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fhlbdm:WellsFargoBankN.A.Member 2020-01-01 2020-03-31 0001325814 us-gaap:PrincipalOwnerMember 2020-01-01 2020-03-31 0001325814 srt:FederalHomeLoanBankOfAtlantaMember 2019-01-01 2019-03-31 0001325814 srt:FederalHomeLoanBankOfAtlantaMember 2019-03-31 0001325814 srt:FederalHomeLoanBankOfAtlantaMember 2018-12-31 0001325814 srt:FederalHomeLoanBankOfBostonMember 2019-12-31 0001325814 srt:FederalHomeLoanBankOfBostonMember 2020-03-31 0001325814 srt:FederalHomeLoanBankOfBostonMember 2020-01-01 2020-03-31 xbrli:shares iso4217:USD iso4217:USD xbrli:shares fhlbdm:bank xbrli:pure fhlbdm:Institutions
 
 
 
 
 
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 March 31, 2020
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 April 30, 2020
 
Class B Stock, par value $100
 
42,192,609
 
 
 
 
 
 
 
 
 



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,
2020
 
December 31,
2019
ASSETS
 
 
 
 
Cash and due from banks
 
$
611

 
$
1,029

Interest-bearing deposits (Note 3)
 
1

 
1

Securities purchased under agreements to resell (Note 3)
 
6,550

 
13,950

Federal funds sold (Note 3)
 
8,935

 
4,605

Investment securities (Note 3)
 
 
 
 
Trading securities
 
1,728

 
888

Available-for-sale securities (amortized cost of $16,282 and $16,603)
 
16,166

 
16,651

Held-to-maturity securities (fair value of $2,346 and $2,439)
 
2,254

 
2,370

Total investment securities
 
20,148

 
19,909

Advances (Note 4)
 
79,757

 
80,360

Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1 (Note 5)
 
9,546

 
9,334

Accrued interest receivable
 
179

 
195

Derivative assets, net (Note 6)
 
233

 
102

Other assets
 
108

 
118

TOTAL ASSETS
 
$
126,068

 
$
129,603

LIABILITIES
 
 
 
 
Deposits
 
 
 
 
Interest-bearing
 
$
1,076

 
$
987

Non-interest-bearing
 
191

 
125

Total deposits
 
1,267

 
1,112

Consolidated obligations (Note 7)
 
 
 
 
Discount notes
 
33,071

 
29,531

Bonds
 
84,266

 
91,553

Total consolidated obligations
 
117,337

 
121,084

Mandatorily redeemable capital stock (Note 8)
 
96

 
206

Accrued interest payable
 
258

 
252

Affordable Housing Program payable
 
161

 
157

Derivative liabilities, net (Note 6)
 
9

 
1

Other liabilities
 
207

 
65

TOTAL LIABILITIES
 
119,335

 
122,877

Commitments and contingencies (Note 10)
 

 

CAPITAL (Note 8)
 
 
 
 
Capital stock - Class B putable ($100 par value); 47 and 45 issued and outstanding shares
 
4,653

 
4,517

Retained earnings
 
 
 
 
Unrestricted
 
1,677

 
1,661

Restricted
 
522

 
504

Total retained earnings
 
2,199

 
2,165

Accumulated other comprehensive income (loss)
 
(119
)
 
44

TOTAL CAPITAL
 
6,733

 
6,726

TOTAL LIABILITIES AND CAPITAL
 
$
126,068

 
$
129,603

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,
 
 
2020
 
2019
INTEREST INCOME
 
 
 
 
Advances
 
$
399

 
$
715

Interest-bearing deposits
 
1

 
—

Securities purchased under agreements to resell
 
30

 
32

Federal funds sold
 
27

 
43

Trading securities
 
9

 
8

Available-for-sale securities
 
75

 
143

Held-to-maturity securities
 
14

 
22

Mortgage loans held for portfolio
 
78

 
69

Total interest income
 
633

 
1,032

INTEREST EXPENSE
 
 
 
 
Consolidated obligations - Discount notes
 
110

 
271

Consolidated obligations - Bonds
 
410

 
595

Deposits
 
1

 
4

Mandatorily redeemable capital stock
 
3

 
3

Total interest expense
 
524

 
873

NET INTEREST INCOME
 
109

 
159

OTHER INCOME (LOSS)
 
 
 
 
Net gains (losses) on trading securities
 
26

 
10

Net gains (losses) on derivatives and hedging activities
 
(48
)
 
(12
)
Gains on litigation settlements, net
 
56

 
—

Other, net
 
2

 
7

Total other income (loss)
 
36


5

OTHER EXPENSE
 
 
 
 
Compensation and benefits
 
18

 
16

Contractual services
 
4

 
4

Professional fees
 
8

 
7

Other operating expenses
 
6

 
7

Federal Housing Finance Agency
 
3

 
2

Office of Finance
 
2

 
2

Other, net
 
2

 
1

Total other expense
 
43

 
39

NET INCOME BEFORE ASSESSMENTS
 
102

 
125

Affordable Housing Program assessments
 
10

 
13

NET INCOME
 
$
92

 
$
112

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,
 
 
2020
 
2019
Net income
 
$
92

 
$
112

Other comprehensive income (loss)
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
(164
)
 
1

Pension and postretirement benefits
 
1

 
—

Total other comprehensive income (loss)
 
(163
)
 
1

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
(71
)
 
$
113

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, 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

 
 
 
 
BALANCE, DECEMBER 31, 2019
45

 
$
4,517

Adjustment for cumulative effect of accounting change (Note 2)
—

 
—

Comprehensive income (loss)
—

 
—

Proceeds from issuance of capital stock
21

 
2,074

Repurchases/redemptions of capital stock
(19
)
 
(1,932
)
Net shares reclassified (to) from mandatorily redeemable capital stock
—

 
(6
)
Cash dividends on capital stock
—

 
—

BALANCE, MARCH 31, 2020
47

 
$
4,653

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, 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

 
 
 
 
 
 
 
 
 
 
 
BALANCE, DECEMBER 31, 2019
 
$
1,661

 
$
504

 
$
2,165

 
$
44

 
$
6,726

Adjustment for cumulative effect of accounting change (Note 2)
 
1

 
—

 
1

 
—

 
1

Comprehensive income (loss)
 
74

 
18

 
92

 
(163
)
 
(71
)
Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
2,074

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(1,932
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
(6
)
Cash dividends on capital stock
 
(59
)
 
—

 
(59
)
 
—

 
(59
)
BALANCE, MARCH 31, 2020
 
$
1,677

 
$
522

 
$
2,199

 
$
(119
)
 
$
6,733

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


7
Table of Contents

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
(Unaudited)
 
 
For the Three Months Ended
 
 
March 31,
 
 
2020
 
2019
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
92

 
$
112

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
Depreciation and amortization
 
(6
)
 
16

Net (gains) losses on trading securities
 
(26
)
 
(10
)
Net change in derivatives and hedging activities
 
(262
)
 
(33
)
Other adjustments
 
6

 
—

Net change in:
 
 
 
 
Accrued interest receivable
 
(7
)
 
(52
)
Other assets
 
10

 
(2
)
Accrued interest payable
 
5

 
32

Other liabilities
 
2

 
(3
)
Total adjustments
 
(278
)
 
(52
)
Net cash provided by (used in) operating activities
 
(186
)
 
60

INVESTING ACTIVITIES
 
 
 
 
Net change in:
 
 
 
 
Interest-bearing deposits
 
(346
)
 
(29
)
Securities purchased under agreements to resell
 
7,400

 
(3,300
)
Federal funds sold
 
(4,330
)
 
(3,835
)
Trading securities
 
 
 
 
Proceeds from maturities
 
57

 
8

Purchases
 
(871
)
 
—

Available-for-sale securities
 
 
 
 
Proceeds from maturities
 
772

 
640

Held-to-maturity securities
 
 
 
 
Proceeds from maturities
 
113

 
115

Advances
 
 
 
 
Repaid
 
79,358

 
67,845

Originated
 
(78,332
)
 
(60,649
)
Mortgage loans held for portfolio
 
 
 
 
Principal collected
 
357

 
216

Purchased
 
(571
)
 
(327
)
Other investing activities, net
 
(2
)
 
(2
)
Net cash provided by (used in) investing activities
 
3,605

 
682

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

8
Table of Contents

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,
 
 
2020
 
2019
FINANCING ACTIVITIES
 
 
 
 
Net change in deposits
 
155

 
(142
)
Borrowings from other FHLBanks
 
—

 
(500
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
Discount notes
 
32,197

 
37,073

Bonds
 
17,706

 
14,926

Payments for maturing and retiring consolidated obligations
 
 
 
 
Discount notes
 
(28,645
)
 
(34,973
)
Bonds
 
(25,217
)
 
(16,844
)
Proceeds from issuance of capital stock
 
2,074

 
1,551

Proceeds from issuance of mandatorily redeemable capital stock
 
19

 
1

Payments for repurchases/redemptions of capital stock
 
(1,932
)
 
(1,781
)
Payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(135
)
 
(21
)
Cash dividends paid
 
(59
)
 
(70
)
Net cash provided by (used in) financing activities
 
(3,837
)
 
(780
)
Net increase (decrease) in cash and due from banks
 
(418
)
 
(38
)
Cash and due from banks at beginning of the period
 
1,029

 
119

Cash and due from banks at end of the period
 
$
611

 
$
81

 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
Cash Transactions:
 
 
 
 
Interest paid
 
$
569

 
$
853

Affordable Housing Program payments
 
6

 
7

Non-Cash Transactions:
 
 
 
 
Capitalized interest on reverse mortgage investment securities
 
22

 
32

Traded but not yet settled investment security purchases
 
139

 
—

Transfers of mortgage loans to other assets
 
—

 
1

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
6

 
2

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 certain employer payroll 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 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.




10
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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, 2019, which are contained in the Bank’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 11, 2020 (2019 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, 2020.

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank’s significant accounting policies during the three months ended March 31, 2020, 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 2019 Form 10-K.

Beginning January 1, 2020, the Bank adopted new accounting guidance pertaining to the measurement of credit losses on financial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as available-for-sale securities to be recorded through an allowance for credit losses. Upon adoption of this guidance, the Bank recorded a $1 million decrease in its allowance for credit losses on mortgage loans through a cumulative effect adjustment to retained earnings. See “Note 2 — Recently Adopted and Issued Accounting Guidance” for additional information. The new guidance is summarized below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. See “Note 1 — Summary of Significant Accounting Policies” in the 2019 Form 10-K for information on the prior accounting treatment.

Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold

The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold. These investments provide short-term liquidity and are carried at amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition.

These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The Bank uses the collateral maintenance provision practical expedient for securities purchased under agreements to resell. Consequently, a credit loss would be recognized if there is a collateral shortfall which the Bank does not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s amortized cost. See “Note 3 — Investments” for details on the allowance methodologies relating to these investments.

Investment Securities

Available for Sale. For securities classified as available-for-sale (AFS), the Bank evaluates an individual security for impairment on a quarterly basis by comparing the security’s fair value to its amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition. Impairment exists when the fair value of the investment is less than its amortized cost (i.e. in an unrealized loss position). In assessing whether a credit loss exists on an impaired security, the Bank considers whether there would be a shortfall in receiving all cash flows contractually due. When a shortfall is considered possible, the Bank compares the present value of cash flows to be collected from the security with the amortized cost basis of the security. If the present value of cash flows is less than amortized cost, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance is limited by the amount of the unrealized loss. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately, if applicable.


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If management intends to sell an impaired security classified as AFS, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in other income (loss). If management does not intend to sell an impaired security classified as AFS and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to “Net unrealized gains (losses) on available-for-sale securities” within accumulated other comprehensive income (loss) (AOCI). Prior to January 1, 2020, credit losses, if applicable, were recorded as a direct write-down of the AFS security carrying value.

Held-to-Maturity. Securities that the Bank has both the ability and intent to hold to maturity are classified as held-to-maturity (HTM) and are carried at amortized cost, which represents the amount at which an investment is acquired, adjusted for periodic principal repayments, amortization of premiums, and accretion of discounts. Accrued interest receivable is recorded separately on the Statements of Condition.

HTM securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. An allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately, if applicable. Prior to January 1, 2020, credit losses, if applicable, were recorded as a direct write-down of the HTM security carrying value.

See “Note 3 — Investments” for details on the allowance methodologies relating to AFS and HTM securities.

Advances

Advances (secured loans to members, former members, or eligible housing associates) are carried at amortized cost,
which is net of premiums, discounts, and fair value hedging adjustments unless the Bank has elected the fair value option (FVO), in which case, the advances are carried at fair value. For advances carried at amortized cost, accrued interest receivable is recorded separately on the Statements of Condition. The advances carried at amortized cost are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. See “Note 4 — Advances” for details on the allowance methodology relating to advances.

Mortgage Loans Held for Portfolio

The Bank classifies mortgage loans that it has the intent and ability to hold for the foreseeable future, or until maturity or payoff, as held for portfolio. Accordingly, these mortgage loans are reported net of premiums, discounts, basis adjustments from mortgage loan purchase commitments, charge-offs, and the allowance for credit losses. The Bank records interest on mortgage loans to interest income as earned. The Bank amortizes/accretes premiums, discounts, and basis adjustments on mortgage loan purchase commitments to income using the level-yield method over the contractual life of the mortgage loans. Accrued interest receivable is recorded separately on the Statements of Condition.

The Bank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses.

The Bank measures expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis. When developing the allowance for credit losses, the Bank measures the estimated loss over the remaining life of a mortgage loan, which also considers how the Bank’s credit enhancements mitigate credit losses. The allowance excludes uncollectible accrued interest receivable, as the Bank writes off accrued interest receivable by reversing interest income if a mortgage loan is placed on nonaccrual status.

The Bank does not purchase mortgage loans with credit deterioration present at the time of purchase. The Bank includes estimates of expected recoveries within the allowance for credit losses. See “Note 5 — Mortgage Loans” for details on the allowance methodology relating to mortgage loans.


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Off-Balance Sheet Credit Exposures

The Bank evaluates its off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision (reversal) for credit losses. See “Note 10 — Commitments and Contingencies” for additional information.

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED 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 Financial Accounting Standards Board (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 on the statement of income as the fees associated with the hosting element (service) and classify payments for capitalized implementation costs on 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 on 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 became effective for the Bank for the interim and annual periods beginning on January 1, 2020, and was adopted on a prospective basis. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows.
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 became effective for the Bank for the interim and annual periods beginning on January 1, 2020. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it reduced certain disclosures.
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).

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The FASB issued subsequent amendments 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 became effective for the Bank for the interim and annual periods beginning on January 1, 2020 and was adopted on a modified retrospective basis. Upon adoption, the Bank recorded no credit losses on its advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products) as well as its investment portfolio. For its mortgage loans held for portfolio, the Bank recorded a $1 million decrease in its allowance for credit losses through a cumulative effect adjustment to retained earnings on January 1, 2020. This decrease was attributable to recoveries on mortgage loans that were previously written down and have had their collateral values subsequently improve, partially offset by the incorporation of lifetime credit losses on its mortgage loan portfolio.

ISSUED ACCOUNTING GUIDANCE
Reference Rate Reform (ASU 2020-04)
On March 12, 2020, the FASB issued guidance to provide temporary optional expedients and exceptions to GAAP on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). Entities can elect to not apply certain modification accounting requirements to contracts affected by rate reform, if certain criteria are met. Additionally, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform. Lastly, entities can make a one-time election to sell and/or transfer to AFS or trading any HTM debt securities that refer to an interest rate affected by reference rate reform and were classified as HTM before January 1, 2020.

This guidance becomes effective for the Bank upon election of any of the amendments and will be applied prospectively from the date elected until December 31, 2022. For certain hedge accounting optional expedients, they will be applied through the end of the hedging relationship, which could extend beyond December 31, 2022. 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.
Note 3 — Investments

The Bank makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold and may make other investments in debt securities, which are classified as either trading, AFS, or HTM.

INTEREST-BEARING DEPOSITS, SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, AND FEDERAL FUNDS SOLD

The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received a credit rating of triple-B or greater (investment grade) by a Nationally Recognized Statistical Rating Organization (NRSRO). At March 31, 2020, none of these investments were with counterparties rated below triple-B; however, approximately 42 percent were secured securities purchased under agreements to resell with unrated counterparties. These may differ from any internal ratings of the investments by the Bank.

Federal funds sold are unsecured loans that are generally transacted on an overnight term. Finance Agency regulations include a limit on the amount of unsecured credit the Bank may extend to a counterparty. At March 31, 2020 and December 31, 2019, no allowance for credit losses was recorded for interest-bearing deposits and Federal funds sold as all assets were repaid or expected to be repaid according to their contractual terms. Carrying values of interest-bearing deposits and Federal funds sold excluded accrued interest receivable of less than $1 million as of March 31, 2020 and December 31, 2019.


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Securities purchased under agreements to resell are secured, short-term and are structured such that they are evaluated regularly to determine if the market value of the underlying securities decreases below the market value required as collateral (i.e. subject to collateral maintenance provisions). If so, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash, generally by the next business day. Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at March 31, 2020 and December 31, 2019. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of less than $1 million and $2 million as of March 31, 2020 and December 31, 2019.

DEBT SECURITIES

The Bank invests in debt securities, which are classified as either trading, AFS, or HTM. Within these investments, the Bank is subject to credit risk related to private-label (MBS) that are supported by underlying mortgage or asset-backed loans. The Bank is prohibited by Finance Agency regulations from purchasing certain higher-risk securities, such as equity securities and debt instruments that are not investment quality. Exceptions are allowed for certain investments targeted at low-income persons or communities, and instruments that experience credit deterioration after their purchase by the Bank.

Trading Securities

Trading securities by major security type were as follows (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Non-mortgage-backed securities
 
 
 
U.S. Treasury obligations
$
873

 
$
—

Other U.S. obligations1
140

 
150

GSE and Tennessee Valley Authority obligations
64

 
60

Other2
262

 
259

     Total non-mortgage-backed securities
1,339

 
469

Mortgage-backed securities
 
 
 
GSE multifamily
389

 
419

Total fair value
$
1,728

 
$
888


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, 2020 and 2019. During the three months ended March 31, 2020 and 2019, the Bank recorded net holding gains of $26 million and $10 million on its trading securities.


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Table of Contents

AFS Securities

AFS securities by major security type were as follows (dollars in millions):
 
March 31, 2020
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
2,000

 
$
2

 
$
(27
)
 
$
1,975

GSE and Tennessee Valley Authority obligations
1,118

 
5

 
(16
)
 
1,107

State or local housing agency obligations
761

 
—

 
(1
)
 
760

Other3
292

 
1

 
(1
)
 
292

Total non-mortgage-backed securities
4,171

 
8

 
(45
)
 
4,134

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
3,917

 
1

 
(26
)
 
3,892

GSE single-family
609

 
3

 
(3
)
 
609

GSE multifamily
7,585

 
2

 
(56
)
 
7,531

Total mortgage-backed securities
12,111

 
6

 
(85
)
 
12,032

Total
$
16,282

 
$
14

 
$
(130
)
 
$
16,166


 
December 31, 2019
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
2,122

 
$
6

 
$
(1
)
 
$
2,127

GSE and Tennessee Valley Authority obligations
1,034

 
26

 
—

 
1,060

State or local housing agency obligations
761

 
—

 
(5
)
 
756

Other3
276

 
9

 
—

 
285

Total non-mortgage-backed securities
4,193

 
41

 
(6
)
 
4,228

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
4,044

 
17

 
(2
)
 
4,059

GSE single-family
646

 
4

 
(1
)
 
649

GSE multifamily
7,720

 
13

 
(18
)
 
7,715

Total mortgage-backed securities
12,410

 
34

 
(21
)
 
12,423

Total
$
16,603

 
$
75

 
$
(27
)
 
$
16,651



1
Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of $33 million and $42 million at March 31, 2020 and December 31, 2019.

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.



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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, 2020
 
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
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations1
$
998

 
$
(15
)
 
$
818

 
$
(12
)
 
$
1,816

 
$
(27
)
GSE and Tennessee Valley Authority obligations
326

 
(16
)
 
—

 
—

 
326

 
(16
)
State or local housing agency obligations
210

 
—

 
314

 
(1
)
 
524

 
(1
)
Other
128

 
(1
)
 
—

 
—

 
128

 
(1
)
Total non-mortgage-backed securities
1,662

 
(32
)
 
1,132

 
(13
)
 
2,794

 
(45
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
3,052

 
(19
)
 
558

 
(7
)
 
3,610

 
(26
)
GSE single-family
212

 
(1
)
 
98

 
(2
)
 
310

 
(3
)
GSE multifamily
4,811

 
(42
)
 
2,486

 
(14
)
 
7,297

 
(56
)
Total mortgage-backed securities
8,075

 
(62
)
 
3,142

 
(23
)
 
11,217

 
(85
)
Total
$
9,737

 
$
(94
)
 
$
4,274

 
$
(36
)
 
$
14,011

 
$
(130
)

 
December 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
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations1
$
196

 
$
—

 
$
706

 
$
(1
)
 
$
902

 
$
(1
)
State or local housing agency obligations
57

 
—

 
344

 
(5
)
 
401

 
(5
)
Total non-mortgage-backed securities
253

 
—

 
1,050

 
(6
)
 
1,303

 
(6
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
169

 
—

 
564

 
(2
)
 
733

 
(2
)
GSE single-family
133

 
—

 
104

 
(1
)
 
237

 
(1
)
GSE multifamily
2,001

 
(8
)
 
2,766

 
(10
)
 
4,767

 
(18
)
Total mortgage-backed securities
2,303

 
(8
)
 
3,434

 
(13
)
 
5,737

 
(21
)
Total
$
2,556

 
$
(8
)
 
$
4,484

 
$
(19
)
 
$
7,040

 
$
(27
)


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




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Table of Contents

Contractual Maturity

The following table summarizes AFS securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
March 31, 2020
 
December 31, 2019
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
92

 
$
92

 
$
92

 
$
92

Due after one year through five years
 
2,104

 
2,096

 
2,099

 
2,110

Due after five years through ten years
 
1,200

 
1,187

 
1,294

 
1,302

Due after ten years
 
775

 
759

 
708

 
724

Total non-mortgage-backed securities
 
4,171

 
4,134

 
4,193

 
4,228

Mortgage-backed securities
 
12,111

 
12,032

 
12,410

 
12,423

Total
 
$
16,282

 
$
16,166

 
$
16,603

 
$
16,651



Net Gains (Losses) from Sale of AFS Securities

During the three months ended March 31, 2020 and 2019, the Bank did not sell any AFS securities.


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Table of Contents

HTM Securities

HTM securities by major security type were as follows (dollars in millions):
 
March 31, 2020
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
383

 
$
96

 
$
—

 
$
479

State or local housing agency obligations
212

 
2

 
(1
)
 
213

Total non-mortgage-backed securities
595

 
98

 
(1
)
 
692

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

 
—

 
—

 
4

U.S. obligations commercial2
1

 
—

 
—

 
1

GSE single-family
1,647

 
7

 
(12
)
 
1,642

Private-label
7

 
—

 
—

 
7

Total mortgage-backed securities
1,659

 
7

 
(12
)
 
1,654

Total
$
2,254

 
$
105

 
$
(13
)
 
$
2,346

 
December 31, 2019
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
384

 
$
72

 
$
—

 
$
456

State or local housing agency obligations
221

 
1

 
(1
)
 
221

Total non-mortgage-backed securities
605

 
73

 
(1
)
 
677

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
5

 
—

 
—

 
5

U.S. obligations commercial2
1

 
—

 
—

 
1

GSE single-family
1,752

 
4

 
(7
)
 
1,749

Private-label
7

 
—

 
—

 
7

Total mortgage-backed securities
1,765

 
4

 
(7
)
 
1,762

Total
$
2,370

 
$
77

 
$
(8
)
 
$
2,439


1
Amortized cost includes adjustments made to the cost basis of an investment for accretion or amortization and excludes accrued interest receivable of $12 million and $7 million as of March 31, 2020 and December 31, 2019.

