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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Shares outstanding as of July 31, 2019
 
Class B Stock, par value $100
 
49,273,564
 
 
 
 
 
 
 
 
 




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)
 
 
June 30,
2019
 
December 31,
2018
ASSETS
 
 
 
 
Cash and due from banks
 
$
218

 
$
119

Interest-bearing deposits
 
1

 
1

Securities purchased under agreements to resell
 
9,450

 
4,700

Federal funds sold
 
8,100

 
4,150

Investment securities
 
 
 
 
Trading securities (Note 3)
 
931

 
915

Available-for-sale securities (Note 4)
 
17,896

 
19,019

Held-to-maturity securities (fair value of $2,825 and $3,021) (Note 5)
 
2,762

 
2,992

Total investment securities
 
21,589

 
22,926

Advances (Note 7)
 
101,288

 
106,323

Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1 (Notes 8 and 9)
 
8,324

 
7,835

Accrued interest receivable
 
304

 
290

Derivative assets, net (Note 10)
 
87

 
58

Other assets
 
113

 
113

TOTAL ASSETS
 
$
149,474

 
$
146,515

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
1,038

 
$
976

Non-interest-bearing
 
101

 
94

Total deposits
 
1,139

 
1,070

Consolidated obligations (Note 11)
 
 
 
 
Discount notes
 
36,934

 
42,879

Bonds
 
103,223

 
93,772

Total consolidated obligations
 
140,157

 
136,651

Borrowings from other FHLBanks
 

 
500

Mandatorily redeemable capital stock (Note 12)
 
203

 
255

Accrued interest payable
 
285

 
268

Affordable Housing Program payable
 
158

 
153

Derivative liabilities, net (Note 10)
 
2

 
9

Other liabilities
 
53

 
61

TOTAL LIABILITIES
 
141,997

 
138,967

Commitments and contingencies (Note 14)
 

 

CAPITAL (Note 12)
 
 
 
 
Capital stock - Class B putable ($100 par value); 53 and 54 issued and outstanding shares
 
5,304

 
5,414

Retained earnings
 
 
 
 
Unrestricted
 
1,652

 
1,623

Restricted
 
468

 
427

Total retained earnings
 
2,120

 
2,050

Accumulated other comprehensive income (loss)
 
53

 
84

TOTAL CAPITAL
 
7,477

 
7,548

TOTAL LIABILITIES AND CAPITAL
 
$
149,474

 
$
146,515

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

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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
INTEREST INCOME
 
 
 
 
 
 
 
 
Advances
 
$
713

 
$
626

 
$
1,428

 
$
1,128

Interest-bearing deposits
 
1

 
1

 
1

 
1

Securities purchased under agreements to resell
 
50

 
16

 
82

 
28

Federal funds sold
 
42

 
22

 
85

 
45

Trading securities
 
7

 
8

 
15

 
16

Available-for-sale securities
 
133

 
122

 
276

 
232

Held-to-maturity securities
 
22

 
22

 
44

 
43

Mortgage loans held for portfolio
 
70

 
61

 
139

 
121

Total interest income
 
1,038

 
878


2,070

 
1,614

INTEREST EXPENSE
 
 
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
247

 
170

 
518

 
294

Consolidated obligations - Bonds
 
636

 
534

 
1,231

 
982

Deposits
 
4

 
2

 
8

 
5

Mandatorily redeemable capital stock
 
4

 
5

 
7

 
9

Total interest expense
 
891

 
711


1,764

 
1,290

NET INTEREST INCOME
 
147

 
167


306

 
324

OTHER INCOME (LOSS)
 
 
 
 
 
 
 
 
Net gains (losses) on trading securities
 
18

 
(8
)
 
28

 
(24
)
Net gains (losses) on derivatives and hedging activities
 
(21
)
 
14

 
(33
)
 
34

Other, net
 
6

 
2

 
13

 
6

Total other income (loss)
 
3


8


8

 
16

OTHER EXPENSE
 
 
 
 
 
 
 
 
Compensation and benefits
 
16

 
14

 
32

 
31

Contractual services
 
4

 
3

 
8

 
6

Professional fees
 
8

 
4

 
15

 
7

Other operating expenses
 
9

 
6

 
16

 
11

Federal Housing Finance Agency
 
3

 
3

 
5

 
5

Office of Finance
 
1

 
1

 
3

 
3

Other, net
 
2

 
1

 
3

 
2

Total other expense
 
43

 
32


82

 
65

NET INCOME BEFORE ASSESSMENTS
 
107

 
143


232


275

Affordable Housing Program assessments
 
11

 
14

 
24

 
28

NET INCOME
 
$
96

 
$
129


$
208


$
247

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

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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
For the Six Months Ended
 
