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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                    to                                   
 
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
(Exact name of registrant as specified in its charter) 
Federally Chartered Corporation 25-6001324
(State or other jurisdiction of
incorporation or organization)		 (IRS Employer Identification No.)
   
601 Grant Street 

Pittsburgh,
 		PA
15219
 

 (Address of principal executive offices)

 (Zip Code)
412 288-3400 
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading 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.  [x]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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  [x] 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.
o 
Large accelerated filer
o 
Accelerated filer
☐
Emerging growth company
x 
Non-accelerated filer
☐
Smaller reporting company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).☐ Yes ☒ No

There were 19,587,548 shares of common stock with a par value of $100 per share outstanding at October 30, 2020.


FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS
  
Part I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
    Notes to Financial Statements (unaudited)
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Risk Management
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Item 4: Controls and Procedures
Part II - OTHER INFORMATION
Item 1: Legal Proceedings
Item 1A: Risk Factors
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Item 3: Defaults upon Senior Securities
Item 4: Mine Safety Disclosures
Item 5: Other Information
Item 6: Exhibits
Signature


i

PART I - FINANCIAL INFORMATION

Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Statements contained in this Form 10-Q, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of Pittsburgh (the Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; including but not limited to, the possible discontinuance of the London Interbank Offered Rate (LIBOR) and the related effect on the Bank's LIBOR-based financial products, investments and contracts; the occurrence of man-made or natural disasters, endemics, global pandemics, conflicts or terrorist attacks or other geopolitical events; political, legislative, regulatory, litigation, or judicial events or actions; risks related to mortgage-backed securities (MBS); changes in the assumptions used to estimate credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; changes in expectations regarding the Bank’s payment of dividends; membership changes; changes in the demand by Bank members for Bank advances; an increase in advance prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the Federal Home Loan Bank (FHLBank) System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Bank's unaudited interim financial statements and notes and any Risk Factors included in Part II, Item 1A of this Form 10-Q and all risks and uncertainties addressed throughout this report, as well as the Bank's 2019 Form 10-K (2019 Form 10-K), including Risk Factors included in Part I, Item 1A of that report and the Bank's Quarterly Report on Form 10-Q for the period ended June 30, 2020 (second quarter Form 10-Q), including Risk Factors included in Part II, Item 1A of that report. Information on the Bank's websites referred to in this Form 10-Q is not incorporated in, or a part of, this Form 10-Q.

Executive Summary

Overview. The Bank's financial condition and results of operations are influenced by global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets, all of which impact the interest rate environment. See additional discussion below in this Executive Summary for the continuing impact on the Bank's operations and financial condition due to the spread of the coronavirus (COVID-19 pandemic).

The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk in connection with advances and debt, the Bank executes interest-rate exchange agreements. Short-term interest rates also directly affect the Bank's earnings on invested capital. Finally, the Bank's mortgage-related assets make it sensitive to changes in mortgage rates. The Bank earns relatively narrow spreads between yields on assets (particularly advances, its largest asset) and the rates paid on corresponding liabilities.

The Bank's earnings are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. The flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year
1

maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products.

The COVID-19 pandemic caused the markets to be volatile toward the end of the first quarter and into the second quarter of 2020. To address the virus impact on the U.S. economy, the Federal Reserve Board (Federal Reserve) lowered the Federal funds target rate, falling eventually to a range between 0% to 0.25%. In addition, the Federal Reserve committed to using its full range of tools to respond to the turbulence in the markets, provide liquidity, and to support the economy.  During the third quarter of 2020, the markets continued to contend with the impact of the COVID-19 pandemic. At its September 2020 meeting, the Federal Reserve maintained the Federal funds target range through at least 2023 and said it would maintain its quantitative easing, repurchase and overnight lending programs to keep credit available.

Yields on U.S. Treasuries were generally lower during the third quarter of 2020 relative to the prevailing yields during the second quarter, although yields increased for maturities 10 years and longer. The decline of 3-month LIBOR during the third quarter resulted in compressed short-term funding spreads. The Bank's long-term funding costs relative to LIBOR improved during the quarter due to increased investor confidence creating more demand in the term markets. Term debt spreads relative to U.S. Treasuries remained high but did improve during the quarter due to stronger investor demand.

Results of Operations. The Bank's net income totaled $57.4 million for the third quarter of 2020, compared to $70.3 million for the third quarter of 2019. Lower net interest income was the primary driver for the year-over-year change, partially offset by higher other noninterest income. Interest income was $185.9 million for the third quarter of 2020, compared with $700.0 million for the third quarter of 2019. The decrease was the result of lower average interest-earning asset balances as well as lower yields driven by lower short-term interest rates. Interest income also included net prepayment fees on advances of $13.8 million for the third quarter of 2020, compared with $1.1 million for the third quarter of 2019. Interest expense was $101.7 million for the third quarter of 2020, compared with $590.9 million in the same prior-year period. This decrease was primarily the result of lower average consolidated obligation balances as well as lower rates paid, which were driven by lower short-term interest rates. The net interest margin was 47 basis points and 41 basis points for the third quarters of 2020 and 2019, respectively. The increase in net interest margin was primarily due to advance prepayment fees, lower funding costs, and a higher percentage of MBS and Mortgage Partnership Finance® (MPF®) Program assets which have wider spreads.

The Bank’s net income totaled $153.6 million for the nine months ended September 30, 2020, compared to $236.0 million for the same prior-year period. The $82.4 million decrease was driven primarily by lower net interest income and lower other noninterest income. Interest income was $936.1 million for the nine months ended September 30, 2020, compared with $2.1 billion for the same prior-year period. This decrease was the result of lower average advance balances as well as lower yields driven by lower short-term interest rates. Interest income also included net prepayment fees on advances of $17.0 million for the nine months ended September 30, 2020, compared with $9.0 million for the same prior-year period. Interest expense was $653.4 million for the nine months ended September 30, 2020, compared with $1.8 billion in the same prior-year period. This decrease was primarily the result of lower average consolidated obligation balances as well as lower rates paid, which was driven by lower short-term interest rates. The net interest margin was 44 basis points and 45 basis points for the first nine months of 2020 and 2019, respectively.

Financial Condition. Advances. Advances totaled $35.8 billion at September 30, 2020, a decrease of $29.8 billion compared to $65.6 billion at December 31, 2019. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. After a significant increase in first quarter advances that corresponded with member needs, new federal government liquidity programs took hold in the second and third quarters, which continue to contribute to higher deposits at our members and decreased advance levels for the Bank. While the advance portfolio decreased compared to December 31, 2019, the term of advances increased slightly. At September 30, 2020, approximately 38% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 37% at December 31, 2019.

The ability to grow and/or maintain the advance portfolio is affected by, among other things, the following: (1) the liquidity demands of the Bank's borrowers; (2) the composition of the Bank's membership; (3) members' regulatory requirements; (4) current and future credit market conditions; (5) housing market trends; (6) the shape of the yield curve and (7) advance pricing.

Liquidity. The Bank maintains liquidity to meet member borrowing needs and regulatory standards. Liquidity is comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and U.S. Treasury obligations classified as trading or available-for-sale (AFS). At September 30, 2020, the Bank held $6.8 billion of liquid assets compared to $10.9 billion at December 31, 2019. The Bank expanded its liquidity portfolio in the first quarter of 2020
2

reflecting its ability to stand ready for its members during the COVID-19 pandemic, then contracted during the second and third quarters of 2020 which was consistent with decreased member advance activity during the quarter.

Investments. To enhance earnings, the Bank also maintains investments classified as AFS and held-to-maturity (HTM) as well as certain trading securities. The Bank held $12.4 billion in its investment portfolio at September 30, 2020 compared with $13.7 billion at December 31, 2019, a decrease of $1.3 billion.

Consolidated Obligations. The Bank's consolidated obligations totaled $55.6 billion at September 30, 2020, a decrease of $34.3 billion from December 31, 2019. At September 30, 2020, bonds represented 75% of the Bank's consolidated obligations, compared with 74% at December 31, 2019. Discount notes represented 25% of the Bank's consolidated obligations at September 30, 2020 compared with 26% at year-end 2019. The overall decrease in consolidated obligations outstanding is consistent with the decreased advances, liquidity and total asset balances.

Capital Position and Regulatory Requirements. Total capital at September 30, 2020 was $3.4 billion, compared to $4.5 billion at December 31, 2019. The decrease was primarily due to lower capital stock as a result of lower advances. Total retained earnings at September 30, 2020 were $1.4 billion, relatively unchanged from year-end 2019. Accumulated other comprehensive income (AOCI) was $140.5 million at September 30, 2020, an increase of $48.7 million from December 31, 2019. This increase was primarily due to net unrealized gains within the AFS portfolio.

In October, July and April 2020, the Bank paid quarterly dividends of 6.25% annualized on activity stock and 3.00% annualized on membership stock. In February 2020, the Bank paid quarterly dividends of 7.75% annualized on activity stock and 4.50% annualized on membership stock. The dividends paid were based on stockholders' average balances for the fourth quarter of 2019 (February dividend), the first quarter of 2020 (April dividend), the second quarter of 2020 (July dividend), and the third quarter of 2020 (October dividend).

The dividend rates based on the first three quarters of 2020 financial results are reflective of, and in line with, the Bank’s performance during the first nine months of the year, particularly given lower interest rates, lower member advance levels and lower net income. The dividend rates also demonstrate that the Bank continues to return value to its members. The fourth quarter 2020 dividend, which has historically been paid in February of the following year, will likely be lower. The Bank will continue to assess the impact of market and business conditions on the Bank's financial performance and level of dividends. Those conditions can be unpredictable, and their impact on the Bank’s results of operations and financial condition may result in the potential for lower dividend levels.

The Bank met all of its capital requirements as of September 30, 2020, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of June 30, 2020, the Bank was deemed "adequately capitalized."

    Impact of COVID-19 Pandemic on Operations and Financial Condition. During continued COVID-19 uncertainty, executive leadership and the Bank’s Board of Directors have remained focused on the health and safety of staff and being a reliable, readily available liquidity provider for members. As an essential business, the Bank has remained fully operational during the pandemic. During the third quarter, the Bank continued to operate effectively with most staff working remote. The Bank continues to monitor guidance from government authorities to determine in what manner staff are able to work in the Bank's office locations. The Bank will also be focusing on supporting the communities that our members serve and maintaining an open dialogue with members, particularly as it relates to credit management.

The Bank’s 2019 Annual Report on Form 10-K and the Quarterly Reports on Form 10-Q for the quarters ending March 31 and June 30, 2020, outlined several potential drivers of lower performance in 2020, including lower interest rates, increasing operating expenses, and a change in the Bank’s operating landscape as a result of legislative and regulatory actions. As reported at the end of the first quarter, advance levels in March increased when the pandemic was first impacting the economy. During the second and third quarters, deposits at members increased and advances subsequently declined as a result of U.S. Treasury and Federal Reserve actions to stimulate the economy. The Bank also operated in a lower interest rate environment and experienced a moderate increase in operating expenses. The Bank is well-capitalized with significant retained earnings.

The Bank monitors member credit quality on a regular basis. To date, deterioration in member credit quality has not been material. Given, however, the current economic environment (pandemic-related business limitations, unemployment levels and increases in loan forbearance and delinquencies) as well as lower interest rates, the Bank anticipates associated deterioration in member credit quality, particularly should such conditions persist for an extended period.

Expected prolonged low interest rates will likely result in lower net income. Paydown of the high-yielding MBS and MPF Program portfolios and further decreased member advance volume could also weigh on financial performance. Given present
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economic and market conditions, the Bank will continue to monitor member credit quality and prudently manage operating expenses.

The extent to which the COVID-19 pandemic impacts the Bank’s business, results of operations, and financial condition will depend on future developments. These developments continue to be highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. The pandemic may also cause prolonged recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could materially affect the Bank’s business, results of operations and financial condition.

Financial Highlights

The following are the financial highlights of the Bank. The Condensed Statements of Condition as of December 31, 2019 have been derived from the Bank's audited financial statements. Financial highlights for the other quarter-end periods have been derived from the Bank's unaudited financial statements.

Condensed Statements of Income
 Three months ended
 September 30,June 30,March 31,December 31,September 30,
(in millions)20202020202020192019
Net interest income$84.2 $102.8 $95.7 $104.2 $109.1 
Provision (benefit) for credit losses (1)
1.2 1.0 3.4 (0.5)0.4 
Other noninterest income (loss)5.0 0.1 (31.3)17.0 (6.7)
Other expense23.8 34.5 20.4 31.1 23.2 
Income before assessments64.2 67.4 40.6 90.6 78.8 
AHP assessment (2)
6.8 7.1 4.7 9.7 8.5 
Net income$57.4 $60.3 $35.9 $80.9 $70.3 
Dividends (in millions)$39.8 $41.3 $56.1 $63.7 $63.5 
Dividends per share1.84 1.50 1.99 2.11 1.87 
Weighted average dividend rate5.89 %6.06 %7.43 %7.46 %7.44 %
Dividend payout ratio (3)
69.30 %68.38 %156.28 %78.70 %90.40 %
Return on average equity6.29 %5.89 %3.39 %7.26 %5.79 %
Return on average assets0.32 %0.26 %0.15 %0.33 %0.26 %
Net interest margin (4)
0.47 %0.45 %0.41 %0.43 %0.41 %
Regulatory capital ratio (5)
5.72 %5.14 %4.53 %4.94 %4.88 %
GAAP capital ratio (6)
5.58 %4.90 %4.29 %4.67 %4.65 %
Total average equity to average assets5.05 %4.36 %4.53 %4.53 %4.47 %
Notes:
(1) Effective January 1, 2020, the Bank adopted ASU 2016-13: Financial Instruments - Credit Losses, as amended (ASU 2016-13). The 2020 amount includes provision for private label MBS held in the AFS portfolio, the MPF portfolio and Banking on Business (BOB) loans.
(2) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(3) Represents dividends paid as a percentage of net income for the respective periods presented.
(4) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(5) Regulatory capital ratio is the sum of capital stock, mandatorily redeemable capital stock and retained earnings as a percentage of total assets at period-end.
(6) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.

4

Nine months ended
(in millions)September 30, 2020September 30, 2019
Net interest income$282.7 $349.6 
Provision (benefit) for credit losses (1)
5.6 1.8 
Other noninterest income (loss)(26.2)(14.0)
Other expense78.7 70.4 
Income before assessments172.2 263.4 
AHP assessment (2)
18.6 27.4 
Net income$153.6 $236.0 
Dividends$137.2 $203.1 
Dividends per share5.32 5.73 
Weighted average dividend rate6.49 %7.45 %
Dividend payout ratio (3)
89.28 %86.07 %
Return on average equity5.13 %6.38 %
Return on average assets0.24 %0.30 %
Net interest margin (4)
0.44 %0.45 %
Regulatory capital ratio (5)
5.72 %4.88 %
GAAP capital ratio (6)
5.58 %4.65 %
Total average equity to average assets4.61 %4.75 %
Notes:
(1) Effective January 1, 2020, the Bank adopted ASU 2016-13: Financial Instruments - Credit Losses, as amended (ASU 2016-13). The 2020 amount includes provision for private label MBS held in the AFS portfolio, the MPF portfolio and BOB loans.
(2) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(3) Represents dividends paid as a percentage of net income for the respective periods presented.
(4) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(5) Regulatory capital ratio is the sum of capital stock, mandatorily redeemable capital stock and retained earnings as a percentage of total assets at period-end.
(6) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.