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

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Contractual Maturity

The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
March 31, 2020
 
December 31, 2019
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
—

 
$
—

 
$
—

 
$
—

Due after one year through five years
 
—

 
—

 
—

 
—

Due after five years through ten years
 
411

 
457

 
412

 
446

Due after ten years
 
184

 
235

 
193

 
231

Total non-mortgage-backed securities
 
595

 
692

 
605

 
677

Mortgage-backed securities
 
1,659

 
1,654

 
1,765

 
1,762

Total
 
$
2,254

 
$
2,346

 
$
2,370

 
$
2,439



Net Gains (Losses) from Sale of HTM Securities

During the three months ended March 31, 2020 and 2019, the Bank did not sell any HTM securities.

ALLOWANCE FOR CREDIT LOSSES ON AFS AND HTM SECURITIES

The Bank evaluates AFS and HTM investment securities for credit losses on a quarterly basis. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. See “Note 2 — Recently Adopted and Issued Accounting Guidance” for additional information. See “Note 1 — Summary of Significant Accounting Policies” in the 2019 Form 10-K for information on the prior methodology for evaluating credit losses.

AFS and HTM Securities (Excluding Private-label MBS)

The Bank’s AFS and HTM securities may include, but are not limited to, certificates of deposit, commercial paper, U.S. obligations, GSE and Tennessee Valley Authority (TVA) obligations, state or local housing agency obligations, taxable municipal bonds, and mortgage-backed securities (MBS). The Bank only purchases securities considered investment quality. Excluding private-label MBS, at March 31, 2020, all of the Bank’s AFS securities and HTM securities, based on amortized cost, were rated single-A, or above, by an NRSRO, based on the lowest long-term credit rating for each security. These may differ from any internal ratings of the securities by the Bank.

The Bank evaluates its individual AFS securities for impairment by comparing the security’s fair value to its amortized cost. Impairment may exist when the fair value of the investment is less than its amortized cost (i.e. in an unrealized loss position). At March 31, 2020, certain AFS securities held by the Bank were in an unrealized loss position. These losses are considered temporary as the Bank expects to recover the entire amortized cost basis on these AFS investment securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. Further, the Bank has not experienced any payment defaults on the instruments. In addition, substantially all of these securities carry an implicit or explicit government guarantee. As a result, no allowance for credit losses was recorded on these AFS securities at March 31, 2020.

The Bank evaluates its HTM securities for impairment on a collective, or pooled basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. As of March 31, 2020, the Bank had no allowance for credit losses recorded on its HTM securities because the securities: (i) were all highly-rated, (ii) had not experienced, nor did the Bank expect, any payment default on the instruments, and (iii) in the case of U.S. obligations and GSE and TVA obligations, carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero.


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Private-label MBS

The Bank holds investments in private-label MBS classified as HTM. As of March 31, 2020, these investments represented less than one percent of the Bank’s HTM portfolio and approximately 70 percent of these securities, based on amortized cost, were rated single-A, or above, by an NRSRO. As of March 31, 2020, the Bank had no allowance for credit losses recorded on its private-label MBS because the securities (i) were highly-rated and/or (ii) had not experienced, nor did the Bank expect, any payment default on the instruments.

Note 4 — Advances

REDEMPTION TERM

The following table summarizes the Bank’s advances outstanding by redemption term (dollars in millions):
 
 
March 31, 2020
 
December 31, 2019
Redemption Term
 
Amount1
 
Weighted
Average
Interest
Rate
 
Amount1
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
5

 
1.36
%
 
$
1

 
2.73
%
Due in one year or less
 
33,669

 
1.05

 
35,432

 
1.97

Due after one year through two years
 
19,305

 
1.71

 
21,959

 
2.23

Due after two years through three years
 
10,264

 
2.07

 
8,693

 
2.33

Due after three years through four years
 
5,244

 
2.36

 
5,109

 
2.51

Due after four years through five years
 
7,231

 
1.93

 
5,978

 
2.17

Thereafter
 
3,441

 
2.43

 
3,013

 
2.72

Total par value
 
79,159

 
1.57
%
 
80,185

 
2.16
%
Premiums
 
24

 
 
 
25

 
 
Discounts
 
(5
)
 
 
 
(6
)
 
 
Fair value hedging adjustments
 
579

 
 
 
156

 
 
Total
 
$
79,757

 
 
 
$
80,360

 
 


1
Excludes accrued interest receivable of $69 million and $91 million as of March 31, 2020 and December 31, 2019.

The following table summarizes advances by year of redemption term or next call date for callable advances, and by year of redemption term or next put date for putable advances (dollars in millions):
 
 
Redemption Term
or Next Call Date
 
Redemption Term
or Next Put Date
 
 
March 31,
2020
 
December 31, 2019
 
March 31,
2020
 
December 31, 2019
Overdrawn demand deposit accounts
 
$
5

 
$
1

 
$
5

 
$
1

Due in one year or less
 
48,177

 
53,156

 
34,633

 
36,278

Due after one year through two years
 
12,855

 
11,967

 
19,360

 
22,101

Due after two years through three years
 
6,617

 
5,427

 
10,320

 
8,730

Due after three years through four years
 
3,924

 
3,802

 
5,036

 
5,004

Due after four years through five years
 
4,558

 
3,461

 
6,375

 
5,069

Thereafter
 
3,023

 
2,371

 
3,430

 
3,002

Total par value
 
$
79,159

 
$
80,185

 
$
79,159

 
$
80,185


 
The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). Other advances may require a prepayment fee or credit that makes the Bank financially indifferent to the prepayment of the advance. At March 31, 2020 and December 31, 2019, the Bank had callable advances outstanding totaling $19.5 billion and $25.5 billion.


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The Bank holds certain putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on the predetermined exercise dates. Generally, these put options are exercised when interest rates increase relative to contractual rates. At both March 31, 2020 and December 31, 2019, the Bank had putable advances outstanding totaling $1.4 billion.

PREPAYMENT FEES

The Bank generally charges a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank financially indifferent to the prepayment of the advance. For certain advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Prepayment fees and credits are recorded net of fair value hedging adjustments in advance income on the Statements of Income. The Bank recorded prepayment fees on advances, net of $3 million and less than $1 million for the three months ended March 31, 2020 and 2019.

ADVANCE CONCENTRATIONS

The Bank’s advances are concentrated in commercial banks, savings institutions, and insurance companies. At March 31, 2020 and December 31, 2019, the Bank had outstanding advances of $17.5 billion and $25.5 billion to Wells Fargo Bank, N.A. who individually held 10 percent or more of the Bank’s advances, which represented 22 percent and 32 percent of the total principal amount of outstanding advances.

ALLOWANCE FOR CREDIT LOSSES

The Bank evaluates advances for credit losses on a quarterly basis. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. See “Note 2 — Recently Adopted and Issued Accounting Guidance” for additional information.

The Bank manages its credit exposure to advances through an approach that includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower’s financial condition in conjunction with the Bank’s collateral and lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, the Bank lends to eligible borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

The Bank is required by regulation to obtain sufficient collateral to fully secure its advances. The estimated value of the collateral required to secure each borrower’s advances is calculated by applying collateral discounts, or haircuts, to the unpaid principal balance or market value, if available, of the collateral. The Bank also has policies and procedures for validating the reasonableness of the Bank’s collateral valuations. In addition, collateral verifications and on-site reviews are performed by the Bank based on the risk profile of the borrower. Management believes that these policies effectively manage the Bank’s credit risk from advances.

Eligible collateral includes:

•
fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages;

•
loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Government National Mortgage Association;

•
cash deposited with the Bank; and

•
other real estate-related collateral acceptable to the Bank, such as second lien mortgages, home equity lines of credit, tax-exempt municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property.

Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank has a lien on each member’s capital stock investment; however, capital stock cannot be pledged as collateral to secure advances.


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Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can also require additional or substitute collateral to protect its security interest. The Bank periodically evaluates and makes changes to its collateral guidelines and collateral haircuts.

Borrowers may pledge collateral to the Bank by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with the Bank or its custodians. The Bank perfects its security interest in all pledged collateral by filing Uniform Commercial Code financing statements or by taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to the Bank by its members, or any affiliates of its members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.
Under a blanket pledge agreement, the Bank is granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, the Bank does not initially take delivery of collateral from blanket agreement borrowers. In the event of deterioration in the financial condition of a blanket pledge agreement borrower, the Bank has the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, the Bank generally requires collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or loans to the Bank or its custodians.

Using a risk-based approach and taking into consideration each borrower’s financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its advances. At March 31, 2020 and December 31, 2019, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of its outstanding advances.

As a result of recent stressed market conditions stemming from the coronavirus pandemic (COVID-19), the Bank is taking additional steps to monitor its credit risk on advances. These steps include increased frequency of collateral valuation and identifying, analyzing, and monitoring borrowers with higher risk profiles.

At March 31, 2020 and December 31, 2019, none of the Bank’s advances were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings (TDRs) related to advances during the three months ended March 31, 2020 and 2019.

The Bank has never experienced a credit loss on its advances. Based upon the Bank’s collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no expected credit losses on its advances as of March 31, 2020. For the same reasons, the Bank did not record any allowance for credit losses for its advances at December 31, 2019.

Note 5 — Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio includes conventional mortgage loans and government-guaranteed or -insured mortgage loans obtained through the Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) and the Mortgage Purchase Program (MPP). The MPF program, which represented 98 percent of the Bank’s mortgage loans held for portfolio at both March 31, 2020 and December 31, 2019, involves investment by the Bank in single-family mortgage loans held for portfolio that are either purchased from participating financial institutions (PFIs) or funded by the Bank through PFIs. MPF loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank’s MPF PFIs generally originate, service, and credit enhance mortgage loans that are sold to the Bank. MPF PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the MPF PFI to a designated mortgage service provider.

Under the MPP, the Bank acquired single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to the Bank. The MPP program represented two percent of the Bank’s mortgage loans held for portfolio at both March 31, 2020 and December 31, 2019. The Bank does not currently purchase mortgage loans under this program. All loans in this portfolio were originated prior to 2006.


23
Table of Contents

The following table presents information on the Bank’s mortgage loans held for portfolio (dollars in millions):
 
March 31,
2020
 
December 31, 2019
Fixed rate, long-term single-family mortgage loans
$
8,335

 
$
8,192

Fixed rate, medium-term1 single-family mortgage loans
1,079

 
1,016

Total unpaid principal balance
9,414

 
9,208

Premiums
128

 
125

Discounts
(4
)
 
(4
)
Basis adjustments from mortgage loan purchase commitments
9

 
6

Total mortgage loans held for portfolio2
9,547

 
9,335

Allowance for credit losses
(1
)
 
(1
)
Total mortgage loans held for portfolio, net
$
9,546

 
$
9,334



1
Medium-term is defined as a term of 15 years or less.
2
Excludes accrued interest receivable of $49 million and $48 million as of March 31, 2020 and December 31, 2019.

The following table presents the Bank’s mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):
 
March 31,
2020
 
December 31, 2019
Conventional mortgage loans
$
8,917

 
$
8,712

Government-insured mortgage loans
497

 
496

Total unpaid principal balance
$
9,414

 
$
9,208


PAYMENT STATUS OF MORTGAGE LOANS

Payment status is the key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include non-accrual loans and loans in process of foreclosure.

The following tables present the payment status for MPF and MPP conventional mortgage loans (dollars in millions):
 
March 31, 2020
 
Origination Year
 
 
 
Prior to 2016
 
2016 to 2020
 
Total
Past due 30 - 59 days
$
35

 
$
16

 
$
51

Past due 60 - 89 days
12

 
2

 
14

Past due 90 - 179 days
6

 
3

 
9

Past due 180 days or more
8

 
1

 
9

Total past due mortgage loans
61

 
22

 
83

Total current mortgage loans
2,726

 
6,231

 
8,957

Total amortized cost of mortgage loans1
$
2,787

 
$
6,253

 
$
9,040

 
December 31, 2019
Past due 30 - 59 days
$
57

Past due 60 - 89 days
14

Past due 90 - 179 days
10

Past due 180 days or more
10

Total past due mortgage loans
91

Total current mortgage loans
8,783

Total recorded investment of mortgage loans1
$
8,874


1
Amortized cost represents the unpaid principal balance adjusted for unamortized premiums, discounts, basis adjustments, and direct write-downs. Recorded investment at December 31, 2019 includes accrued interest receivable whereas the amortized cost at March 31, 2020 excludes accrued interest receivable.

24
Table of Contents


 
The following tables present other delinquency statistics for MPF and MPP mortgage loans (dollars in millions):
 
 
March 31, 2020
Amortized Cost
 
Conventional
 
Government-Insured
 
Total
In process of foreclosure1
 
$
5

 
$
1

 
$
6

Serious delinquency rate2
 
—
%
 
2
%
 
—
%
Past due 90 days or more and still accruing interest3
 
$
—

 
$
8

 
$
8

Non-accrual mortgage loans4
 
$
29

 
$
—

 
$
29

 
 
December 31, 2019
Recorded Investment
 
Conventional
 
Government- Insured
 
Total
In process of foreclosure1
 
$
5

 
$
1

 
$
6

Serious delinquency rate2
 
—
%
 
1
%
 
—
%
Past due 90 days or more and still accruing interest3
 
$
—

 
$
7

 
$
7

Non-accrual mortgage loans4
 
$
31

 
$
—

 
$
31


1
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported.

2
Represents mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of total mortgage loans.

3
Represents government-insured mortgage loans that are 90 days or more past due.

4
Represents conventional mortgage loans that are 90 days or more past due or TDRs. As of March 31, 2020, none of these conventional mortgage loans on non-accrual status had an associated allowance for expected credit losses.


ALLOWANCE FOR CREDIT LOSSES

The Bank evaluates mortgage loans for credit losses on a quarterly basis. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. See “Note 2 — Recently Adopted and Issued Accounting Guidance” for additional information. See “Note 10 — Allowance for Credit Losses” in the 2019 Form 10-K for information on the prior methodology for evaluating credit losses on mortgage loans.

Conventional Mortgage Loans

Conventional mortgage loans are evaluated collectively when similar risk characteristics exists. Conventional loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis. The Bank determines its allowances for credit losses on conventional loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions.

For collectively evaluated loans, the Bank uses a projected cash flow model to estimate expected credit losses over the life of the loans. This model relies on a number of inputs, such as current and projected property values and interest rates as well as historical borrower behavior experience. For MPF loans, the Bank also incorporates associated credit enhancements when determining its estimate of expected credit losses. In limited instances, the Bank may incorporate a management adjustment in the allowance for credit losses for conventional mortgage loans due to changes in economic and business conditions or other factors that may not be fully captured in its model.

For individually evaluated loans, the Bank uses the practical expedient for collateral dependent assets. A mortgage loan is considered collateral dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default. The Bank estimates the fair value of this collateral using a property valuation model. The expected credit loss of a collateral dependent mortgage loan is equal to the difference between the amortized cost of the loan and the estimated fair value of the collateral, less estimated selling costs. The Bank records a direct charge-off of the loan balance, if certain triggering criteria are met. Expected recoveries of prior charge-offs are included in the allowance for credit losses.


25
Table of Contents

At both March 31, 2020 and December 31, 2019, the Bank’s allowance for credit losses on conventional mortgage loans totaled $1 million. As a result of adopting Measurement of Credit Losses on Financial Instruments (ASU 2016-13), the Bank recorded a $1 million decrease in its allowance for credit losses through a cumulative effect adjustment to retained earnings on January 1, 2020. This decrease was attributable to recoveries on conventional mortgage loans that were previously written down and have had their collateral values subsequently improve, partially offset by the incorporation of lifetime credit losses on its mortgage loan portfolio.

During the three months ended March 31, 2020, the Bank’s cash flow model for collectively evaluated loans projected a slight decrease in expected credit losses due to an updated calibration of model assumptions, optimistic mortgage rate forecast, and slight increase in regional home price appreciation (HPA). However, rapidly changing economic and business conditions in March of 2020 in response to COVID-19 and the potential forthcoming impact on the Bank’s portfolio indicated that, a reduction in expected credit losses was not warranted or prudent. As such, the Bank incorporated a management adjustment in its allowance for credit losses that was informed by multiple benchmark modeling scenarios that captured the projected effects of the global pandemic, including fiscal and monetary policy actions, updated mortgage rate and housing price forecasts, and significant increases in unemployment. Expected recoveries of prior charge-offs remained stable during the three months ended March 31, 2020.

Government-Insured Mortgage Loans

The Bank invests in government-insured fixed rate mortgage loans portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance.

The Bank has never experienced a credit loss on its government-insured mortgage loans. As of March 31, 2020, the Bank assessed its servicers and determined there was no expectation that a servicer would fail to remit payments due until paid in full. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at March 31, 2020 and December 31, 2019. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

Note 6 — Derivatives and Hedging Activities

NATURE OF BUSINESS ACTIVITY

The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the Bank’s interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.

The Bank enters into derivative contracts to manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions. Finance Agency regulations and the Bank’s risk management policies establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.


26
Table of Contents

Derivative financial instruments are used by the Bank to achieve its financial and risk management objectives. The Bank reevaluates its hedging strategies periodically and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the Bank uses derivatives are to:

•
reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

•
preserve an interest rate spread between the yield of an asset and the cost of the related liability. Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the asset does not match a change in the interest rate on the liability;

•
mitigate the adverse earnings effects of the shortening or extension of certain assets and liabilities;

•
manage embedded options in assets and liabilities; and

•
reduce funding costs by combining a derivative with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation.

TYPES OF DERIVATIVES

The Bank may use the following derivative instruments:

•
interest rate swaps;

•
options;

•
swaptions;

•
interest rate caps and floors; and

•
futures/forwards contracts.

The Bank may have the following types of hedged items:

•
investment securities;

•
advances;
       
•
mortgage loans;
  
•
consolidated obligations; and
  
•
firm commitments.

For additional information on the Bank’s derivative and hedging accounting policy, see “Note 1 — Summary of Significant Accounting Policies” in the 2019 Form 10-K.

FINANCIAL STATEMENT EFFECT AND ADDITIONAL FINANCIAL INFORMATION

The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.


27
Table of Contents

The following table summarizes the Bank’s notional amount and fair value of derivative instruments and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest (dollars in millions):
 
 
March 31, 2020
 
December 31, 2019
 
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
Derivatives designated as hedging instruments (fair value hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
37,610

 
$
55

 
$
360

 
$
37,684

 
$
31

 
$
159

Derivatives not designated as hedging instruments (economic hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
1,858

 
12

 
89

 
1,038

 
8

 
43

Forward settlement agreements (TBAs)
 
342

 
—

 
7

 
122

 
—

 
—

Mortgage loan purchase commitments
 
348

 
4

 
—

 
127

 
—

 
—

Total derivatives not designated as hedging instruments
 
2,548

 
16

 
96

 
1,287

 
8

 
43

Total derivatives before netting and collateral adjustments
 
$
40,158

 
71

 
456

 
$
38,971

 
39

 
202

Netting adjustments and cash collateral1
 
 
 
162

 
(447
)
 
 
 
63

 
(201
)
Total derivative assets and derivative liabilities
 
 
 
$
233

 
$
9

 
 
 
$
102

 
$
1


1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. At March 31, 2020 and December 31, 2019, cash collateral posted by the Bank and related accrued interest was $609 million and $264 million. At both March 31, 2020 and December 31, 2019, the Bank did not hold any cash collateral or related accrued interest from clearing agents or counterparties.




28
Table of Contents

The following tables summarize the income effect from fair value hedging relationships recorded in net interest income as well as total income (expense) by product recorded on the Statements of Income (dollars in millions):
 
 
For the Three Months Ended March 31, 2020
 
 
Interest Income (Expense)
 
 
Advances
 
Available-for-Sale Securities
 
Consolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
 
$
399

 
$
75

 
$
(410
)
Net interest income effect from fair value hedging relationships
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
   Derivatives2
 
$
(435
)
 
$
(316
)
 
$
237

   Hedged items3
 
423

 
290

 
(233
)
Total net interest income effect from fair value hedging relationships
 
$
(12
)
 
$
(26
)
 
$
4


 
 
For the Three Months Ended March 31, 2019
 
 
Interest Income (Expense)
 
 
Advances
 
Available-for-Sale Securities
 
Consolidated Obligation Bonds
Total income (expense) recorded on the Statements of Income1
 
$
715

 
$
143

 
$
(595
)
Net income effect from fair value hedging relationships
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
 
Derivatives2
 
$
(78
)
 
$
(81
)
 
$
67

Hedged items3
 
103

 
86

 
(135
)
Total net income effect from fair value hedging relationships
 
$
25

 
$
5

 
$
(68
)

1
Amounts shown to give context to the disclosure and include total interest income (expense) of the products indicated, including coupon, prepayment fees, amortization, and derivative net interest settlements. Interest income (expense) amounts also include gains and losses on derivatives and hedged items in fair value hedging relationships.

2
Includes changes in fair value, net interest settlements on derivatives, and amortization of the financing element of off-market derivatives.
    
3
Includes changes in fair value and amortization/accretion of basis adjustments on closed hedge relationships.



29
Table of Contents

The following tables summarize cumulative fair value hedging adjustments and the related amortized cost of the hedged items (dollars in millions):
 
 
March 31, 2020
Line Item on Statements of Condition
 
Amortized Cost of Hedged Asset/ Liability1
 
Changes in Fair Value for Active Hedging Relationships Included in Amortized Cost
 
Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost
 
Cumulative Amount of Fair Value Hedging Adjustments
Advances
 
$
18,330

 
$
557

 
$
22

 
$
579

Available-for-sale securities
 
6,539

 
458

 
—

 
458

Consolidated obligation bonds
 
16,339

 
247

 
(13
)
 
234


 
 
December 31, 2019
Line Item on Statements of Condition
 
Amortized Cost of Hedged Asset/ Liability1
 
Changes in Fair Value for Active Hedging Relationships Included in Amortized Cost
 
Basis Adjustments for Discontinued Hedging Relationships Included in Amortized Cost
 
Cumulative Amount of Fair Value Hedging Adjustments
Advances
 
$
14,806

 
$
146

 
$
10

 
$
156

Available-for-sale securities
 
6,221

 
167

 
—

 
167

Consolidated obligation bonds
 
20,256

 
16

 
(15
)
 
1


1    Includes the portion of amortized cost representing the hedged items in fair value hedging relationships.

The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented on the Statements of Income (dollars in millions).
 
For the Three Months Ended
 
March 31,
 
2020
 
2019
Derivatives not designated as hedging instruments (economic hedges)
 
 
 
Interest rate swaps
$
(45
)
 
(12
)
Forward settlement agreements (TBAs)
(8
)
 
(1
)
Mortgage loan purchase commitments
7

 
1

Net interest settlements
(2
)
 
—

Net gains (losses) on derivatives and hedging activities
$
(48
)
 
$
(12
)




30
Table of Contents

MANAGING CREDIT RISK ON DERIVATIVES

The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative contracts. The Bank manages credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in the Bank’s policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

The Bank transacts most of its derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearings agent) with a Derivative Clearing Organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Bank is not a derivative dealer and does not trade derivative for short-term profit.

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in the derivative contracts to mitigate the risk. The Bank requires collateral agreements on its uncleared derivatives.

