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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 March 31, 2019
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
 
 
 
Indicate 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 April 30, 2019
 
Class B Stock, par value $100
 
56,284,893
 
 
 
 
 



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)
 
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Cash and due from banks
 
$
81

 
$
119

Interest-bearing deposits
 
1

 
1

Securities purchased under agreements to resell
 
8,000

 
4,700

Federal funds sold
 
7,985

 
4,150

Investment securities
 
 
 
 
Trading securities (Note 3)
 
918

 
915

Available-for-sale securities (Note 4)
 
18,493

 
19,019

Held-to-maturity securities (fair value of $2,918 and $3,021) (Note 5)
 
2,874

 
2,992

Total investment securities
 
22,285

 
22,926

Advances (Note 7)
 
99,228

 
106,323

Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1 (Notes 8 and 9)
 
7,943

 
7,835

Accrued interest receivable
 
314

 
290

Derivative assets, net (Note 10)
 
92

 
58

Other assets
 
114

 
113

TOTAL ASSETS
 
$
146,043

 
$
146,515

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
834

 
$
976

Non-interest-bearing
 
128

 
94

Total deposits
 
962

 
1,070

Consolidated obligations (Note 11)
 
 
 
 
Discount notes
 
44,994

 
42,879

Bonds
 
91,979

 
93,772

Total consolidated obligations
 
136,973

 
136,651

Borrowings from other FHLBanks
 

 
500

Mandatorily redeemable capital stock (Note 12)
 
237

 
255

Accrued interest payable
 
299

 
268

Affordable Housing Program payable
 
159

 
153

Derivative liabilities, net (Note 10)
 
2

 
9

Other liabilities
 
52

 
61

TOTAL LIABILITIES
 
138,684

 
138,967

Commitments and contingencies (Note 14)
 

 

CAPITAL (Note 12)
 
 
 
 
Capital stock - Class B putable ($100 par value); 52 and 54 issued and outstanding shares
 
5,182

 
5,414

Retained earnings
 
 
 
 
Unrestricted
 
1,643

 
1,623

Restricted
 
449

 
427

Total retained earnings
 
2,092

 
2,050

Accumulated other comprehensive income (loss)
 
85

 
84

TOTAL CAPITAL
 
7,359

 
7,548

TOTAL LIABILITIES AND CAPITAL
 
$
146,043

 
$
146,515

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

3

Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
 
March 31,
 
 
2019
 
2018
INTEREST INCOME
 
 
 
 
Advances
 
$
715

 
$
502

Securities purchased under agreements to resell
 
32

 
12

Federal funds sold
 
43

 
23

Trading securities
 
8

 
8

Available-for-sale securities
 
143

 
110

Held-to-maturity securities
 
22

 
21

Mortgage loans held for portfolio
 
69

 
60

Total interest income
 
1,032

 
736

INTEREST EXPENSE
 
 
 
 
Consolidated obligations - Discount notes
 
271

 
124

Consolidated obligations - Bonds
 
595

 
448

Deposits
 
4

 
3

Mandatorily redeemable capital stock
 
3

 
4

Total interest expense
 
873

 
579

NET INTEREST INCOME
 
159

 
157

OTHER INCOME (LOSS)
 
 
 
 
Net gains (losses) on trading securities
 
10

 
(16
)
Net gains (losses) on derivatives and hedging activities
 
(12
)
 
20

Other, net
 
7

 
4

Total other income (loss)
 
5


8

OTHER EXPENSE
 
 
 
 
Compensation and benefits
 
16

 
17

Contractual services
 
4

 
3

Professional fees
 
7

 
3

Other operating expenses
 
7

 
5

Federal Housing Finance Agency
 
2

 
2

Office of Finance
 
2

 
2

Other, net
 
1

 
1

Total other expense
 
39

 
33

NET INCOME BEFORE ASSESSMENTS
 
125

 
132

Affordable Housing Program assessments
 
13

 
14

NET INCOME
 
$
112

 
$
118

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
 
 
March 31,
 
 
2019
 
2018
Net income
 
$
112

 
$
118

Other comprehensive income (loss)
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
1

 
45

Total other comprehensive income (loss)
 
1

 
45

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
113

 
$
163

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




5

Table of Contents

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

 
Capital Stock Class B (putable)
 
Shares
 
Par Value
BALANCE, DECEMBER 31, 2017
51

 
$
5,068

Comprehensive income (loss)

 

Proceeds from issuance of capital stock
20

 
2,013

Repurchases/redemptions of capital stock
(17
)
 
(1,706
)
Net shares reclassified (to) from mandatorily redeemable capital stock

 
(3
)
Cash dividends on capital stock

 