Condensed Statements of Condition
September 30,June 30,March 31,December 31,September 30,
(in millions)20202020202020192019
Cash and due from banks$1,386.5 $377.4 $3,946.6 $21.5 $13.8 
Investments (1)
17,792.1 22,332.6 27,900.6 24,572.0 27,277.4 
Advances35,841.0 49,614.4 78,092.9 65,610.1 70,325.9 
Mortgage loans held for portfolio, net5,089.8 5,241.5 5,237.6 5,114.6 4,827.2 
Total assets60,443.3 77,975.0 115,658.2 95,724.1 102,913.7 
Consolidated obligations:
Discount notes
13,995.7 26,051.8 52,062.5 23,141.4 28,155.7 
Bonds
41,583.3 46,582.8 56,953.3 66,807.8 68,452.7 
Total consolidated obligations 55,579.0 72,634.6 109,015.8 89,949.2 96,608.4 
Deposits990.6 951.0 812.6 573.4 556.2 
Total liabilities57,071.3 74,156.2 110,697.7 91,251.3 98,128.0 
Capital stock - putable1,880.4 2,371.4 3,629.9 3,055.0 3,372.9 
Retained earnings1,351.1 1,333.5 1,305.9 1,326.0 1,308.8 
Total capital3,372.0 3,818.8 4,960.5 4,472.8 4,785.7 
Notes:
(1) Includes interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and trading, AFS and HTM investment securities.

5

Earnings Performance

    The following is Management's Discussion and Analysis of the Bank's earnings performance for the three and nine months ended September 30, 2020 and 2019, which should be read in conjunction with the Bank's unaudited interim financial statements included in this Form 10-Q as well as the audited financial statements included in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2019 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank's net income totaled $57.4 million for the third quarter of 2020, compared to $70.3 million for the third quarter of 2019. Lower net interest income was the primary driver for the year-over-year change, partially offset by higher other noninterest income. The $12.9 million decrease in net income year-over-year was driven primarily by the following:

•Net interest income was $84.2 million for the third quarter of 2020, a decline of $24.9 million from $109.1 million in the third quarter of 2019.
–Interest income was $185.9 million for the third quarter of 2020, compared with $700.0 million for the third quarter of 2019. This decrease was the result of lower average interest-earning asset balances as well as lower yields driven by lower short-term interest rates.
–Interest income also included net prepayment fees on advances of $13.8 million for the third quarter of 2020, compared with $1.1 million for the third quarter of 2019.
–Interest expense was $101.7 million for the third quarter of 2020, compared with $590.9 million in the same prior-year period. This decrease was primarily the result of lower average consolidated obligation balances as well as lower rates paid, which were driven by lower short-term interest rates.
•Other noninterest income was a gain of $5.0 million in the third quarter of 2020, compared with a loss of $6.7 million in the same prior-year period. The improvement in other noninterest income was the result of net gains on derivatives and hedging activities, partially offset by net losses on investment securities.

    The Bank's return on average equity for the third quarter of 2020 was 6.29% compared to 5.79% for the third quarter of 2019.

The Bank’s net income totaled $153.6 million for the nine months ended September 30, 2020, compared to $236.0 million for the same prior-year period. The $82.4 million decrease was driven primarily by the following:

•Net interest income was $282.7 million for the nine months ended September 30, 2020, a decline of $66.9 million from $349.6 million in the same prior-year period.
–Interest income was $936.1 million for the nine months ended September 30, 2020, compared with $2.1 billion for the same prior-year period. This decrease was the result of lower average advance balances as well as lower yields driven by lower short-term interest rates.
–Interest income also included net prepayment fees on advances of $17.0 million for the nine months ended Sept. 30, 2020, compared with $9.0 million for the same prior-year period.
–Interest expense was $653.4 million for the nine months ended September 30, 2020, compared with $1.8 billion in the same prior-year period. This decrease was primarily the result of lower average consolidated obligation balances as well as lower rates paid, which were driven by lower short-term interest rates.
▪Other expenses increased $8.3 million to $78.7 million for the nine months ended Sept. 30, 2020, compared with the same prior-year period. Higher compensation and benefits expenses, technology-related costs and voluntary community investments were the primary drivers in the comparison.
•Other noninterest income was a loss of $26.2 million for the nine months ended September 30, 2020, compared with a loss of $14.0 million in the same prior-year period. This $12.2 million increase was due primarily to higher net losses on derivatives and hedging activities, partially offset by higher net gains on investment securities.

    The Bank's return on average equity for the first nine months of 2020 was 5.13% compared to 6.38% for the same prior-year period.

6

Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications, and the net interest margin for the three and nine months ended September 30, 2020 and 2019.

Average Balances and Interest Yields/Rates Paid
 Three months ended September 30,
 20202019
(dollars in millions)Average
Balance		Interest
Income/
Expense 		Avg.
Yield/
Rate
(%)		Average
Balance		Interest
Income/
Expense		Avg.
Yield/
Rate
(%)
Assets:     
Federal funds sold and securities purchased under agreements to resell (1)
$5,705.7 $1.3 0.09 $10,532.4 $59.1 2.23 
Interest-bearing deposits (2)
1,469.8 0.6 0.17 1,598.5 9.4 2.32 
Investment securities (3)
14,728.0 52.9 1.43 14,968.1 110.6 2.93 
Advances (4)
43,729.1 95.2 0.87 74,816.4 478.5 2.54 
Mortgage loans held for portfolio (5)
5,178.2 35.9 2.76 4,758.5 42.4 3.54 
Total interest-earning assets70,810.8 185.9 1.04 106,673.9 700.0 2.61 
Other assets (6)
1,057.3   1,163.1 
Total assets$71,868.1   $107,837.0 
Liabilities and capital:      
Deposits (2)
$990.2 $— — $582.8 $2.9 1.99
Consolidated obligation discount notes20,993.1 17.0 0.32 29,892.4 167.42.22
Consolidated obligation bonds (7)
45,320.9 80.6 0.71 71,164.2 413.92.31
Other borrowings251.4 4.1 6.44 343.8 6.7 7.75 
Total interest-bearing liabilities67,555.6 101.7 0.60 101,983.2 590.9 2.30
Other liabilities683.3 1,036.8 
Total capital3,629.2 4,817.0 
Total liabilities and capital$71,868.1 $107,837.0 
Net interest spread0.44 0.31 
Impact of noninterest-bearing funds0.03 0.10
Net interest income/net interest margin$84.2 0.47 $109.1 0.41 
Notes:
(1) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $462.4 million and $208.2 million in 2020 and 2019, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) Beginning January 1, 2020, the Bank adopted ASU 2016-13. Other assets include allowance for credit losses on investment securities and MPF. Prior to January 1, 2020, Other assets included the allowance for credit losses and the noncredit portion of OTTI losses on investment securities.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $51.1 million and $31.5 million in 2020 and 2019, respectively.

    Net interest income for the third quarter of 2020 decreased $24.9 million from the same prior year period due to a decrease in interest income, partially offset by lower interest expense. Interest-earning assets decreased 34% primarily due to lower average advances. The rate earned on interest-earning assets decreased 157 basis points due to lower yields across all categories. Interest income on advances, investments and Federal funds sold and securities purchased under agreements to resell declined due to both lower volume and a decrease in yield. Interest income was also favorably impacted by higher net
7

prepayment fees on advances in the third quarter of 2020 compared with the third quarter of 2019. The rate paid on interest-bearing liabilities decreased 170 basis points due to lower funding costs on consolidated obligation bonds and discount notes. The impact of noninterest-bearing funds decreased seven basis points due to lower interest rates.

Average Balances and Interest Yields/Rates Paid
 Nine months ended September 30,
 20202019
(dollars in millions)Average
Balance		Interest
Income/
Expense 		Avg.
Yield/
Rate
(%)		Average
Balance		Interest
Income/
Expense		Avg.
Yield/
Rate
(%)
Assets:     
Federal funds sold and securities purchased under agreements to resell (1)
$8,749.6 $35.3 0.54 $8,664.2 $152.4 2.35
Interest-bearing deposits (2)
1,629.8 6.0 0.49 1,730.6 31.5 2.43
Investment securities (3)
16,026.7 224.3 1.87 13,416.8 307.5 3.06
Advances (4)
54,008.3 549.0 1.36 74,576.5 1,508.2 2.70
Mortgage loans held for portfolio (5)
5,205.4 121.5 3.12 4,622.50 126.9 3.67
Total interest-earning assets85,619.8 936.1 1.46 103,010.6 2,126.5 2.76 
Other assets (6)
1,139.7   1,095.0   
Total assets$86,759.5   $104,105.6   
Liabilities and capital:      
Deposits (2)
$812.2 $1.8 0.30 $562.6 $8.9 2.12
Consolidated obligation discount notes28,794.1 175.5 0.81 28,174.2 497.4 2.36
Consolidated obligation bonds (7)
52,146.2 462.0 1.18 69,219.0 1,260.0 2.43
Other borrowings297.7 14.1 6.34 184.010.6 7.73
Total interest-bearing liabilities82,050.2 653.4 1.06 98,139.8 1,776.9 2.42 
Other liabilities705.5 1,017.9 
Total capital4,003.8 4,947.9 
Total liabilities and capital$86,759.5 $104,105.6 
Net interest spread0.40 0.34 
Impact of noninterest-bearing funds0.04 0.11 
Net interest income/net interest margin$282.7 0.44 $349.6 0.45 
Notes:
(1) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $409.4 million and $50.3 million in 2020 and 2019, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) Beginning January 1, 2020, the Bank adopted ASU 2016-13. Other assets include allowance for credit losses on investment securities and MPF. Prior to January 1, 2020, Other assets included the allowance for credit losses and the noncredit portion of OTTI losses on investment securities.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $56.6 million and $(33.1) million in 2020 and 2019, respectively.

    Net interest income for the first nine months of 2020 decreased $66.9 million from the same prior year period due to a decrease in interest income, partially offset by lower interest expense. Interest-earning assets decreased 17% primarily due to lower demand for advances partially offset by higher average investments, increased purchases of Federal funds sold and securities purchased under agreements to resell, and increased purchases of mortgage loans held for portfolio. The rate earned on interest-earning assets decreased 130 basis points due to lower yields across all categories. Interest income on advances declined due to both lower volume and a decrease in yield. Interest income on investments, Federal funds sold and securities purchased under agreements to resell and mortgage loans held for portfolio declined due to a decrease in yield which more than offset higher volume. Interest income was also favorably impacted by higher net prepayment fees on advances during the first
8

nine months of 2020 compared with the same prior-year period. The rate paid on interest-bearing liabilities decreased 136 basis points due to lower funding costs on consolidated obligation bonds and discount notes. The impact of noninterest-bearing funds decreased seven basis points due to lower interest rates.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between three and nine months ended September 30, 2020 and 2019.
 Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2020 compared to 2019
 Three months ended September 30,Nine months ended September 30,
(in millions)VolumeRateTotalVolumeRateTotal
Federal funds sold$(18.7)$(39.1)$(57.8)$1.5 $(118.6)$(117.1)
Interest-bearing deposits(0.8)(8.0)(8.8)(1.8)(23.7)(25.5)
Investment securities(1.8)(55.9)(57.7)52.2 (135.4)(83.2)
Advances(148.5)(234.8)(383.3)(341.7)(617.5)(959.2)
Mortgage loans held for portfolio3.5 (10.0)(6.5)15.0 (20.4)(5.4)
Total interest-earning assets
$(166.3)$(347.8)$(514.1)$(274.8)$(915.6)$(1,190.4)
Interest-bearing deposits$1.2 $(4.1)$(2.9)$2.8 $(9.9)$(7.1)
Consolidated obligation discount notes(38.9)(111.5)(150.4)10.7 (332.6)(321.9)
Consolidated obligation bonds(114.8)(218.5)(333.3)(258.7)(539.3)(798.0)
Other borrowings(1.6)(1.0)(2.6)5.7 (2.2)3.5 
Total interest-bearing liabilities
$(154.1)$(335.1)$(489.2)$(239.5)$(884.0)$(1,123.5)
Total decrease in net interest income
$(12.2)$(12.7)$(24.9)$(35.3)$(31.6)$(66.9)

    Interest income and interest expense decreased in both the quarter-over-quarter and year-over-year comparisons. Lower rates and lower volume drove the decrease in the third quarter and first nine months of 2020. The rate decrease was primarily due to a decrease in market interest rates as the Federal funds target rate decreased multiple times in 2020. Lower volumes were primarily due to decreases in member advance activity.

    Interest expense on total average consolidated obligations decreased in both comparisons. The decline was primarily due to lower rates paid on both discount notes and bonds given lower market interest rates in 2020. A portion of the bond portfolio is currently swapped to a variable rate; therefore, as the variable rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Derivatives Effects on Interest Income” discussion below.

    The following table presents the average par balances of the Bank's advance portfolio for the three and nine months ended September 30, 2020 and 2019. These balances do not reflect any hedge accounting adjustments.
(in millions)Three months ended September 30,Nine months ended September 30,
Product2020201920202019
RepoPlus/Mid-Term Repo$12,123.9 $23,331.1 $16,341.0 $21,243.2 
Core (Term)31,125.4 51,257.1 37,240.0 53,263.1 
Convertible Select20.0 20.0 20.0 20.0 
Total par value$43,269.3 $74,608.2 $53,601.0 $74,526.3 

    Variances in total advances shown above were driven primarily by changes in large member activity.

9

    Derivative Effects on Interest Income. The following tables quantify the effects of the Bank's derivative activities on interest income and interest expense (including net interest settlements) for the three and nine months ended September 30, 2020 and 2019.
Three months ended
September 30, 2020
(dollars in millions)		Average BalanceInterest Inc./
 Exp. with Derivatives		Avg.
Yield/
Rate (%)		Interest Inc./ Exp. without
Derivatives		Avg.
Yield/
Rate (%)		Impact of
Derivatives		Incr./
(Decr.) (%)
Assets:       
Advances$43,729.1 $95.2 0.87 $164.8 1.50 $(69.6)(0.63)
Mortgage loans held for portfolio5,178.2 35.9 2.76 36.9 2.84 (1.0)(0.08)
All other interest-earning assets21,903.5 54.8 1.00 61.4 1.11 (6.6)(0.11)
Total interest-earning assets$70,810.8 $185.9 1.04 $263.1 1.48 $(77.2)(0.44)
Liabilities:       
Consolidated obligation bonds$45,320.9 $80.6 0.71 $102.5 0.90 $(21.9)(0.19)
All other interest-bearing liabilities22,234.7 21.1 0.38 21.1 0.38 — — 
Total interest-bearing liabilities$67,555.6 $101.7 0.60 $123.6 0.73 $(21.9)(0.13)
Net interest income/net
 interest spread		$84.2 0.44 $139.5 0.75 $(55.3)(0.31)
Three months ended
September 30, 2019
(dollars in millions)		Average BalanceInterest Inc./
 Exp. with Derivatives		Avg.
Yield/
Rate (%)		Interest Inc./ Exp. without
Derivatives		Avg.
Yield/
Rate (%)		Impact of
Derivatives		Incr./
(Decr.) (%)
Assets:       
Advances$74,816.4 $478.5 2.54$470.1 2.49$8.4 0.05 
Mortgage loans held for portfolio4,758.5 42.43.5443.23.60(0.8)(0.06)
All other interest-earning assets27,099.0 179.12.62180.32.64(1.2)(0.02)
Total interest-earning assets$106,673.9 $700.0 2.61 $693.6 2.58 $6.4 0.03 
Liabilities:       
Consolidated obligation bonds$71,164.2 $413.9 2.31$401.6 2.24$12.3 0.07 
All other interest-bearing liabilities30,819.0 177.02.28177.02.28— — 
Total interest-bearing liabilities$101,983.2 $590.9 2.30 $578.6 2.25 $12.3 0.05 
Net interest income/net
 interest spread		$109.1 0.31 $115.0 0.33 $(5.9)(0.02)
Nine months ended
September 30, 2020
(dollars in millions)		Average BalanceInterest Inc./
 Exp. with Derivatives		Avg.
Yield/
Rate (%)		Interest Inc./ Exp. without
Derivatives		Avg.
Yield/
Rate (%)		Impact of
Derivatives		Incr./
(Decr.) (%)
Assets:       
Advances$54,008.3 $549.0 1.36 $685.7 1.70 $(136.7)(0.34)
Mortgage loans held for portfolio5,205.4 121.5 3.12 123.7 3.17 (2.2)(0.05)
All other interest-earning assets26,406.1 265.6 1.34 282.6 1.43 (17.0)(0.09)
Total interest-earning assets$85,619.8 $936.1 1.46 $1,092.0 1.70 $(155.9)(0.24)
Liabilities:       
Consolidated obligation bonds$52,146.2 $462.0 1.18 $517.0 1.32 $(55.0)(0.14)
All other interest-bearing liabilities29,904.0 191.4 0.85 191.3 0.85 0.1 — 
Total interest-bearing liabilities$82,050.2 $653.4 1.06 $708.3 1.15 $(54.9)(0.09)
Net interest income/net
 interest spread		$282.7 0.40 $383.7 0.55 $(101.0)(0.15)
10