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a NRSRO, the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions, unless the collateral delivery threshold is set to zero. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2020 was $7 million, for which the Bank was not required to post collateral in the normal course of business. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would not have been required to deliver additional collateral to its uncleared derivative counterparties at March 31, 2020.
 
For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Bank utilizes one Clearinghouse, CME Clearing for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin requirements, and the clearing agent in turn notifies the Bank.

The Clearinghouse determines initial margin requirements which are considered cash collateral. Generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agent, based on credit considerations, at March 31, 2020. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, rather than cash collateral.

The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments for changes in the fair value of cleared derivatives is posted daily through a clearing agent.

OFFSETTING OF DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

The Bank presents derivative instruments, related cash collateral received or pledged, and associated accrued interest on a net basis by clearing agent and/or by counterparty when it has met the netting requirements. Additional information regarding these agreements is provided in “Note 1 — Summary of Significant Accounting Policies” in the 2019 Form 10-K.

The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and has determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

31
Table of Contents

The following tables present the fair value of derivative instruments meeting or not meeting the netting requirements and the related collateral received from or pledged to counterparties (dollars in millions):
 
 
March 31, 2020
 
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
 
Gross Amount Recognized1
 
Gross Amount of Netting Adjustments and Cash Collateral
 
Derivative Instruments Not Meeting Netting Requirements2
 
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
49

 
$
(43
)
 
$
4

 
$
10

   Cleared derivatives
 
18

 
205

 
—

 
223

Total
 
$
67

 
$
162

 
$
4

 
$
233

Derivative Liabilities
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
447

 
$
(438
)
 
$
—

 
$
9

   Cleared derivatives
 
9

 
(9
)
 
—

 
—

Total
 
$
456

 
$
(447
)
 
$
—

 
$
9

 
 
December 31, 2019
 
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
 
Gross Amount Recognized1
 
Gross Amount of Netting Adjustments and Cash Collateral
 
Derivative Instruments Not Meeting Netting Requirements2
 
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
34

 
$
(28
)
 
$
—

 
$
6

   Cleared derivatives
 
5

 
91

 
—

 
96

Total
 
$
39

 
$
63

 
$
—

 
$
102

Derivative Liabilities
 
 
 
 
 
 
 
 
   Uncleared derivatives
 
$
199

 
$
(198
)
 
$
—

 
$
1

   Cleared derivatives
 
3

 
(3
)
 
—

 
—

Total
 
$
202

 
$
(201
)
 
$
—

 
$
1


1    Represents derivative assets and derivative liabilities prior to netting adjustments and cash collateral.
2    Represents mortgage loan purchase commitments not subject to enforceable master netting requirements.

Note 7 — Consolidated Obligations

Consolidated obligations consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. Bonds are issued primarily to raise intermediate- and long-term funds for the Bank and are not subject to any statutory or regulatory limits on their maturity. Discount notes are issued primarily to raise short-term funds for the Bank and have original maturities of up to one year. Discount notes sell at or below their face amount and are redeemed at par value when they mature.

Although the Bank is primarily liable for the portion of consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all FHLBank System consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority. At March 31, 2020 and December 31, 2019, the total par value of outstanding consolidated obligations of the FHLBanks was $1,174.7 billion and $1,025.9 billion.


32
Table of Contents

DISCOUNT NOTES

The following table summarizes the Bank’s discount notes (dollars in millions):
 
March 31, 2020
 
December 31, 2019
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Par value
$
33,114

 
1.08
%
 
$
29,592

 
1.65
%
Discounts and concessions1
(43
)
 
 
 
(61
)
 
 
Total
$
33,071

 
 
 
$
29,531

 
 


1
Concessions represent fees paid to dealers in connections with the issuance of certain consolidated obligation discount notes.

BONDS

The following table summarizes the Bank’s bonds outstanding by contractual maturity (dollars in millions):
 
 
March 31, 2020
 
December 31, 2019
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Due in one year or less
 
$
53,646

 
1.08
%
 
$
58,106

 
1.81
%
Due after one year through two years
 
14,221

 
1.82

 
16,997

 
1.91

Due after two years through three years
 
3,961

 
2.30

 
3,907

 
2.35

Due after three years through four years
 
2,841

 
2.64

 
3,083

 
2.53

Due after four years through five years
 
3,415

 
2.96

 
3,503

 
3.03

Thereafter
 
5,753

 
2.87

 
5,777

 
3.00

Total par value
 
83,837

 
1.52
%
 
91,373

 
1.99
%
Premiums
 
231

 
 
 
217

 
 
Discounts and concessions1
 
(35
)
 
 
 
(38
)
 
 
Fair value hedging adjustments
 
233

 
 
 
1

 
 
Total
 
$
84,266

 
 
 
$
91,553

 
 


1
Concessions represent fees paid to dealers in connections with the issuance of certain consolidated obligation bonds.

The following table summarizes the Bank’s bonds outstanding by call features (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Non-callable or non-putable
$
80,454

 
$
87,246

Callable
3,383

 
4,127

Total par value
$
83,837

 
$
91,373



The following table summarizes the Bank’s bonds outstanding by year of contractual maturity or next call date (dollars in millions):
Year of Contractual Maturity or Next Call Date
March 31,
2020
 
December 31,
2019
Due in one year or less
$
55,514

 
$
60,639

Due after one year through two years
15,104

 
17,643

Due after two years through three years
4,443

 
4,410

Due after three years through four years
2,746

 
2,788

Due after four years through five years
3,385

 
3,376

Thereafter
2,645

 
2,517

Total par value
$
83,837

 
$
91,373





33
Table of Contents

Note 8 — Capital

CAPITAL STOCK

The Bank’s capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. The Bank generally issues a single class of capital stock (Class B stock) and has two subclasses of capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding in the Bank’s Statements of Condition. All capital stock issued is subject to a notice of redemption period of five years.

The capital stock requirements established in the Bank’s Capital Plan are designed so that the Bank can remain adequately capitalized as member activity changes. The Bank’s Board of Directors may make adjustments to the capital stock requirements within ranges established in the Capital Plan.
 
EXCESS STOCK

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under its Capital Plan, the Bank, at its discretion and upon 15 days’ written notice, may repurchase excess membership capital stock. The Bank, at its discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At March 31, 2020 and December 31, 2019, the Bank’s excess capital stock outstanding was less than $1 million.

MANDATORILY REDEEMABLE CAPITAL STOCK

The Bank reclassifies capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Dividends on mandatorily redeemable capital stock are classified as interest expense on the Statements of Income.

At March 31, 2020 and December 31, 2019, the Bank’s mandatorily redeemable capital stock totaled $96 million and $206 million. During the three months ended March 31, 2020 and 2019, interest expense on mandatorily redeemable capital stock was $3 million.

As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance companies ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014 will have their memberships terminated no later than February 19, 2021. On the effective date of the final rule, the Bank reclassified the total outstanding capital stock held by all of the captive insurance companies that were Bank members, to mandatorily redeemable capital stock.

The following tables summarize changes in mandatorily redeemable capital stock (dollars in millions):
 
For the Three Months Ended March 31,
 
2020
 
2019
Balance, beginning of period
$
206

 
$
255

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
6

 
2

Net payments for repurchases/redemptions of mandatorily redeemable capital stock
(116
)
 
(20
)
Balance, end of period
$
96

 
$
237




34
Table of Contents

The following table summarizes the Bank’s mandatorily redeemable capital stock by year of contractual redemption (dollars in millions):
Year of Contractual Redemption1
 
March 31,
2020
 
December 31, 2019
Due in one year or less
 
$
1

 
$
—

Due after one year through two years
 
10

 
1

Due after two years through three years
 
1

 
11

Due after three years through four years
 
5

 
5

Due after four years through five years
 
—

 
—

Thereafter2
 
65

 
175

Past contractual redemption date due to outstanding activity with the Bank
 
14

 
14

Total
 
$
96

 
$
206


1
At the Bank’s election, the mandatorily redeemable capital stock may be redeemed prior to the expiration of the five year redemption period that commences on the date of the notice of redemption, or in the case of captive insurance company members, on the date of the membership termination.

2
Represents mandatorily redeemable capital stock resulting from the Finance Agency rule previously discussed that makes captive insurance companies ineligible for FHLBank membership. The related mandatorily redeemable capital stock is not required to be redeemed until five years after the member's termination.

RESTRICTED RETAINED EARNINGS

The Bank entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of the Bank over time. Under the JCE Agreement, each FHLBank is required to allocate 20 percent of its quarterly net income to a separate restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends. At March 31, 2020 and December 31, 2019, the Bank’s restricted retained earnings account totaled $522 million and $504 million.

ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes changes in AOCI (dollars in millions):
 
Net unrealized gains (losses) on AFS securities (Note 3)
 
Pension and postretirement benefits
 
Total AOCI
Balance, December 31, 2018
$
87

 
$
(3
)
 
$
84

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
1

 
—

 
1

Net current period other comprehensive income (loss)
1

 
—

 
1

Balance, March 31, 2019
$
88

 
$
(3
)
 
$
85

 
 
 
 
 
 
Balance, December 31, 2019
$
48

 
$
(4
)
 
$
44

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
(164
)
 
—

 
(164
)
Reclassifications from AOCI to net income
 
 
 
 

Amortization - pension and postretirement
—

 
1

 
1

Net current period other comprehensive income (loss)
(164
)
 
1

 
(163
)
Balance, March 31, 2020
$
(116
)
 
$
(3
)
 
$
(119
)



35
Table of Contents

REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to three regulatory capital requirements:

•
Risk-based capital. The Bank must maintain at all times permanent capital greater than or equal to the sum of its credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B stock (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement.

•
Regulatory capital. The Bank is required to maintain a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes Class B stock (including mandatorily redeemable capital stock) and retained earnings. It does not include AOCI.

•
Leverage capital. The Bank is required to maintain a minimum five percent leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. The Bank did not hold any nonpermanent capital at March 31, 2020 and December 31, 2019.

In addition to the requirements previously discussed, during 2019, the Finance Agency finalized an Advisory Bulletin on capital stock (the Capital Stock AB) which required each FHLBank to maintain at all times a ratio of at least two percent of capital stock to total assets, effective February 2020. For purposes of the Capital Stock AB, capital stock includes mandatorily redeemable capital stock. The capital stock to total assets ratio is measured on a daily average basis at month end.

If the Bank’s capital falls below the required levels, the Finance Agency has authority to take actions necessary to return it to levels that it deems to be consistent with safe and sound business operations.

The following table shows the Bank’s compliance with the Finance Agency’s regulatory capital requirements (dollars in millions):
 
March 31, 2020
 
December 31, 2019
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements
 
 
 
 
 
 
 
Risk-based capital
$
673

 
$
6,948

 
$
1,138

 
$
6,888

Regulatory capital
$
5,043

 
$
6,948

 
$
5,184

 
$
6,888

Leverage capital
$
6,303

 
$
10,421

 
$
6,480

 
$
10,332

Capital-to-assets ratio
4.00
%
 
5.51
%
 
4.00
%
 
5.31
%
Capital stock-to-assets ratio
2.00
%
 
3.72
%
 
N/A1

 
N/A1

Leverage ratio
5.00
%
 
8.27
%
 
5.00
%
 
7.97
%

1
The Capital Stock AB became effective in February 2020.

Note 9 — Fair Value

Fair value amounts are determined by the Bank using available market information and reflect the Bank’s best judgment of appropriate valuation methods. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The fair value hierarchy requires an entity to maximize the use of significant observable inputs and minimize the use of significant unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability.

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

•
Level 1 Inputs. Quoted prices (unadjusted) for identical assets or liabilities in an active market that the Bank can access on the measurement date. An active market for an asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

36
Table of Contents


•
Level 2 Inputs. Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities), and (iv) market-corroborated inputs.

•
Level 3 Inputs. Unobservable inputs for the asset or liability.

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. The Bank had no transfers of assets or liabilities between fair value levels during the three months ended March 31, 2020 and 2019.

The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at March 31, 2020 (dollars in millions). The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio on a non-recurring basis. The Bank records all other financial assets and liabilities at amortized cost. The fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.
 
 
 
 
Fair Value
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 

Cash and due from banks
 
$
611

 
$
611

 
$
—

 
$
—

 
$
—

 
$
611

Interest-bearing deposits
 
1

 
—

 
1

 
—

 
—

 
1

Securities purchased under agreements to resell
 
6,550

 
—

 
6,550

 
—

 
—

 
6,550

Federal funds sold
 
8,935

 
—

 
8,935

 
—

 
—

 
8,935

Trading securities
 
1,728

 
—

 
1,728

 
—

 
—

 
1,728

Available-for-sale securities
 
16,166

 
—

 
16,166

 
—

 
—

 
16,166

Held-to-maturity securities
 
2,254

 
—

 
2,339

 
7

 
—

 
2,346

Advances
 
79,757

 
—

 
80,270

 
—

 
—

 
80,270

Mortgage loans held for portfolio, net
 
9,546

 
—

 
9,837

 
49

 
—

 
9,886

Accrued interest receivable
 
179

 
—

 
179

 
—

 
—

 
179

Derivative assets, net
 
233

 
—

 
71

 
—

 
162

 
233

Other assets
 
28

 
28

 
—

 
—

 
—

 
28

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,267
)
 
—

 
(1,267
)
 
—

 
—

 
(1,267
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(33,071
)
 
—

 
(33,109
)
 
—

 
—

 
(33,109
)
Bonds
 
(84,266
)
 
—

 
(85,331
)
 
—

 
—

 
(85,331
)
Total consolidated obligations
 
(117,337
)
 
—

 
(118,440
)
 
—

 
—

 
(118,440
)
Mandatorily redeemable capital stock
 
(96
)
 
(96
)
 
—

 
—

 
—

 
(96
)
Accrued interest payable
 
(258
)
 
—

 
(258
)
 
—

 
—

 
(258
)
Derivative liabilities, net
 
(9
)
 
—

 
(456
)
 
—

 
447

 
(9
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

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Table of Contents

The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at December 31, 2019 (dollars in millions):
 
 
 
 
Fair Value
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
1,029

 
$
1,029

 
$
—

 
$
—

 
$
—

 
$
1,029

Interest-bearing deposits
 
1

 
—

 
1

 
—

 
—

 
1

Securities purchased under agreements to resell
 
13,950

 
—

 
13,950

 
—

 
—

 
13,950

Federal funds sold
 
4,605

 
—

 
4,605

 
—

 
—

 
4,605

Trading securities
 
888

 
—

 
888

 
—

 
—

 
888

Available-for-sale securities
 
16,651

 
—

 
16,651

 
—

 
—

 
16,651

Held-to-maturity securities
 
2,370

 
—

 
2,432

 
7

 
—

 
2,439

Advances
 
80,360

 
—

 
80,576

 
—

 
—

 
80,576

Mortgage loans held for portfolio, net
 
9,334

 
—

 
9,458

 
52

 
—

 
9,510

Accrued interest receivable
 
195

 
—

 
195

 
—

 
—

 
195

Derivative assets, net
 
102

 
—

 
39

 
—

 
63

 
102

Other assets
 
34

 
34

 
—

 
—

 
—

 
34

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,112
)
 
—

 
(1,112
)
 
—

 
—

 
(1,112
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(29,531
)
 
—

 
(29,532
)
 
—

 
—

 
(29,532
)
Bonds
 
(91,553
)
 
—

 
(92,002
)
 
—

 
—

 
(92,002
)
Total consolidated obligations
 
(121,084
)
 
—

 
(121,534
)
 
—

 
—

 
(121,534
)
Mandatorily redeemable capital stock
 
(206
)
 
(206
)
 
—

 
—

 
—

 
(206
)
Accrued interest payable
 
(252
)
 
—

 
(252
)
 
—

 
—

 
(252
)
Derivative liabilities, net
 
(1
)
 
—

 
(202
)
 
—

 
201

 
(1
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

SUMMARY OF VALUATION TECHNIQUES AND PRIMARY INPUTS
 
The valuation techniques and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or non-recurring basis on the Statements of Condition are outlined below.

Trading and AFS Investment Securities. The Bank’s valuation technique incorporates prices from multiple designated third-party pricing vendors, when available. The pricing vendors generally use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, benchmark securities and yields, reported trades, dealer estimates, issuer spreads, bids, offers, and other market-related data. Since many investment securities do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established process in place to challenge investment valuations, which facilitates resolution of questionable prices identified by the Bank. Annually, the Bank conducts reviews of its pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies, and control procedures for investment securities.


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Table of Contents

The Bank’s valuation technique for estimating the fair values of its investment securities first requires the establishment of a median price for each security. All prices that are within a specified tolerance threshold of the median price are included in the cluster of prices that are averaged to compute a default price. All prices that are outside the threshold (outliers) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, and/or non-binding dealer estimates) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier (or outliers) is (are) in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security. In limited instances, when no prices are available from one of the designated pricing services, the Bank obtains prices from dealers.

As of March 31, 2020 and December 31, 2019, multiple prices were received for the majority of the Bank’s trading and AFS investment securities. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy.

Impaired Mortgage Loans Held for Portfolio. The fair value of impaired mortgage loans held for portfolio is estimated by obtaining property values from an external pricing vendor. This vendor utilizes multiple pricing models that generally factor in market observable inputs, including actual sales transactions and home price indices. The Bank applies an adjustment to these values to capture certain limitations in the estimation process and takes into consideration estimated selling costs and expected PMI proceeds. In limited instances, the Bank may estimate the fair value of an impaired mortgage loan by calculating the present value of expected future cash flows discounted at the loan’s effective interest rate.  

Derivative Assets and Liabilities and the Related Hedged Items. The fair value of derivatives is generally estimated using standard valuation techniques such as discounted cash flow analyses and comparisons to similar instruments, and includes variation margin payments for daily settled contracts. In limited instances, fair value estimates for interest-rate related derivatives may be obtained using an external pricing model that utilizes observable market data. The Bank is subject to credit risk in derivatives transactions due to the potential nonperformance of its derivatives counterparties. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. To mitigate credit risk on uncleared derivatives, the Bank enters into master netting agreements with its counterparties as well as collateral agreements that have collateral delivery thresholds. The Bank has evaluated the potential for the fair value of its derivatives to be affected by counterparty credit risk and its own credit risk and has determined that no adjustments were significant to the overall fair value measurements.

The fair values of the Bank’s derivative assets and derivative liabilities include accrued interest receivable/payable and related cash collateral. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by clearing agent and/or counterparty if the netting requirements are met. If these netted amounts result in a receivable to the Bank, they are classified as an asset and, if classified as a payable to the clearing agent or counterparty, they are classified as a liability.

The Bank’s discounted cash flow model utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). The Bank uses the following inputs for measuring the fair value of interest-related derivatives:

•
Discount rate assumption. The Bank utilizes the Federal Funds OIS curve. 

•
Forward interest rate assumption. The Bank utilizes the LIBOR swap curve or Federal Funds OIS curve.

•
Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

For forward settlement agreements (TBAs), the Bank utilizes TBA securities prices that are determined by coupon class and expected term until settlement. For mortgage loan purchase commitments, the Bank utilizes TBA securities prices adjusted for factors such as credit risk and servicing spreads.
 
For the related hedged items, the fair value is estimated using a discounted cash flow analyses which typically considers the following inputs:


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Table of Contents

•
Discount rate assumption. The Bank utilizes the designated benchmark interest rate curve. 

•
Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

Other Assets. These represent grantor trust assets, which are carried at estimated fair value based on quoted market prices as of the last business day of the reporting period.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods previously described are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates.

FAIR VALUE ON A RECURRING BASIS

The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on the Statements of Condition at March 31, 2020 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
 
$
—

 
$
873

 
$
—

 
$
—

 
$
873

Other U.S. obligations
 
—

 
140

 
—

 
—

 
140

GSE and Tennessee Valley Authority obligations
 
—

 
64

 
—

 
—

 
64

Other non-MBS
 
—

 
262

 
—

 
—

 
262

GSE multifamily MBS
 
—

 
389

 
—

 
—

 
389

Total trading securities
 
—

 
1,728

 
—

 
—

 
1,728

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
 
—

 
1,975

 
—

 
—

 
1,975

GSE and Tennessee Valley Authority obligations
 
—

 
1,107

 
—

 
—

 
1,107

State or local housing agency obligations
 
—

 
760

 
—

 
—

 
760

Other non-MBS
 
—

 
292

 
—

 
—

 
292

U.S. obligations single-family MBS
 
—

 
3,892

 
—

 
—

 
3,892

GSE single-family MBS
 
—

 
609

 
—

 
—

 
609

GSE multifamily MBS
 
—

 
7,531

 
—

 
—

 
7,531

Total available-for-sale securities
 
—

 
16,166

 
—

 
—

 
16,166

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
67

 
—

 
162

 
229

Mortgage loan purchase commitments
 
—

 
4

 
—

 
—

 
4

Total derivative assets, net
 
—

 
71

 
—

 
162

 
233

Other assets
 
28

 
—

 
—

 
—

 
28

Total recurring assets at fair value
 
$
28

 
$
17,965

 
$
—

 
$
162

 
$
18,155

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
(449
)
 
—

 
447

 
(2
)
  Forward settlement agreements (TBAs)
 
—

 
(7
)
 
—

 
—

 
(7
)
Total derivative liabilities, net
 
—

 
(456
)
 
—

 
447

 
(9
)
Total recurring liabilities at fair value
 
$
—

 
$
(456
)
 
$
—

 
$
447

 
$
(9
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.


40
Table of Contents

The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on the Statements of Condition at December 31, 2019 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
 
$
—

 
$
150

 
$
—

 
$
—

 
$
150

GSE and Tennessee Valley Authority obligations
 
—

 
60

 
—

 
—

 
60

Other non-MBS
 
—

 
259

 
—

 
—

 
259

GSE multifamily MBS
 
—

 
419

 
—

 
—

 
419

Total trading securities
 
—

 
888

 
—

 
—

 
888

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
 
—

 
2,127

 
—

 
—

 
2,127

GSE and Tennessee Valley Authority obligations
 
—

 
1,060

 
—

 
—

 
1,060

State or local housing agency obligations
 
—

 
756

 
—

 
—

 
756

Other non-MBS
 
—

 
285

 
—

 
—

 
285

U.S. obligations single-family MBS
 
—

 
4,059

 
—

 
—

 
4,059

GSE single-family MBS
 
—

 
649

 
—

 
—

 
649

GSE multifamily MBS
 
—

 
7,715

 
—

 
—

 
7,715

Total available-for-sale securities
 
—

 
16,651

 
—

 
—

 
16,651

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
39

 
—

 
63

 
102

Other assets
 
34

 
—

 
—

 
—

 
34

Total recurring assets at fair value
 
$
34

 
$
17,578

 
$
—

 
$
63

 
$
17,675

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
(202
)
 
—

 
201

 
(1
)
Total recurring liabilities at fair value
 
$
—

 
$
(202
)
 
$
—

 
$
201

 
$
(1
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

FAIR VALUE ON A NON-RECURRING BASIS

The Bank measures certain impaired mortgage loans held for portfolio at level 3 fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances. At March 31, 2020 and December 31, 2019, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $1 million and $2 million. These fair values were as of the date the fair value adjustment was recorded during the three months ended March 31, 2020 and year-ended December 31, 2019.


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Table of Contents

Note 10 — Commitments and Contingencies

Joint and Several Liability. The FHLBanks have joint and several liability for all consolidated obligations issued. Accordingly, if an FHLBank were unable to repay any consolidated obligation for which it is the primary obligor, each of the other FHLBanks could be called upon by the Finance Agency to repay all or part of such obligations. No FHLBank has ever been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. At March 31, 2020 and December 31, 2019, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable was approximately $1,057.7 billion and $904.9 billion.

