9

 
3

Mandatorily redeemable capital stock
 
6

 
4

 
15

 
13

Total interest expense
 
757

 
506


2,047

 
1,289

NET INTEREST INCOME
 
156

 
174


480

 
497

Provision (reversal) for credit losses on mortgage loans
 

 
1

 

 
1

NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES
 
156

 
173

 
480

 
496

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Net gains (losses) on trading securities
 
(9
)
 
1

 
(33
)
 
10

Net gains (losses) on derivatives and hedging activities
 
9

 
(2
)
 
43

 
1

Gains on litigation settlements, net
 

 

 

 
21

Other, net
 
7

 
5

 
13

 
13

Total other income (loss)
 
7


4


23

 
45

OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
15

 
12

 
46

 
39

Contractual services
 
3

 
2

 
9

 
8

Professional fees
 
6

 
5

 
13

 
15

Other operating expenses
 
6

 
6

 
17

 
16

Federal Housing Finance Agency
 
2

 
3

 
7

 
8

Office of Finance
 
2

 
1

 
5

 
5

Other, net
 
2

 
1

 
4

 
2

Total other expense
 
36

 
30


101

 
93

NET INCOME BEFORE ASSESSMENTS
 
127

 
147


402


448

Affordable Housing Program assessments
 
14

 
15

 
42

 
46

NET INCOME
 
$
113

 
$
132


$
360


$
402

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

4

Table of Contents


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
113

 
$
132

 
$
360

 
$
402

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
(19
)
 
12

 
9

 
117

Pension and postretirement benefits
 

 
(1
)
 

 
1

Total other comprehensive income (loss)
 
(19
)
 
11


9


118

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
94

 
$
143


$
369


$
520

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




5

Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in millions)
(Unaudited)

 
Capital Stock Class B (putable)
 
Additional Capital from Merger
 
Shares
 
Par Value
 
BALANCE, DECEMBER 31, 2016
59

 
$
5,917

 
$
52

Comprehensive income (loss)

 

 

Proceeds from issuance of capital stock
43

 
4,364

 

Repurchases/redemptions of capital stock
(46
)
 
(4,617
)
 

Net shares reclassified (to) from mandatorily redeemable capital stock

 
(40
)
 

Cash dividends on capital stock

 

 
(52
)
BALANCE, SEPTEMBER 30, 2017
56

 
$
5,624

 
$

 
 
 
 
 
 
BALANCE, DECEMBER 31, 2017
51

 
$
5,068

 
$

Comprehensive income (loss)

 

 

Proceeds from issuance of capital stock
58

 
5,837

 

Repurchases/redemptions of capital stock
(57
)
 
(5,693
)
 

Net shares reclassified (to) from mandatorily redeemable capital stock

 
(49
)
 

Cash dividends on capital stock

 

 

BALANCE, SEPTEMBER 30, 2018
52

 
$
5,163

 
$

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

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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL (continued from previous page)
(dollars and shares in millions)
(Unaudited)
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Capital
 
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, DECEMBER 31, 2016
 
$
1,219

 
$
231

 
$
1,450

 
$
(18
)
 
$
7,401

Comprehensive income (loss)
 
322

 
80

 
402

 
118

 
520

Proceeds from issuance of capital stock
 

 

 

 

 
4,364

Repurchases/redemptions of capital stock
 

 

 

 

 
(4,617
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 
(40
)
Cash dividends on capital stock
 
(78
)
 

 
(78
)
 

 
(130
)
BALANCE, SEPTEMBER 30, 2017
 
$
1,463

 
$
311

 
$
1,774

 
$
100

 
$
7,498

 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2017
 
$
1,504

 
$
335

 
$
1,839

 
$
114

 
$
7,021

Comprehensive income (loss)
 
288

 
72

 
360

 
9

 
369

Proceeds from issuance of capital stock
 

 

 

 

 
5,837

Repurchases/redemptions of capital stock
 

 

 

 

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

 

 

 

 
(49
)
Cash dividends on capital stock
 
(180
)
 

 
(180
)
 

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

 
$
407

 
$
2,019

 
$
123

 
$
7,305

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


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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
(Unaudited)
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
360

 
$
402

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

 
30

Net (gains) losses on trading securities
 
33

 
(10
)
Net change in derivatives and hedging activities
 
142

 

Other adjustments
 

 
7

Net change in:
 
 
 
 
Accrued interest receivable
 
(128
)
 
(85
)
Other assets
 
3

 
(2
)
Accrued interest payable
 
32

 
46

Other liabilities
 
19

 
(11
)
Total adjustments
 
132

 
(25
)
Net cash provided by (used in) operating activities
 
492

 
377

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
91

 
40

Securities purchased under agreements to resell
 
(500
)
 
425

Federal funds sold
 
(2,140
)
 
(1,675
)
Premises, software, and equipment
 
(24
)
 
(25
)
Loans to other FHLBanks
 

 
200

Trading securities
 
 
 