Nine months ended
September 30, 2019
(dollars in millions)		Average BalanceInterest Inc./
 Exp. with Derivatives		Avg.
Yield/
Rate (%)		Interest Inc./ Exp. without
Derivatives		Avg.
Yield/
Rate (%)		Impact of
Derivatives		Incr./
(Decr.) (%)
Assets:       
Advances$74,576.5 $1,508.2 2.70$1,456.7 2.61$51.5 0.09 
Mortgage loans held for portfolio4,622.5 126.93.67129.23.74(2.3)(0.07)
All other interest-earning assets23,811.6 491.42.76494.02.77(2.6)(0.01)
Total interest-earning assets$103,010.6 $2,126.5 2.76 $2,079.9 2.70 $46.6 0.06 
Liabilities:       
Consolidated obligation bonds$69,219.0 $1,260.0 2.43 $1,194.5 2.31 $65.5 0.12 
All other interest-bearing liabilities28,920.8 516.9 2.39 516.9 2.39 — — 
Total interest-bearing liabilities$98,139.8 $1,776.9 2.42 $1,711.4 2.33 $65.5 0.09 
Net interest income/net
 interest spread		$349.6 0.34 $368.5 0.37 $(18.9)(0.03)

The use of derivatives negatively impacted both net interest income and net interest spread for the three and nine months ended September 30, 2020 and 2019. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

    The Bank uses derivatives to hedge the fair market value changes attributable to the change in the benchmark interest rates. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations, which convert the interest rates on those instruments from a fixed rate to a variable rate. The purpose of this strategy is to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.
The Bank uses many different funding and hedging strategies. These strategies involve closely match-funding bullet advances with bullet debt. This is designed in part to avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.

Provision for Credit Losses. Beginning January 1, 2020, the Bank adopted new accounting guidance (ASU 2016-13 Financial Instruments - Credit Losses, as amended) 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 AFS to be recorded through the allowance for credit losses. For additional information, refer to Note 1 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

The provision for credit losses was $1.2 million for the third quarter of 2020 compared to $0.4 million for the third quarter of 2019. For the nine months ended September 30, 2020 and 2019, the provision for credit losses was $5.6 million and $1.8 million, respectively. The increase was primarily due to the provision for credit losses on mortgage loans held for portfolio which reflected higher delinquencies arising from loans being placed in forbearance programs as a result of the COVID-19 pandemic.

11

Other Noninterest Income
 Three months ended September 30,Nine months ended September 30,
(in millions)2020201920202019
Net OTTI losses$— $(0.3)$— $(0.3)
Net gains (losses) on investment securities(5.3)5.4 53.9 23.3 
Net gains (losses) on derivatives and hedging activities
3.6 (17.4)(97.7)(55.2)
Standby letters of credit fees5.4 5.3 16.0 16.3 
Other, net1.3 0.3 1.6 1.9 
Total other noninterest income (loss)$5.0 $(6.7)$(26.2)$(14.0)

    The Bank's change in total other noninterest income (loss) for the third quarter and first nine months of 2020 compared to the same prior year periods was primarily due to the positive/negative variance in net gains (losses) on derivatives and hedging activities, partially offset by the positive/negative variance in net gains (losses) on investment securities. As discussed in Executive Summary in this Form 10-Q, there were actions taken by the Federal Reserve to lower interest rates toward the end of the first quarter of 2020 to mitigate the economic impacts of the COVID-19 pandemic. These significant interest rate declines and related market volatility during the third quarter and first nine months of 2020 impacted the Bank’s investments and derivatives due to mark-to-market (fair value) adjustments on these instruments. The activity related to derivatives and hedging activities is discussed in more detail below. The net gains (losses) on investment securities reflects the impact of fair market value changes on Agency and U.S. Treasury investments held in the Bank's trading portfolio.

Derivatives and Hedging Activities. The Bank enters into interest rate swaps, TBAs, interest rate caps and floors and swaption agreements, referred to as derivatives transactions. The Bank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. All derivatives are recorded on the balance sheet at fair value. Changes in derivatives' fair values are recorded in the Statements of Income.

Economic hedges address specific risks inherent in the Bank's balance sheet, but either they do not qualify for hedge accounting or the Bank does not elect to apply hedge accounting. As a result, income recognition on the derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes nor does it have any cash flow hedges.

Regardless of the hedge strategy employed, the Bank's predominant hedging instrument is an interest rate swap. At the time of inception, the fair market value of an interest rate swap generally equals or is close to zero. Notwithstanding the exchange of interest payments made during the life of the swap, which are recorded as either interest income/expense or as a gain (loss) on derivatives, depending upon the accounting classification of the hedging instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an interest rate swap is likely to change over the course of its full term, upon maturity any unrealized gains and losses generally net to zero.

    The following tables detail the net effect of derivatives and hedging activities on noninterest income for the three and nine months ended September 30, 2020 and 2019.
 
Three months ended September 30, 2020
(in millions)AdvancesInvestmentsMortgage LoansBondsDiscount NotesOtherTotal
Net gains (losses) on derivatives and hedging activities:
     
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
$0.1 $1.4 $2.1 $— $— $— $3.6 
Other (1)
— — — — — — — 
Total net gains (losses) on derivatives and hedging activities
$0.1 $1.4 $2.1 $— $— $— $3.6 
12

 Three months ended September 30, 2019
(in millions)AdvancesInvestmentsMortgage LoansBondsDiscount NotesOtherTotal
Net gains (losses) on derivatives and hedging activities:    
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
$(1.9)$(9.7)$(9.0)$2.9 $— $— $(17.7)
Other (1)
— — — — — 0.3 0.3 
Total net gains (losses) on derivatives and hedging activities
$(1.9)$(9.7)$(9.0)$2.9 $— $0.3 $(17.4)
 Nine months ended September 30, 2020
(in millions)AdvancesInvestmentsMortgage LoansBondsDiscount NotesOtherTotal
Net gains (losses) on derivatives and hedging activities:
     
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
$(17.4)$(93.8)$(10.9)$16.4 $7.7 $— $(98.0)
Other (1)
— 0.1 — — — 0.2 0.3 
Total net gains (losses) on derivatives and hedging activities
$(17.4)$(93.7)$(10.9)$16.4 $7.7 $0.2 $(97.7)
 Nine months ended September 30, 2019
(in millions)AdvancesInvestmentsMortgage LoansBondsDiscount NotesOtherTotal
Net gains (losses) on derivatives and hedging activities:
     
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
$(15.1)$(42.2)$(31.9)$33.7 $0.2 $— $(55.3)
Other (1)
— — — — — 0.1 0.1 
Total net gains (losses) on derivatives and hedging activities
$(15.1)$(42.2)$(31.9)$33.7 $0.2 $0.1 $(55.2)
Notes:
(1) Represents the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting (i.e., economic hedges and mortgage delivery commitments), the Bank includes the net interest settlements and the fair value changes in the "Net gains (losses) on derivatives and hedging activities" financial statement line item. The Bank recorded net gains of $3.6 million in the third quarter of 2020 compared to net losses of $(17.7) million for the third quarter of 2019. The net gains observed during the third quarter of 2020 were primarily on the Bank’s asset swaps and were attributed to slight increases in mid and long term interest rates compared to the interest rate decreases observed during the third quarter of 2019. For the nine months ended September 30, 2020 and 2019, the Bank recorded net losses of $(98.0) million and $(55.3) million, respectively. The higher net losses during 2020 were due to overall larger decreases in interest rates throughout the first nine months of 2020 compared to the same period in 2019. Refer to Executive Summary in this Form 10-Q for additional discussion of Federal Reserve actions to lower interest rates to mitigate the economic impacts of the COVID-19 pandemic. In response to changing market conditions, the total notional amount of economic hedges, which includes mortgage delivery commitments, decreased to $3.2 billion at September 30, 2020 from $11.8 billion at December 31, 2019.

Other Expense

    The Bank's total other expenses increased $0.6 million to $23.8 million for the third quarter of 2020, compared to the same prior year period. Total other expenses for the first nine months of 2020 were $78.7 million, up $8.3 million from the first nine months of 2019. The increase was primarily due to a $4.8 million contribution to the Bank's homeless initiative known as Home4Good, higher compensation and benefits expense, and technology-related costs.
13

Financial Condition

    The following should be read in conjunction with the Bank's unaudited interim financial statements in this Form 10-Q and the audited financial statements in the Bank's 2019 Form 10-K.

Assets

    Total assets were $60.4 billion at September 30, 2020, compared with $95.7 billion at December 31, 2019, a decrease of $35.3 billion. The decrease was primarily due to advances. Advances totaled $35.8 billion at September 30, 2020, a decrease of $29.8 billion compared to $65.6 billion at December 31, 2019.

    The Bank's core mission activities include the issuance of advances and acquiring member assets through the MPF® program. The core mission asset ratio, defined as the ratio of par amount of advances and MPF loans relative to consolidated obligations adjusted for high quality liquid assets using full year average balances, was 75.5 % and 82.2% as of September 30, 2020 and December 31, 2019, respectively. The decrease in the core mission asset ratio was due to the decrease in average advances and the Bank holding additional liquidity during the first nine months of 2020 to address volatility in member advance demand. This was done by purchasing liquidity investments which are not core mission assets.
    Beginning January 1, 2020, the Bank adopted new accounting guidance (ASU 2016-13 Financial Instruments - Credit Losses, as amended) 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 AFS to be recorded through the allowance for credit losses. For additional information, refer to Note 1- Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

Advances. Advances (par) totaled $35.5 billion at September 30, 2020 compared to $65.4 billion at December 31, 2019. At September 30, 2020 the Bank had advances to 155 borrowing members, compared to 161 borrowing members at December 31, 2019. After a significant increase in first quarter advances that corresponded with member needs, new federal government liquidity programs took hold in the second and third quarters which contributed to decreased advance levels. Total advances outstanding to the Bank’s five largest borrowers decreased to 68.9% of total advances as of September 30, 2020, compared to 77.7% at December 31, 2019.

14

The following table provides information on advances at par by redemption terms at September 30, 2020 and December 31, 2019.
(in millions)September 30, 2020December 31, 2019
Fixed-rate
Due in 1 year or less (1)
$9,394.9 $21,783.1 
Due after 1 year through 3 years9,625.6 13,523.4 
Due after 3 years through 5 years2,357.6 2,012.5 
Thereafter164.4 594.4 
Total par value$21,542.5 $37,913.4 
Fixed-rate, callable or prepayable(1)
Due after 1 year through 3 years$50.0 $20.0 
Total par value$50.0 $20.0 
Variable-rate
Due in 1 year or less (1)
$10,071.8 $14,129.5 
Due after 1 year through 3 years825.0 5,025.0 
Due after 3 years through 5 years3.1 53.1 
Total par value$10,899.9 $19,207.6 
Variable-rate, callable or prepayable(2)
Due in 1 year or less$2,600.0 $5,225.0 
Due after 1 year through 3 years10.0 2,635.0 
Due after 3 years through 5 years40.0 40.0 
Total par value$2,650.0 $7,900.0 
Other(3)
Due in 1 year or less$100.3 $123.7 
Due after 1 year through 3 years134.4 147.4 
Due after 3 years through 5 years61.1 69.7 
Thereafter44.4 57.3 
Total par value$340.2 $398.1 
Total par balance$35,482.6 $65,439.1 
Notes:
(1) Includes overnight advances.
(2) Prepayable advances are those advances that may be contractually prepaid by the borrower on specified dates without incurring prepayment or termination fees.
(3) Includes fixed-rate amortizing/mortgage matched, convertible, and other advances.

The Bank had no putable advances at September 30, 2020 or December 31, 2019.
15

The following table provides a distribution of the number of members, categorized by individual member asset size (as reported quarterly), that had an outstanding advance balance during the nine months ended 2020 and 2019. Commercial Bank, Savings Institution, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 billion to $25 billion), Mid-size ($1.2 billion to $4 billion) and Community Financial Institutions (CFIs) (under $1.2 billion).
Member ClassificationSeptember 30, 2020September 30, 2019
Large5 5 
Regional18 15 
Mid-size31 27 
CFI (1)
132 162 
Insurance16 15 
Total borrowing members during the period202 224 
Total membership278 289 
Percentage of members borrowing during the period72.7 %77.5 %
Notes:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

    The following table provides information at par on advances by member classification at September 30, 2020 and December 31, 2019.
(in millions)September 30, 2020December 31, 2019
Member Classification
Large$19,430.0 $43,165.0 
Regional3,740.3 5,256.1 
Mid-size2,591.4 4,197.7 
CFI2,575.5 2,887.3 
Insurance1,631.4 1,416.5 
Non-member5,514.0 8,516.5 
Total$35,482.6 $65,439.1 

    As of September 30, 2020, total advances decreased 46% compared with balances at December 31, 2019. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. After a significant increase in first quarter advances that corresponded with member needs, new federal government liquidity programs took hold in the second and third quarters, which continue to contribute to higher deposits at our members and decreased advance levels for the Bank.

    See the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section of this Item 2 for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of September 30, 2020.

    Allowance for Credit Losses (ACL) - Advances. The Bank evaluates its advances for an allowance for credit losses on a collective, or pooled basis unless an individual assessment is deemed necessary because the instruments do not possess similar risk characteristics. The Bank pools advances by member type. Based on the collateral held as security, the Bank's credit extension and collateral policies and repayment history on advances, including that the Bank has not incurred any credit losses since inception, the Bank has not recorded any ACL at September 30, 2020 and December 31, 2019. For additional information on the allowance methodology, see Note 3 - Advances in this Form 10-Q.

Mortgage Loans Held for Portfolio, Net. Mortgage loans held for portfolio, net of ACL, totaled $5.1 billion at both September 30, 2020 and December 31, 2019.

The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status. In addition, the Bank records cash payments received as a reduction of principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by the recording of interest income. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to government guarantees or
16

insurance. The Bank has a loan modification program for participating financial institutions (PFIs) under the MPF Program. The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF Program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank.

Through the MPF Program, the Bank may grant a forbearance period to borrowers due to COVID-19-related difficulties regardless of the status of the loan at the time of the request. Despite granting the forbearance period, the Bank continues to apply its accounting policy for determining days past due, non-accrual, and charge-offs during the forbearance period. For MPF loans that have been granted a forbearance period, there has been no change in the terms of the loans. For MPF loans that have received COVID-19-related forbearance and meet certain criteria, the Bank may not charge-off the MPF loan, including when it is 180 or more days delinquent, if the Bank expects to recover its amortized cost. After the forbearance period the Bank may modify the borrower's MPF loan. The Bank has elected to suspend TDR accounting for eligible modifications under Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). For additional information, refer to Note 1 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations and Note 4 - Mortgage Loans Held for Portfolio in this Form 10-Q.