The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):
 
March 31, 2020
 
December 31, 2019
 
Expire
within one year
 
Expire
after one year
 
Total1
 
Total1
Standby letters of credit2
$
9,530

 
$
121

 
$
9,651

 
$
10,193

Standby bond purchase agreements
42

 
774

 
816

 
819

Commitments to purchase mortgage loans
348

 
—

 
348

 
127

Commitments to issue bonds
133

 
—

 
133

 
—

Commitments to fund advances
954

 
—

 
954

 
527



1
The Bank has deemed it unnecessary to record any liability for credit losses on these agreements.

2
Excludes commitments to issue standby letters of credit of $9 million and $34 million at March 31, 2020 and December 31, 2019.


Standby Letters of Credit. The Bank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed with members for a fee. If the Bank is required to make payment for a beneficiary’s draw, the member either reimburses the Bank for the amount drawn or, subject to the Bank’s discretion, the amount drawn may be converted into a collateralized advance to the member. The original terms of standby letters of credit outstanding at March 31, 2020, range from less than one month to 13 years, currently no later than 2025. The carrying value of guarantees related to standby letters of credit are recorded in “Other liabilities” on the Statements of Condition and amounted to $2 million at both March 31, 2020 and December 31, 2019.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of its borrowers. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit. All standby letters of credit, similar to advances, are fully collateralized at the time of issuance and subject to member borrowing limits as established by the Bank.

Standby Bond Purchase Agreements. The Bank has entered into standby bond purchase agreements with state housing associates within its district whereby, for a fee, it agrees to serve as a standby liquidity provider if required, to purchase and hold the housing associate’s bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which the Bank would be required to purchase the bonds and typically allows the Bank to terminate the agreement upon the occurrence of a default event of the issuer. At March 31, 2020, the Bank had standby bond purchase agreements with seven housing associates. The standby bond purchase commitments entered into by the Bank have original expiration periods of up to seven years, currently no later than 2025. During both the three months ended March 31, 2020 and 2019, the Bank was not required to purchase any bonds under these agreements.

Commitments to Purchase Mortgage Loans. The Bank enters into commitments that unconditionally obligate it to purchase mortgage loans from its members. These commitments are considered derivatives and their estimated fair value at March 31, 2020 and December 31, 2019 is reported in “Note 6 — Derivatives and Hedging Activities” as mortgage loan purchase commitments.

Commitments to Issue Bonds. The Bank enters into commitments to issue consolidated obligation bonds and discount notes outstanding in the normal course of its business. At March 31, 2020 , the Bank had commitments to issue $133 million of consolidated obligation bonds. At December 31, 2019, the Bank had no commitments to issue consolidated obligation bonds.

42
Table of Contents

Commitments to Fund Advances. The Bank enters into commitments to fund additional advances up to 24 months in the future. At March 31, 2020 and December 31, 2019, the Bank had commitments to fund advances of $954 million and $527 million.

Other Commitments. For each MPF master commitment, the Bank’s potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the first loss account (FLA). For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all MPF master commitments with a PFI credit enhancement obligation was $142 million and $138 million at March 31, 2020 and December 31, 2019.
Legal Proceedings. As a result of the merger with the Federal Home Loan Bank of Seattle (Seattle Bank), the Bank has been involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label MBS. Of the 11 cases initially filed, one has been dismissed, two have been settled in part and dismissed in part, and eight have been settled. The Bank appealed the one complete dismissal and two partial dismissals covering the claims related to five certificates across three different cases. The appellate court affirmed the dismissal of the claims related to four certificates in December 2017 and affirmed the dismissal of the remaining certificate in May 2018. In January 2018, the Bank filed petitions for discretionary review of the appellate court’s rulings in December 2017 related to four of the certificates with the Washington Supreme Court. On May 3, 2018, the Court granted those petitions. The aggregate consideration paid for these four certificates is $567 million. Oral arguments were heard on October 9, 2018. In June 2018, the Bank filed a petition for discretionary review of the appellate court’s ruling in May 2018 on the fifth certificate. The aggregate consideration paid for that one certificate is $200 million.
On October 3, 2019, the Washington Supreme Court reversed the judgment of the appellate court on the four certificates
covered by the Bank’s petition of January 2018 and reinstated the Bank’s claims on those four certificates. Trials for the two cases relating to these reinstated claims have been scheduled for July and August of 2020. With respect to the fifth certificate, on January 30, 2020, the Washington Supreme Court remanded the case to the appellate court for reconsideration in light of the Court’s reversal on the claims for the other four certificates. On March 16, 2020, the appellate court remanded the case to the trial court. On March 25, 2020, the Bank entered into a settlement agreement with one of the defendants in connection with two of the certificates for the aggregate amount of approximately $56 million (after netting certain legal fees and expenses). Other than the private-label MBS litigation, the Bank does not believe any legal proceedings to which it is a party could have a material impact on its financial condition, results of operations, or cash flows.
The Bank records legal expenses related to litigation settlements as incurred in other expenses on the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement. During the three months ended March 31, 2020, the Bank recognized $56 million in net gains on litigation settlements through other income (loss), due to the settlement of one of the Bank’s private-label MBS claims. During the three months ended March 31, 2019, the Bank did not recognize net gains on litigation settlements.

Note 11 — Activities with Stockholders

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. All transactions with stockholders are entered into in the ordinary course of business.

TRANSACTIONS WITH DIRECTORS’ FINANCIAL INSTITUTIONS

In the normal course of business, the Bank extends credit to its members whose directors and officers serve as Bank directors (Directors’ Financial Institutions). Finance Agency regulations require that transactions with Directors’ Financial Institutions be made on the same terms and conditions as those with any other member.

43
Table of Contents

The following table summarizes the Bank’s outstanding transactions with Directors’ Financial Institutions (dollars in millions):
 
 
March 31, 2020
 
December 31, 2019
 
 
Amount
 
% of Total
 
Amount
 
% of Total
Advances
 
$
4,613

 
6
 
$
3,337

 
4
Mortgage loans
 
211

 
2
 
208

 
2
Deposits
 
10

 
1
 
27

 
2
Capital stock
 
235

 
5
 
182

 
4


BUSINESS CONCENTRATIONS

The Bank considers itself to have business concentrations with stockholders owning 10 percent or more of its total capital stock outstanding (including mandatorily redeemable capital stock). At March 31, 2020 and December 31, 2019, the Bank had the following business concentrations with stockholders (dollars in millions):
 
 
March 31, 2020
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans
 
Income2
Wells Fargo Bank, N.A.
 
$
709

 
15
 
$
17,450

 
$
20

 
$
113

Superior Guaranty Insurance Company3
 
14

 
—
 
—

 
334

 
—

Total
 
$
723

 
15
 
$
17,450

 
$
354

 
$
113



 
 
December 31, 2019
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans
 
Income2
Wells Fargo Bank, N.A.
 
$
1,029

 
22
 
$
25,450

 
$
21

 
$
1,059

Superior Guaranty Insurance Company3
 
15

 
—
 
—

 
350

 
—

Total
 
$
1,044

 
22
 
$
25,450

 
$
371

 
$
1,059


1
Pursuant to applicable Finance Agency regulations, the Bank’s voting structure limits the voting rights of these stockholders and other members holding a significant amount of the Bank’s capital stock.
 
2
Represents interest income earned on advances during the three months ended March 31, 2020 and the year ended December 31, 2019. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.

3
Superior Guaranty Insurance Company is an affiliate of Wells Fargo Bank, N.A.


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Table of Contents

Note 12 — Activities with Other FHLBanks

Overnight Funds. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. The following table summarizes loan activity to other FHLBanks during the three months ended March 31, 2020 and 2019 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Loans
 
Principal
Repayment
 
Ending
Balance
2020
 
 
 
 
 
 
 
 
Boston
 
$
—

 
$
250

 
$
(250
)
 
$
—

 
 
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
 
 
Atlanta
 
$
—

 
$
565

 
$
(565
)
 
$
—


    
During the three months ended March 31, 2020, the Bank did not borrow funds from other FHLBanks. The following table summarizes borrowing activity from other FHLBanks during the three months ended March 31, 2019 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Borrowing
 
Principal Payment
 
Ending
Balance
2019
 
 
 
 
 
 
 
 
Atlanta
 
$
500

 
$
—

 
$
(500
)
 
$
—



At March 31, 2020 and 2019, none of the previous transactions were outstanding on the Bank’s Statements of Condition. The interest income and expense related to this activity were immaterial.

Note 13 — Subsequent Events

Subsequent events have been evaluated from April 1, 2020, through the time of the Form 10-Q filing with the Securities and Exchange Commission. No material subsequent events requiring disclosure were identified.



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Table of Contents

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

Our Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with our financial statements and condensed notes at the beginning of this Form 10-Q and in conjunction with our MD&A and Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on March 11, 2020 (2019 Form 10-K). Our MD&A is designed to provide information that will help the reader develop a better understanding of our financial statements, key financial statement changes from quarter to quarter, and the primary factors driving those changes. Our MD&A is organized as follows:
CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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FORWARD-LOOKING INFORMATION

Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such as believes, projects, expects, anticipates, estimates, intends, strategy, plan, could, should, may, and will or their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These risks and uncertainties include, but are not limited to, the following:
 
•
general economic and market conditions that could impact the business we do with our members, including, but not limited to, the timing and volatility of market activity, the continued impact of the coronavirus pandemic (COVID-19), inflation/deflation, employment rates, housing prices, the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments, the valuation of pledged collateral, and the condition of the capital markets on our consolidated obligations;

•
the ability to develop and support internal controls, business processes, information systems, and other operating technologies that effectively manage the risks we face, including but not limited to, cyber-attacks, widespread health emergencies such as COVID-19, and other business interruptions;

•
political or economic events, including legislative, regulatory, monetary, judicial, or other developments that affect us, our members, our counterparties, and/or our investors in the consolidated obligations of the 11 Federal Home Loan Banks (FHLBanks);

•
the ability to meet capital and other regulatory requirements;

•
competitive forces, including without limitation, other sources of funding available to our borrowers that could impact the demand for our advances, other entities purchasing mortgage loans in the secondary mortgage market, and other entities borrowing funds in the capital markets;

•
reliance on a relatively small number of member institutions for a large portion of our advance business;

•
replacement of the London Interbank Offered Rate (LIBOR) benchmark interest rate and transition to an alternative benchmark;

•
member consolidations and failures;

•
disruptions in the credit and debt markets and the effect on future funding costs, sources, and availability;

•
ineffective use of hedging strategies or the availability of derivative instruments in the types and quantities needed for risk management purposes from acceptable counterparties;

•
the volatility of reported results due to changes in the fair value of certain assets, liabilities, and derivative instruments;

•
risks related to the other FHLBanks that could trigger our joint and several liability for debt issued by the other FHLBanks;

•
changes in the relative attractiveness of consolidated obligations due to actual or perceived changes in the FHLBanks’ credit ratings as well as the U.S. Government’s long-term credit rating;

•
increases in delinquency or loss estimates on mortgage loans;

•
the ability to attract and retain key personnel;

•
significant business interruptions resulting from third party failures; and

•
the volatility of credit quality, market prices, interest rates, and other indices that could affect the value of collateral held by us as security for borrower and counterparty obligations.


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For additional information regarding these and other risks and uncertainties that could cause our actual results to differ materially from the expectations reflected in our forward-looking statements, see “Item 1A. Risk Factors” in this quarterly report and in our 2019 Form 10-K. Forward-looking statements apply only as of the date they are made, and we undertake no obligation to update or revise any forward-looking statement.

EXECUTIVE OVERVIEW

Our Bank is a member-owned cooperative serving shareholder members in our district. Our mission is to be a reliable provider of funding, liquidity, and services for our members so that they can meet the housing, business, and economic development needs of the communities they serve. We strive to achieve our mission within an operating model that balances the trade-off between attractively priced products, reasonable returns on capital stock, maintaining an adequate level of capital to meet regulatory capital requirements, and maintaining adequate retained earnings to preserve the par value of member-owned capital stock. Our members include commercial banks, savings institutions, credit unions, insurance companies, and community development financial institutions (CDFIs).

COVID-19
The effects of COVID-19 and the response to the virus have negatively impacted financial markets and overall economic conditions. We strive to be a readily available and reliable source of liquidity in all economic environments and remain dedicated to meeting the needs of members through these challenging and unusual times. We are focused on both the health and safety of our employees. As such, employees who are designated essential continue to work in our offices, while employees considered non-essential are working remotely. We do not expect the change in working arrangements to impair our ability to meet the needs of our members. The effects of COVID-19 are rapidly evolving, and the full impact and duration of the virus are unknown. As a result of the recent market volatility, our financial performance has been adversely impacted. The extent of the impact to our future performance will depend upon how long the current conditions persist. For additional information, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Conditions in the Financial Markets — Economy and Financial Markets” and “Item 1A. Risk Factors.”
Financial Results
For the three months ended March 31, 2020, we reported net income of $92 million compared to $112 million for the same period in 2019. The decline in our net income for the three months ended March 31, 2020, calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), was primarily driven by a decrease in net interest income, offset in part by an increase in other income.

Net interest income totaled $109 million for the three months ended March 31, 2020 compared to $159 million for the same period last year. The decline during the three months ended March 31, 2020 was primarily due to a decrease in net interest margin and a decline in average advance volumes. Our net interest margin was 0.35 percent during the three months ended March 31, 2020 compared to 0.45 percent for the same period in 2019. The decrease in net interest margin was primarily attributable to lower asset liability spreads and declining interest rates. In addition, we incurred losses of $12 million on our fair value hedge relationships which stemmed from market volatility caused by COVID-19.

We recorded net gains of $36 million in other income (loss) for the three months ended March 31, 2020 compared to net gains of $5 million for the same period last year. During the three months ended March 31, 2020, other income (loss) was primarily impacted by net gains on litigation settlements of $56 million as a result of a settlement with a defendant in our private-label MBS litigation. We did not record any litigation settlements during the three months ended March 31, 2019. Other factors impacting other income (loss) included net gains (losses) on trading securities and net gains (losses) on derivatives and hedging activities, as described below.

During the three months ended March 31, 2020, we recorded net gains on trading securities of $26 million compared to net gains of $10 million for the same period last year. These changes in fair value were primarily due to the impact of changes in interest rates and credit spreads on our fixed rate trading securities which stemmed from market volatility caused by COVID-19.


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During the three months ended March 31, 2020, we recorded net losses of $48 million on our derivatives and hedging activities through other income (loss) compared to net losses of $12 million during the same period last year. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio. The changes in interest rates were primarily driven by market volatility caused by COVID-19.

Our total assets decreased to $126.1 billion at March 31, 2020, from $129.6 billion at December 31, 2019, primarily due to a decrease in investments of $2.8 billion. Money market investments decreased by $3.1 billion from December 31, 2019. This decline was offset in part by an increase in U.S. Treasuries of $0.9 billion that we purchased and utilized for liquidity management during the first quarter of 2020.

Our total liabilities decreased to $119.3 billion at March 31, 2020, from $122.9 billion at December 31, 2019, primarily driven by a decrease in the amount of consolidated obligations needed to fund our assets.

Total capital remained relatively stable at $6.7 billion at March 31, 2020 compared to December 31, 2019. Our regulatory capital ratio increased to 5.51 percent at March 31, 2020, from 5.31 percent at December 31, 2019, and was above the required regulatory limit at each period end. Regulatory capital includes all capital stock, mandatorily redeemable capital stock, and retained earnings.

Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition” for additional discussion on our financial condition.

Adjusted Earnings

As part of evaluating our financial performance, we adjust GAAP net interest income and GAAP net income before assessments for the impact of (i) market adjustments relating to derivative and hedging activities and instruments held at fair value, (ii) realized gains (losses) on investment securities, and (iii) other non-routine and unpredictable items, including net asset prepayment fee income, mandatorily redeemable capital stock interest expense, and net gains on litigation settlements. The resulting non-GAAP measure, referred to as our adjusted earnings, reflects both adjusted net interest income and adjusted net income.
Because our business model is primarily one of holding assets and liabilities to maturity, management believes that the adjusted earnings measure is helpful in understanding our operating results and provides a meaningful period-to-period comparison of our economic performance in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility on financial instruments recorded at fair value or transactions that are considered to be unpredictable or not routine. As a result, management uses the adjusted earnings measure to assess performance under our incentive compensation plans. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. While these non-GAAP measures can be used to assist in understanding the components of our earnings, they should not be considered a substitute for results reported under GAAP.

The adjusted net income methodology is calculated on a post Affordable Housing Program (AHP) assessment basis. Management believes AHP assessments are a fundamental component of our business and believes this assessment should be included in our adjusted net income calculation. In addition, this treatment aligns the adjusted net income results to our strategic business plan which is calculated on a post AHP assessment basis.

As indicated in the tables that follow, our adjusted net interest income and adjusted net income decreased during the three months ended March 31, 2020 when compared to the same period in 2019. The decline was driven by lower adjusted net interest income due to a decrease in net interest margin and a decline in average advance volumes as previously noted.


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The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):
 
For the Three Months Ended
 
March 31,
 
2020
 
2019
GAAP net interest income
$
109

 
$
159

Exclude:
 
 
 
Prepayment fees on advances, net1
4

 
—

Prepayment fees on investments, net2
1

 
3

Mandatorily redeemable capital stock interest expense
(3
)
 
(3
)
Market value adjustments on fair value hedges3
(12
)
 
—

Total adjustments
(10
)
 
—

Include items reclassified from other income (loss):
 
 
 
Net interest expense on economic hedges
(1
)
 
—

Adjusted net interest income
$
118

 
$
159

Adjusted net interest margin
0.37
%
 
0.45
%

1
Prepayment fees on advances, net includes basis adjustment amortization and premium and/or discount amortization.

2
Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.

3
Represents gains (losses) on derivatives and hedged items in qualifying hedging relationships. Amounts do not include the amortization of the financing element of off-market derivatives.

The following table summarizes the reconciliation between GAAP net income before assessments and adjusted net income (dollars in millions):
 
For the Three Months Ended
 
March 31,
 
2020
 
2019
GAAP net income before assessments
$
102

 
$
125

Exclude:
 
 
 
Prepayment fees on advances, net1
4

 
—

Prepayment fees on investments, net2
1

 
3

Mandatorily redeemable capital stock interest expense
(3
)
 
(3
)
Market value adjustments on fair value hedges3
(12
)
 
—

Net gains (losses) on trading securities
26

 
10

Net gains (losses) on derivatives and hedging activities
(48
)
 
(12
)
Gains on litigation settlements, net
56

 
—

Include:
 
 
 
Net interest expense on economic hedges
(1
)
 
—

Adjusted net income before assessments
77

 
127

Adjusted AHP assessments4
8

 
13

Adjusted net income
$
69

 
$
114


1
Prepayment fees on advances, net includes basis adjustment amortization and premium and/or discount amortization.

2
Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.

3
Represents gains (losses) on derivatives and hedged items in qualifying hedging relationships. Amounts do not include the amortization of the financing element of off-market derivatives.

4
Adjusted AHP assessments for this non-GAAP measure are calculated as 10 percent of adjusted net income before assessments. For additional discussion on AHP assessments, refer to “Item 8. Financial Statements and Supplementary Data — Note 14 — Affordable Housing Program” in our 2019 10-K.

For additional discussion on items impacting our GAAP earnings, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”


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Replacement of the LIBOR Benchmark Interest Rate

In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that after 2021 it will no longer compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks. This committee has proposed Secured Overnight Financing Rate (SOFR) as its recommended alternative to U.S. dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.

On September 27, 2019, the Finance Agency issued a Supervisory Letter to all FHLBanks providing LIBOR transition guidance. The Supervisory Letter stated that by March 31, 2020, the FHLBanks should no longer enter into new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021 for all product types other than investments. For investments, the Supervisory Letter indicated the FHLBanks, by December 31, 2019, should stop purchasing investments that reference LIBOR and mature after December 31, 2021. We ceased purchasing investments that reference LIBOR in 2018. As a result of market volatility triggered in part by COVID-19, on March 16, 2020, the Finance Agency extended from March 31, 2020 to June 30, 2020 the FHLBanks’ ability to enter into instruments referencing LIBOR that mature after December 31, 2021, except for investments and option embedded products. For additional information on the Finance Agency’s supervisory letter, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”

As noted throughout this report, many of our advances, investments, consolidated obligation bonds, derivatives, and related collateral are indexed to LIBOR. Some of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. We are preparing for a transition away from LIBOR as a benchmark interest rate and plan to utilize SOFR as the dominant replacement on an ongoing basis. We have developed a transition plan that will change with market developments and member needs and addresses considerations such as LIBOR exposure, member products, fallback language, which provides for contractual alternatives to the use of LIBOR when LIBOR cannot be determined based on the method provided in the agreement, operational preparedness, and balance sheet management.
In assessing our current exposure to LIBOR, we have developed an inventory of financial instruments impacted and identified contracts that may require adding or adjusting the fallback language. We have added or adjusted fallback language to our advance agreements with members and added fallback language to our consolidated obligation agreements. We continue to monitor the market-wide efforts to address fallback language related to derivatives and investment securities as well as fallback language for new activities and issuances of financial instruments. We are in the process of ensuring we are operationally ready, including updating our processes and information technology systems to support the transition from LIBOR to an alternative reference rate.
Market activity in SOFR-indexed financial instruments continues to increase and we continue to offer SOFR-indexed advances and issue SOFR-indexed debt. While we have reduced our use of LIBOR-indexed derivatives, we continue to execute LIBOR-indexed derivatives to manage interest-rate risk and to monitor market wide efforts to address fallback language related to LIBOR-linked derivative transactions. In 2020, we began utilizing the Federal Funds Overnight Index Swap (OIS) rate as an interest-rate hedge strategy for certain financial instruments as an alternative to using LIBOR when entering into new derivative transactions.