 
June 30,
 
June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
96

 
$
129

 
$
208

 
$
247

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
(32
)
 
(17
)
 
(31
)
 
28

Total other comprehensive income (loss)
 
(32
)
 
(17
)

(31
)

28

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
64

 
$
112


$
177


$
275

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
STATEMENTS OF CAPITAL
(dollars and shares in millions)
(Unaudited)


 
Capital Stock Class B (putable)
 
Shares
 
Par Value
BALANCE, MARCH 31, 2018
54

 
$
5,372

Comprehensive income (loss)

 

Proceeds from issuance of capital stock
20

 
2,002

Repurchases/redemptions of capital stock
(20
)
 
(1,918
)
Net shares reclassified (to) from mandatorily redeemable capital stock

 
(36
)
Cash dividends on capital stock

 

BALANCE, JUNE 30, 2018
54

 
$
5,420

 
 
 
 
BALANCE, MARCH 31, 2019
52

 
$
5,182

Comprehensive income (loss)

 

Proceeds from issuance of capital stock
19

 
1,958

Repurchases/redemptions of capital stock
(18
)
 
(1,833
)
Net shares reclassified (to) from mandatorily redeemable capital stock

 
(3
)
Cash dividends on capital stock

 

BALANCE, JUNE 30, 2019
53

 
$
5,304

 
 
 
 
BALANCE, DECEMBER 31, 2017
51

 
$
5,068

Comprehensive income (loss)

 

Proceeds from issuance of capital stock
40

 
4,015

Repurchases/redemptions of capital stock
(37
)
 
(3,624
)
Net shares reclassified (to) from mandatorily redeemable capital stock

 
(39
)
Cash dividends on capital stock

 

BALANCE, JUNE 30, 2018
54

 
$
5,420

 
 
 
 
BALANCE, DECEMBER 31, 2018
54

 
$
5,414

Comprehensive income (loss)

 

Proceeds from issuance of capital stock
35

 
3,509

Repurchases/redemptions of capital stock
(36
)
 
(3,614
)
Net shares reclassified (to) from mandatorily redeemable capital stock

 
(5
)
Cash dividends on capital stock

 

BALANCE, JUNE 30, 2019
53

 
$
5,304

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
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, MARCH 31, 2018
 
$
1,546

 
$
358

 
$
1,904

 
$
159

 
$
7,435

Comprehensive income (loss)
 
103

 
26

 
129

 
(17
)
 
112

Proceeds from issuance of capital stock
 

 

 

 

 
2,002

Repurchases/redemptions of capital stock
 

 

 

 

 
(1,918
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 
(36
)
Cash dividends on capital stock
 
(56
)
 

 
(56
)
 

 
(56
)
BALANCE, JUNE 30, 2018
 
$
1,593

 
$
384

 
$
1,977

 
$
142

 
$
7,539

 
 
 
 
 
 
 
 
 
 
 
BALANCE, MARCH 31, 2019
 
$
1,643

 
$
449

 
$
2,092

 
$
85

 
$
7,359

Comprehensive income (loss)
 
77

 
19

 
96

 
(32
)
 
64

Proceeds from issuance of capital stock
 

 

 

 

 
1,958

Repurchases/redemptions of capital stock
 

 

 

 

 
(1,833
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 
(3
)
Cash dividends on capital stock
 
(68
)
 

 
(68
)
 

 
(68
)
BALANCE, JUNE 30, 2019
 
$
1,652

 
$
468

 
$
2,120

 
$
53

 
$
7,477

 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2017
 
$
1,504

 
$
335

 
$
1,839

 
$
114

 
$
7,021

Comprehensive income (loss)
 
198

 
49

 
247

 
28

 
275

Proceeds from issuance of capital stock
 

 

 

 

 
4,015

Repurchases/redemptions of capital stock
 

 

 

 

 
(3,624
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 
(39
)
Cash dividends on capital stock
 
(109
)
 

 
(109
)
 

 
(109
)
BALANCE, JUNE 30, 2018
 
$
1,593

 
$
384

 
$
1,977

 
$
142

 
$
7,539

 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2018
 
$
1,623

 
$
427

 
$
2,050

 
$
84

 
$
7,548

Comprehensive income (loss)
 
167

 
41

 
208

 
(31
)
 
177

Proceeds from issuance of capital stock
 

 

 

 

 
3,509

Repurchases/redemptions of capital stock
 

 

 

 

 
(3,614
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 
(5
)
Cash dividends on capital stock
 
(138
)
 

 
(138
)
 