Foregone interest represents income the Bank would have recorded if the loan was paying according to its contractual terms. Foregone interest was immaterial for both the Bank's mortgage loans and BOB loans for the first nine months of 2020 and 2019. Balances regarding the Bank’s loan products are summarized below.
(in millions)September 30, 2020December 31, 2019
Advances (1)
$35,841.0 $65,610.1 
Mortgage loans held for portfolio, net (2)
5,089.8 5,114.6 
Nonaccrual mortgage loans (3)
123.2 15.6 
Mortgage loans 90 days or more delinquent and still accruing interest (4)
7.7 3.3 
BOB loans, net 21.2 19.7 
Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and do not include performing TDRs. The amount at September 30, 2020 included approximately $88.5 million related to loans in forbearance or repayment programs as a result of COVID-19.
(4) Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has declined; however, the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of September 30, 2020, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 1.7% of the MPF Original portfolio, 3.4% of the MPF Plus portfolio, and 2.9% of the MPF 35 portfolio, compared with 0.4%, 2.2%, and 0.03%, respectively, at December 31, 2019. The amount of seriously delinquent loans increased across the Bank's MPF portfolio compared to December 31, 2019, which was partially attributable to delinquencies that resulted from loans in forbearance or repayment programs as a result of COVID-19.

    ACL - Conventional MPF. The Bank’s conventional mortgage loan portfolio is comprised of large groups of smaller-balance homogeneous loans made to borrowers of PFIs that are secured by residential real estate. Expected credit losses are evaluated based on either an individual or collective assessment of the loans, depending on whether the loans share similar risk characteristics. The Bank purchases government-guaranteed and/or insured and conventional fixed-rate residential mortgage loans. Because the credit risk on the government-guaranteed/insured loans is predominantly assumed by other entities, only conventional mortgage loans are evaluated for an ACL.

The Bank determines its ACL through consideration of various loan portfolio and collateral-related characteristics, including past performance, current conditions, and reasonable and supportable forecasts of economic conditions. To estimate credit losses, the Bank uses a third-party model which incorporates certain assumptions, including forecasted housing prices and interest rates, as well as historical borrower behavior experience. The estimate of the expected credit losses includes coverage of certain losses by primary mortgage insurance (PMI), if applicable. The Bank may incorporate a qualitative adjustment to the model results, if deemed appropriate, based on current market conditions or results. For loans determined to be collateral dependent, the Bank charges-off the estimated credit loss against the reserve. However, if the estimated loss can be recovered through credit enhancement (CE), a receivable is established, resulting in a net charge-off. The expected credit loss of a collateral dependent mortgage loan to determine the charge-off is equal to the difference between the amortized cost basis of the loan and the estimated fair value of the underlying collateral, less selling costs.

17

With the adoption of ASU 2016-13, the Bank is permitted to recognize a recovery when expected credit losses, including credit losses charged-off for collateral dependent loans, are less than the amounts previously charged-off. Expected recoveries of prior charge-offs, if any, are included as a reduction to the ACL through the Bank's provision for credit losses. The reduction to the ACL is partially offset by a reversal of expected CE, resulting in a net impact to the Bank's provision for credit losses.

    The Bank's conventional MPF loans held for portfolio are required to be credit enhanced as determined through the use of a validated model so the risk of loss is limited to the losses within the Bank's risk tolerance. Credit losses on a mortgage loan may only be absorbed by the CE amount in the master commitment related to the loan. In addition, the CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the First Loss Account (FLA). Additional eligible credit losses are covered by CE provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF 35 and MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank.

The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at September 30, 2020 and December 31, 2019.
 MPF CE structure
September 30, 2020		ACL
September 30, 2020
(in millions)FLAAvailable CEEstimate of Credit Loss
Estimate of Recovery (1)
Charge-offsReduction to the ACL due
to CE		ACL
MPF Original $6.4 $90.7 $5.5 $(2.7)$(0.4)$(2.9)$(0.5)
MPF 3512.6 125.5 9.4 (0.3)— (7.1)2.0 
MPF Plus15.3 5.6 7.3 (1.9)— (0.3)5.1 
Total$34.3 $221.8 $22.2 $(4.9)$(0.4)$(10.3)$6.6 
 MPF CE structure
December 31, 2019		ACL
December 31, 2019
(in millions)FLAAvailable CEEstimate of Credit LossCharge-offsReduction to the ACL due
to CE		ACL
MPF Original $6.1 $82.6 $3.9 $(1.3)$(2.2)$0.4 
MPF 3510.3 107.1 0.7 — (0.7)— 
MPF Plus15.6 5.6 9.0 — (1.6)7.4 
Total$32.0 $195.3 $13.6 $(1.3)$(4.5)$7.8 
Note:
(1) Expected recoveries of amounts previously charged-off based on the Bank's quarterly estimate of expected lifetime credit losses.

    The ACL on mortgage loans decreased $1.2 million during the first nine months of 2020 primarily due to recoveries in the MPF Original and MPF Plus products as a result of the adoption of ASU 2016-13, which was effective for the Bank January 1, 2020. At adoption, the Bank recorded a decrease in its ACL of $3.9 million, which was largely offset by a reversal of expected CE of $3.8 million, resulting in a net impact of $0.1 million. The reduction in the Bank's ACL due to the adoption of ASU 2016-13 was partially offset by increases in the allowance for credit losses for each of the Bank's MPF products, which reflected both lower CE fee recovery resulting from a shorter weighted-average life of the MPF 35 portfolio and an increase in delinquencies arising from loans being placed in forbearance programs as a result of the COVID-19 pandemic.

During the first quarter of 2020, the COVID-19 pandemic resulted in financial market deterioration and substantial uncertainty about the future short-term economic environment, which has continued through the third quarter of 2020. The Bank appropriately considered potential economic impacts resulting from the pandemic when assessing expected credit losses on its MPF portfolio. The Bank continues to monitor developments and assess the impact of the pandemic on the Bank's MPF portfolio, including with respect to market assumptions, borrower performance, and regulatory relief.


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Cash and Investments. The Bank's strategy is to maintain its short-term liquidity position in part to be able to meet members' loan demand and regulatory liquidity requirements. Excess cash is typically invested in overnight investments. The Bank also maintains an investment portfolio to enhance earnings. These investments may be classified as trading, AFS or HTM.

The Bank maintains a liquidity portfolio comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell and U.S. Treasury obligations classified as trading or AFS. The liquidity portfolio at September 30, 2020 decreased by approximately $4.1 billion compared to December 31, 2019. Larger balances held by the Bank in its liquidity portfolio earlier in 2020 reflected the Bank's ability to stand ready to meet its members' needs during the COVID-19 pandemic. These needs decreased at September 30, 2020, given the federal government liquidity programs which took hold in the second and third quarters of 2020.

The Bank's investment portfolio is comprised of trading, AFS and HTM investments (excluding those investments included in the liquidity portfolio). The investments must meet the Bank's risk guidelines and certain other requirements, such as yield. The Bank's investment portfolio totaled $12.4 billion and $13.7 billion at September 30, 2020 and December 31, 2019, respectively.

Investment securities, including trading, AFS, and HTM securities, totaled $13.4 billion at September 30, 2020, compared to $17.1 billion at December 31, 2019. Details of the investment securities portfolio follow.
 Carrying Value
(in millions)September 30, 2020December 31, 2019
Trading securities:  
Non-MBS:
U.S. Treasury obligations$1,028.7 $3,390.7 
Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations
258.9 240.9 
Total trading securities$1,287.6 $3,631.6 
Yield on trading securities1.98 %2.02 %
AFS securities:  
GSE and TVA obligations$1,658.7 $1,550.7 
State or local agency obligations247.9 247.9 
MBS:
      U.S. obligations single-family MBS658.7 807.6 
      GSE single-family MBS 3,704.5 4,055.8 
      GSE multifamily MBS 3,615.6 4,109.6 
Private label MBS267.6 326.2 
Total AFS securities$10,153.0 $11,097.8 
Yield on AFS securities1.52 %2.58 %
HTM securities:  
State or local agency obligations
$— $94.3 
MBS:
      U.S. obligations single-family MBS176.0 250.2 
      GSE single-family MBS 1,158.6 1,156.6 
      GSE multifamily MBS 531.1 770.8 
Private label MBS101.3 123.8 
Total HTM securities$1,967.0 $2,395.7 
Yield on HTM securities2.75 %3.22 %
Total investment securities$13,407.6 $17,125.1 
Yield on investment securities1.75 %2.55 %

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As of September 30, 2020, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
(in millions)Total
Book Value		Total
Fair Value
Fannie Mae$5,992.4 $6,018.2 
U.S. Treasury1,028.7 1,028.7 
Freddie Mac3,043.1 3,097.8 
Federal Farm Credit Banks1,805.0 1,805.0 
Ginnie Mae792.0 793.3 
Total$12,661.2 $12,743.0 

For additional information on the credit risk of the investment portfolio, see the Credit and Counterparty Risk - Investments discussion in the Risk Management section of this Item 2.

ACL - Investments. The Bank invests in interest-bearing deposits and Federal funds sold which are unsecured investments. The Bank also invests in securities purchased under agreements to resell which are secured investments. At September 30, 2020 and December 31, 2019, all investments in interest-bearing deposits, Federal funds sold, and securities purchased under agreements to resell were repaid according to the contractual terms. No ACL was recorded for these assets at September 30, 2020.

AFS securities are evaluated quarterly for expected credit losses on an individual security basis. In assessing whether a credit loss exists, the Bank considers whether there would be a shortfall in receiving all cash flows contractually due. The allowance is limited to the amount of the AFS security’s unrealized loss, if any. If the AFS security is in an unrealized gain, the ACL is zero. The ACL on AFS private label MBS was $1.7 million at September 30, 2020.

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 ACL is recorded with a corresponding adjustment to the provision for credit losses. There was no ACL at September 30, 2020.

    For additional information on the allowance methodology, see Note 2 - Investments in this Form 10-Q.

Liabilities and Capital

Deposits. The Bank offers demand, overnight and term deposits for members and qualifying nonmembers. Total deposits at September 30, 2020 increased to $990.6 million from $573.4 million at December 31, 2019.

    Consolidated Obligations. Consolidated obligations consist of bonds and discount notes. The Bank's consolidated obligations totaled $55.6 billion at September 30, 2020, a decrease of $34.3 billion from December 31, 2019. The overall decrease in consolidated obligations outstanding is consistent with the decreased advances, liquidity portfolio and total asset balances.

    Discount notes outstanding at September 30, 2020 decreased to $14.0 billion from $23.1 billion at December 31, 2019. At September 30, 2020, the Bank’s bonds outstanding decreased to $41.6 billion compared to $66.8 billion at December 31, 2019. The Bank primarily uses noncallable bonds as a source of funding but also utilizes structured notes such as callable bonds. Unswapped callable bonds primarily fund the Bank’s mortgage portfolio while swapped callable bonds fund other floating rate assets.

For additional information on the Bank's consolidated obligations, refer to Note 13 to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data of the Bank's 2019 Form 10-K.

Commitments and Off-Balance Sheet Items. As of September 30, 2020, the Bank was obligated to fund approximately $1.6 million in BOB loans, $68.0 million of mortgage loans, and to issue $104.0 million in consolidated obligations. In addition, the Bank had $19.6 billion in outstanding standby letters of credit as of September 30, 2020. The Bank does not consolidate any off-balance sheet special purpose entities or other off-balance sheet conduits.

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Capital and Retained Earnings. The Bank's capital stock is owned by its members. The concentration of the Bank's capital stock by institution type is presented below.
(dollars in millions)September 30, 2020December 31, 2019
Commercial banks135 $1,584.5 140 $2,729.6 
Savings institutions51 122.1 53 148.2 
Insurance companies29 107.0 31 109.3 
Credit unions61 66.4 60 67.5 
Community Development Financial Institution (CDFI)2 0.4 2 0.4 
Total member institutions / total GAAP capital stock278 $1,880.4 286 $3,055.0 
Mandatorily redeemable capital stock223.0 343.6 
Total capital stock$2,103.4 $3,398.6 

    The total number of members as of September 30, 2020 decreased by eight members compared to December 31, 2019. The Bank lost nine members in the first nine months of 2020 and added one new member. Six members merged with other institutions within the Bank's district; one member relocated and merged its charter with an entity outside of the Bank's district; one member withdrew its membership; and one member failed.

The following tables present member holdings of 10% or more of the Bank’s total capital stock, including mandatorily redeemable capital stock, outstanding as of September 30, 2020 and December 31, 2019.
(dollars in millions)September 30, 2020December 31, 2019
Member Capital Stock% of TotalCapital Stock% of Total
Ally Bank, Midvale, UT (1)
$394.5 18.8 %$700.8 20.6 %
PNC Bank, N.A., Wilmington, DE (1)
265.0 12.6 746.6 22.0 
Note:
(1) For Bank membership purposes, the principal place of business for Ally Bank, is Horsham, PA. For PNC Bank the principal place of business is Pittsburgh, PA.

The Finance Agency has issued regulatory guidance to the FHLBanks relating to capital management and retained earnings. The guidance directs each FHLBank to assess, at least annually, the adequacy of its retained earnings with consideration given to future possible financial and economic scenarios. The guidance also outlines the considerations that each FHLBank should undertake in assessing the adequacy of its retained earnings.

Management monitors capital adequacy, including the level of retained earnings, through the evaluation of market value of equity to par value of capital stock (MV/CS) as well as other risk metrics. Details regarding these metrics are discussed in the Risk Management portion of this Item 2.

Management has developed and adopted a framework for evaluating retained earnings adequacy, consistent with regulatory guidance and requirements. Retained earnings are intended to cover unexpected losses and protect members' par value of capital stock. The framework includes four risk elements that comprise the Bank's total retained earnings target: (1) market risk; (2) credit risk; (3) operational risk; and (4) accounting risk. The retained earnings target generated from this framework is sensitive to changes in the Bank's risk profile, whether favorable or unfavorable. The framework assists management in its overall analysis of the level of future dividends. The framework generated a retained earnings target of $455 million as of September 30, 2020. The Bank's retained earnings were $1,351.1 million at September 30, 2020.

Retained earnings increased slightly to $1,351.1 million at September 30, 2020, compared to $1,326.0 million at December 31, 2019. The increase in retained earnings during the first nine months of 2020 reflected net income that was offset by dividends paid, along with the partial recovery of the prior capital distribution to the Financing Corporation (FICO) in the second quarter of 2020. FICO was established by the Competitive Equality Banking Act of 1987 to provide for the recapitalization of the Federal Savings and Loan Insurance Corporation. The Bank’s partial recovery of prior capital distributions in the second quarter of 2020 approximated $8.5 million based on its share of the $680 million originally contributed by all FHLBanks. These funds are accounted for as a return of the FHLBanks’ investment in FICO capital stock as a partial recovery of the prior capital distributions and credited to the Bank's unrestricted retained earnings account. Total retained earnings at September 30, 2020 included unrestricted retained earnings of $905.1 million and restricted retained earnings (RRE) of $446.0 million.
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Capital Resources

The following should be read in conjunction with the unaudited interim financial statements included in this Form 10-Q, the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data and the Capital Resources section of Item 1. Business in the Bank's 2019 Form 10-K.

Risk-Based Capital (RBC)

The Finance Agency’s RBC regulatory framework requires the Bank to maintain sufficient permanent capital, defined as retained earnings plus capital stock, to meet its combined credit risk, market risk and operations risk. Each of these components is computed as specified in regulations and directives issued by the Finance Agency.
(in millions)September 30, 2020December 31, 2019
Permanent capital:  
Capital stock (1)
$2,103.4 $3,398.6 
Retained earnings
1,351.1 1,326.0 
Total permanent capital$3,454.5 $4,724.6 
RBC requirement:  
Credit risk capital
$202.0 $337.9 
Market risk capital
187.8 131.8 
Operations risk capital
117.0 140.9 
Total RBC requirement$506.8 $610.6 
Excess permanent capital over RBC requirement$2,947.7 $4,114.0 
Note:
(1) Capital stock includes mandatorily redeemable capital stock.