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The following tables summarize our variable rate advances, investments, consolidated obligation bonds and derivatives by interest-rate index at March 31, 2020 and December 31, 2019 (in millions):
 
March 31, 2020
 
LIBOR
 
SOFR
 
OIS
 
Other
 
Total
Advances, principal amount
$
17,742

 
$
500

 
$
—

 
$
12,672

 
$
30,914

Investment securities
 
 
 
 
 
 
 
 
 
Non-mortgage-backed securities, principal amount
2,052

 
—

 
—

 
—

 
2,052

Mortgage-backed securities, principal amount
8,698

 
—

 
—

 
1

 
8,699

Total investment securities
10,750

 
—

 
—

 
1

 
10,751

Consolidated bonds, principal amount
38,548

 
10,967

 
—

 
—

 
49,515

Total variable rate financial instruments amount
$
67,040

 
$
11,467

 
$
—

 
$
12,673

 
$
91,180

 
 
 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
 

Pay leg, notional amount
14,220

 
—

 
—

 
—

 
14,220

Receive leg, notional amount
19,665

 
—

 
5,583

 
—

 
25,248

 
December 31, 2019
 
LIBOR
 
SOFR
 
Other
 
Total
Advances, principal amount
$
22,919

 
$
500

 
$
17,605

 
$
41,024

Investment securities
 
 
 
 
 
 
 
Non-mortgage-backed securities, principal amount
2,120

 
—

 
—

 
2,120

Mortgage-backed securities, principal amount
9,345

 
—

 
1

 
9,346

Total investment securities
11,465

 
—

 
1

 
11,466

Consolidated obligation bonds, principal amount
48,970

 
3,967

 
—

 
52,937

Total variable rate financial instruments amount
$
83,354

 
$
4,467

 
$
17,606

 
$
105,427

 
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Pay leg, notional amount
17,473

 
—

 
—

 
17,473

Receive leg, notional amount
21,249

 
—

 
—

 
21,249



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The following tables present our exposure to LIBOR-indexed advances, investments, consolidated obligation bonds and derivatives at March 31, 2020 and December 31, 2019 (in millions):
 
March 31, 2020
 
Due in 2020
 
Due in 2021
 
Thereafter
 
Total
Assets Indexed to LIBOR
 
 
 
 
 
 
 
Advances, principal amount by redemption term
$
6,168

 
$
10,936

 
$
638

 
$
17,742

Investment securities, by contractual maturity1
 
 
 
 
 
 
 
Non-mortgage-backed securities, principal amount
8

 
—

 
2,044

 
2,052

Mortgage-backed securities, principal amount
—

 
12

 
8,686

 
8,698

Derivatives, receive leg
 
 
 
 
 
 
 
Cleared, notional amount
2,531

 
2,655

 
9,186

 
14,372

Uncleared, notional amount
92

 
505

 
4,696

 
5,293

Total Principal/Notional Amount
$
8,799

 
$
14,108

 
$
25,250

 
$
48,157

 
 
 
 
 
 
 
 
Liabilities Indexed to LIBOR
 
 
 
 
 
 
 
Consolidated obligation bonds, principal amount by contractual maturity
$
33,608

 
$
4,940

 
$
—

 
$
38,548

Derivatives, pay leg
 
 
 
 
 
 
 
Cleared, notional amount
3,644

 
8,837

 
1,004

 
13,485

Uncleared, notional amount
164

 
168

 
403

 
735

Total Principal/Notional Amount
$
37,416

 
$
13,945

 
$
1,407

 
$
52,768

1
MBS are presented by contractual maturity, however, their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
 
December 31, 2019
 
Due in 2020
 
Due in 2021
 
Thereafter
 
Total
Assets Indexed to LIBOR
 
 
 
 
 
 
 
Advances, principal amount by redemption term
$
10,445

 
$
11,886

 
$
588

 
$
22,919

Investment securities, by contractual maturity1
 
 
 
 
 
 
 
Non-mortgage-backed securities, principal amount
8

 
—

 
2,112

 
2,120

Mortgage-backed securities, principal amount
—

 
12

 
9,333

 
9,345

Derivatives, receive leg
 
 
 
 
 
 
 
Cleared, notional amount
3,425

 
2,763

 
9,445

 
15,633

Uncleared, notional amount
157

 
514

 
4,945

 
5,616

Total Principal/Notional Amount
$
14,035

 
$
15,175

 
$
26,423

 
$
55,633

 
 
 
 
 
 
 
 
Liabilities Indexed to LIBOR
 
 
 
 
 
 
 
Consolidated obligation bonds, principal amount by contractual maturity
$
44,780

 
$
4,190

 
$
—

 
$
48,970

Derivatives, pay leg
 
 
 
 
 
 
 
Cleared, notional amount
6,882

 
8,837

 
1,004

 
16,723

Uncleared, notional amount
179

 
168

 
403

 
750

Total Principal/Notional Amount
$
51,841

 
$
13,195

 
$
1,407

 
$
66,443

1
MBS are presented by contractual maturity, however, their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
For a summary of our risks on the replacement of the LIBOR benchmark interest rate, refer to “Item 1A. Risk Factors” in our 2019 Form 10-K.

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CONDITIONS IN THE FINANCIAL MARKETS

Economy and Financial Markets

COVID-19 has harmed communities and disrupted economic activity in many countries, including the U.S. Available economic data show that the U.S. economy came into this challenging period on a strong footing. Economic and market data received since the Federal Open Market Committee (FOMC or Committee) meeting in January of 2020 indicates that the labor market remained strong through February and economic activity rose at a moderate rate. Job gains had been solid, on average, through February, and the unemployment rate remained low. Although household spending rose at a moderate pace, business fixed investment and exports remained weak. More recently, the energy sector has come under stress. On a 12-month basis, overall inflation and measures excluding food and energy prices are running below the FOMC’s target of two percent. Market-based measures of inflation compensation have declined, and survey-based measures of longer-term inflation expectations are little changed.

In March 2020, the FOMC stated it continues to seek to foster maximum employment and price stability. The effects of COVID-19 will weigh on economic activity in the near term and pose risks to the economic outlook. In light of these developments, the Committee stated that it decided to lower the target range for the Federal funds rate by 150 basis points, to zero to 0.25 percent. The Committee stated that it expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. This action is expected to help support economic activity, strong labor market conditions, and inflation returning to the Committee’s two percent objective.

In determining the timing and size of future adjustments to the target range for the Federal funds rate, the FOMC stated that it will assess realized and expected economic conditions relative to its maximum employment and a two percent inflation rate. The assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures, inflation expectations, and financial and international developments.

Throughout March, as the spread of COVID-19 and the expected economic impact increased, the Federal Reserve and Congress implemented a multitude of programs to help stabilize market conditions. The Federal Reserve announced the implementation of many 2008/2009 tools, including but not limited to expanded repurchase facilities, the purchase of U.S. Treasuries, agency MBS, and commercial MBS, a commercial paper liquidity facility, and discount window changes. Congress signed a record $2.2 trillion Coronavirus Aid, Recovery and Economic Stability (CARES) Act. This fiscal stimulus included provisions to support small businesses, unemployment benefits, the health care system, state municipalities, and more. Funding for the Paycheck Protection Program (PPP), which was created by the CARES Act, was increased on April 24, 2020 with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act. For additional information, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”

Mortgage Markets

The housing market started strong during the first quarter of 2020 with an increase in home prices and new home sales; however those trends reversed in March due to the slowing of economic activity as a result of COVID-19. Home sales are expected to decline during the remainder of 2020 due to an increase in unemployment and frictions in the mortgage origination process as a result of social distancing. Mortgage rates declined during the first quarter of 2020, but lagged Treasury rates. Refinancing was the primary driver of mortgage activity, but is expected to slow due to higher unemployment, tighter credit standards, and delays in the closing process.

The federal government has implemented several programs to assist homeowners affected by the pandemic, including temporary mortgage payment forbearance and a temporary moratorium on foreclosures and evictions.


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Interest Rates

The following table shows information on key market interest rates1:
 
First Quarter 2020
3-Month Average
 
First Quarter 2019
3-Month Average
 
March 31, 2020
Ending Rate
 
12/31/2019
Federal funds
1.23
%
 
2.40
%
 
0.08
%
 
1.55
%
Three-month LIBOR
1.52

 
2.69

 
1.45

 
1.91

SOFR
1.23

 
2.43

 
0.01

 
1.55

2-year U.S. Treasury
1.09

 
2.49

 
0.25

 
1.57

10-year U.S. Treasury
1.37

 
2.65

 
0.67

 
1.92

30-year residential mortgage note
3.52

 
4.39

 
3.50

 
3.74


1
Source: Bloomberg.

In March 2020, the FOMC announced two emergency decreases to the Federal funds rate, bringing the target range of the Federal funds rate to zero to 0.25 percent, noting that COVID-19 has harmed communities and disrupted economic activity in many countries, including the U.S., and has significantly affected global financial conditions.

The 10-year U.S. Treasury yields have declined to historically low levels and mortgage rates were lower on average in the first quarter of 2020 when compared to the same period in the prior year. The global concerns related to COVID-19 and the impact on economic activity have led to lower interest rates. As interest rates declined, our net income was negatively impacted.

Funding Spreads

The following table reflects our funding spreads to LIBOR (basis points)1:
 
First Quarter 2020
3-Month Average
 
First Quarter 2019
3-Month Average
 
March 31, 2020
Ending Spread
 
December 31, 2019
Ending Spread
3-month
(35.1
)
 
(24.2
)
 
(131.5
)
 
(32.7
)
2-year
4.9

 
(6.5
)
 
(8.5
)
 
(7.4
)
5-year
17.4

 
7.1

 
22.3

 
2.4

10-year
48.1

 
41.1

 
78.4

 
28.7


1
Source: The Office of Finance.

The following table reflects our funding spreads to U.S. Treasuries (basis points)1:
 
First Quarter 2020
3-Month Average
 
First Quarter 2019
3-Month Average
 
March 31, 2020
Ending Spread
 
December 31, 2019
Ending Spread
3-month
8.4

 
4.8
 
0.5

 
5.1

2-year
12.4

 
5.2
 
16.2

 
3.6

5-year
20.4

 
14.0
 
37.0

 
5.2

10-year
44.4

 
43.2
 
82.0

 
26.0


1
Source: The Office of Finance.


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As a result of our credit quality and government-sponsored enterprise (GSE) status, we generally have ready access to funding at relatively competitive interest rates. During the first quarter of 2020, our funding spreads were mixed relative to LIBOR. Short-term spreads improved, on average, when compared to the same period in prior year, while long-term spreads deteriorated, on average. This was due to LIBOR rates remaining elevated even after the FOMC interest rate declines. Our funding spreads to U.S. Treasuries deteriorated, on average, during the first quarter of 2020 when compared to the same period in the prior year, particularly on longer maturities. The FOMC decision to purchase U.S. Treasuries in March was one driver of differences between our funding spreads and U.S. Treasuries. During the three months ended March 31, 2020, we utilized short-term discount notes in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements.

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SELECTED FINANCIAL DATA

The following tables present selected financial data for the periods indicated (dollars in millions):
Statements of Condition
March 31,
2020
 
December 31,
2019
 
September 30,
2019
 
June 30,
2019
 
March 31,
2019
Cash and due from banks
$
611

 
$
1,029

 
$
209

 
$
218

 
$
81

Investments1
35,634

 
38,465

 
34,402

 
39,140

 
38,271

Advances
79,757

 
80,360

 
85,009

 
101,288

 
99,228

Mortgage loans held for portfolio, net2
9,546

 
9,334

 
8,952

 
8,324

 
7,943

Total assets
126,068

 
129,603

 
129,148

 
149,474

 
146,043

Consolidated obligations
 
 
 
 
 
 
 
 
 
Discount notes
33,071

 
29,531

 
26,716

 
36,934

 
44,994

Bonds
84,266

 
91,553

 
93,611

 
103,223

 
91,979

Total consolidated obligations3
117,337

 
121,084

 
120,327

 
140,157

 
136,973

Mandatorily redeemable capital stock
96

 
206

 
202

 
203

 
237

Total liabilities
119,335

 
122,877

 
122,305

 
141,997

 
138,684

Capital stock — Class B putable
4,653

 
4,517

 
4,676

 
5,304

 
5,182

Retained earnings
2,199

 
2,165

 
2,131

 
2,120

 
2,092

Accumulated other comprehensive income (loss)
(119
)
 
44

 
36

 
53

 
85

Total capital
6,733

 
6,726

 
6,843

 
7,477

 
7,359

Regulatory capital ratio4
5.51

 
5.31

 
5.43

 
5.10

 
5.14

 
For the Three Months Ended
Statements of Income
March 31,
2020
 
December 31,
2019
 
September 30,
2019
 
June 30,
2019
 
March 31,
2019
Net interest income
$
109

 
$
141

 
$
129

 
$
147

 
$
159

Other income (loss)5
36

 
9

 
3

 
3

 
5

Other expense6
43

 
43

 
43

 
43

 
39

AHP assessments
10

 
11

 
9

 
11

 
13

Net income
92

 
96

 
80

 
96

 
112

Selected Financial Ratios7
 
 
 
 
 
 
 
 
 
Net interest spread8
0.25
%
 
0.33
%
 
0.25
%
 
0.27
%
 
0.31
%
Net interest margin9
0.35

 
0.43

 
0.38

 
0.40

 
0.45

Return on average equity (annualized)
5.51

 
5.67

 
4.57

 
5.13

 
6.16

Return on average capital stock (annualized)
8.26

 
8.41

 
6.66

 
7.23

 
8.70

Return on average assets (annualized)
0.29

 
0.29

 
0.23

 
0.26

 
0.31

Average equity to average assets
5.27

 
5.13

 
5.13

 
5.05

 
5.08

Dividend payout ratio10
63.50

 
64.69

 
87.28

 
70.34

 
62.02


1
Investments include interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale (AFS) securities, and held-to-maturity (HTM) securities.

2
Includes an allowance for credit losses of $1 million at March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019.

3
The total par value of outstanding consolidated obligations of the 11 FHLBanks was $1,174.7 billion, $1,025.9 billion, $1,010.3 billion, $1,048.4 billion, and $1,010.9 billion at March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019, respectively.

4
Represents period-end regulatory capital expressed as a percentage of period-end total assets. Regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock) and retained earnings.

5
Other income (loss) includes, among other things, net gains (losses) on investment securities, net gains (losses) on derivatives and hedging activities, and gains on litigation settlements, net. During the three months ended March 31, 2020, other income (loss) was impacted by net gains on litigation settlements. The Bank did not record any litigation settlements during the three months ended December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019.

6
Other expense includes, among other things, compensation and benefits, professional fees and contractual services.

7
Amounts used to calculate selected financial ratios are based on numbers in actuals. Accordingly, recalculations using numbers in millions may not produce the same results.

8
Represents annualized yield on total interest-earning assets minus annualized cost of total interest-bearing liabilities.

9
Represents net interest income expressed as a percentage of average interest-earning assets.

10
Represents dividends declared and paid in the stated period expressed as a percentage of net income in the stated period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense on our Statements of Income.

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RESULTS OF OPERATIONS

Net Income

The following table presents comparative highlights of our net income for the three months ended March 31, 2020 and 2019 (dollars in millions). See further discussion of these items in the sections that follow.
 
For the Three Months Ended
 
March 31,
 
2020
 
2019
 
$ Change
 
% Change
Net interest income
$
109

 
$
159

 
$
(50
)
 
(31
)%
Other income (loss)
36

 
5

 
31

 
620

Other expense
43

 
39

 
4

 
10

AHP assessments
10

 
13

 
(3
)
 
(23
)
Net income
$
92

 
$
112

 
$
(20
)
 
(18
)%

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Table of Contents

Net Interest Income

Our net interest income is impacted by changes in average interest-earning asset and interest-bearing liability balances, and the related yields and costs. The following table presents average balances and annualized yields/costs of major asset and liability categories (dollars in millions):    
 
For the Three Months Ended March 31,
 
20201
 
20191
 
Average
Balance2
 
Yield/Cost
 
Interest
Income/
Expense
 
Average
Balance2
 
Yield/Cost
 
Interest
Income/
Expense
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
384

 
0.84
%
 
$
1

 
$
125

 
1.33
%
 
$
—

Securities purchased under agreements to resell
8,709

 
1.41

 
30

 
5,212

 
2.46

 
32

Federal funds sold
8,718

 
1.25

 
27

 
7,187

 
2.43

 
43

Mortgage-backed securities3,4
14,396

 
2.00

 
72

 
16,615

 
3.05

 
125

    Other investments3,4,5
5,447

 
1.92

 
26

 
5,884

 
3.31

 
48

Advances4
78,875

 
2.04

 
399

 
101,763

 
2.85

 
715

Mortgage loans6
9,403

 
3.33

 
78

 
7,890

 
3.57

 
69

     Loans to other FHLBanks
8

 
1.61

 
—

 
6

 
2.45

 
—

Total interest-earning assets
125,940

 
2.02

 
633

 
144,682

 
2.89

 
1,032

Non-interest-earning assets
1,053

 
—

 
—

 
949

 
—

 
—

Total assets
$
126,993

 
2.01
%
 
$
633

 
$
145,631

 
2.88
%
 
$
1,032

Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
969

 
0.44
%
 
$
1

 
$
906

 
1.95
%
 
$
4

Consolidated obligations
 
 
 
 
 
 
 

 
 

 
 

Discount notes
28,695

 
1.54

 
110

 
44,569

 
2.46

 
271

Bonds4
89,139

 
1.85

 
410

 
91,488

 
2.64

 
595

Other interest-bearing liabilities7
200

 
5.54

 
3

 
256

 
5.45

 
3

Total interest-bearing liabilities
119,003

 
1.77

 
524

 
137,219

 
2.58

 
873

Non-interest-bearing liabilities
1,304

 
—

 
—

 
1,015

 
—

 
—

Total liabilities
120,307

 
1.75

 
524

 
138,234

 
2.56

 
873

Capital
6,686

 
—

 
—

 
7,397

 
—

 
—

Total liabilities and capital
$
126,993

 
1.66
%
 
$
524

 
$
145,631

 
2.43
%
 
$
873

Net interest income and spread8
 
 
0.25
%
 
$
109

 
 
 
0.31
%
 
$
159

Net interest margin9
 
 
0.35
%
 
 
 
 
 
0.45
%
 
 
Average interest-earning assets to interest-bearing liabilities
 
 
105.83
%
 
 
 
 
 
105.44
%
 
 

1
Interest income and expense amounts reported for advances, MBS, other investments, and consolidated obligation bonds include gains (losses) on hedged items and derivatives in qualifying hedge relationships.

2
Average balances are calculated on a daily weighted average basis and do not reflect the effect of derivative master netting arrangements with counterparties and/or clearing agents.

3
The average balance of AFS securities is reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.

4
Average balances reflect the impact of fair value hedging adjustments.

5
Other investments primarily include U.S. Treasury obligations, other U.S. obligations, GSE obligations and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and Private Export Funding Corporation (PEFCO) bonds.

6
Non-accrual loans are included in the average balance used to determine the average yield.

7
Other interest-bearing liabilities consists primarily of mandatorily redeemable capital stock.

8
Represents annualized yield on total interest-earning assets minus annualized yield on total interest-bearing liabilities.

9
Represents net interest income expressed as a percentage of average interest-earning assets.









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Table of Contents



The following table presents changes in interest income and interest expense. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, are allocated to the volume and rate categories based on the proportion of the absolute value of the volume and rate changes (dollars in millions).
 
Three Months Ended
 
March 31, 2020 vs. March 31, 2019
 
Total Increase
(Decrease) Due to
 
Total Increase
(Decrease)
 
Volume
 
Rate
 
Interest income
 
 
 
 
 
Interest-bearing deposits
$
1

 
$
—

 
$
1

Securities purchased under agreements to resell
15

 
(17
)
 
(2
)
Federal funds sold
8

 
(24
)
 
(16
)
Mortgage-backed securities
(15
)
 
(38
)
 
(53
)
Other investments
(3
)
 
(19
)
 
(22
)
Advances
(140
)
 
(176
)
 
(316
)
Mortgage loans
14

 
(5
)
 
9

Total interest income
(120
)
 
(279
)
 
(399
)
Interest expense
 
 
 
 
 
Deposits
—

 
(3
)
 
(3
)
Consolidated obligations
 
 
 
 
 
Discount notes
(79
)
 
(82
)
 
(161
)
Bonds
(15
)
 
(170
)
 
(185
)
Total interest expense
(94
)
 
(255
)
 
(349
)
Net interest income
$
(26
)
 
$
(24
)
 
$
(50
)
    
NET INTEREST SPREAD

Net interest spread equals the annualized yield on total interest-earning assets minus the annualized cost of total interest-bearing liabilities. For the three months ended March 31, 2020, our net interest spread was 0.25 percent compared to 0.31 percent during the same period in 2019. The decline in net interest spread during the three months ended March 31, 2020 was primarily impacted by our interest-earning assets repricing to lower interest rates at a quicker pace than our interest-bearing liabilities during the first quarter of 2020. The primary components of our interest income and interest expense are discussed below.

NET INTEREST MARGIN

Net interest margin equals net interest income expressed as a percentage of average interest-earning assets. For the three months ended March 31, 2020, our net interest margin was 0.35 percent compared to 0.45 percent during the same period in 2019. Our net interest margin decreased during the three months ended March 31, 2020 compared to the same period in 2019 and was primarily attributable to lower asset liability spreads and declining interest rates. In addition, we incurred losses of $12 million on our fair value hedge relationships which stemmed from market volatility caused by COVID-19.

Advances

Interest income on advances decreased during the three months ended March 31, 2020 when compared to the same period in 2019 due primarily to the lower interest rate environment and lower average advance balances. The decrease in average advance balances from prior year was a result of a decline in advances from Wells Fargo, Bank N.A. and captive insurance company members, partially offset by an increase in borrowings by certain other institution types.


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Table of Contents

Investments

Interest income on investments decreased during the three months ended March 31, 2020 when compared to the same period in 2019 due primarily to the lower interest rate environment. In addition, we incurred $12 million in losses on our investment fair value hedge relationships which stemmed from market volatility caused by COVID-19.

Bonds

Interest expense on bonds decreased during the three months ended March 31, 2020 when compared to the same period in 2019 due primarily to the lower interest rate environment.

Discount Notes

Interest expense on discount notes decreased during the three months ended March 31, 2020 when compared to the same period in 2019 primarily due to the lower interest rate environment and lower average discount note balances. While period end discount note balances increased from December 31, 2019, average discount note balances decreased from the prior year primarily due to a reduction in total assets.

For additional information on how we manage the difference between our asset and liability maturities, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

Other Income (Loss)

The following table summarizes the components of other income (loss) (dollars in millions):
 
For the Three Months Ended
 
March 31,
 
2020
 
2019
Net gains (losses) on trading securities
$
26

 
$
10

Net gains (losses) on derivatives and hedging activities
(48
)
 
(12
)
Gains on litigation settlements, net
56

 
—

Other, net
2

 
7

Total other income (loss)
$
36

 
$
5

    
Other income (loss) can be volatile from period to period depending on the type of activity recorded. We recorded net gains of $36 million during the three months ended March 31, 2020 compared to net gains of $5 million during the same period in 2019. During the three months ended March 31, 2020, other income (loss) was primarily impacted by net gains on litigation settlements of $56 million as a result of a settlement with a defendant in our private-label MBS litigation. We did not record any litigation settlements during the three months ended March 31, 2019. Other factors impacting other income (loss) included net gains (losses) on trading securities and net gains (losses) on derivatives and hedging activities, as described below.

During the three months ended March 31, 2020, we recorded net gains on trading securities of $26 million compared to net gains of $10 million during the same period in 2019. These changes in fair value were primarily due to the impact of interest rates and credit spreads on our fixed rate trading securities which stemmed from market volatility caused by COVID-19. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

During the three months ended March 31, 2020, we recorded net losses of $48 million on our derivatives and hedging activities through other income (loss) compared to net losses of $12 million during the same period in 2019. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio. The changes in interest rates were primarily driven by market volatility caused by COVID-19. Accounting rules require all derivatives to be recorded at fair value and therefore we may be subject to income statement volatility. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Hedging Activities” for additional discussion on our derivatives and hedging activities, including the net impact of economic hedge relationships.



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Table of Contents

Hedging Activities

We use derivatives to manage interest rate risk. Accounting rules affect the timing and recognition of income and expense on derivatives and therefore we may be subject to income statement volatility.

If a hedging activity qualifies for hedge accounting treatment (fair value hedge), the net interest settlements of interest receivables or payables related to the derivative are recognized as interest income or expense in the relevant income statement caption consistent with the hedged asset or liability. The fair value gains and losses of derivatives and hedged items designated in fair value hedge relationships are also recognized as interest income or expense. Amortization of basis adjustments from terminated hedges and the amortization of the financing element of off-market derivatives are recorded in interest income or expense.

If a hedging activity does not qualify for hedge accounting treatment (economic hedge), the net interest settlements of interest receivables or payables related to the derivative as well as the fair value gains and losses on the derivative are recorded as a component of other income (loss) in “Net gains (losses) on derivatives and hedging activities;” however, there is no fair value adjustment for the corresponding asset or liability being hedged unless changes in the fair value of the asset or liability are normally marked to fair value through earnings (i.e., trading securities and fair value option instruments).