BALANCE, MARCH 31, 2018
54

 
$
5,372

 
 
 
 
BALANCE, DECEMBER 31, 2018
54

 
$
5,414

Comprehensive income (loss)

 

Proceeds from issuance of capital stock
16

 
1,551

Repurchases/redemptions of capital stock
(18
)
 
(1,781
)
Net shares reclassified (to) from mandatorily redeemable capital stock

 
(2
)
Cash dividends on capital stock

 

BALANCE, MARCH 31, 2019
52

 
$
5,182

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

6

Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL (continued from previous page)
(dollars and shares in millions)
(Unaudited)
 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Capital
 
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, DECEMBER 31, 2017
 
$
1,504

 
$
335

 
$
1,839

 
$
114

 
$
7,021

Comprehensive income (loss)
 
95

 
23

 
118

 
45

 
163

Proceeds from issuance of capital stock
 

 

 

 

 
2,013

Repurchases/redemptions of capital stock
 

 

 

 

 
(1,706
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 
(3
)
Cash dividends on capital stock
 
(53
)
 

 
(53
)
 

 
(53
)
BALANCE, MARCH 31, 2018
 
$
1,546

 
$
358

 
$
1,904

 
$
159

 
$
7,435

 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2018
 
$
1,623

 
$
427

 
$
2,050

 
$
84

 
$
7,548

Comprehensive income (loss)
 
90

 
22

 
112

 
1

 
113

Proceeds from issuance of capital stock
 

 

 

 

 
1,551

Repurchases/redemptions of capital stock
 

 

 

 

 
(1,781
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 
(2
)
Cash dividends on capital stock
 
(70
)
 

 
(70
)
 

 
(70
)
BALANCE, MARCH 31, 2019
 
$
1,643

 
$
449

 
$
2,092

 
$
85

 
$
7,359

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 Three Months Ended
 
 
March 31,
 
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
112

 
$
118

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
Depreciation and amortization
 
16

 
(22
)
Net (gains) losses on trading securities
 
(10
)
 
16

Net change in derivatives and hedging activities
 
(33
)
 
33

Net change in:
 
 
 
 
Accrued interest receivable
 
(52
)
 
(38
)
Other assets
 
(2
)
 
4

Accrued interest payable
 
32

 
14

Other liabilities
 
(3
)
 
7

Total adjustments
 
(52
)
 
14

Net cash provided by (used in) operating activities
 
60

 
132

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(29
)
 
50

Securities purchased under agreements to resell
 
(3,300
)
 
1,100

Federal funds sold
 
(3,835
)
 
(1,410
)
Trading securities
 
 
 
 
Proceeds from maturities of long-term
 
8

 
209

Available-for-sale securities
 
 
 
 
Proceeds from maturities of long-term
 
640

 
895

Held-to-maturity securities
 
 
 
 
Proceeds from maturities of long-term
 
115

 
195

Advances
 
 
 
 
Repaid
 
67,845

 
74,565

Originated or purchased
 
(60,649
)
 
(80,328
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
216

 
223

Originated or purchased
 
(327
)
 
(245
)
Other investing activities
 
(2
)
 
(2
)
Net cash provided by (used in) investing activities
 
682

 
(4,748
)
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 Three Months Ended
 
 
March 31,
 
 
2019
 
2018
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
(142
)
 
(58
)
Borrowings from other FHLBanks
 
(500
)
 
(600
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
37,073

 
45,511

Bonds
 
14,926

 
16,385

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(34,973
)
 
(48,244
)
Bonds
 
(16,844
)
 
(8,909
)
Proceeds from issuance of capital stock
 
1,551

 
2,013

Payments for repurchases/redemptions of capital stock
 
(1,781
)
 
(1,706
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(20
)
 
(32
)
Cash dividends paid
 
(70
)
 
(53
)
Net cash provided by (used in) financing activities
 
(780
)
 
4,307

Net increase (decrease) in cash and due from banks
 
(38
)
 
(309
)
Cash and due from banks at beginning of the period
 
119

 
503

Cash and due from banks at end of the period
 
$
81

 
$
194

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
853

 
$
604

Affordable Housing Program payments
 
7

 
6

Non-Cash Transactions:
 
 
 
 
Capitalized interest on reverse mortgage investment securities
 
32

 
18

Transfers of mortgage loans to other assets
 
1

 
1

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
2

 
3

Initial right-of-use lease asset recognition
 
3

 

Initial lease liability recognition
 
3

 

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

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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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Note 1 — Basis of Presentation

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

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

Reclassifications

Certain amounts in the Bank’s 2018 financial statements have been reclassified to conform to the presentation as of March 31, 2019. These amounts were not deemed to be material.