 
Proceeds from maturities of long-term
 
241

 
771

Available-for-sale securities
 
 
 
 
Proceeds from maturities of long-term
 
2,467

 
1,962

Purchases of long-term
 
(1,365
)
 
(402
)
Held-to-maturity securities
 
 
 
 
Proceeds from maturities of long-term
 
521

 
844

Advances
 
 
 
 
Repaid
 
228,179

 
211,223

Originated or purchased
 
(226,534
)
 
(197,191
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
700

 
790

Originated or purchased
 
(1,169
)
 
(925
)
Proceeds from sales of foreclosed assets
 
6

 
7

Net cash provided by (used in) investing activities
 
473

 
16,044

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

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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
(Unaudited)
 
 
For the Nine Months Ended
 
 
September 30,
 
 
2018
 
2017
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
(180
)
 
(171
)
Borrowings from other FHLBanks
 
(600
)
 

Net payments on derivative contracts with financing elements
 
(1
)
 
(3
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
130,226

 
162,882

Bonds
 
31,217

 
53,241

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(124,838
)
 
(190,878
)
Bonds
 
(36,944
)
 
(40,832
)
Proceeds from issuance of capital stock
 
5,837

 
4,364

Payments for repurchases/redemptions of capital stock
 
(5,693
)
 
(4,617
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(157
)
 
(282
)
Cash dividends paid
 
(180
)
 
(130
)
Net cash provided by (used in) financing activities
 
(1,313
)
 
(16,426
)
Net increase (decrease) in cash and due from banks
 
(348
)
 
(5
)
Cash and due from banks at beginning of the period
 
503

 
223

Cash and due from banks at end of the period
 
$
155

 
$
218

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
2,010

 
$
1,277

Affordable Housing Program payments
 
30

 
25

Non-Cash Transactions:
 
 
 
 
Capitalized interest on reverse mortgage investment securities
 
66

 
43

Mortgage loan charge-offs
 
1

 
1

Transfers of mortgage loans to other assets
 
3

 
5

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
49

 
40

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

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Table of Contents

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

Background Information

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

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

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

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




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Table of Contents

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements and should be read in conjunction with the audited financial statements for the year ended December 31, 2017, which are contained in the Bank’s 2017 Annual Report on Form 10-K filed with the SEC on March 12, 2018 (2017 Form 10-K).

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results for the interim periods. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2018.

Reclassifications

Certain amounts in the Bank’s 2017 financial statements and footnotes have been reclassified to conform to the presentation as of September 30, 2018. In particular, due to the change in current presentation, variation margin on cleared derivatives has been allocated to the individual derivative instruments. Previously, this amount was included as a component of netting adjustments and cash collateral. For additional details regarding this reclassification, refer to “Note 10 Derivatives and Hedging Activities.”

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank’s significant accounting policies during the nine months ended September 30, 2018. Descriptions of all significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” in the 2017 Form 10-K.










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Table of Contents

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)
On March 10, 2017, the FASB issued amended guidance that requires an employer to disaggregate the service cost component from the other components of net periodic pension cost and net periodic postretirement benefit cost (net benefit cost). The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018 and was adopted retrospectively. The adoption of this guidance resulted in a reclassification of other net benefit costs from “Compensation and Benefits” to “Other Expense, Net” in the Bank’s Statements of Income. The adoption of this guidance did not have a material effect on the Bank’s financial condition, result of operations, or cash flows.
Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)

On August 26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018 and was adopted retrospectively. The adoption of this guidance did not have a direct effect on the Bank’s financial condition, results of operations, or cash flows. However, the Bank did revise its previously reported supplemental interest paid disclosure to align with the clarified accounting guidance.
Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)

On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:

Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in income.

Requires an entity to present separately in other comprehensive income (OCI) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statements of condition or the accompanying notes to the financial statements.

Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statements of condition.

This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018 and was adopted using the modified retrospective approach. The adoption of this guidance affected the Bank’s fair value disclosures. However, the guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows.

Revenue from Contracts with Customers (ASU 2014-09)

On May 28, 2014, the FASB issued guidance on revenue from contracts with customers. This guidance outlines a single comprehensive model for recognizing revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, this guidance amends the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer. This guidance applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, and lease contracts. The guidance provides entities with the option of using either of the following adoption methods: a full retrospective method, retrospectively to each prior reporting period presented; or a modified retrospective method, retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application.


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Table of Contents

On August 12, 2015, the FASB issued an amendment to defer the effective date of this guidance issued in May 2014 by one year. In 2016, the FASB issued additional amendments to clarify certain aspects of the new revenue guidance. However, these amendments did not change the core principle in the new revenue standard.

This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018, and was adopted retrospectively. Given that the majority of the Bank’s financial instruments and other contractual rights that generate revenue are covered by other U.S. GAAP, the adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, and cash flows.