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Three Months Ended March 31, 2020
Net Effect of Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
(6
)
 
$
(1
)
 
$
—

 
$
(1
)
 
$
(8
)
Net gains (losses) on fair value hedges2
 
1

 
(13
)
 
—

 
1

 
(11
)
Net interest settlements on derivatives3
 
(7
)
 
(12
)
 
—

 
4

 
(15
)
Total impact to net interest income
 
(12
)
 
(26
)
 
—

 
4

 
(34
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on economic hedges4
 
—

 
(47
)
 
(1
)
 
—

 
(48
)
Net gains (losses) on trading securities5
 
—

 
26

 
—

 
—

 
26

Total impact to other income (loss)
 
—

 
(21
)
 
(1
)
 
—

 
(22
)
Total net effect of hedging activities6
 
$
(12
)
 
$
(47
)
 
$
(1
)
 
$
4

 
$
(56
)

1
Represents the amortization/accretion of basis adjustments on closed hedge relationships.

2
Gains (losses) on derivatives and hedged items in qualifying hedging relationships are reported in net interest income. Net gains (losses) on fair value hedges also includes the amortization of the financing element of off-market derivatives.

3
Represents the interest component on derivatives that qualify for fair value hedge accounting.

4
Represents amounts recorded in “Net gains (losses) on derivatives and hedging activities” on the Statements of Income.

5
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

6
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.


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Table of Contents

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Three Months Ended March 31, 2019
Net Effect of Hedging Activities
 
Advances
 
Investments
 
Bonds
 
Total
Net interest income:
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
—

 
$
2

 
$
(1
)
 
$
1

Net gains (losses) on fair value hedges2
 
1

 
2

 
(2
)
 
1

Net interest settlements on derivatives3
 
24

 
1

 
(65
)
 
(40
)
Total impact to net interest income
 
25

 
5

 
(68
)
 
(38
)
Other income (loss):
 
 
 
 
 
 
 
 
Net gains (losses) on economic hedges4
 
—

 
(12
)
 
—

 
(12
)
Net gains (losses) on trading securities5
 
—

 
10

 
—

 
10

Total impact to other income (loss)
 
—

 
(2
)
 
—

 
(2
)
Total net effect of hedging activities6
 
$
25

 
$
3

 
$
(68
)
 
$
(40
)

1
Represents the amortization/accretion of basis adjustments on closed hedge relationships.

2
Gains (losses) on derivatives and hedged items in qualifying hedging relationships are reported in net interest income. Net gains (losses) on fair value hedges also includes the amortization of the financing element of off-market derivatives.

3
Represents the interest component on derivatives that qualify for fair value hedge accounting.

4
Represents amounts recorded in “Net gains (losses) on derivatives and hedging activities” on the Statements of Income.

5
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

6
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.


NET AMORTIZATION/ACCRETION

Amortization/accretion varies from period to period depending on our hedge relationship termination activities and the maturity, call, or prepayment of assets or liabilities previously in hedge relationships.

NET INTEREST SETTLEMENTS

Net interest settlements represent the interest component on derivatives. These amounts vary from period to period depending on our hedging activities and interest rates and are partially offset by the interest component on the related hedged item within net interest income. The hedging activity tables do not include the impact of the interest component on the related hedged item.

NET GAINS (LOSSES) ON FAIR VALUE HEDGES

The fair value gains and losses of derivatives and hedged items in designated fair value hedge relationships are recorded in net interest income. Gains (losses) on fair value hedges are driven by changes in the benchmark interest rate, volatility, and the divergence in the valuation curves used to value our assets, liabilities, and derivatives. During the first quarter of 2020, we incurred losses of $12 million on our fair value hedge relationships which stemmed from market volatility caused by COVID-19.

NET GAINS (LOSSES) ON ECONOMIC HEDGES

We utilize economic derivatives to manage certain risks on our Statements of Condition. Gains and losses on economic derivatives are driven primarily by changes in interest rates and volatility and include interest settlements. Interest settlements represent the interest component on economic derivatives. These amounts vary from period to period depending on our hedging activities and interest rates. During the first quarter of 2020, we recorded net losses of $48 million on our economic derivatives. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio as highlighted in the table below. The changes in interest rates were primarily driven by market volatility caused by COVID-19.


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Table of Contents

The following discussion highlights key items impacting gains and losses on economic investment derivatives.

Investments
 
We utilize interest rate swaps to economically hedge a portion of our trading securities against changes in fair value. Gains and losses on these economic derivatives are due primarily to changes in interest rates. Gains and losses on our trading securities are also due primarily to changes in interest rates and credit spreads.

The following table summarizes gains and losses on these economic derivatives as well as the related trading securities (dollars in millions):
 
For the Three Months Ended
 
March 31,
 
2020
 
2019
Gains (losses) on interest rate swaps economically hedging our investments
$
(45
)
 
$
(12
)
Interest settlements
(2
)
 
—

Net gains (losses) on investment derivatives
(47
)
 
(12
)
Net gains (losses) on related trading securities
26

 
10

Net gains (losses) on economic investment hedge relationships
$
(21
)
 
$
(2
)

Other Expense
The following table shows the components of other expense (dollars in millions):
 
For the Three Months Ended March 31,
 
2020
 
2019
Compensation and benefits
$
18

 
$
16

Contractual services
4

 
4

Professional fees
8

 
7

Other operating expenses
6

 
7

Total operating expenses
36

 
34

Federal Housing Finance Agency
3

 
2

Office of Finance
2

 
2

Other, net
2

 
1

Total other expense
$
43

 
$
39


Other expense increased for the three months ended March 31, 2020 compared to the same period last year. The increase in other expense was driven primarily by an increase in compensation and benefits.



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Table of Contents

STATEMENTS OF CONDITION

Financial Highlights

Our total assets decreased to $126.1 billion at March 31, 2020 from $129.6 billion at December 31, 2019. Our total liabilities decreased to $119.3 billion at March 31, 2020 from $122.9 billion at December 31, 2019. Total capital remained stable at $6.7 billion at March 31, 2020 when compared to December 31, 2019. See further discussion of changes in our financial condition in the appropriate sections that follow.

Cash and Due from Banks

At March 31, 2020, our total cash balance was $611 million compared to $1.0 billion at December 31, 2019. Our cash balance is influenced by our liquidity needs, member advance activity, market conditions, and the availability of attractive investment opportunities.

Advances

The following table summarizes our advances by type of institution (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Commercial banks
$
45,645

 
$
47,835

Savings institutions
1,980

 
1,376

Credit unions
6,039

 
5,976

Non-captive insurance companies
24,267

 
20,821

Captive insurance companies
905

 
3,798

CDFIs
16

 
14

Total member advances
78,852

 
79,820

Housing associates
43

 
100

Non-member borrowers
264

 
265

Total par value
$
79,159

 
$
80,185


Our total advance par value decreased $1.0 billion or one percent at March 31, 2020 when compared to December 31, 2019. The decrease in total par value was primarily due to a decrease in borrowings of $8.0 billion by Wells Fargo Bank, N.A and $2.9 billion by captive insurance company members. This decrease was partially offset by an increase in borrowings by certain other institution types. Wells Fargo Bank, N.A. has continued to pay down advances after the end of the first quarter of 2020 and this trend may continue during the second quarter of 2020 and for the remainder of the year. If we continue to experience additional decreases in the amount of business with certain of our top borrowers, our financial condition and results of operations could be negatively affected.

As a result of the final rule on membership issued by the Federal Housing Finance Agency (Finance Agency) effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance company members ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014 will have their memberships terminated no later than February 19, 2021. The magnitude of the impact of the final rule at that date will depend, in part, on our size and profitability at the time of membership termination or maturity of the related advances. As of March 31, 2020, we had five captive insurance company members with total advances outstanding of $905 million, which represented one percent of our total advances outstanding.


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Table of Contents

The following table summarizes our advances by product type (dollars in millions):
 
March 31, 2020
 
December 31, 2019
 
Amount
 
% of Total
 
Amount
 
% of Total
Variable rate
$
30,914

 
39
 
$
41,024

 
51
Fixed rate
45,768

 
58
 
37,007

 
46
Amortizing
2,477

 
3
 
2,154

 
3
Total par value
79,159

 
100
 
80,185

 
100
Premiums
24

 
 
 
25

 
 
Discounts
(5
)
 
 
 
(6
)
 
 
Fair value hedging adjustments
579

 
 
 
156

 
 
Total advances
$
79,757

 
 
 
$
80,360

 
 

Fair value hedging adjustments changed $423 million at March 31, 2020 when compared to December 31, 2019 due to the impact of interest rates on our cumulative fair value adjustments on advances in hedge relationships.

At March 31, 2020 and December 31, 2019, 24 percent and 31 percent of our advances were variable rate callable advances. Callable advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Interest rates on our variable rate callable advances reset at each call date to be consistent with either the underlying index or our current offering rate of our underlying cost of funds. In addition, we retain the flexibility to adjust the spread relative to our cost of funds for a material percentage of these variable rate advances on each reset date. We generally fund our variable rate callable advances with either discount notes or short-term floating rate debt. For additional discussion on our funding strategies, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

At March 31, 2020 and December 31, 2019, advances outstanding to our five largest member borrowers totaled $32.7 billion and $39.3 billion, representing 41 and 49 percent of our total advances outstanding. The following table summarizes advances outstanding to our five largest member borrowers at March 31, 2020 (dollars in millions):
 
Amount
 
% of Total
Wells Fargo Bank, N.A.
$
17,450

 
22
TCF National Bank
5,000

 
6
Principal Life Insurance Company
4,100

 
5
Midland National Life Insurance Company1
3,073

 
4
Washington Federal Bank, National Association
3,050

 
4
Total par value
$
32,673

 
41

1
Excludes $1.5 billion of advances with North American Company for Life and Health Insurance, an affiliate of Midland National Life Insurance Company.    

We evaluate advances for credit losses on a quarterly basis. For additional discussion on our advance credit risk, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Advances.”




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Mortgage Loans

The following tables summarize information on our mortgage loans held for portfolio (dollars in millions):
 
March 31,
2020
 
December 31, 2019
Fixed rate conventional loans
$
8,917

 
$
8,712

Fixed rate government-insured loans
497

 
496

Total unpaid principal balance
9,414

 
9,208

Premiums
128

 
125

Discounts
(4
)
 
(4
)
Basis adjustments from mortgage loan purchase commitments
9

 
6

Total mortgage loans held for portfolio
9,547

 
9,335

Allowance for credit losses
(1
)
 
(1
)
Total mortgage loans held for portfolio, net
$
9,546

 
$
9,334


Our total mortgage loans increased $0.2 billion or two percent at March 31, 2020 when compared to December 31, 2019 due to loan purchases exceeding principal paydowns. Loan purchases increased due to the addition of new participating financial institutions (PFIs) and higher refinance activity driven by lower rates.

We evaluate mortgage loans for credit losses on a quarterly basis. For additional discussion on our mortgage loan credit risk, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Mortgage Assets.”


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Investments

The following table summarizes the carrying value of our investments (dollars in millions):
 
March 31, 2020
 
December 31, 2019
 
Amount
 
% of Total
 
Amount
 
% of Total
Short-term investments1
 
 
 
 
 
 
 
Interest-bearing deposits
$
1

 
—
 
$
1

 
—
Securities purchased under agreements to resell
6,550

 
18
 
13,950

 
36
Federal funds sold
8,935

 
25
 
4,605

 
12
Total short-term investments
15,486

 
43
 
18,556

 
48
Long-term investments2
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
GSE single-family
2,256

 
7
 
2,401

 
6
GSE multifamily
7,920

 
22
 
8,134

 
21
U.S. obligations single-family3
3,896

 
11
 
4,064

 
11
U.S. obligations commercial3
1

 
—
 
1

 
—
Private-label residential
7

 
—
 
7

 
—
Total mortgage-backed securities
14,080

 
40
 
14,607

 
38
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. Treasury obligations3
873

 
2
 
—

 
—
Other U.S. obligations3
2,115

 
6
 
2,277

 
6
GSE and Tennessee Valley Authority obligations
1,554

 
4
 
1,504

 
4
State or local housing agency obligations
972

 
3
 
977

 
3
Other
554

 
2
 
544

 
1
Total non-mortgage-backed securities
6,068

 
17
 
5,302

 
14
Total long-term investments
20,148

 
57
 
19,909

 
52
Total investments
$
35,634

 
100
 
$
38,465

 
100

1
Short-term investments have original maturities equal to or less than one year.

2
Long-term investments have original maturities of greater than one year.

3
Represents investment securities backed by the full faith and credit of the U.S. Government.

Our investments decreased $2.8 billion or seven percent at March 31, 2020 when compared to December 31, 2019. Investments decreased primarily due to a decline in money market investments of $3.1 billion, offset in part by an increase in U.S. Treasuries of $0.9 billion that we purchased and utilized for liquidity management during the first quarter of 2020. At March 31, 2020, we had GSE MBS with a total par value of $137 million that were traded but not yet settled. These investments have been recorded as “available-for-sale” on our Statements of Condition with a corresponding payable recorded in “other liabilities.”

The Finance Agency limits our investments in MBS by requiring that the total book value of our MBS not exceed three times regulatory capital at the time of purchase. Our ratio of MBS to regulatory capital was 2.04 and 2.12 at March 31, 2020 and December 31, 2019.

We evaluate investments for credit losses on a quarterly basis. For additional discussion on our investment credit risk, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Investments.”


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Consolidated Obligations

Consolidated obligations, which include bonds and discount notes, are the primary source of funds to support our advances, mortgage loans, and investments. At March 31, 2020 and December 31, 2019, the carrying value of consolidated obligations for which we are primarily liable totaled $117.3 billion and $121.1 billion.

DISCOUNT NOTES

The following table summarizes our discount notes, all of which are due within one year (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Par value
$
33,114

 
$
29,592

Discounts and concession fees1
(43
)
 
(61
)
Total
$
33,071

 
$
29,531


1
Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation discount notes.
    
Our discount notes increased $3.5 billion or 12 percent at March 31, 2020 when compared to December 31, 2019. We increased our usage of shorter-term discount notes in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements.

BONDS

The following table summarizes information on our bonds (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Total par value
$
83,837

 
$
91,373

Premiums
231

 
217

Discounts and concession fees1
(35
)
 
(38
)
Fair value hedging adjustments
233

 
1

Total bonds
$
84,266

 
$
91,553


1
Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation bonds.

Our bonds decreased $7.3 billion or eight percent at March 31, 2020, when compared to December 31, 2019. The decrease was driven by a reduction in total assets. During the first quarter of 2020, we increased our usage of shorter-term discount notes relative to bonds in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements. Fair value hedging adjustments changed $232 million at March 31, 2020 when compared to December 31, 2019 due to the impact of interest rates on our cumulative fair value adjustments on bonds in hedge relationships.
 
For additional information on our bonds, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”


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Mandatorily Redeemable Capital Stock

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.

At March 31, 2020 and December 31, 2019, our mandatorily redeemable capital stock totaled $96 million and $206 million.
Our total mandatorily redeemable capital stock balance decreased $110 million at March 31, 2020 when compared to December 31, 2019 due primarily to the repurchase of capital stock outstanding to captive insurance company members during the first quarter driven by repayment of their advance balances.

Capital

The following table summarizes information on our capital (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Capital stock
$
4,653

 
$
4,517

Retained earnings
2,199

 
2,165

Accumulated other comprehensive income (loss)
(119
)
 
44

Total capital
$
6,733

 
$
6,726


Our capital remained stable at March 31, 2020 when compared to December 31, 2019. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital” for additional information on our capital.

Derivatives

We use derivatives to manage interest rate risk. The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor our overall exposure to credit and market risk.

The following table categorizes the notional amount of our derivatives by type (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Interest rate swaps
 
 
 
Noncallable
$
37,827

 
$
37,017

Callable by counterparty
1,441

 
1,495

Callable by the Bank
200

 
210

Total interest rate swaps
39,468

 
38,722

Forward settlement agreements (TBAs)
342

 
122

Mortgage loan purchase commitments
348

 
127

Total notional amount
$
40,158

 
$
38,971

    
The notional amount of our derivative contracts remained relatively stable at March 31, 2020 when compared to December 31, 2019. Consistent with the move to an alternative benchmark rate other than LIBOR, we started using OIS rate-based interest rate swaps to economically hedge certain fixed rate investments during the quarter. For additional discussion regarding our use of derivatives, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Derivatives.”

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LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital positions are actively managed in an effort to preserve stable, reliable, and cost-effective sources of funds to meet current and projected future operating financial commitments, as well as regulatory, liquidity, and capital requirements.

Liquidity

SOURCES OF LIQUIDITY

We utilize several sources of liquidity to carry out our business activities. These include, but are not limited to, proceeds from the issuance of consolidated obligations, payments collected on advances and mortgage loans, proceeds from investment securities, member deposits, the issuance of capital stock, and current period earnings.

Our primary source of liquidity is proceeds from the issuance of consolidated obligations (bonds and discount notes) in the capital markets. During the three months ended March 31, 2020, proceeds from the issuance of bonds and discount notes were $17.7 billion and $32.2 billion compared to $14.9 billion and $37.1 billion for the same period in 2019. We continued to focus on issuing shorter-term discount notes in an effort to capture attractive funding, match repricing structures on advances, and provide additional liquidity.

As the COVID-19 outbreak developed during the first quarter of 2020, the capital markets became more volatile and investor preferences changed. Despite the increased market volatility, we were operationally prepared, maintained continual access to funding, and issued debt to meet the needs of our members. Access to debt markets has been reliable because investors, driven by increased liquidity preference and our government affiliation, have sought the FHLBanks’ debt as an asset of choice. However, due to the short-term maturity of the debt, we may be exposed to additional risks associated with refinancing and our ability to access the capital markets. For additional information on our risks associated with our access to the capital markets, refer to “Item 1A. Risk Factors.”

We are focused on maintaining an adequate liquidity balance and a funding balance between our financial assets and financial liabilities and work collectively with the other FHLBanks to manage the system-wide liquidity and funding needs. We monitor our debt refinancing risk and liquidity position primarily by tracking the maturities of financial assets and financial liabilities. In managing and monitoring the amounts of assets that require refunding, we consider contractual maturities of our financial assets, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments). External factors, including member borrowing needs, supply and demand in the debt markets, and other factors may affect liquidity balances and the funding balances between financial assets and financial liabilities. Refer to “Item 1. Financial Statements” for additional information regarding the contractual maturities of certain of our financial assets and liabilities.

Our ability to raise funds in the capital markets as well as our cost of borrowing may be affected by our credit ratings. As of April 30, 2020, our consolidated obligations were rated AA+/A-1+ by Standard and Poor’s and Aaa/P-1 by Moody’s and both ratings had a stable outlook. For further discussion of how credit rating changes and our ability to access the capital markets may impact us in the future, refer to “Item 1A. Risk Factors.”

Although we are primarily liable for the portion of consolidated obligations that are issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations issued by the FHLBank System. At March 31, 2020 and December 31, 2019, the total par value of outstanding consolidated obligations for which we are primarily liable was $117.0 billion and $121.0 billion. At March 31, 2020 and December 31, 2019, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which we are jointly and severally liable was approximately $1,057.7 billion and $904.9 billion.

The Office of Finance and FHLBanks have contingency plans in place that prioritize the allocation of proceeds from the issuance of consolidated obligations during periods of financial distress if consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand. In the event of significant market disruptions or local disasters, our President or designee is authorized to establish interim borrowing relationships with other FHLBanks. To provide further access to funding, the FHLBank Act also authorizes the U.S. Treasury to directly purchase new issue consolidated obligations of the GSEs, including FHLBanks, up to an aggregate principal amount of $4.0 billion. As of April 30, 2020, no purchases had been made by the U.S. Treasury under this authorization.


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USES OF LIQUIDITY

We use our available liquidity, including proceeds from the issuance of consolidated obligations, primarily to repay consolidated obligations, fund advances, and purchase investments. During the three months ended March 31, 2020, repayments of consolidated obligations totaled $53.9 billion compared to $51.8 billion for the same period in 2019. A portion of these payments were due to the call of certain bonds in an effort to better match our projected asset cash flows. During the three months ended March 31, 2020, we called bonds with a total par value of $1.3 billion. We did not call any bonds during the three months ended March 31 2019.

During the three months ended March 31, 2020, advance disbursements totaled $78.3 billion compared to $60.6 billion for the same period in 2019. Advance disbursements will vary from period to period depending on member needs. During the three months ended March 31, 2020, investment purchases (excluding overnight investments) totaled $7.8 billion compared to $24.5 billion for the same period in 2019. Investment purchases during each period were primarily driven by the purchase of money market investments, including secured resale agreements in an effort to manage our liquidity position.

We also use liquidity to purchase mortgage loans, redeem member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, pay expenses, and pay dividends.

LIQUIDITY REQUIREMENTS
Finance Agency regulations mandate three liquidity requirements. First, we are required to maintain contingent liquidity sufficient to meet our liquidity needs, which shall, at a minimum, cover five calendar days of inability to access the consolidated obligation debt markets. Second, we are required to have available at all times an amount greater than or equal to members’ current deposits invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. Third, we are required to maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to the amount of our participation in total consolidated obligations outstanding. At March 31, 2020 and December 31, 2019, we were in compliance with all three of the Finance Agency liquidity requirements.

In addition to the liquidity measures previously discussed, the Finance Agency Advisory Bulletin on FHLBank liquidity (the Liquidity Guidance AB) and other guidance outlines an additional scenario required for measuring liquidity. The Base Case Scenario assumes that we cannot access the capital markets to issue debt, and during that time we will automatically renew maturing and called advances for all members, including very large highly-rated members, and we hold additional liquid assets equal to one percent of our letters of credit balances. As a result of the recent deterioration in financial market conditions due to COVID-19, the Finance Agency temporarily issued revised guidance with respect to base case liquidity. On March 3, 2020, the Finance Agency indicated that the FHLBanks should maintain no less than 10 calendar days of positive daily cash balances through April 30, 2020 and that the FHLBanks should then return to 20 calendar days or more of positive daily cash balances by September 30, 2020. As a result of this guidance, we were required to hold a minimum of 10 days of liquidity on March 31, 2020, lower than the 20 days required on December 31, 2019. At March 31, 2020 and December 31, 2019, we were in compliance with Finance Agency liquidity guidance.
The Liquidity Guidance AB also specified new guidance for appropriate funding gap limits to address the risks associated with a FHLBank having too large a mismatch between the contractual maturities of its assets and liabilities. A funding gap measures the difference between assets and liabilities that are scheduled to mature during a specified period and is expressed as a percentage of our total assets. The Liquidity Guidance AB provided funding gap limits within the range of negative 10 percent to negative 20 percent for a three-month horizon and negative 25 percent to negative 35 percent for a one-year horizon. Initial guidance was set at a trailing three-month average of negative 15 percent for the three-month horizon and a trailing three-month average of negative 30 percent for the one-year horizon. In addition to the relief provided for base case liquidity, on March 12, 2020, the Finance Agency also increased (through July 30, 2020) the funding gap ratios for the three-month and one-year time horizons to negative 25 percent or better and negative 40 percent or better, respectively. According to the guidance, by September 30, 2020, the funding gap ratios for the three-month and one-year time horizons should not exceed negative 20 percent and negative 35 percent, respectively. By December 31, 2020, the funding gap ratios should not exceed the limits that were in place prior to COVID-19. At March 31, 2020 and December 31, 2019 we adhered to Finance Agency liquidity guidance. For a discussion of this revised guidance issued by the Finance Agency, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”


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Capital

CAPITAL REQUIREMENTS

We are subject to certain regulatory capital requirements. First, the FHLBank Act requires that we maintain at all times permanent capital greater than or equal to the sum of our credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock, (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement. Second, the FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock) and retained earnings. It does not include accumulated other comprehensive income (AOCI). Third, the FHLBank Act imposes a five percent minimum leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. At March 31, 2020 and December 31, 2019, we did not hold any nonpermanent capital. At March 31, 2020 and December 31, 2019, we were in compliance with all three of the Finance Agency’s regulatory capital requirements.