The lower total RBC requirement as of September 30, 2020 is mainly related to the net change in the credit and market risk capital components. The changes were primarily driven by capital regulation changes and revisions by the Finance Agency to the market risk scenario methodology which became effective in the first quarter of 2020. Despite the significant decline in permanent capital due to member advance declines and associated reduction in capital stock, the Bank continues to maintain significant excess permanent capital over the RBC requirement.

On September 25, 2020, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2020. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended September 30, 2020.

Critical Accounting Policies and Estimates

The Bank's financial statements are prepared by applying certain accounting policies. Note 1 - Summary of Significant Accounting Policies in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2019 Form 10-K describes the most significant accounting policies used by the Bank. In addition, the Bank's critical accounting policies and estimates are presented in Item 7. Management's Discussion and Analysis in the Bank's 2019 Form 10-K. Certain of these policies require management to make estimates or economic assumptions that may prove inaccurate or be subject to variations that may significantly affect the Bank's reported results and financial position for the period or in future periods. Management views these policies as critical accounting policies.

The Bank made no changes to its critical accounting policies during the nine months ended September 30, 2020.

See Note 1 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations to the unaudited financial statements in this Form 10-Q for information on new accounting pronouncements impacting the financial statements or becoming effective for the Bank in future periods.


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Legislative and Regulatory Developments

    LIBOR Transition – ISDA 2020 IBOR Fallbacks Protocol and Supplement to the 2006 ISDA Definitions. On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA), launched the Supplement to the 2006 ISDA Definitions (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Fallbacks Protocol). Both the Supplement and the Fallbacks Protocol will take effect on January 25, 2021. On that date, all bilateral legacy derivatives transactions subject to Fallbacks Protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference a covered IBOR, including US Dollar LIBOR, will be amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation. Both the Bank and its relevant counterparty must have adhered to the Fallbacks Protocol in order to effectively amend legacy derivative contracts, otherwise the parties must bilaterally agree to include amended legacy contracts to address LIBOR fallbacks. As of January 25, 2021, new and future derivative contracts will be subject to the relevant IBOR fallbacks set forth in the Supplement.

    On October 21, 2020, the FHFA issued a Supervisory Letter to the FHLBanks that requires each FHLBank to adhere to the Protocol no later than December 31, 2020, and to the extent necessary, to amend any bilateral agreements regarding the adoption of the Protocol by December 15, 2020. The Bank has adhered to the Fallbacks Protocol and will work with its counterparties, as necessary, to address its over-the-counter derivative agreements referencing US Dollar LIBOR as a part of its LIBOR transition efforts. All of the Bank’s counterparties also have adhered to the Fallbacks Protocol.

Margin and Capital Requirements for Covered Swap Entities. On July 1, 2020, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, and the Federal Housing Finance Agency (Finance Agency) (collectively, Prudential Banking Regulators) jointly published a final rule, effective August 31, 2020, amending regulations that established minimum margin and capital requirements for uncleared swaps for covered swap entities under the jurisdiction of the Prudential Banking Regulators (Prudential Margin Rules) which, among other changes: (1) allows swaps entered into by a covered swap entity prior to an applicable compliance date to retain their legacy status and not become subject to the Prudential Margin Rules in the event that the legacy swaps are amended to replace an interbank offered rate (such as LIBOR) or other discontinued rate; and (2) introduces a new Phase 6 compliance date for initial margin requirements for covered swap entities and their counterparties with an average daily aggregate notional amount (AANA) of uncleared swaps from $8 billion to $50 billion, and limits Phase 5 to counterparties with an AANA of uncleared swaps from $50 billion to $750 billion; and (3) clarifies that initial margin trading documentation does not need to be executed prior to a counterparty reaching the initial margin threshold.

On the same date, the Prudential Banking Regulators issued an interim final rule, effective September 1, 2020, extending the initial margin compliance date for Phase 5 counterparties to September 1, 2021 and extending the initial margin compliance date for Phase 6 counterparties to September 1, 2022. On July 10, 2020, the Commodity Futures Trading Commission (CFTC) issued a final rule and a proposed rule to amend the minimum margin and capital requirements for uncleared swaps under the jurisdiction of the CFTC (CFTC Prudential Margin Rules) which collectively, among other things, extends the initial margin compliance date for Phase 5 counterparties to September 1, 2021 and extends the initial margin compliance date for Phase 6 counterparties to September 1, 2022, thereby aligning with the Prudential Banking Regulators.

On September 22, 2020, the CFTC issued a proposed rule to amend the CFTC Margin Rules which would permit, among other changes, covered swap entities to maintain separate minimum transfer amounts (MTA) for initial and variation margin for each swap counterparty, provided the combined MTA does not exceed $500,000. Separately, on September 23, 2020, the CFTC issued a proposed rule to address concerns by covered entities related to determining IM compliance across different regulators and jurisdictions. The CFTC’s proposed rule would, among other things, require entities subject to the CFTC’s jurisdiction to calculate the AANA for uncleared swaps during March, April and May of the current year, based on an average of month-end dates, as opposed to the existing requirement which requires the calculation of AANA during June, July and August of the prior year, based on daily calculations. Parties would continue to be expected to exchange IM based on the AANA totals as of September 1 of the current year. The proposed change aligns with the recommendation of the Basel Committee on Banking Supervision and Board of the International Organization of Securities Commission.

The Bank does not expect these final or proposed rules, if adopted as proposed, to have a material effect on its financial condition or results of operations.


23

Legislative and Regulatory Developments Related to COVID-19 Pandemic

Finance Agency Supervisory Letter - Paycheck Protection Program (PPP) Loans as Collateral for FHLBank Advances. On July 1, 2020, Congress approved an extension of the Paycheck Protection Program until August 8, 2020. The April 23, 2020 Supervisory Letter from the Finance Agency allowing FHLBanks to accept PPP loans as collateral remains in effect.

Coronavirus Aid, Relief, and Economic Security Act. The CARES Act provisions began to expire in July 2020, but some have been extended by regulatory action.
–Additional federal unemployment funds expired July 31, 2020.
–Statutory eviction freeze for federally-backed properties expired July 25, 2020.
–Foreclosure moratorium on federally-backed properties and on evictions was extended by the Finance Agency on August 27, 2020 to until “at least” December 31, 2020.

Additional phases of the CARES Act or other COVID-19 pandemic relief legislation may be enacted by Congress. The Bank continues to evaluate the potential impact of the CARES Act on its business, including its continued impact to the U.S. economy; impacts to mortgages held or serviced by the Bank’s members and that the Bank accepts as collateral; and the impacts on the Bank’s MPF program.

Additional COVID-19 Presidential, Legislative and Regulatory Developments. In light of the COVID-19 pandemic, the President, through executive orders, governmental agencies, including the Securities and Exchange Commission, OCC, Federal Reserve, FDIC, National Credit Union Administration, CFTC and the Finance Agency, as well as state governments and agencies, have taken, and may continue to take, 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 the Bank or its members. Many of these actions are temporary in nature. The Bank continues to monitor these actions and guidance as they evolve and to evaluate their potential impact on the Bank.

Risk Management

    The Bank employs a corporate governance and internal control framework designed to support the effective management of the Bank’s business activities and the related inherent risks. As part of this framework, the Board has approved a Risk Governance Policy and a Member Products Policy, both of which are reviewed regularly and re-approved at least annually. The Risk Governance Policy establishes risk guidelines, limits (if applicable), and standards for credit risk, market risk, liquidity risk, business risk and various forms of operational and technology risk, in accordance with Finance Agency regulations and consistent with the Bank’s risk appetite. The Member Products Policy establishes the eligibility and authorization requirements, policy limits and restrictions, and the terms applicable to each type of Bank product or service, as well as collateral requirements. The risk appetite is established by the Board, as are other applicable guidelines in connection with the Bank’s Capital Plan and overall risk management.

Risk Governance

The Bank’s lending, investment and funding activities and use of derivative instruments expose the Bank to a number of risks that include, market and interest rate risk, credit and counterparty risk, liquidity and funding risk, and operational and business risks. These include risks such as use and reliance on models and end-user computing tools, technology and information security risk, among others. In addition, the Bank’s risks are affected by current and projected financial and residential mortgage market trends, including those described in Item 1A. Risk Factors in the Bank's 2019 Form 10-K. Details regarding the Bank's risk governance framework and processes are included in the "Risk Governance" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2019 Form 10-K.

COVID-19 Pandemic Related Risk Impacts. Severe market volatility also impacts the Bank’s ability to model and manage market and other risks, along with determining collateral values. While the Bank has been able to manage these risks, they could affect the Bank’s ability to make business decisions and limit members’ ability to do business with the Bank. Similarly, because of changing economic and market conditions affecting the Bank’s investments, the Bank may be required to recognize further impairments on securities held, which may result in additional provision for credit losses on private label MBS or reduced comprehensive income depending on the classification of the investment. Additionally, the Bank continues to monitor the Bank's members, counterparties and MPF portfolio, as further and material credit deterioration could occur.

Capital Adequacy Measures. MV/CS provides a current assessment of the liquidation value of the balance sheet and measures the Bank's current ability to honor the par put redemption feature of its capital stock. This is one of the risk metrics
24

used to evaluate the adequacy of retained earnings, which is used to develop dividend payment recommendations and support the repurchase of excess capital stock.

The current Board-approved floor for MV/CS is 90.0%. MV/CS is measured against the floor monthly. When MV/CS is below the established floor, excess capital stock repurchases and dividend payouts are restricted. See the “Capital and Retained Earnings” discussion in Financial Condition in this Item 2 for details regarding the Bank’s retained earnings policy.
The MV/CS ratio was 172.6% at September 30, 2020 and 145.1% at December 31, 2019. The increase was primarily due to the decrease in capital stock as a result of lower advances which was partially offset by the widening of agency term debt and mortgage asset spreads resulting from the economic and financial disruption brought on by the COVID-19 pandemic.

Qualitative and Quantitative Disclosures Regarding Market Risk

Managing Market Risk. The Bank's market risk management objective is to protect member/shareholder and bondholder value consistent with the Bank's housing mission and safe and sound operations across a wide range of interest rate environments. Management believes that a disciplined approach to market risk management is essential to maintaining a strong capital base and uninterrupted access to the capital markets.

The Bank's Market Risk Model. Significant resources are devoted to ensuring that the level of market risk in the balance sheet is accurately measured, thus allowing management to monitor the risk against policy and regulatory limits. The Bank uses externally developed models to evaluate its financial position and market risk. One of the most critical market-based models relates to the prepayment of principal on mortgage-related instruments. Management regularly reviews the major assumptions and methodologies used in its models, as well as the performance of the models relative to empirical results, so that appropriate changes to the models can be made. During the third quarter of 2020, prepayment model changes were made which increased projected prepayment speeds and aligned modeled prepayments more closely with actual portfolio experience. As the COVID-19 pandemic and associated economic impact continues to evolve, including actions taken by governmental authorities, the performance of the Bank's models used to measure market risk will likely continue to be affected. Management will consider the additional impact of the pandemic on key market risk measures and may make further changes as deemed appropriate in future periods.

The Bank regularly validates the models used to measure market risk. Such model validations are performed by the Bank's model risk management department, which is separate from the model owner. These model validations may include third-party specialists when appropriate. The model validations are supplemented by performance monitoring by the model owner which is reported to the Bank's model risk management department. In addition, the Bank benchmarks model-derived fair values to those provided by third-party services or alternative internal valuation models. The benchmarking analysis is performed by a group that is separate from the model owner. Results of the model validations and benchmarking analysis, as well as any changes to the valuation methodologies and inputs, are reported to the Bank's Asset and Liability Committee (ALCO) (or subcommittee of), which is responsible for overseeing market risk.

Duration of Equity. One key risk metric used by the Bank is duration. Duration is a measure of the sensitivity of a financial instrument's value, or the value of a portfolio of instruments, to a 100 basis point parallel shift in interest rates. Duration (typically expressed in years) is commonly used by investors throughout the fixed income securities market as a measure of financial instrument price sensitivity.

The Bank's asset/liability management policy approved by the Board calls for actual duration of equity to be maintained within a + 4.5 year range in the base case. In addition, the duration of equity exposure limit in an instantaneous parallel interest rate shock of + 200 basis points is + 7 years. Management analyzes the duration of equity exposure against this policy limit on a daily basis and regularly evaluates its market risk management strategies.

The following table presents the Bank's duration of equity exposure at September 30, 2020 and December 31, 2019. Given the low level of interest rates, an instantaneous parallel interest rate shock of "down 200 basis points" could not be meaningfully measured for these periods and therefore is not presented. For similar reasons, the Bank temporarily suspended the "Down 100 basis points" metric as of March 31, 2020.
(in years)Down 100 basis pointsBase
Case		Up 100
 basis points		Up 200
 basis points
Actual Duration of Equity:
September 30, 2020n/a(1.1)0.52.9
December 31, 20190.10.11.32.3
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    Duration of equity changes in the first nine months of 2020 were mainly the result of the significant decline in interest rates, decrease in capital stock, funding actions and the prepayment model changes noted above. The Bank continues to monitor the mortgage and related fixed-income markets, including the impact that changes in the market or anticipated modeling changes may have on duration of equity and other market risk measures and may take actions to reduce market risk exposures as needed. Management believes that the Bank's current market risk profile is reasonable given the current market conditions.

Return on Equity (ROE) Spread Volatility. Interest rate risk is also measured based on the volatility in the Bank’s projected return on capital in excess of the return of an established benchmark market index. ROE spread is defined as the Bank's return on average equity, including capital stock and retained earnings, in excess of the average of the projected Federal funds rate. Management converted the benchmark index from 3-month LIBOR to the Federal funds rate during the first quarter of 2020. The change in benchmark, which was driven by the planned discontinuation of LIBOR as a published rate, had no impact on the reported results given the nature of the shocks employed and the short-term nature of both rates.

ROE spread volatility is a measure of the variability of the Bank’s projected ROE spread in response to shifts in interest rates and represents the change in ROE spread compared to an ROE spread that is generated by the Bank in its base forecasting scenario. ROE spread volatility is measured over a rolling forward 12 month period for selected interest rate scenarios and excludes the income sensitivity resulting from mark-to-market changes, which are separately described below.

        The ROE spread volatility presented in the table below reflects spreads relative to the projected Federal funds rate. Management uses both parallel and non-parallel rate scenarios to assess interest rate risk. The steeper and flatter yield curve shift scenarios are represented by appropriate increases and decreases in short-term and long-term interest rates using the three-year point on the yield curve as the pivot point. Given the low rate environment, management replaced a "down 200 basis points parallel rate" scenario with a "down 100 basis points longer term rate shock" as an additional non-parallel rate scenario that reflects a decline in longer-term rates.
ROE Spread Volatility Increase/(Decline)
(in basis points)Down 100 bps Longer Term
Rate Shock		Down 100 bps Parallel Shock100 bps Steeper100 bps FlatterUp 200 bps
Parallel Shock
September 30, 2020(25)(21)91049
December 31, 2019(22)2253(9)(18)

    Changes in ROE spread volatility in the first nine months of 2020 primarily reflect the impact of significantly lower interest rates, funding actions and the prepayment model changes noted above. For each scenario, the Board's limit on the decline in ROE spread is set at no greater than 100 basis points. The Bank was in compliance with the ROE spread volatility limit across all selected interest rate shock scenarios at September 30, 2020 and December 31, 2019.

    Mark-to-Market Risk. The Bank measures earnings risk associated with certain mark-to-market positions, including economic hedges. This framework measures forward-looking, scenario-based exposure based on interest rate and volatility shocks that are applied to any existing transaction that is marked to market through the income statement without an offsetting mark arising from a qualifying hedge relationship. In addition, the Bank's Capital Markets and Corporate Risk Management departments monitor the actual profit/loss change on a daily, monthly cumulative, and quarterly cumulative basis. The Bank's ALCO monitors mark-to-market risk through a daily exposure guideline and quarterly profit/loss reporting trigger.