ISSUED ACCOUNTING GUIDANCE
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16)
On October 25, 2018, the FASB issued amended guidance to include the SOFR OIS rate as a U.S. benchmark interest rate for hedge accounting purposes. Including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate, and will be effective prospectively for qualifying new or re-designated hedging relationships entered into on or after January 1, 2019. The Bank is currently evaluating the effect this guidance may have on its hedging strategies.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15)
On August 29, 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance.
The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance outlined in ASC Topic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. They require the customer to expense the capitalized implementation costs over the term of the hosting arrangement. The amendments also require the customer to present the expense in the same line item in the statement of income as the fees associated with the hosting element (service) and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Lastly, capitalized implementation costs should be presented in the statement of condition in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.
This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2020, and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Bank is in the process of evaluating this guidance, and its effect on the Bank’s financial condition, results of operations, and cash flows has not yet been determined.
Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for defined benefit plans to improve disclosure effectiveness. This guidance becomes effective for the Bank for annual periods ending on December 31, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it may reduce certain disclosures.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance becomes effective for the Bank for interim and annual periods beginning on January 1, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it may reduce certain disclosures.

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Table of Contents

Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in OCI. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.
Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk.
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate.
This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2019, and early adoption is permitted. The amended presentation and disclosure guidance is required only prospectively. The Bank does not intend to adopt this guidance early. The Bank has evaluated this guidance and it is not expected to affect the Bank’s application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul method for its short-cut hedge strategies, which will not have an impact on the Bank’s financial condition, results of operations or cash flows. Upon adoption, this guidance will prospectively affect the Bank’s income statement presentation for fair value hedge relationships and will require certain new disclosures. The Bank will continue to assess opportunities enabled by the new guidance to expand its risk management strategies.
Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)

On March 30, 2017, the FASB issued guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, this guidance requires the premium to be amortized to the earliest call date. This guidance does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance is effective for the Bank for the interim and annual periods beginning on January 1, 2019, and early adoption is permitted. This guidance should be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Bank does not intend to adopt this guidance early. The Bank has evaluated this guidance and its effect on the Bank’s financial condition, results of operations, and cash flows is not expected to be material.

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

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

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


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Table of Contents

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

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

This guidance is effective for the Bank for the interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. This guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for PCD assets upon adoption and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Bank does not intend to adopt the new guidance early. While the Bank is in the process of evaluating this guidance, the Bank expects the adoption of the guidance may result in an increase in the allowance for credit losses and corresponding expense, including an allowance for debt securities, given the requirement to assess losses for the entire estimated life of the financial asset. The effect on the Bank’s financial condition, results of operations, and cash flows will depend upon the composition of financial assets held by the Bank at the adoption date as well as the economic conditions and forecasts at that time.
Leases (ASU 2016-02)

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

This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2019, and early application is permitted. In July 2018, the FASB issued amendments that, among other things, provide entities with an additional transition method to adopt the guidance. The new transition method allows entities an option to recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Bank does not intend to adopt this new guidance early. Upon adoption, the Bank estimates that it will recognize right-of-use assets and lease liabilities for its operating leases of approximately $5 million on its statements of condition. The Bank does not anticipate the adoption of this guidance will have a material effect on its results of operations or cash flows.


15

Table of Contents

Note 3 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in millions):
 
September 30,
2018
 
December 31,
2017
Non-mortgage-backed securities
 
 
 
U.S. obligations1
$
157

 
$
197

GSE and Tennessee Valley Authority obligations
56

 
260

Other2
262

 
272

     Total non-mortgage-backed securities
475

 
729

Mortgage-backed securities
 
 
 
GSE multifamily
428

 
448

Total fair value
$
903

 
$
1,177


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

2
Consists of taxable municipal bonds.

NET GAINS (LOSSES) ON TRADING SECURITIES

The Bank did not sell any trading securities during the three and nine months ended September 30, 2018 and 2017. During the three and nine months ended September 30, 2018, the Bank recorded net holding losses of $9 million and $33 million on its trading securities compared to net holding gains of $1 million and $10 million for the same periods in 2017.


16

Table of Contents

Note 4 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in millions):
 
September 30, 2018
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations2
$
2,675

 
$
10

 
$
(2
)
 
$
2,683

GSE and Tennessee Valley Authority obligations
988

 
35

 

 
1,023

State or local housing agency obligations
846

 

 
(2
)
 
844

Other3
257

 
12

 

 
269

Total non-mortgage-backed securities
4,766

 
57

 
(4
)
 
4,819

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
4,291

 
29

 
(1
)
 
4,319

GSE single-family
834

 
6

 
(6
)
 
834

GSE multifamily
9,612

 
54

 
(8
)
 
9,658

Total mortgage-backed securities
14,737

 
89

 
(15
)
 
14,811

Total
$
19,503

 
$
146

 
$
(19
)
 
$
19,630


 
December 31, 2017
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations2
$
3,096

 
$
8

 
$
(5
)