In addition to the requirements previously discussed, during 2019, the Finance Agency finalized an Advisory Bulletin on capital stock (the Capital Stock AB) which required each FHLBank to maintain at all times a ratio of at least two percent of capital stock to total assets, effective February 2020. For purposes of the Capital Stock AB, capital stock includes mandatorily redeemable capital stock. The capital stock to total assets ratio is measured on a daily average basis at month end. At March 31, 2020, we were in compliance with the Capital Stock AB. Refer to “Item 1. Financial Statements — Note 8 — Capital” for additional information on our capital requirements.

CAPITAL STOCK
Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We generally issue a single class of capital stock (Class B stock) and have two subclasses of Class B capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10.0 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding. All Class B capital issued is subject to a notice of redemption period of five years.

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) when a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.

The capital stock requirements established in our Capital Plan are designed so that we can remain adequately capitalized as member activity changes. Our Board of Directors may make adjustments to the capital stock requirements within ranges established in our Capital Plan.

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under our Capital Plan, we, at our discretion and upon 15 days’ written notice, may repurchase excess membership capital stock. We, at our discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At March 31, 2020 and December 31, 2019, our excess capital stock outstanding was less than $1 million.
        

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The following table summarizes our regulatory capital stock by type of member (dollars in millions):
 
March 31,
2020
 
December 31,
2019
Commercial banks
$
2,709

 
$
2,767

Savings institutions
145

 
113

Credit unions
569

 
547

Non-captive insurance companies
1,164

 
914

Captive insurance companies
65

 
175

CDFIs
1

 
1

Total GAAP capital stock
4,653

 
4,517

Mandatorily redeemable capital stock
96

 
206

Total regulatory capital stock
$
4,749

 
$
4,723


Retained Earnings
Our risk management policies include a target level of retained earnings based on the amount we believe necessary to help protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to achieve our targeted level of retained earnings. At March 31, 2020, our actual retained earnings exceeded our retained earnings target.
We entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other Federal Home Loan Banks in 2011. Under the JCE Agreement, we are required to allocate 20 percent of our quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of our average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately on our Statements of Condition. At March 31, 2020 and December 31, 2019, our restricted retained earnings balance totaled $522 million and $504 million. One percent of our average balance of outstanding consolidated obligations for the three months ended December 31, 2019 was $1.2 billion.
Dividends

Our current dividend philosophy is to pay a membership capital stock dividend similar to a reference rate of interest, such as average three-month LIBOR over time, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. We have historically used average three-month LIBOR as our reference rate; however, beginning with the second quarter dividend we will move to using SOFR as our reference rate.

Our dividend rates seek to strike a balance between providing reasonable returns to members while preserving our financial position, flexibility, and ability to serve as a long-term liquidity provider. Our actual dividend is determined quarterly by our Board of Directors, based on policies, regulatory requirements, actual performance, and other considerations that the Board determines to be appropriate.

The following table summarizes dividend-related information (dollars in millions):
 
For the Three Months Ended
 
March 31,
 
2020
 
2019
Aggregate cash dividends paid1
$
59

 
$
70

Effective combined annualized dividend rate paid on capital stock2
5.14
%
 
5.25
%
Annualized dividend rate paid on membership capital stock
3.25
%
 
3.25
%
Annualized dividend rate paid on activity-based capital stock
5.75
%
 
5.75
%
Average three-month LIBOR
1.52
%
 
2.69
%

1
Includes aggregate cash dividends paid during the period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense on our Statements of Income.

2
Effective combined annualized dividend rate is paid on total capital stock, including mandatorily redeemable capital stock.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting policies and estimates, refer to our 2019 Form 10-K. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2020.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Margin and Capital Requirements for Covered Swap Entities

On April 9, 2020, the Commodities Futures Trading Commission (CFTC) issued a final rule, effective May 11, 2020, to amend its rules requiring minimum margin and capital requirements for uncleared swaps for covered swap entities for which there is no prudential regulator by extending the phase-in compliance date for initial margin requirements from September 1, 2020, to September 1, 2021, for counterparties with an average daily aggregate notional amount of non-cleared swaps between $8 billion and $50 billion. We do not expect this final rule to materially affect our financial condition or results of operations.

Finance Agency Final Rule on Stress Testing

On March 24, 2020, the Finance Agency issued a final rule, effective upon issuance, to amend its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA). The final rule (i) raises the minimum threshold for entities regulated by the Finance Agency to conduct periodic stress tests from $10 billion to $250 billion or more in total consolidated assets; (ii) removes the requirements for FHLBanks to conduct stress testing; and (iii) removes the adverse scenario from the list of required scenarios. FHLBanks are currently excluded from this regulation because no FHLBank has total consolidated assets over $250 billion, but the Finance Agency reserved its discretion to require an FHLBank with total consolidated assets below the $250 billion threshold to conduct stress testing. These amendments align the Finance Agency’s stress testing rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stress testing requirements, as amended by EGRRCPA.

The results of our most recent annual severely adverse economic conditions stress test were published to our public website, www.fhlbdm.com, on November 15, 2019. This rule will eliminate these stress testing requirements for the Bank, unless the Finance Agency exercises its discretion to require stress testing in the future. We do not expect this rule to have a material effect on our financial condition or results of operations.

Finance Agency Supervisory Letter - Planning for LIBOR Phase-Out

On September 27, 2019, the Finance Agency issued a Supervisory Letter (Supervisory Letter) to the FHLBanks that the Finance Agency stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provided that the FHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates do not apply to collateral accepted by the FHLBanks. The Supervisory Letter also directed the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020, in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. The FHLBanks were expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021, by the deadlines specified in the Supervisory Letter, subject to limited exceptions granted by the FHFA for LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives. We have already ceased purchasing investments that reference LIBOR and mature after December 31, 2021.

As a result of the recent market volatility triggered in part by COVID-19, the FHLBanks’ authority to enter into LIBOR-based instruments that mature after December 31, 2021 has been extended from March 31, 2020 to June 30, 2020, except for investments and option embedded products. In addition, the requirement to update pledged collateral certification reporting requirements was extended from March 31, 2020, to September 30, 2020.

We continue to evaluate the potential impact of the Supervisory Letter and the related subsequent guidance on our financial condition and results of operations, but we may experience lower overall demand or increased costs for our advances, which in turn may negatively impact the future composition of our balance sheet, capital stock levels, core mission asset ratio, net income and dividend.

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 Finance Agency Advisory Bulletin 2020-01 Federal Home Loan Bank Risk Management of Acquired Member Assets (AMA) Risk Management

On January 31, 2020, the Finance Agency released guidance on risk management of AMA. The guidance communicates the Finance Agency’s expectations with respect to an FHLBank’s funding of its members through the purchase of eligible mortgage loans and includes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the board of an FHLBank should ensure that the bank serves as a liquidity source for members, and an FHLBank should ensure that its portfolio limits do not result in the FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The advisory bulletin contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single participating financial institution. In addition, the guidance provides that the board of an FHLBank should consider concentration risk in the areas of geographic area, high-balance loans, and in third-party loan originations.

We continue to evaluate the potential impact of this advisory bulletin but do not expect it to materially affect our financial condition or results of operations.

FDIC Brokered Deposits Restrictions

On February 10, 2020, the FDIC published a proposed rule to amend its brokered deposits restrictions that apply to less than well capitalized insured depository institutions. The FDIC states that the proposed amendments are intended to modernize its brokered deposit regulations and would establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits. These deposit placement arrangements include those between insured depository institutions and third parties, such as financial technology companies, for a variety of business purposes, including access to deposits. By creating a new framework for analyzing certain provisions of the deposit broker definition, including shortening the list of activities considered facilitating and expanding the scope of the primary purpose exception, the proposed rule would narrow the definition of deposit broker and exclude more deposits from treatment as brokered deposits. The proposed rule would also establish an application and reporting process with respect to the primary purpose exception.

If this rule is adopted as proposed, it may have an effect on member demand for advances, but we cannot predict the extent of the impact. We do not expect this rule, if adopted as proposed, to materially affect our financial condition or results of operations.

Legislative and Regulatory Developments Related to COVID-19
Finance Agency Supervisory Letter - PPP Loans as Collateral for FHLBank Advances
On April 23, 2020, the Finance Agency issued a Supervisory Letter (PPP Supervisory Letter) permitting the FHLBanks to accept PPP loans as collateral for advances as “Agency Securities,” given the Small Business Administration’s (SBA) 100 percent guarantee of the unpaid principal balance. On April 20, 2020, the SBA published its third interim final rule related to PPP loans, which explicitly waived certain regulatory requirements that must be satisfied before a member could pledge PPP loans to the FHLBanks as collateral. The PPP Supervisory Letter establishes a series of conditions under which the FHLBanks may accept PPP loans as collateral, which conditions focus on the financial condition of members, collateral discounts, and pledge dollar limits.

We are evaluating the potential impact of the PPP Supervisory Letter, but do not expect the PPP Supervisory Letter to materially affect our financial condition or results of operations.

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CARES Act
The CARES Act was passed by the Senate on March 25, 2020, and by the House on March 27, 2020, and the President signed it into law the same day. The $2.2 trillion package is the largest stimulus bill in U.S. history. The CARES Act is in addition to previous relief legislation passed by Congress in March 2020. The legislation provides the following:
•
Assistance to businesses, states, and municipalities.
•
Creates a loan program for small businesses, non-profits and physician practices that can be forgiven through employee retention incentives.
•
Provides the Treasury Secretary authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens some regulations imposed through the Dodd-Frank Act.
•
Direct payments to eligible taxpayers and their families.
•
Expands eligibility for unemployment insurance and payment amounts.
•
Includes mortgage forbearance provisions and a foreclosure moratorium.

Funding for the PPP, which was created by the CARES Act, was increased on April 24, 2020 with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act. Additional phases of the CARES Act or other COVID-19 relief legislation may be enacted by Congress. We are evaluating the potential impact of the CARES Act on our business, including its impact to the U.S. economy, which is unknown; and impacts to mortgages held or serviced by our members and that we accept as collateral.

Additional COVID-19 Legislative and Regulatory Developments

In light of COVID-19, governmental agencies, including the Securities and Exchange Commission, Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Association, CFTC and the Finance Agency, as well as state governments and agencies, have taken actions to provide various forms of relief from and guidance regarding the financial, operational, credit, market and other effects of the pandemic, some of which may have a direct or indirect impact on us and/or our members. Many of these actions are temporary in nature. We are monitoring these actions and guidance and evaluating their potential impact on us.

RISK MANAGEMENT
    
We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, model, information security, compliance, and strategic risk, as well as capital adequacy. Our primary risk management objective is to manage our assets and liabilities in ways that protect the par redemption value of our capital stock. We periodically evaluate our risk management policies in order to respond to changes in our financial position and general market conditions.

Market Risk

We define market risk as the risk that changes in market prices may adversely affect our financial condition and performance. Interest rate risk is the principal type of market risk to which we are exposed as our cash flows, and therefore earnings and equity value, can change significantly as interest rates change. Our general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities, and derivatives, which, taken together, limit our expected exposure to interest rate risk. Management regularly reviews our sensitivity to interest rate changes by monitoring our market risk measures in parallel and non-parallel interest rate changes and spread and volatility movements.

Our key risk measures are Market Value of Capital Stock (MVCS) Sensitivity and Projected Income Sensitivity.

MARKET VALUE OF CAPITAL STOCK SENSITIVITY
  
We define MVCS as an estimate of the market value of assets minus the market value of liabilities (excluding mandatorily redeemable capital stock) divided by the total shares of capital stock (including mandatorily redeemable capital stock) outstanding. It represents an estimation of the “liquidation value” of one share of our capital stock if all assets and liabilities were liquidated at current market prices. MVCS does not represent our long-term value, as it takes into account short-term market price fluctuations. These fluctuations are often unrelated to the long-term value of the cash flows from our assets and liabilities.


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The MVCS calculation uses market prices which are computed using interest rates, spreads, and volatilities, and assumes a run-off balance sheet. The timing and variability of balance sheet cash flows are calculated by an internal model. To ensure the accuracy of the MVCS calculation, we reconcile the computed market prices of complex instruments, such as derivatives and mortgage assets, to market observed prices or dealers’ quotes.

Interest rate risk stress tests of MVCS involve instantaneous parallel and non-parallel changes in interest rates. The resulting percentage change in MVCS from the base case value is an indication of longer-term repricing risk and option risk embedded in the balance sheet.

In an effort to protect the MVCS from large interest rate swings, we manage the interest rate risk of our balance sheet by using hedging transactions, such as issuing consolidated obligation bonds, including floating rate, simple bullet, callable, or other structured features and entering into or canceling interest rate swaps, caps, floors, and swaptions.

We monitor and manage to the MVCS policy limits in an effort to ensure the stability of the Bank’s value. Our policy limits are based on declines from the base case in parallel and non-parallel interest rate change scenarios. Any policy limit breach requires a prompt action to address the measure outside of the policy limit and the breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the MVCS policy limits at March 31, 2020 and December 31, 2019.

Our down 200 basis point policy limit is suspended when the 10-year swap rate is below 2.50 percent and remains so for five consecutive days. At both March 31, 2020 and December 31, 2019, the 10-year swap rate had been below 2.50 percent for five consecutive days, and therefore the associated policy limit was suspended.

The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous parallel changes in interest rates at March 31, 2020 and December 31, 2019:
 
Market Value of Capital Stock Assuming Parallel Changes (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
March 31, 2020
$
142.3

 
$
141.9

 
$
141.2

 
$
141.1

 
$
141.4

 
$
140.5

 
$
138.0

December 31, 2019
$
144.7

 
$
145.2

 
$
146.7

 
$
147.2

 
$
146.8

 
$
145.9

 
$
143.4

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
March 31, 2020
0.8
 %
 
0.5
 %
 
0.1
 %
 
—
%
 
0.2
 %
 
(0.4
)%
 
(2.2
)%
December 31, 2019
(1.7
)%
 
(1.3
)%
 
(0.3
)%
 
—
%
 
(0.3
)%
 
(0.9
)%
 
(2.6
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
March 31, 2020 and December 31, 2019
(9.0
)%
 
(5.0
)%
 
(2.2
)%
 
—
%
 
(2.2
)%
 
(5.0
)%
 
(9.0
)%


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The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous non-parallel changes in interest rates at March 31, 2020 and December 31, 2019:
 
Market Value of Capital Stock Assuming Non-Parallel Changes (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
March 31, 2020
$
139.5

 
$
139.0

 
$
139.4

 
$
141.1

 
$
141.9

 
$
142.2

 
$
141.6

December 31, 2019
$
143.2

 
$
145.0

 
$
146.3

 
$
147.2

 
$
147.6

 
$
147.3

 
$
145.8

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
March 31, 2020
(1.2
)%
 
(1.5
)%
 
(1.2
)%
 
—
%
 
0.6
%
 
0.7
%
 
0.3
 %
December 31, 2019
(2.8
)%
 
(1.5
)%
 
(0.6
)%
 
—
%
 
0.2
%
 
0.1
%
 
(1.0
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
March 31, 2020 and December 31, 2019
(9.0
)%
 
(5.0
)%
 
(2.2
)%
 
—
%
 
(2.2
)%
 
(5.0
)%
 
(9.0
)%

Our base case MVCS was 141.1 at March 31, 2020 when compared to 147.2 at December 31, 2019. The decline was primarily attributable to the following factors:

•
Option-adjusted spread: The spread between mortgage interest rates and LIBOR, adjusted for the mortgage prepayment option, increased at March 31, 2020 when compared to December 31, 2019. This had a negative impact on MVCS as it decreased the value of mortgage-related assets.

•
Increase in retained earnings: We recorded net income of $92 million during the three months ended March 31, 2020, which was primarily driven by net interest income of $109 million. Dividend payments for the three months ended March 31, 2020 totaled $59 million. The earnings in excess of dividend payments had a positive impact on the market value of our assets, thereby increasing MVCS.

PROJECTED INCOME SENSITIVITY

Projected income sensitivity is measured as the change in spread between projected 24-month return on average capital stock (ROACS) and average projected three-month LIBOR. We monitored and managed projected 24-month income sensitivity in an effort to limit the short-term earnings volatility of the Bank. The projected 24-month income sensitivity was based on the forward interest rates, business, and risk management assumptions.

Our primary income sensitivity policy specifies a limit on our change in 24-month projected ROACS spread to average projected three-month LIBOR from base spread for the up and down 100 and 200 basis points parallel interest rate change scenarios. In addition, our income sensitivity policy specifies a limit for the up and down 100 basis points non-parallel interest rate change scenarios. Additionally, there is a limit on our change from base ROACS for certain basis shock scenarios to limit basis risk exposure. Any policy limit breach requires a prompt action to address the measure outside of the policy limit. We were in compliance with the projected 24-month income sensitivity policy limits as of both March 31, 2020 and December 31, 2019. For more information on our Projected Income Sensitivity, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Projected Income Sensitivity” in our 2019 Form 10-K.

CAPITAL ADEQUACY

An adequate capital position is necessary for providing safe and sound operations of the Bank. Our key capital adequacy measures are MVCS and regulatory capital in order to maintain capital levels in accordance with Finance Agency regulations. In addition, we monitor retained earnings. For a discussion of our key capital adequacy measure, MVCS, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Market Value of Capital Stock Sensitivity.”


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RETAINED EARNINGS TARGET LEVEL AND REGULATORY CAPITAL REQUIREMENTS

Our risk management policies include a target level of retained earnings based on the amount we believe necessary to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We are also subject to certain regulatory capital requirements. For additional information on our compliance with these requirements, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Liquidity Risk

We define liquidity risk as the risk that we will be unable to meet our financial obligations as they come due or meet the credit needs of our members in a timely and cost efficient manner. To manage this risk, we maintain liquidity in accordance with Finance Agency regulations. For additional information on our compliance with these requirements, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity Requirements.”

Credit Risk

We define credit risk as the potential that our borrowers or counterparties will fail to meet their obligations in accordance with agreed upon terms. Our primary credit risks arise from our ongoing lending, investing, and hedging activities. Our overall objective in managing credit risk is to operate a sound credit granting process and to maintain appropriate credit administration, measurement, and monitoring practices.

ADVANCES

We manage our credit exposure to advances through an approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower’s financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

We are required by regulation to obtain sufficient collateral to fully secure our advances and other credit products. The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal or market value, if available, of the collateral. We also have policies and procedures for validating the reasonableness of our collateral valuations. In addition, we perform collateral verifications and on-site reviews based on the risk profile of the borrower. Management believes that these policies effectively manage our credit risk from advances.
 
Eligible collateral includes:

•
fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages;
•
loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae;
•
cash deposited with us; and
•
other real estate-related collateral acceptable to us, such as second lien mortgages, home equity lines of credit, tax-exempt municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and we can perfect a security interest in such collateral.
Community Financial Institutions (CFIs) may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each borrower’s capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Borrowers may pledge collateral to us by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with us or our custodians. We perfect our security interest in all pledged collateral by filing Uniform Commercial Code financing statements or taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to us by our members, or any affiliates of our members, has priority over the claims and rights of any other party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims

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and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.

Under a blanket pledge agreement, we are granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, we do not initially take delivery of collateral from blanket agreement borrowers. In the event of deterioration in the financial condition of a blanket pledge agreement borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, we generally require collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), we generally take control of collateral through the delivery of cash, securities, or loans to us or our custodians.

Although management has policies and procedures in place to manage credit risk, we may be exposed to this risk if our outstanding advance value exceeds the liquidation value of our collateral. We mitigate this risk by applying collateral discounts or haircuts to the unpaid principal balance or market value, if available, of the collateral to determine the advance equivalent value of the collateral securing each borrower’s obligation. The amount of these discounts will vary based on the type of collateral and security agreement. We determine these discounts or haircuts using data based upon historical price changes, discounted cash flow analyses, and loan level modeling.

As a result of recent stressed market conditions stemming from COVID-19, we are taking additional steps to monitor our credit risk on advances. These steps include increased frequency of collateral valuation and identifying, analyzing, and monitoring borrowers with higher risk profiles.
    
At March 31, 2020 and December 31, 2019, borrowers pledged $327.6 billion and $329.4 billion of collateral (net of applicable discounts) to support activity with us, including advances. At March 31, 2020 and December 31, 2019, all of our advances met the requirement to be collateralized at a minimum of 100 percent, net of applicable discounts. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate available liquidity and to borrow additional amounts in the future.

The following table shows our total exposure, including advances, as well as the collateralization percentage of outstanding exposure by borrower type (dollars in millions):
 
March 31, 2020
 
December 31, 2019
 
Sum of Total Exposure
 
% Collateralized
 
Sum of Total Exposure
 
% Collateralized
Commercial banks
$
54,587

 
434
%
 
$
57,455

 
421
%
Savings institutions
2,043

 
407

 
1,431

 
432

Credit unions
6,862

 
369

 
6,678

 
360

Non-captive insurance companies
24,291

 
140

 
20,846

 
145

Captive insurance companies
906

 
120

 
3,798

 
100

CDFIs
16

 
141

 
14

 
170

Housing associates
44

 
355

 
100

 
172

Non-member borrowers
283

 
132

 
273

 
146

Total borrowers
$
89,032

 
344
%
 
$
90,595

 
339
%

We evaluate advances for credit losses on a quarterly basis. We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. We have never experienced a credit loss on our advances. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no expected credit losses on our advances as of March 31, 2020. For the same reasons, we did not record any allowance for credit losses for our advances at December 31, 2019. Refer to “Item 1. Financial Statements — Note 4 — Advances” for additional information.

MORTGAGE LOANS

We are exposed to credit risk through our participation in the Mortgage Partnership Finance (MPF) program and the Mortgage Purchase Program (MPP). Mortgage loan credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage loans is affected by a number of factors, including loan type, borrower’s credit history, and other factors such as home price fluctuations, unemployment levels, and other economic factors in the local market or nationwide.

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As a result of recent deteriorating market and economic conditions stemming from COVID-19, we may be subject to increased credit risk on our mortgage loan portfolio. To assist homeowners affected by the current economic conditions, the federal government has implemented several programs through the CARES Act, including temporary mortgage payment forbearance and a temporary moratorium on foreclosures and evictions. We are closely monitoring our mortgage loan portfolio. The extent these programs will impact our mortgage portfolio and results of operations will depend on the number of homeowners who partake in these programs in the months to come. For additional information, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”

The following table presents the unpaid principal balance of our mortgage loan portfolio by product type (dollars in millions):
Product Type
 
March 31,
2020
 
December 31,
2019
Conventional
 
$
8,917

 
$
8,712

Government
 
497

 
496

Total mortgage loan unpaid principal balance
 
$
9,414

 
$
9,208


We manage the credit risk on mortgage loans by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, and (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs.

We evaluate mortgage loans for credit losses on a quarterly basis and establish an allowance for credit losses to reflect management’s estimate of expected credit losses inherent in the portfolio. We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020.
                                                                                                                                            
Conventional Mortgage Loans. We determine our allowance for credit losses on conventional loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. Conventional mortgage loans are evaluated collectively when similar risk characteristics exists. Conventional loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis. In limited instances, we may incorporate a management adjustment in the allowance for credit losses for conventional mortgage loans due to changes in economic and business conditions or other factors that may not be fully captured in our model. Refer to “Item 1. Financial Statements — Note 5 — Mortgage Loans Held for Portfolio” for additional information.