26

Credit and Counterparty Risk - Total Credit Exposure (TCE) and Collateral

TCE. The Bank manages the credit risk of each member on the basis of the member’s total credit exposure (TCE) to the Bank, which includes advances and related accrued interest, fees, basis adjustments and estimated prepayment fees; letters of credit; forward-dated advance commitments; and MPF credit enhancement and related obligations. This credit risk is managed by monitoring the financial condition of borrowers and by requiring all borrowers (and, where applicable in connection with member affiliate pledge arrangements approved by the Bank, their affiliates) to pledge sufficient eligible collateral for all borrower obligations to the Bank to ensure that all potential forms of credit-related exposures are covered by sufficient eligible collateral. At September 30, 2020, aggregate TCE was $56.8 billion, comprised of approximately $35.5 billion in advance principal outstanding, $21.0 billion in letters of credit (including forward commitments), and $364.6 million in accrued interest, prepayment fees, MPF credit enhancement obligations and other fees.

The Bank establishes a maximum borrowing capacity (MBC) for each member based on collateral weightings applied to eligible collateral as described in the Bank’s Member Products Policy. Details regarding this policy are available in the Advance Products discussion in Item 1. Business in the Bank's 2019 Form 10-K. According to the Policy, eligible collateral is weighted to help ensure that the collateral value will exceed the amount that may be owed to the Bank in the event of a default. The Bank also has the ability to call for additional or substitute collateral while any indebtedness is outstanding to protect the Bank’s fully secured position. At September 30, 2020 and December 31, 2019, on a borrower-by-borrower basis, the Bank had a perfected security interest in eligible collateral with an estimated collateral value (after collateral weightings) in excess of the book value of all members’ and nonmember housing associates’ obligations to the Bank.

The financial condition of all members and eligible non-member housing associates is closely monitored for compliance with financial criteria as set forth in the Bank’s credit policies. The Bank has developed an internal credit rating (ICR) system that calculates financial scores and rates member institutions on a quarterly basis using a numerical rating scale from one to ten, with one being the best rating. Generally, scores are objectively calculated based on financial ratios computed from publicly available data. The scoring system gives the highest weighting to the member’s asset quality and capitalization. Other key factors include earnings and balance sheet composition. Operating results which include net income, capital levels, reserve coverage and other factors for the previous four quarters are used. The most recent quarter’s results are given a higher weighting. Additionally, a member’s credit score can be adjusted for various qualitative factors, such as the financial condition of the member’s holding company. A rating in one of the higher number (i.e., worse) categories indicates that a member exhibits well defined financial weaknesses as described in the Bank's policy. Members in these categories are reviewed for potential collateral delivery status. Other uses of the ICR include the scheduling of on-site collateral reviews. Insurance company members are rated on the same credit scale as depository institutions, but the analysis includes both quantitative and qualitative factors. While depository institution member analysis is based on standardized regulatory Call Report data and risk modeling, insurance company credit risk analysis is based on various forms of financial data, including, but not limited to, statutory reporting filed by insurance companies with state insurance regulators, which requires specialized methodologies and dedicated underwriting resources.

During the first nine months of 2020, there were two failures of FDIC-insured institutions nationwide. One of these institutions was a member of the Bank. The institution was closed by the West Virginia Division of Financial Institutions on April 3, 2020 and the FDIC was appointed receiver. At the time of the closure, the institution had advances outstanding, and its credit obligations were fully assumed and secured through an FDIC Purchase and Assumption agreement with another member of the Bank. The Bank did not incur any credit losses as a result of the failure.

As noted above, the Bank monitors member credit quality on a regular basis. To date, deterioration in member credit quality has not been material. Given, however, the current economic environment (COVID-19 pandemic-related business limitations, unemployment levels and possible increases in loan forbearance and delinquencies) as well as lower interest rates, the Bank anticipates associated deterioration in member credit quality, particularly should such conditions persist for an extended period.

Management believes that it has adequate policies and procedures in place to effectively manage credit risk exposure related to member TCE. These credit and collateral policies balance the Bank’s dual goals of meeting members’ needs as a reliable source of liquidity and limiting credit loss by adjusting the credit and collateral terms in response to deterioration in creditworthiness. The Bank has never experienced a loss on its advance exposure.

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The following table presents the Bank’s top five financial entities with respect to their TCE at September 30, 2020.
September 30, 2020
(dollars in millions)TCE% of Total
TD Bank, National Association, DE$12,899.1 22.7 %
Ally Bank, UT (1)
8,824.9 15.5 
PNC Bank, National Association, DE (2)
5,507.3 9.7 
JP Morgan Chase Bank, N.A., OH (3)
5,001.38.8 
Santander Bank, National Association, DE (4)
3,356.25.9 
35,588.8 62.6 
Other financial institutions21,256.937.4 
Total TCE outstanding$56,845.7 100.0 %
Notes:
(1) For Bank membership purposes, principal place of business is Horsham, PA.
(2) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(3) In 2019, the Bank's member Chase Bank USA, N.A. merged into JP Morgan Chase Bank, N.A., a non-member of the Bank, with a principal place of business in Columbus, OH.
(4) Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.

    Member Advance Concentration Risk. The following table lists the Bank’s top five borrowers based on advance balances at par as of September 30, 2020.
September 30, 2020
(dollars in millions)Advance Balance% of Total
Ally Bank, UT (1)
$8,800.0 24.8 %
PNC Bank, National Association, DE (2)
5,500.0 15.5 
JP Morgan Chase Bank, N.A., OH (3)
5,000.0 14.1 
Santander Bank, National Association, DE (4)
3,050.0 8.6 
First National Bank of Pennsylvania, PA2,080.0 5.9 
24,430.0 68.9 
Other borrowers11,052.6 31.1 
Total advances$35,482.6 100.0 %
Notes:
(1) For Bank membership purposes, principal place of business is Horsham, PA.
(2) For Bank membership purposes, principal place of business is Pittsburgh, PA.
(3) In 2019, the Bank's member Chase Bank USA, N.A. merged into JP Morgan Chase Bank, N.A., a non-member of the Bank, with a principal place of business in Columbus, OH.
(4) Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.

The average year-to-date September 30, 2020 balances for the five largest borrowers totaled $39.8 billion, or 74.3% of total average advances outstanding. The advances made by the Bank to each of these borrowers are secured by collateral with an estimated value, after collateral weightings, in excess of the book value of the advances. The Bank has never incurred any losses on these advances. The Bank has implemented specific credit and collateral review monitoring for these members.

Letters of Credit. The letter of credit product is collateralized under the same policies, procedures and guidelines that apply to advances. Outstanding letters of credit totaled $19.6 billion at September 30, 2020 and $17.4 billion at December 31, 2019, primarily related to public unit deposits. Available master standby letters of credit of $931.9 million and $1.4 billion at September 30, 2020 and December 31, 2019, respectively, are not included in these totals. The Bank had a concentration of letters of credit with one member (TD Bank) of $12.0 billion or 61% of the total at September 30, 2020 and $9.8 billion or 56% of the total at December 31, 2019.

Collateral Policies and Practices. All members are required to maintain eligible collateral to secure their TCE. Refer to the Risk Management section of the Bank's 2019 Form 10-K for additional information related to the Bank’s Collateral Policy.

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Collateral Agreements and Valuation. The Bank provides members with two types of collateral agreements: a blanket lien collateral pledge agreement and a specific collateral pledge agreement. Under a blanket lien agreement, the Bank obtains a lien against all of the member’s unencumbered eligible collateral assets and most ineligible assets to secure the member’s obligations with the Bank. Under a specific collateral pledge agreement, the Bank obtains a lien against specific eligible collateral assets of the member or its affiliate (if applicable) to secure the member’s obligations with the Bank. The member provides a detailed listing, as an addendum to the specific collateral agreement, identifying those assets pledged as collateral or delivered to the Bank or its third party custodian. Details regarding average lending values provided under both blanket liens and specific liens and delivery arrangements are available in the "Credit and Counterparty Risk - TCE and Collateral" discussion in Risk Management in Item 7. Management's Discussion and Analysis in the Bank's 2019 Form 10-K.

During the first nine months of 2020, the Bank communicated several key Collateral Policy changes and clarifications in response to the impact of the COVID-19 pandemic. These updates were intended to relax certain requirements related to expanded collateral and provide greater flexibility in the current economic environment.  The Bank now recognizes the following as eligible collateral:

•Loans that are past due up to 89 days and that are not on nonaccrual.
•Performing TDRs. This includes loans considered to be TDRs that are performing to agreed-upon terms after a prudent forbearance period.
•Loans with a forbearance period up to 12 months for all eligible loan types.
•PPP loans guaranteed by the SBA in accordance with the Finance Agency supervisory standards.

Consistent with previous policy stipulations, high quality investment securities are defined as U.S. Treasury and U.S. Agency securities, REFCORP bonds, GSE MBS, commercial and residential private label MBS with a minimum credit rating of single A, which the Bank considers as part of its evaluation of the collateral. In addition, municipal securities (or portions thereof) with a real estate nexus (e.g. proceeds primarily used for real estate development) with a minimum credit rating of single A are included. Members have the option to deliver such high quality investment securities to the Bank to increase their maximum borrowing capacity. Upon delivery, these securities are valued daily and all non-government or agency securities are subject to daily ratings reviews. Reported amount also includes pledged cash deposits with the Bank.

    For member borrowers, the following tables present information on a combined basis regarding the type of collateral securing their outstanding credit exposure and the collateral status as of September 30, 2020 and December 31, 2019.
September 30, 2020
(dollars in millions)Blanket LienListingDeliveryTotal
Amount%Amount%Amount%Amount%
One-to-four single-family residential
mortgage loans		$94,974.7 45.5 %$259.2 9.0 %$6,026.0 79.4 %$101,259.9 46.2 %
High quality investment securities1,735.2 0.8 2,434.3 84.5 1,489.9 19.6 5,659.4 2.6 
ORERC/CFI eligible collateral91,515.3 43.8 167.8 5.8 78.4 1.0 91,761.5 41.8 
Multi-family residential mortgage
loans		20,572.5 9.9 19.6 0.7 1.9 — 20,594.0 9.4 
Total eligible collateral value$208,797.7 100.0 %$2,880.9 100.0 %$7,596.2 100.0 %$219,274.8 100.0 %
Total TCE$49,426.7 87.0 %$1,559.6 2.7 %$5,859.4 10.3 %$56,845.7 100.0 %
Number of members169 85.0 %15 7.5 %15 7.5 %199 100.0 %
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December 31, 2019
(dollars in millions)Blanket LienListingDeliveryTotal
Amount%Amount%Amount%Amount%
One-to-four single-family residential
mortgage loans		$90,403.5 43.8 %$5,658.5 81.2 %$9,267.4 87.8 %$105,329.4 47.1 %
High quality investment securities4,452.4 2.2 1,306.4 18.8 1,265.6 12.0 7,024.4 3.1 
ORERC/CFI eligible collateral91,434.3 44.3 — — 20.2 0.2 91,454.5 40.9 
Multi-family residential mortgage
loans		19,956.5 9.7 — — 0.1 — 19,956.6 8.9 
Total eligible collateral value$206,246.7 100.0 %$6,964.9 100.0 %$10,553.3 100.0 %$223,764.9 100.0 %
Total TCE$74,267.6 87.7 %$1,494.0 1.8 %$8,922.5 10.5 %$84,684.1 100.0 %
Number of members17988.2 %104.9 %146.9 %203100.0 %

Credit and Counterparty Risk - Investments

    The Bank is also subject to credit risk on investments consisting of money market investments and investment securities. The Bank considers a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, credit ratings based on NRSROs, and/or the financial health of the underlying issuer

    Beginning January 1, 2020, the Bank adopted new accounting guidance (ASU 2016-13 Financial Instruments - Credit Losses, as amended) 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 AFS to be recorded through the allowance for credit losses. For additional information, refer to Note 1 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of September 30, 2020 and December 31, 2019, based on the lowest credit rating from the NRSROs (Moody’s, S&P and Fitch).
September 30, 2020(1)
Long-Term Rating
(in millions)AAAAAABBBBelow Investment GradeUnratedTotal
Money market investments:
  Interest-bearing deposits$— $— $1,077.2 $— $— $— $1,077.2 
  Securities purchased under agreements to resell— — 750.0 600.0 — — 1,350.0 
  Federal funds sold— 250.0 1,700.0 — — — 1,950.0 
Total money market investments— 250.0 3,527.2 600.0 — — 4,377.2 
Investment securities:
  U.S. Treasury obligations— 1,028.7 — — — — 1,028.7 
  GSE and TVA obligations— 1,917.6 — — — — 1,917.6 
  State or local agency obligations25.9 222.0 — — — — 247.9 
Total non-MBS25.9 3,168.3 — — — — 3,194.2 
  U.S. obligations single-family MBS— 834.7 — — — — 834.7 
  GSE single-family MBS— 4,863.1 — — — — 4,863.1 
  GSE multifamily MBS— 4,146.7 — — — — 4,146.7 
  Private label MBS — 16.0 20.0 32.6 123.0 177.3 368.9 
Total MBS— 9,860.5 20.0 32.6 123.0 177.3 10,213.4 
Total investments$25.9 $13,278.8 $3,547.2 $632.6 $123.0 $177.3 $17,784.8 
30

December 31, 2019 (1)
Long-Term Rating
(in millions)AAAAAABBBBelow Investment GradeUnratedTotal
Money market investments:
  Interest-bearing deposits$— $— $1,471.7 $— $— $— $1,471.7 
  Securities purchased under agreements to resell600.0 — 1,000.0 600.0 — — 2,200.0 
  Federal funds sold— 800.0 2,820.0 150.0 — — 3,770.0 
Total money market investments600.0 800.0 5,291.7 750.0 — — 7,441.7 
Investment securities:
  U.S. Treasury obligations— 3,390.7 — — — — 3,390.7 
  GSE and TVA obligations— 1,791.6 — — — — 1,791.6 
  State or local agency obligations25.6 316.6 — — — — 342.2 
Total non-MBS25.6 5,498.9 — — — — 5,524.5 
  U.S. obligations single-family MBS— 1,057.8 — — — — 1,057.8 
  GSE single-family MBS— 5,212.4 — — — — 5,212.4 
  GSE multifamily MBS— 4,880.4 — — — — 4,880.4 
  Private label MBS — 20.1 27.8 36.3 152.1 213.7 450.0 
Total MBS— 11,170.7 27.8 36.3 152.1 213.7 11,600.6 
Total investments$625.6 $17,469.6 $5,319.5 $786.3 $152.1 $213.7 $24,566.8 
Notes:
(1) Balances exclude total accrued interest of $28.0 million and $46.7 million for September 30, 2020 and December 31, 2019, respectively.

The Bank also manages credit risk based on an internal credit rating system. For purposes of determining the internal credit rating, the Bank measures credit exposure through a process which includes internal credit review and various external factors including NRSRO analysis. The Bank does not rely solely on any NRSRO rating in deriving its final internal credit rating.

Short-term Investments. Within the portfolio of short-term investments, the Bank faces credit risk from unsecured exposures. The Bank's unsecured credit investments have maturities generally ranging between overnight and six months and may include the following types:

•Interest-bearing deposits. Primarily consists of unsecured deposits that earn interest;
•Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions that are made on an overnight and term basis; and
•Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer at maturity or on demand.

Under the Bank’s Risk Governance Policy, the Bank can place money market investments, which include those investment types listed above, on an unsecured basis with large financial institutions with long-term credit ratings no lower than BBB. Management actively monitors the credit quality of these counterparties. The Bank also invests in securities purchased under agreements to resell which are secured investments.

As of September 30, 2020, the Bank had unsecured exposure to eight counterparties totaling $3.0 billion, with four counterparties exceeding 10% of the total exposure. The following table presents the Bank's unsecured credit exposure with non-governmental counterparties by investment type at September 30, 2020 and December 31, 2019. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions)
Carrying Value (1)
September 30, 2020December 31, 2019
Interest-bearing deposits$1,077.2 $1,471.7 
Federal funds sold1,950.0 3,770.0 
Total$3,027.2 $5,241.7 
Note:
31

(1) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.