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank’s significant accounting policies during the three months ended March 31, 2019, with the exception of the policies noted below. Descriptions of all significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” in the 2018 Form 10-K.
Investment Securities

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

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








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Table of Contents

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16)
On October 25, 2018, the 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 are effective prospectively for qualifying new or re-designated hedging relationships entered into on or after January 1, 2019. The Bank adopted this guidance on January 1, 2019, however, the Bank did not implement any new SOFR OIS hedge strategies. It will continue to assess opportunities to expand its eligible hedge strategies in the future.
Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in OCI. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.
Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk.
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate.
This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019. This guidance did not affect the Bank’s application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul method for its short-cut hedge strategies, which did not impact the Bank’s financial condition, results of operations or cash flows. This guidance prospectively affected the Bank’s income statement presentation for fair value hedge relationships and required certain new disclosures. Prior period comparative financial information was not reclassified to conform to current presentation. The impact of recording changes in fair value of the derivative hedging instrument and the hedged item for designated fair value hedges in the same line as the earnings effect of the hedged item increased net interest income by less than $1 million for the three months ended March 31, 2019; however, it had no impact on total net income reported for the period. The Bank will continue to assess opportunities enabled by the new guidance to expand its risk management strategies.
Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)

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


12

Table of Contents

Leases (ASU 2016-02)

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

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

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

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Table of Contents

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

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

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

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

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

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



14

Table of Contents

Note 3 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in millions):
 
March 31,
2019
 
December 31,
2018
Non-mortgage-backed securities
 
 
 
U.S. obligations1
$
155

 
$
159

GSE and Tennessee Valley Authority obligations
59

 
57

Other2
268

 
266

     Total non-mortgage-backed securities
482

 
482

Mortgage-backed securities
 
 
 
GSE multifamily
436

 
433

Total fair value
$
918

 
$
915


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

2
Consists of taxable municipal bonds.

NET GAINS (LOSSES) ON TRADING SECURITIES

The Bank did not sell any trading securities during the three months ended March 31, 2019 and 2018. During the three months ended March 31, 2019 and 2018, the Bank recorded net holding gains of $10 million and net holding losses of $16 million on its trading securities.


15

Table of Contents

Note 4 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in millions):
 
March 31, 2019
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations2
$
2,489

 
$
7

 
$
(1
)
 
$
2,495

GSE and Tennessee Valley Authority obligations
1,030

 
24

 

 
1,054

State or local housing agency obligations
819

 

 
(7
)
 
812

Other3
268

 
11

 

 
279

Total non-mortgage-backed securities
4,606

 
42

 
(8
)
 
4,640

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
4,379

 
22

 
(2
)
 
4,399

GSE single-family
761

 
5

 
(2
)
 
764

GSE multifamily
8,659

 
39

 
(8
)
 
8,690

Total mortgage-backed securities
13,799

 
66

 
(12
)
 
13,853

Total
$
18,405

 
$
108

 
$
(20
)
 
$
18,493


 
December 31, 2018
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

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

 
$
8

 
$
(3
)
 
$
2,602

GSE and Tennessee Valley Authority obligations
1,012

 
26

 

 
1,038

State or local housing agency obligations
820

 

 
(6
)
 
814

Other3
264

 
11

 

 
275

Total non-mortgage-backed securities
4,693

 
45

 
(9
)
 
4,729

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

 
25

 
(1
)
 
4,483

GSE single-family
794

 
6

 
(4
)
 
796

GSE multifamily
8,986

 
36

 
(11
)
 
9,011

Total mortgage-backed securities
14,239

 
67

 
(16
)
 
14,290

Total
$
18,932

 
$
112

 
$
(25
)
 
$
19,019



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

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

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



16

Table of Contents

UNREALIZED LOSSES

The following tables summarize AFS securities with unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
March 31, 2019
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations1
$
747

 
$
(1
)
 
$
300

 
$

 
$
1,047

 
$
(1
)
State or local housing agency obligations
139

 

 
510

 
(7
)
 
649

 
(7
)
Total non-mortgage-backed securities
886

 
(1
)
 
810

 
(7
)
 
1,696

 
(8
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
653

 
(2
)
 

 

 
653

 
(2
)
GSE single-family
119

 

 
203

 
(2
)
 
322

 
(2
)
GSE multifamily
1,493

 
(2
)
 
2,132

 
(6
)
 
3,625

 
(8
)
Total mortgage-backed securities
2,265

 
(4
)
 
2,335

 
(8
)
 
4,600

 
(12
)
Total
$
3,151

 
$
(5
)
 
$
3,145

 
$
(15
)
 
$
6,296

 
$
(20
)

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

 
$
(1
)