At both March 31, 2020 and December 31, 2019, the allowance for credit losses on our conventional loans was $1 million.

Government-Insured Mortgage Loans. We invest in government-insured fixed rate mortgage loans that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, we only have credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance.

We have never experienced a credit loss on our government-insured mortgage loans. At March 31, 2020 and December 31, 2019, we determined no allowance for credit losses was necessary on our government-insured mortgage loans.

Refer to “Item 1. Financial Statements — Note 5 — Mortgage Loans Held for Portfolio” for additional information on our allowance for credit losses and the payment status of our conventional mortgage loans.

INVESTMENTS

We maintain an investment portfolio primarily to provide investment income and liquidity. Our primary credit risk on investments is the counterparties’ ability to meet repayment terms. We mitigate this credit risk by purchasing investment quality securities. We define investment quality as a security with adequate financial backings so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security. We consider a variety of credit quality factors when analyzing potential investments, including collateral performance,

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marketability, asset class or sector considerations, local and regional economic conditions, nationally recognized statistical rating organization (NRSRO) credit ratings, and/or the financial health of the underlying issuer.

In light of recent market volatility stemming from COVID-19, we are taking additional steps to monitor our credit risk on investments. These steps include temporarily suspending business to Bank counterparties with increased credit risk and performing additional analysis on our unsecured portfolios. In addition, we will continue to monitor market volatility and counterparty ratings, counterparty pricing, news, sovereign and counterparty research, market research and articles, and COVID-19 predictions and analysis.

Finance Agency regulations limit the type of investments we may purchase. We are prohibited from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks, unless otherwise approved by the Finance Agency. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. At March 31, 2020, we were in compliance with the above regulation and did not own any financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks, and those approved by the Finance Agency.

Finance Agency regulations also include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. These limits are based on a percentage of eligible regulatory capital and the counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of our total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that we may offer for extensions of unsecured credit, excluding overnight Federal funds sold, ranges from three to 15 percent based on the counterparty’s credit rating. Our total unsecured exposure to a counterparty, including overnight Federal funds sold, may not exceed twice that amount, or a total of six to 30 percent of the eligible amount of regulatory capital, based on the counterparty’s credit rating. At March 31, 2020, we were in compliance with the regulatory limits established for unsecured credit.

Our short-term portfolio may include, but is not limited to, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, certificates of deposit, commercial paper, and U.S. Treasury bill obligations. Our long-term portfolio may include, but is not limited to, U.S. Treasury obligations, other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. We consider our long-term investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC to be of the highest credit quality and therefore those exposures are not monitored with other unsecured investments. Given the credit quality of our unsecured long-term investments, our unsecured credit risk is primarily in the short-term portfolio.

We primarily limit short-term unsecured credit exposure to the following overnight investment types:

•
Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions.

•
Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.


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At March 31, 2020, our unsecured short-term investment exposure consisted of overnight Federal funds sold. The following table presents our unsecured short-term investment exposure by counterparty credit rating and domicile at March 31, 2020 (excluding accrued interest receivable) (dollars in millions):
 
 
Credit Rating1,2
Domicile of Counterparty
 
AA
 
A
 
Total
Domestic
 
$
—

 
$
1,025

 
$
1,025

U.S subsidiaries of foreign commercial banks
 
600

 
—

 
600

U.S. branches and agency offices of foreign commercial banks
 
 
 
 
 

Australia
 
1,350

 
—

 
1,350

Canada
 
—

 
1,870

 
1,870

Finland
 
670

 
—

 
670

Germany
 
700

 
—

 
700

Japan
 
—

 
330

 
330

Netherlands
 
—

 
670

 
670

Norway
 
400

 
—

 
400

Sweden
 
670

 
650

 
1,320

Total U.S. branches and agency offices of foreign commercial banks
 
3,790

 
3,520

 
7,310

Total unsecured short-term investment exposure
 
$
4,390

 
$
4,545

 
$
8,935


1
Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2
Table excludes investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC.


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Investment Ratings

The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
March 31, 2020
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB or Lower
 
Unrated2
 
Total
Interest-bearing deposits
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Securities purchased under agreements to resell
—

 
—

 
—

 
—

 
—

 
6,550

 
6,550

Federal funds sold
—

 
4,390

 
4,545

 
—

 
—

 
—

 
8,935

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family
—

 
2,256

 
—

 
—

 
—

 
—

 
2,256

GSE multifamily
—

 
7,920

 
—

 
—

 
—

 
—

 
7,920

U.S. obligations single-family3
—

 
3,896

 
—

 
—

 
—

 
—

 
3,896

U.S. obligations commercial3
—

 
1

 
—

 
—

 
—

 
—

 
1

Private-label residential
—

 
4

 
1

 
1

 
1

 
—

 
7

Total mortgage-backed securities
—

 
14,077

 
1

 
1

 
1

 
—

 
14,080

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations3
—

 
873

 
—

 
—

 
—

 
—

 
873

Other U.S. obligations3
—

 
2,115

 
—

 
—

 
—

 
—

 
2,115

GSE and Tennessee Valley Authority obligations
—

 
1,554

 
—

 
—

 
—

 
—

 
1,554

State or local housing agency obligations
772

 
200

 
—

 
—

 
—

 
—

 
972

Other
455

 
99

 
—

 
—

 
—

 
—

 
554

Total non-mortgage-backed securities
1,227

 
4,841

 
—

 
—

 
—

 
—

 
6,068

Total investments
$
1,227

 
$
23,309

 
$
4,546

 
$
1

 
$
1

 
$
6,550

 
$
35,634


1
Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2
Represents secured securities purchased under agreements to resell with no NRSRO or guarantor rating.

3
Represents investment securities backed by the full faith and credit of the U.S. Government.



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The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
December 31, 2019
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB
 
Unrated2
 
Total
Interest-bearing deposits
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Securities purchased under agreements to resell
—

 
1,500

 
2,200

 
—

 
—

 
10,250

 
13,950

Federal funds sold
—

 
1,700

 
2,905

 
—

 
—

 
—

 
4,605

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family
—

 
2,401

 
—

 
—

 
—

 
—

 
2,401

GSE multifamily
—

 
8,134

 
—

 
—

 
—

 
—

 
8,134

U.S. obligations single-family3
—

 
4,064

 
—

 
—

 
—

 
—

 
4,064

U.S. obligations commercial3
—

 
1

 
—

 
—

 
—

 
—

 
1

Private-label residential
—

 
4

 
1

 
1

 
1

 
—

 
7

Total mortgage-backed securities
—

 
14,604

 
1

 
1

 
1

 
—

 
14,607

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations3
—

 
2,277

 
—

 
—

 
—

 
—

 
2,277

GSE and Tennessee Valley Authority obligations
—

 
1,504

 
—

 
—

 
—

 
—

 
1,504

State or local housing agency obligations
769

 
208

 
—

 
—

 
—

 
—

 
977

Other
445

 
99

 
—

 
—

 
—

 
—

 
544

Total non-mortgage-backed securities
1,214

 
4,088

 
—

 
—

 
—

 
—

 
5,302

Total investments
$
1,214

 
$
21,893

 
$
5,106

 
$
1

 
$
1

 
$
10,250

 
$
38,465


1
Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2
Represents secured securities purchased under agreements to resell with no NRSRO or guarantor rating.

3
Represents investment securities backed by the full faith and credit of the U.S. Government.


We evaluate investments for credit losses on a quarterly basis. We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. At March 31, 2020, we determined no allowance for credit losses was necessary on our investments. Refer to “Item 1. Financial Statements — Note 3 — Investments” for additional information our allowance for credit losses.

Mortgage-Backed Securities

We limit our purchases of MBS to those guaranteed by the U.S. Government or issued by a GSE. Our risk management policies prohibit new purchases of private-label MBS. We perform ongoing analysis on these investments to determine potential credit issues. At March 31, 2020 and December 31, 2019, we owned $14.1 billion and $14.6 billion of MBS, of which approximately 99.9 percent were guaranteed by the U.S. Government or issued by GSEs and 0.1 percent were private-label MBS at each period end.

We are exposed to mortgage asset credit risk through our investments in MBS. Mortgage asset credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by a number of factors, including the strength and ability to guarantee the payments from the agency that created the structure, underlying loan performance, and other economic factors in the local market or nationwide.

DERIVATIVES

We execute most of our derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives).


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We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in our policies and Finance Agency regulations.

Uncleared Derivatives. Due to risk of nonperformance by the counterparties to our derivative agreements, we generally require collateral on uncleared derivative agreements. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty or a contractually established threshold level. A counterparty generally must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our uncleared derivative agreements.

Cleared Derivatives. For cleared derivatives, the Derivative Clearing Organization (Clearinghouse) is our counterparty. We are subject to risk of nonperformance by the Clearinghouse and clearing agent. The requirement that we post initial and variation margin through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. However, the use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. We do not anticipate any credit losses on our cleared derivatives.

The contractual or notional amount of derivatives reflects our involvement in the various classes of financial instruments. Our maximum credit risk is the estimated cost of replacing derivatives if there is a default, minus the value of any related collateral. In determining maximum credit risk, we consider accrued interest receivables and payables as well as our ability to net settle positive and negative positions with the same counterparty and/or clearing agent when netting requirements are met.

The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
March 31, 2020
Credit Rating1
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty
 
Net Credit Exposure
 to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
Cleared derivatives2
 
$
33,342

 
$
9

 
$
214

 
$
223

Liability positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
AA
 
104

 
(49
)
 
50

 
1

A
 
2,858

 
(196
)
 
200

 
4

BBB
 
224

 
(38
)
 
39

 
1

Total derivative positions with credit exposure to non-member counterparties
 
36,528

 
(274
)
 
503

 
229

Member institutions3
 
296

 
4

 
—

 
4

Total
 
36,824

 
$
(270
)
 
$
503

 
$
233

Derivative positions without credit exposure
 
3,334

 
 
 
 
 
 
Total notional
 
$
40,158

 
 
 
 
 
 

1
Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable.

2
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing's parent, CME Group Inc. was rated Aa3 by Moody's and AA- by Standard and Poor's at March 31, 2020.

3
Represents mortgage loan purchase commitments with our member institutions.

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The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
December 31, 2019
Credit Rating1
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty
 
Net Credit Exposure
to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
   BBB2
 
$
3

 
$
—

 
$
—

 
$
—

   Cleared derivatives3
 
20,881

 
2

 
83

 
85

Liability positions with credit exposure
 
 
 
 
 
 
 


Uncleared derivatives
 
 
 
 
 
 
 
 
   AA
 
137

 
(29
)
 
30

 
1

   A
 
4,448

 
(98
)
 
102

 
4

BBB
 
1,763

 
(37
)
 
38

 
1

Cleared derivatives3
 
$
11,475

 
$
—

 
$
11

 
$
11

Total derivative positions with credit exposure to non-member counterparties
 
38,707

 
(162
)
 
264

 
102

Member institutions2,4
 
118

 
—

 
—

 
—

Total
 
38,825

 
$
(162
)
 
$
264

 
$
102

Derivative positions without credit exposure
 
146

 
 
 
 
 


Total notional
 
$
38,971

 


 


 



1
Represents either the lowest credit rating available for counterparty based on an NRSRO, or the guarantor, credit rating, if applicable.

2
Net credit exposure is less than $1 million

3
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing’s parent, CME Group Inc. was rated Aa3 by Moody’s and AA- by Standard and Poor’s at December 31, 2019.

4
Represents mortgage loan purchase commitments with our member institutions.

Consistent with the additional analysis and monitoring on our other Bank products, we are taking additional steps to monitor our derivatives’ credit risk given the recent market volatility stemming from COVID-19. In addition, we will continue to monitor market volatility and counterparty ratings, counterparty pricing, news, sovereign and counterparty research, market research and articles, and COVID-19 predictions and analysis.

Operational Risk

We define operational risk as the risk arising from inadequate or failed processes, people, and/or systems, including those emanating from external sources. All of our activities and processes generate operational risk, including legal risk. Management has established policies, procedures, and controls to reduce the likelihood of operational risk. We perform annual risk assessments to identify, assess, mitigate, and report on operational risks outside of the Board’s risk appetite. Due to the manual nature of many of our processes, our operational risk exposure is closely monitored. As previously reported in our 2019 Form 10-K, we identified two material weaknesses in our internal controls over financial reporting resulting from control deficiencies in our IT general controls in the areas of user access and IT change management. We are actively working to remediate the identified material weaknesses and strengthen our internal controls over financial reporting.

In response to the recent outbreak of COVID-19, the majority of our employees are working remotely, with only operationally essential employees working on site at our offices. In addition, many of our members, vendors, and regulators are working remotely. While our operations have changed as a result of the global pandemic, we currently do not believe our operational risk to be elevated as a result of the current working arrangements. Refer to “Item 1A. Risk Factors” for additional information.

Model Risk

We define model risk as the risk of adverse consequences from decisions based on incorrect and misused model outputs. Throughout the course of our day-to-day activities, we utilize external and internal pricing and financial models as important inputs into business and risk management decision-making processes.


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Information Security Risk

We define information security risk as the risk arising from unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems. Importantly, this definition includes the security of both digital and non-digital information as well as associated information systems and processes.

Information security risk includes the risk that cyber incidents could result in a failure or interruption of our business operations. We have not experienced any such disruption with a material adverse impact. However, we do rely heavily on internal and third-party information systems and other technology to conduct and manage our business and any disruptions to those items could have a material adverse impact on our financial condition and results of operations. We mitigate cybersecurity risk utilizing the concept of defense in depth, where multiple layers of security controls are implemented. Administrative, physical, and logical controls are in place for identifying, monitoring, and controlling system access, sensitive data, and system changes. In addition, we employ thorough security testing and training that includes regular third party facilitated penetration testing, as well as mandatory staff training on cyber risks. Given the importance of cybersecurity and ever-increasing sophistication of potential cyber-attacks, we expect to continue to strengthen our cyber-defenses. As a result of the control deficiencies previously discussed, two material weaknesses remain related to information security. For additional information, refer to “Item 4. Controls and Procedures.”

Compliance Risk

We define compliance risk as the risk of violations of laws, rules, regulations, regulatory and supervisory guidance, and internal policies and procedures. Our Legal and Compliance departments are responsible for coordinating with our various business units in connection with its identification, evaluation, and mitigation of our compliance risks.

Strategic Risk

We define strategic risk as the risk arising from adverse strategic business decisions, poor implementation of strategic business plan, or a disproportionate response to changes in the industry and operating environment. We consider legislative and reputational risks to be components of strategic risk. From time to time, proposals are made, or legislative and regulatory changes are considered, which could affect our cost of doing business or other aspects of our business. We mitigate strategic risk through strategic business planning and monitoring of our external and internal environment. For additional information on some of the more important risks we face, refer to “Item 1A. Risk Factors.”

    


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk” and the sections referenced therein for quantitative and qualitative disclosures about market risk.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is (i) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our President and chief executive officer (CEO), and chief financial officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our President and CEO, and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the quarterly period covered by this report. Based on that evaluation, and management’s identification of material weaknesses in our internal control over financial reporting described below, our President and CEO, and CFO have concluded that our disclosure controls and procedures were not effective as of March 31, 2020.
As previously reported in our 2019 Form 10-K, management identified two material weaknesses in our internal control over financial reporting:

1.
We did not maintain effective user access controls to ensure appropriate segregation of duties and adequate restrictions on user and privileged access to the Bank’s IT applications, programs, and data. Specifically, we identified control deficiencies related to the provisioning, internal transfer, and removal of user access. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.

2.
We did not maintain effective control over IT change management, including controls to monitor developers’ access to production and testing of program changes. These controls are necessary to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized, and implemented appropriately. We identified control deficiencies related to the approval of changes, execution of quality assurance reviews, and the monitoring of unauthorized system changes. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
Management is committed to improving our overall system of internal control over financial reporting, including taking necessary steps to fully remediate the identified material weaknesses. The following briefly describes certain remediation actions we have taken or plan to take to address these material weaknesses:

1.
Management is re-evaluating IT governance and controls and has updated procedures related to user access management. During 2019, we designed enhanced user access controls. These controls are designed to ensure appropriate segregation of duties and adequate restrictions on user and privileged access to the Bank’s IT applications, programs, and data. During the first quarter of 2020, we implemented these controls; however, they have not been tested.

2.
Management is re-evaluating IT governance and controls and has updated procedures related to IT change management. During 2019, we designed and implemented enhanced IT change management controls. These controls are designed to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately. While these controls have been implemented and management expects the change in controls to address the material weakness related to effective control over IT change management, testing has not been completed.

3.
During 2019, training was provided to IT personnel and business process owners focusing on controls related to user access and IT change management. Continued training will be provided focusing on the execution of IT change management controls, intended to ensure understanding of Bank policies and procedures.

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Management believes that the measures described above should be sufficient to remediate the identified material weaknesses and strengthen our internal control over financial reporting. We cannot assure you, however, that these steps will remediate such weaknesses, nor can we be certain of the timing or whether additional actions will be required or the costs of any such actions.
Changes in Internal Control over Financial Reporting
The remediation activities related to the implementation of user access controls were changes in our internal control over financial reporting during the quarter ended March 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 


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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
    
As a result of the merger with the Federal Home Loan Bank of Seattle (Seattle Bank), the Bank has been involved in certain legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairments of certain private-label MBS, as described below. The private-label MBS litigation is described below. After consultation with legal counsel, other than the private-label MBS litigation, we do not believe any legal proceedings to which we are a party could have a material impact on our financial condition, results of operations, or cash flows.

Private-Label MBS Litigation

As the Seattle Bank previously reported, in December of 2009, it filed 11 complaints in the Superior Court of Washington for King County relating to private-label MBS that it purchased from various dealers and financial institutions in an aggregate original principal amount of approximately $4 billion. The Seattle Bank’s complaints under Washington State law requested rescission of its purchases of the securities and repurchases of the securities by the defendants for the original purchase prices plus eight percent per annum (plus related costs), minus distributions on the securities received by the Seattle Bank. The Seattle Bank asserted that the defendants made untrue statements and omitted important information in connection with their sales of the securities to the Seattle Bank.

Of the 11 cases initially filed, one has been dismissed, two have been settled in part and dismissed in part, and eight have been settled. We appealed the one complete dismissal and two partial dismissals covering the claims related to five certificates across three different cases. The appellate court affirmed the dismissal of the claims related to four certificates in December 2017 and affirmed the dismissal of the remaining certificate in May 2018. In January 2018, we filed petitions for discretionary review of the appellate court’s rulings in December 2017 related to four of the certificates with the Washington Supreme Court. On May 3, 2018, the Court granted those petitions. The aggregate consideration paid for these four certificates is $567 million. Oral arguments were heard on October 9, 2018. In June 2018, we filed a petition for discretionary review of the appellate court’s ruling in May 2018 on the fifth certificate. The aggregate consideration paid for that one certificate is $200 million.

On October 3, 2019, the Washington Supreme Court reversed the judgment of the appellate court on the four certificates covered by our petition of January 2018 and reinstated our claims on those four certificates. Trials for the two cases relating to these reinstated claims have been scheduled for July and August of 2020. With respect to the fifth certificate, on January 30, 2020, the Washington Supreme Court remanded the case to the appellate court for reconsideration in light of the Court’s reversal on the claims for the other four certificates. On March 16, 2020, the appellate court remanded the case to the trial court. On March 25, 2020, we entered into a settlement agreement with one of the defendants in connection with two of the certificates for the aggregate amount of approximately $56 million (after netting certain legal fees and expenses).

Litigation Settlement Gains

Litigation settlement gains are considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded on the Statements of Income. We record legal expenses related to litigation settlements as incurred in other expenses on the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. We incur and recognize these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement. 
During the three months ended March 31, 2020, we settled a private-label MBS claim and recognized $56 million in net gains on litigation settlements. During the three months ended March 31, 2019, we did not record any net gains on litigation settlements.



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ITEM 1A. RISK FACTORS

Other than the risk factor described below, there have been no material changes to our risk factors set forth in our 2019 10-K during the three months ended March 31, 2020.

COVID-19 and related developments have created and may continue to create substantial economic and financial disruptions and uncertainties as well as operational challenges, which could heighten many of the risks we face and adversely impact our business, financial condition, and results of operations.

The recent outbreak of COVID-19, and governmental and public actions taken in response (such as shelter-in-place, stay-at-home, or similar orders, travel restrictions, and business shutdowns), have significantly reduced economic activity and created substantial uncertainty about the future economic environment. In addition, COVID-19 and related developments have resulted in substantial disruptions in the financial markets, including dramatic increases in market volatilities from time to time. There are no comparable recent events that provide guidance as to the effect that COVID-19 may have and, as a result, the ultimate impact of the outbreak, including the depth of the economic downturn and the timing and shape of the economic recovery, is highly uncertain. This could heighten many of the risks we face, as described in Item 1A. Risk Factors in our 2019 Form 10-K, and adversely impact our business, financial condition and results of operations.

A prolonged economic downturn, or periods of significant economic and financial disruptions and uncertainties, resulting from COVID-19 may lead to an increased risk of our Bank’s credit losses, in particular due to declines in the value of collateral securing our advances or of mortgage loans or due to member financial difficulties or member failures. For example, due to the recent turmoil in the financial markets associated with COVID-19, some financial institutions have experienced financial difficulties. Our risk of credit losses may be exacerbated by a downturn in the housing markets, including higher delinquencies from rising unemployment and the effect of mortgage forbearance and other relief.

The disruptions to interest rates, credit spreads, and the availability of funds in the fixed income market in connection with the coronavirus pandemic have also adversely affected, and may continue to adversely affect, our cost of funding or access to funding, as well as the valuation of and the yields on our assets. This, coupled with changes in member demand for advances from time to time, may result in challenges in our ability to manage our assets and liabilities, including the pricing of advances and the funding gap, and may adversely impact our profitability and liquidity.

In addition, the shelter-in-place, stay-at-home, or similar orders, travel restrictions, and business shutdowns as a result of COVID-19 have led to substantial changes in normal business practices (such as the implementation of widespread work-from-home arrangements) for us as well as many of our members, vendors, and regulator. Although we are operating effectively under these current working arrangements, any breakdown or disruption in our information and computer systems, operating processes, member relations, or vendor services as a result of these working arrangements could have an adverse impact on our financial condition and results of operations.
The extent to which COVID-19 impacts our business, financial condition, and results of operations will depend on many factors that are highly uncertain and difficult to predict, including, but not limited to, the duration, spread and severity of COVID-19, the actions taken to contain COVID-19, and how quickly and to what extent normal economic and operating conditions can resume.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Not applicable.


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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Executive Changes

On March 11, 2020, we announced the appointment of Kevin T. Larkin as Chief Information Officer effective March 23, 2020. Mr. Larkin oversees our information technology and information security departments.







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ITEM 6. EXHIBITS
3.1
3.2
4.1
31.1
31.2
32.1
32.2
101.INS
XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

1
Incorporated by reference to our Form 8-K filed with the SEC on June 1, 2015 (Commission File No. 000-51999).

2
Incorporated by reference to our Form 8-K filed with the SEC on December 17, 2018 (Commission File No. 000-51999).










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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

FEDERAL HOME LOAN BANK OF DES MOINES
 
 
(Registrant)
 
 
 
 
 
 
 
Date:
 
May 11, 2020
 
 
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Kristina K. Williams
 
 
 
 
Kristina K. Williams
President and Chief Executive Officer
 
 
 
 
 
 
 
By:
 
/s/ Donna S. Stone
 
 
 
 
Donna S. Stone
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
 
 
 


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