    As of September 30, 2020, 64.4% of the Bank’s unsecured investment credit exposures were to U.S. branches and agency offices of foreign commercial banks. The Bank actively monitors its credit exposures and the credit quality of its counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, sovereign support, and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, the Bank may limit or suspend existing exposures.

    Finance Agency regulations include limits on the amount of unsecured credit the Bank may extend to a counterparty or to a group of affiliated counterparties. This limit is 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 the Bank's 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. This percentage is 1% to 15% and is based on the counterparty's credit rating. The calculation of term extensions of unsecured credit includes on-balance sheet transactions, off-balance sheet commitments, and derivative transactions.

    Finance Agency regulation also permits the Bank to extend additional unsecured credit for overnight transactions and for sales of Federal funds subject to continuing contracts that renew automatically. For overnight exposures only, the Bank's total unsecured exposure to a counterparty may not exceed twice the applicable regulatory limit, or a total of 2% to 30% of the eligible amount of regulatory capital, based on the counterparty's credit rating. As of September 30, 2020, the Bank was in compliance with the regulatory limits established for unsecured credit.

    The Bank's 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. The Bank's 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.

    The following table presents the long-term credit ratings of the unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's immediate parent for U.S. subsidiaries or branches and agency offices of foreign commercial banks based on the NRSROs used. This table does not reflect the foreign sovereign government's credit rating.
(in millions)
September 30, 2020 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
AAATotal
Domestic$— $1,077.2 $1,077.2 
U.S. branches and agency offices of foreign commercial banks:
  Australia— 900.0 900.0 
  Canada— 250.0 250.0 
  Finland250.0 — 250.0 
  Netherlands— 550.0 550.0 
  Total U.S. branches and agency offices of foreign commercial banks$250.0 $1,700.0 $1,950.0 
Total unsecured investment credit exposure$250.0 $2,777.2 $3,027.2 
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(in millions)
December 31, 2019 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
AAABBBTotal
Domestic$— $1,471.7 $150.0 $1,621.7 
U.S. branches and agency offices of foreign commercial banks:
  Australia500.0 — — 500.0 
  Canada— 1,270.0 — 1,270.0 
  Finland300.0 — — 300.0 
  Netherlands— 750.0 — 750.0 
  Norway— 100.0 — 100.0 
  Switzerland— 700.0 — 700.0 
  Total U.S. branches and agency offices of foreign commercial banks800.0 2,820.0 — 3,620.0 
Total unsecured investment credit exposure$800.0 $4,291.7 $150.0 $5,241.7 
Notes:
(1) Ratings are as of the respective dates.
(2) These ratings represent the lowest rating available for each security owned by the Bank based on the NRSROs used by the Bank. The Bank’s internal ratings may differ from those obtained from the NRSROs.
(3) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.
(4) Represents the NRSRO rating of the counterparty not the country. There were no AAA-rated investments at September 30, 2020 or December 31, 2019.

    At September 30, 2020 and December 31, 2019, all of the unsecured investments held by the Bank had overnight maturities.

U.S. Treasury Obligations. The Bank invests in U.S. Treasury obligations that are explicitly fully guaranteed by the U.S. government. This portfolio totaled $1.0 billion and $3.4 billion, at September 30, 2020 and December 31, 2019, respectively.

Agency/GSE Securities and Agency/GSE MBS. The Bank invests in and is subject to credit risk related to securities issued by Federal Agencies or U.S. government corporations. In addition, the Bank invests in MBS issued by these same entities that are directly supported by underlying mortgage loans. Both the securities and MBS are either explicitly or implicitly guaranteed by the U.S. government. These portfolios totaled $11.8 billion at September 30, 2020 and $12.9 billion at December 31, 2019.

State and Local Agency Obligations. The Bank invests in and is subject to credit risk related to a portfolio of state and local agency obligations (i.e., Housing Finance Agency bonds) that are directly or indirectly supported by underlying mortgage loans. These portfolios totaled $247.9 million and $342.2 million at September 30, 2020 and December 31, 2019, respectively.

Private Label MBS. The Bank also holds investments in private label MBS, which are supported by underlying mortgage loans. The Bank made investments in private label MBS that were rated AAA at the time of purchase with the exception of one, which was rated AA at the time of purchase. However, since the time of purchase, there have been significant downgrades. In 2007, the Bank discontinued the purchase of private label MBS. The carrying value of the Bank’s private label MBS portfolio at September 30, 2020 was $368.9 million, which was a decrease of $81.1 million from December 31, 2019. This decline was primarily due to repayments.

Participants in the mortgage market have often characterized single-family loans based upon their overall credit quality at the time of origination, generally considering them to be Prime, Alt-A or subprime. There has been no universally accepted definition of these segments or classifications. The subprime segment of the mortgage market primarily served borrowers with poorer credit payment histories, and such loans typically had a mix of credit characteristics that indicate a higher likelihood of default and higher loss severities than Prime loans. Further, many mortgage participants classified single-family loans with credit characteristics that range between Prime and subprime categories as Alt-A because these loans had a combination of characteristics of each category or may have been underwritten with low or no documentation compared to a full documentation mortgage loan. Industry participants often used this classification principally to describe loans for which the underwriting process was less rigorous and the documentation requirements of the borrower were reduced.

33

Credit Losses. The Bank evaluates its private label MBS for expected credit losses quarterly, based on whether there is an expectation of a shortfall in receiving all cash flows contractually due. Beginning January 1, 2020, with the adoption of ASU 2016-13, for private label MBS for which the Bank expects a shortfall, an ACL is recorded, limited to the amount of a security's unrealized loss, if any. If the security is in an unrealized gain position, the ACL is zero. Prior to January 1, 2020, credit losses were recorded through OTTI as a direct write-down of the security's amortized cost.

The Bank recorded a provision for credit losses of $1.7 million on its private label MBS for the nine months ended September 30, 2020, which included an insignificant amount of provision in the third quarter. The Bank recorded $0.3 million of credit-related OTTI charges in earnings during both the three and nine months ended September 30, 2019. Because the Bank does not intend to sell and will not be required to sell any securities with recorded credit losses before anticipated recovery of their amortized cost basis, the Bank did not write down any of its private label MBS securities amortized cost basis for the difference between amortized cost and fair value. The Bank has not recorded credit losses on any other type of security (i.e., U.S. Agency MBS or non-MBS securities).

The Bank’s estimate of cash flows has a significant impact on the determination of credit losses. To assess for expected credit losses, the Bank evaluates the projected cash flows to determine whether there is an expected shortfall in receiving all cash flows contractually due. The Bank uses a third-party model which incorporates various assumptions, such as expected housing price changes and interest rates among others, to produce cash flows that represent the Bank's best estimate of cash flows expected to be collected during the life of the securities.

The Bank’s life-to-date credit losses are concentrated in its 2006 and 2007 vintage bonds. These vintages represent 92% of life-to-date credit losses, of which 47% relates to Prime and 45% relates to Alt-A, with the remainder in subprime and HELOC. The Bank has recognized life-to-date credit losses as follows:
(dollars in millions)September 30, 2020December 31, 2019
Number of private label MBS with credit losses recognized:
   Life-to-date60 60 
   Still outstanding35 35 
Credit losses
OTTI credit losses recorded life-to-date$458.6 $458.6 
Credit losses recorded through an ACL1.7 — 
Total credit losses recorded life-to-date$460.3 $458.6 
Principal write-downs on private label MBS(161.4)(157.9)
Credit losses on private label MBS no longer owned:
   Private label MBS sold(116.5)(116.5)
   Private label MBS matured (less principal write-downs realized)(18.7)(18.7)
Remaining amount of credit losses(1)
$163.7 $165.5 
Note:
(1) Excludes recoveries of credit losses through interest income as a result of significant increases in projected cash flows.

Previously under the OTTI accounting model, when a significant increase in cash flows was expected, the Bank recognized recovery of OTTI through interest income by adjusting a security's accretable yield. Following the adoption of ASU 2016-13, the Bank will continue to use the accretable yield to recover OTTI previously recorded through interest income. When the Bank projects an increase in cash flows during its quarterly assessment of expected credit losses, the Bank will first reverse the ACL by recognizing a benefit for credit losses up to the amount of the ACL, if any. If the Bank projects a significant increase in cash flows, the Bank adjusts the accretable yield prospectively. Credit losses recovered through interest income on these securities were $4.1 million and $6.0 million for the third quarter of 2020 and 2019, respectively; $12.2 million and $15.5 million for the first nine months of 2020 and 2019, respectively; and $191.2 million life-to-date.

Management will continue to evaluate all impaired securities, including those for which OTTI has been previously recorded. Material credit losses have occurred on private label MBS and may occur in the future. The specific amount of credit losses will depend on the actual performance of the underlying loan collateral, payments received on the securities themselves, as well as the Bank’s future modeling assumptions. Declines in the fair values of securities with expected credit losses may result in the Bank recording an ACL. Those securities for which the Bank is recognizing recovery of credit losses through interest income may be more likely to incur additional credit losses due to the nature of the historic OTTI accounting model.

34

Credit and Counterparty Risk - Mortgage Loans, BOB Loans and Derivatives

Mortgage Loans. The Finance Agency has authorized the Bank to hold mortgage loans under the MPF Program whereby the Bank acquires mortgage loans from participating members in a shared credit risk structure. These assets carry CEs on any conventional mortgage loans acquired such that the Bank has a high degree of confidence that it will be paid principal and interest in all material respects, even under reasonably likely adverse changes to expected economic conditions. Loans are assessed by a third-party credit model at acquisition, and a CE is calculated based on loan attributes and the Bank’s risk tolerance with respect to its MPF portfolio. After an allowance for credit losses of $6.6 million and $7.8 million at September 30, 2020 and December 31, 2019, respectively, the Bank had net mortgage loans held for portfolio of $5.1 billion at both September 30, 2020 and December 31, 2019.

Mortgage Insurers. The Bank’s MPF Program currently has credit exposure to nine mortgage insurance companies which provide PMI and/or Supplemental Mortgage Insurance (SMI) for the Bank’s various products. To be active, the mortgage insurance company must be approved as a qualified insurer in accordance with the AMA regulation. Every two years, the Bank reviews the qualified insurers to determine if they continue to meet the financial and operational standards set by the Bank.

None of the Bank’s mortgage insurers currently maintain a rating by at least one NRSRO of A+ or better. As required by the MPF Program, for originations with PMI, the ratings model currently requires additional CE from the PFI to compensate for the mortgage insurer rating when it is below A+.

The MPF Plus product required SMI under the MPF Program when each pool was established. At September 30, 2020, five of the 14 MPF Plus pools still have SMI policies in place. The Bank does not currently offer the MPF Plus product and has not purchased loans under MPF Plus Commitments since July 2006. Per MPF Program guidelines, the existing MPF Plus product exposure is required to be secured by the PFI once the SMI company is rated below AA-. The Finance Agency guidelines require mortgage insurers that underwrite SMI to be rated AA- or better. This requirement has been temporarily waived by the Finance Agency provided that the Bank otherwise mitigates the risk by requiring the PFI to secure the exposure. As of September 30, 2020, all of the SMI exposure is fully collateralized.

The unpaid principal balance and maximum coverage outstanding for seriously delinquent loans with PMI as of September 30, 2020 was $35.2 million and $10.4 million, respectively. The corresponding amounts at December 31, 2019 were $5.3 million and $2.0 million. The significant increase is primarily related to the increase in seriously delinquent loans related to the COVID-19 pandemic.

    BOB Loans. See Note 1 - Summary of Significant Accounting Policies in Item 8 in the Bank's 2019 Form 10-K for a description of the BOB program. At September 30, 2020 and December 31, 2019, the allowance for credit losses on BOB loans was $3.6 million and $3.1 million, respectively.

Derivative Counterparties. To manage interest rate risk, the Bank enters into derivative contracts. Derivative transactions may be either executed with a counterparty (referred to as uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) or a Swap Execution Facility with a Derivatives Clearing Organization (referred to as cleared derivatives). For uncleared derivatives, the Bank transacts most of its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit.

    The Bank uses Chicago Mercantile Exchange (CME) Clearing as the Clearing House for all cleared derivative transactions. Variation margin payments are characterized as daily settlement payments, rather than collateral. Initial margin is considered cash collateral. The Bank is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions. The amount of credit risk on derivatives depends on the extent to which netting procedures, collateral requirements, daily settlement and other credit enhancements are used and are effective in mitigating the risk. The Bank manages credit risk through credit analysis, collateral management, and other credit enhancements.

Uncleared Derivatives. The Bank is subject to non-performance by counterparties to its uncleared derivative transactions. The Bank requires collateral on uncleared derivative transactions. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty must deliver collateral to the Bank if the total market value of the Bank's exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, the Bank does not anticipate any credit losses on its uncleared derivative transactions with counterparties as of September 30, 2020.

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    Cleared Derivatives. The Bank is subject to credit risk exposure to the Clearing Houses and clearing agent. The requirement that the Bank post initial margin and exchange variation margin settlement payments, through the clearing agent, to the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their obligations. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of its clearing agents. Variation margin is the amount accumulated through daily settlement of the current exposure arising from changes in the market value of the position since the trade was executed. The Bank's use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral postings and variation margin settlement payments are made daily for changes in the value of cleared derivatives through a clearing agent. The Bank does not anticipate any credit losses on its cleared derivatives as of September 30, 2020.

    The contractual or notional amount of derivative transactions reflects the involvement of the Bank in the various classes of financial instruments. The maximum credit risk of the Bank with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there is a default, minus the value of any related collateral, including initial margin and variation margin settlements on cleared derivatives. In determining maximum credit risk, the Bank considers accrued interest receivables and payables as well as the netting requirements to net assets and liabilities. The following table presents the derivative positions with non-member counterparties and member institutions to which the Bank has credit exposure at September 30, 2020 and December 31, 2019.
(in millions)September 30, 2020
Credit Rating (1)
Notional AmountFair Value Before Collateral Cash Collateral Pledged To (From) Counterparties Net Credit Exposure to Counterparties
Non-member counterparties
Asset positions with credit exposure:
  Uncleared derivatives
    AA$75.0 $1.2 $(1.1)$0.1 
    A475.0 0.6 (0.4)0.2 
  Cleared derivatives (2)
20,712.1 2.6 157.8 160.4 
Liability positions with credit exposure:
  Uncleared derivatives
    A27.4 (0.3)0.5 0.2 
Total derivative positions with credit exposure to non-member counterparties
21,289.5 4.1 156.8 160.9 
Member institutions (3)
68.0 — — — 
Total$21,357.5 $4.1 $156.8 $160.9 
Derivative positions without credit exposure
842.9 
Total notional
$22,200.4 
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(in millions)December 31, 2019
Credit Rating (1)
Notional AmountFair Value Before Collateral Cash Collateral Pledged To (From) Counterparties Net Credit Exposure to Counterparties
Non-member counterparties
Asset positions with credit exposure:
  Uncleared derivatives
    A$1,475.6 $3.9 $(3.7)$0.2 
  Cleared derivatives (2)
41,954.8 5.8 133.3 139.1 
Liability positions with credit exposure:
  Uncleared derivatives
    A242.6 (2.0)2.6 0.6 
    BBB663.7 (1.8)2.2 0.4 
Total derivative positions with credit exposure to non-member counterparties
44,336.7 5.9 134.4 140.3 
Member institutions (3)
73.6 — — — 
Total$44,410.3 $5.9 $134.4 $140.3 
Derivative positions without credit exposure
1,979.3 
Total notional
$46,389.6 
Notes:
(1) This table does not reflect any changes in rating, outlook or watch status occurring after September 30, 2020. The ratings presented in this table represent the lowest long-term counterparty credit rating available for each counterparty based on the NRSROs used by the Bank.
(2) Represents derivative transactions cleared through Clearing Houses.
(3) Member institutions include mortgage delivery commitments.