 
(138
)
BALANCE, JUNE 30, 2019
 
$
1,652

 
$
468

 
$
2,120

 
$
53

 
$
7,477

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
STATEMENTS OF CASH FLOWS
(dollars in millions)
(Unaudited)
 
 
For the Six Months Ended
 
 
June 30,
 
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
208

 
$
247

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
Depreciation and amortization
 
(23
)
 
18

Net (gains) losses on trading securities
 
(28
)
 
24

Net change in derivatives and hedging activities
 
(63
)
 
87

Other adjustments
 

 
1

Net change in:
 
 
 
 
Accrued interest receivable
 
(74
)
 
(121
)
Other assets
 
(4
)
 
2

Accrued interest payable
 
17

 
27

Other liabilities
 
1

 
15

Total adjustments
 
(174
)
 
53

Net cash provided by (used in) operating activities
 
34

 
300

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(131
)
 
63

Securities purchased under agreements to resell
 
(4,750
)
 
(300
)
Federal funds sold
 
(3,950
)
 
(185
)
Trading securities
 
 
 
 
Proceeds from maturities
 
12

 
215

Available-for-sale securities
 
 
 
 
Proceeds from maturities
 
1,381

 
1,703

Purchases
 

 
(497
)
Held-to-maturity securities
 
 
 
 
Proceeds from maturities
 
225

 
344

Advances
 
 
 
 
Repaid
 
136,800

 
149,512

Originated or purchased
 
(131,486
)
 
(157,016
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
518

 
445

Originated or purchased
 
(1,012
)
 
(669
)
Other investing activities
 
(5
)
 
(8
)
Net cash provided by (used in) investing activities
 
(2,398
)
 
(6,393
)
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
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
(Unaudited)
 
 
For the Six Months Ended
 
 
June 30,
 
 
2019
 
2018
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
32

 
(11
)
Borrowings from other FHLBanks
 
(500
)
 
(600
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
68,769

 
91,697

Bonds
 
37,497

 
21,052

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(74,683
)
 
(85,275
)
Bonds
 
(28,352
)
 
(21,303
)
Proceeds from issuance of capital stock
 
3,509

 
4,015

Payments for repurchases/redemptions of capital stock
 
(3,614
)
 
(3,624
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(57
)
 
(51
)
Cash dividends paid
 
(138
)
 
(109
)
Net cash provided by (used in) financing activities
 
2,463

 
5,791

Net increase (decrease) in cash and due from banks
 
99

 
(302
)
Cash and due from banks at beginning of the period
 
119

 
503

Cash and due from banks at end of the period
 
$
218

 
$
201

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
1,775

 
$
1,249

Affordable Housing Program payments
 
19

 
16

Non-Cash Transactions:
 
 
 
 
Capitalized interest on reverse mortgage investment securities
 
65

 
39

Transfers of mortgage loans to other assets
 
1

 
3

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
5

 
39

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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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, 2018, which are contained in the Bank’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 15, 2019 (2018 Form 10-K).

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

Reclassifications

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

SIGNIFICANT ACCOUNTING POLICIES

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

Investment Securities

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

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








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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 Financial Accounting Standards Board (FASB) issued amended guidance to include the SOFR OIS rate as a U.S. benchmark interest rate for hedge accounting purposes. Including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will facilitate the London Interbank Offered Rate (LIBOR) to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate, and are effective prospectively for qualifying new or re-designated hedging relationships entered into on or after January 1, 2019. The Bank adopted this guidance on January 1, 2019, however, the Bank did not implement any new SOFR OIS hedge strategies. It will continue to assess opportunities to expand its eligible hedge strategies in the future.
Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)
On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income (OCI). In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.
Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk.
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate.
This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019. This guidance did not affect the Bank’s application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul method for its short-cut hedge strategies, which did not impact the Bank’s financial condition, results of operations or cash flows. This guidance prospectively affected the Bank’s income statement presentation for fair value hedge relationships and required certain new disclosures. Prior period comparative financial information was not reclassified to conform to current presentation. The impact of recording changes in fair value of the derivative hedging instrument and the hedged item for designated fair value hedges in the same line as the earnings effect of the hedged item decreased net interest income by $2 million for both the three and six months ended June 30, 2019; however, it had no impact on total net income reported for the period. The Bank will continue to assess opportunities enabled by the new guidance to expand its risk management strategies.
Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)

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


12

Table of Contents

Leases (ASU 2016-02)

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

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

ISSUED ACCOUNTING GUIDANCE
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15)
On August 29, 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance.
The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance outlined in ASC Topic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. They require the customer to expense the capitalized implementation costs over the term of the hosting arrangement. The amendments also require the customer to present the expense in the same line item in the statement of income a