The following tables summarize the Bank’s uncleared derivative counterparties which represent more than 10% of the Bank’s total uncleared notional amount outstanding as of September 30, 2020 and December 31, 2019. The Bank’s total net credit exposure to uncleared derivative counterparties was $0.5 million and $1.2 million as of September 30, 2020 and December 31, 2019, respectively.
Notional Greater Than 10%September 30, 2020December 31, 2019
(dollars in millions)
Derivative Counterparty		Credit RatingNotional% of NotionalCredit RatingNotional% of Notional
Citi Bank NAA$365.0 24.5 
(1)
(1)
(1)
Bank of America, NAA355.0 23.9 A$1,475.6 33.3 
Morgan Stanley CapitalBBB234.6 15.8 BBB663.715.0 
Deutsche BankBBB160.3 10.8 
(1)
(1)
(1)
All othersn/a373.4 25.0 n/a2,295.5 51.7 
 Total$1,488.3 100.0 $4,434.8 100.0 
Notes:
(1) The percentage of notional was not greater than 10%.

    To appropriately assess potential credit risk to its European holdings, the Bank annually underwrites each counterparty and country and regularly monitors NRSRO rating actions and other publications for changes to credit quality. The Bank also actively monitors its counterparties' approximate indirect exposure to European sovereign debt and considers this exposure as a component of its credit risk review process.

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Liquidity and Funding Risk

As a wholesale bank, the Bank employs financial strategies which enable it to expand and contract its assets, liabilities and capital in response to changes in member credit demand, membership composition and other market factors. In addition, the Bank is required to maintain a level of liquidity in accordance with the FHLBank Act, Finance Agency regulations and policies established by its management and board of directors. The Bank’s liquidity resources are designed to support these strategies and requirements through a focus on maintaining a liquidity and funding balance between its financial assets and financial liabilities.

Asset/Liability Maturity Profile. The Bank is focused on maintaining adequate liquidity and funding balances with its financial assets and financial liabilities, and the FHLBanks work collectively to manage system-wide liquidity and funding needs. The FHLBanks jointly monitor the combined risks, primarily by tracking the maturities of financial assets and financial liabilities. The Bank also monitors the funding balance between financial assets and financial liabilities and is committed to prudent risk management practices. 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.

Sources of Liquidity. The Bank's primary sources of liquidity are proceeds from the issuance of consolidated obligations and a liquidity investment portfolio, as well as proceeds from the issuance of capital stock.

Consolidated Obligations. The Bank’s ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of various debt structures at attractive rates. Consolidated obligation bonds and discount notes, along with member deposits and capital, represent the primary funding sources used by the Bank to support its asset base. Consolidated obligations benefit from the Bank’s GSE status; however, they are not obligations of the U.S., and the U.S. government does not guarantee them. Consolidated obligation bonds and discount notes are rated Aaa with stable outlook/P-1 by Moody’s and AA+ with stable outlook/A-1+ by S&P, as of September 30, 2020. These ratings measure the likelihood of timely payment of principal and interest. Note 6 - Consolidated Obligations to the unaudited financial statements in this Form 10-Q provides additional information regarding the Bank’s consolidated obligations.

Liquidity Investment Portfolio. The Bank’s liquidity for regulatory purposes is comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and U.S. Treasury obligations classified as trading or AFS.

Contingency Liquidity. The Bank’s access to the capital markets has never been interrupted to the extent the Bank’s ability to meet its obligations was compromised, and the Bank currently has no reason to believe that its ability to issue consolidated obligations will be impeded to that extent. Specifically, the Bank's sources of contingency liquidity include maturing overnight and short-term investments, maturing advances, unencumbered repurchase-eligible assets, trading securities, AFS securities, certificates of deposits and MBS repayments. Uses of contingency liquidity include net settlements of consolidated obligations, member loan commitments, mortgage loan purchase commitments, deposit outflows and maturing other borrowed funds. Excess contingency liquidity is calculated as the difference between sources and uses of contingency liquidity. At September 30, 2020 and December 31, 2019, excess contingency liquidity was approximately $17.9 billion and $31.3 billion, respectively. The decrease in excess contingency liquidity reflects the lower member demand for advances.

    Funding and Debt Issuance. Changes or disruptions in the capital markets could limit the Bank’s ability to issue consolidated obligations, which could impact the Bank's liquidity and cost of funds. During the first nine months of 2020, the markets experienced volatility given the impacts related to the COVID-19 pandemic. However, the Bank maintained continual access to funding and coordinated with the Office of Finance (OF) and the other FHLBanks to ensure all funding needs were met.

    Access to short-term debt markets has been reliable because investors, driven by increased liquidity preferences and risk aversion have sought the FHLBank’s short-term debt as an asset of choice, particularly funding indexed to Secured Overnight Financing Rate (SOFR). This has led to advantageous funding opportunities and increased utilization of debt maturing in one year or less. The FHLBanks have maintained comparatively stable access to funding through a diverse investor base at relatively favorable spreads to U.S. Treasury rates.

    Refinancing Risk. There are inherent risks in utilizing short-term funding to support longer-dated assets and the Bank may be exposed to refinancing and investor concentration risks (collectively, refinancing risk). Refinancing risk includes the risk the Bank could have difficulty in rolling over short-term obligations when market conditions change. In managing and
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monitoring the amounts of financial assets that require refinancing, the Bank considers their contractual maturities, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments, embedded call optionality, and scheduled amortizations). The Bank and the OF jointly monitor the combined refinancing risk of the FHLBank system. In managing and monitoring the amounts of assets that require refunding, the Bank may consider contractual maturities of the financial assets, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments and scheduled amortizations).

    Interest Rate Risk. The Bank may use a portion of the short-term consolidated obligations issued to fund both short- and long-term variable rate-indexed assets. However, funding longer-term variable rate-indexed assets with shorter-term liabilities generally does not expose the Bank to interest rate risk because the rates on the variable rate-indexed assets reset similar to the liabilities. The Bank measures and monitors interest rate-risk with commonly used methods and metrics, which include the calculations of market value of equity, duration of equity, and duration gap.

    Regulatory Liquidity Requirements. The Bank is required to maintain a level of liquidity in accordance with certain Finance Agency guidance. Under these policies and guidelines, the Bank is required to maintain contingency liquidity to meet liquidity needs in an amount at least equal to its anticipated net cash outflows under certain scenarios. Effective August 31 2020, one scenario assumes that the Bank cannot access the capital markets for a period of 15 days and during that time members would renew any maturing, prepaid or called advances. In addition, the Bank is required to perform and report to the Finance Agency the results of an annual liquidity stress test. The Bank was in compliance with these requirements at September 30, 2020. Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2019 Form 10-K for additional information.

    Joint and Several Liability. Although the Bank is primarily liable for its portion of consolidated obligations (i.e., those issued on its behalf), the Bank is also jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on consolidated obligations of all the FHLBanks. The Finance Agency, in its discretion and notwithstanding any other provisions, may at any time order any FHLBank to make principal or interest payments due on any consolidated obligation, even in the absence of default by the primary obligor. To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the non-paying FHLBank, which has a corresponding obligation to reimburse the FHLBank to the extent of such assistance and other associated costs. However, if the Finance Agency determines that the non-paying FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis the Finance Agency may determine. Finance Agency regulations govern the issuance of debt on behalf of the FHLBanks and authorize the FHLBanks to issue consolidated obligations, through the OF as its agent. The Bank is not permitted to issue individual debt without Finance Agency approval. See Note 14 - Consolidated Obligations of the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2019 Form 10-K for additional information.

Operational and Business Risks

    Operational Risk. Operational Risk is defined as the potential for loss resulting from inadequate or failed internal processes, people, and systems, or from external events and encompasses risks related to housing mission-related activities, including activities associated with affordable housing programs or goals. The Bank considers various sources of risk of unexpected loss, including human error, fraud, unenforceability of legal contracts, deficiencies in internal controls and/or information systems, or damage from fire, theft, natural disaster or acts of terrorism. Generally, the category of operational risk includes loss exposures of a physical or procedural nature. Specifically, operational risk includes compliance, fraud, information/transaction, legal, cyber, vendor, people, succession and model risk. The Bank has established policies and procedures to manage each of the specific operational risks.

    While the Bank’s business operations have not been significantly disrupted to date, they may be disrupted if significant portions of the Bank’s workforce are unable to work effectively due to illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic. The Bank is reliant on third-party vendors who are also impacted by the COVID-19 pandemic. Vendor personnel may be working remotely and/or the vendors could have a shortage of personnel. While the Bank has not materially experienced this during the pandemic to date and the Bank continues to monitor vendors, a disruption, delay or failure of a critical third-party vendor’s services as a result of these factors could impact the Bank’s operating results, and the Bank’s ability to provide services to the membership.

    Business Risk. Business risk is the possibility of an adverse impact on the Bank’s profitability or financial or business strategies resulting from external factors that may occur in the short-term and/or long-term. This risk includes the potential for strategic business constraints to be imposed through regulatory, legislative or political changes. The Bank’s Risk Management
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Committee monitors economic indicators and the external environment in which the Bank operates for alignment with the Bank's risk appetite.

    The Bank continues to evaluate its risks and monitor the changes in the market as it relates to the cessation of LIBOR and the transition to an alternative rate (e.g., SOFR).  The Bank has developed a LIBOR transition plan which addresses considerations such as: exposure, fallback language, systems preparation, and balance sheet management. In addition, beginning in 2020, the Bank has changed the index upon which it bases risk measures and executive compensation from LIBOR to average Federal funds rate.

The Bank has assessed its exposure to LIBOR by developing an inventory of impacted financial instruments. The Bank assumes LIBOR will continue to exist as the market benchmark rate until the end of 2021. The Bank manages interest rate risk between its assets and liabilities by entering into derivatives to preserve the value of and earn stable returns on its assets. These instruments may have different fallback features when LIBOR ceases. The following table presents the Bank’s LIBOR-indexed financial instruments, excluding interest rate caps, by year of contractual maturity as of September 30, 2020.
(in millions)20202021ThereafterTotal
Assets Indexed to LIBOR
Principal Amount:
   Advances$4,422.0 $7,775.0 $153.1 $12,350.1 
   Investments:
      MBS42.8 3.3 6,756.2 6,802.3 
Derivatives Hedging Assets (Receive Leg LIBOR)
   Notional Amount:
      Cleared844.0 3,789.4 5,810.6 10,444.0 
      Uncleared— — 60.3 60.3 
 Total Principal/Notional Amounts$5,308.8 $11,567.7 $12,780.2 $29,656.7 
Liabilities Indexed to LIBOR
Principal Amount:
   Consolidated Obligations$3,075.0 $5,570.0 $25.0 $8,670.0 
Derivatives Hedging Liabilities (Pay Leg LIBOR)
   Notional Amount:
      Cleared2,759.2 2,022.0 610.5 5,391.7 
      Uncleared— 15.0 140.0 155.0 
 Total Principal/Notional Amounts$5,834.2 $7,607.0 $775.5 $14,216.7 

To assess trigger events requiring potential fallback language, the Bank has evaluated its contracts. As to advance contracts with its members, the Bank has added or adjusted fallback language. Similarly, fallback language has been added to consolidated obligation agreements. For derivatives, refer to Legislative and Regulatory Developments in Item 2. in this Form 10-Q for more information on LIBOR transition ISDA fallbacks protocol. As to investments held by the Bank that are tied to LIBOR, the Bank is monitoring market-wide efforts to enhance fallback language for new activity and develop frameworks to address existing transactions. The operational impact of adjusting terms and conditions to reflect the fallback language may be impacted by the number of financial instruments and counterparties.

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The Bank continues to execute certain variable rate instruments that are indexed to LIBOR. The Bank is assessing its operational readiness including potential effects on core Bank systems.  From a balance sheet management perspective, the Bank has issued SOFR-indexed debt and SOFR-indexed advance products. Additionally, the Bank has been executing Overnight Index Swap (OIS) and SOFR indexed derivatives as alternative interest rate hedging strategies. The following table presents the Bank’s variable rate financial instruments, excluding interest rate caps, by index as of September 30, 2020.
(in millions)LIBORSOFROISOtherTotal
Assets Indexed to a Variable Rate
Principal Amount:
   Advances$12,350.1 $1,000.0 $— $199.8 $13,549.9 
   Investments:
      MBS6,802.3 — — 107.9 6,910.2 
Derivatives Hedging Assets (Receive Leg Variable Rate)
   Notional Amount10,504.3 3,358.1 1,398.2 — 15,260.6 
 Total Principal/Notional Amounts$29,656.7 $4,358.1 $1,398.2 $307.7 $35,720.7 
Liabilities Indexed to a Variable Rate
Principal Amount:
   Consolidated obligations$8,670.0 $12,943.3 $— $— $21,613.3 
Derivatives Hedging Liabilities (Pay Leg Variable Rate)
   Notional Amount5,546.7 — 120.1 — 5,666.8 
 Total Principal/Notional Amounts$14,216.7 $12,943.3 $120.1 $— $27,280.1 

The Finance Agency issued a supervisory letter to the FHLBanks providing LIBOR transition guidance, as amended. The supervisory letter states that by June 30, 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 except investments and option embedded products. In addition, the Bank has ceased entering into derivatives with swaps, caps, or floors indexed to LIBOR that terminate after December 31, 2021.

    For additional information on operating and business risks to the Bank associated with the LIBOR transition, including those items that are dependent actions by third parties and developments in the market, see Risk Factors in Item 1A and the "Operating and Business Risks" discussion in the Risk Management section and Legislative and Regulatory Developments of Item 7. in the Bank's 2019 Form 10-K.

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Item 1: Financial Statements (unaudited)

Federal Home Loan Bank of Pittsburgh
Statements of Income (unaudited)
 Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Interest income:    
Advances
$95,201 $478,477 $548,953 $1,508,189 
Interest-bearing deposits
638 9,347 6,005 31,437 
Securities purchased under agreements to resell
294 10,168 7,923 25,871 
Federal funds sold
1,000 48,954 27,454 126,551 
Trading securities9,055 18,309 41,786 41,317 
Available-for-sale (AFS) securities
31,996 71,884 138,565 201,198 
Held-to-maturity (HTM) securities
11,816 20,401 43,932 65,027 
Mortgage loans held for portfolio
35,932 42,452 121,561 126,922 
Total interest income185,932 699,992 936,179 2,126,512 
Interest expense:    
Consolidated obligations - discount notes16,980 167,435 175,414 497,369 
Consolidated obligations - bonds80,579 413,901 462,006 1,259,974 
Deposits
26 2,922 1,827 8,929 
Mandatorily redeemable capital stock and other borrowings
4,072 6,715 14,127 10,635 
Total interest expense101,657 590,973 653,374 1,776,907 
Net interest income84,275 109,019 282,805 349,605 
Provision for credit losses1,243 371 5,635 1,820 
Net interest income after provision for credit losses83,032 108,648 277,170 347,785 
Other noninterest income (loss):
Net OTTI losses — (271)— (330)
Net gains (losses) on investment securities (Note 2)(5,323)5,441 53,868 23,355 
Net gains (losses) on derivatives and hedging activities (Note 5)3,589 (17,397)(97,685)(55,201)
Standby letters of credit fees
5,407 5,274 16,019 16,310 
Other, net
1,405 322 1,688 1,875 
Total other noninterest income (loss)5,078 (6,631)(26,110)(13,991)
Other expense:
Compensation and benefits 12,844 11,129 39,190 36,909 
Other operating
7,871 8,657 29,869 24,151 
Finance Agency
1,894 1,589 5,688 4,775 
Office of Finance
1,243 1,812 3,995 4,581 
Total other expense23,852 23,187 78,742 70,416 
Income before assessments64,258 78,830 172,318 263,378 
Affordable Housing Program (AHP) assessment
6,833 8,554 18,644 27,400 
Net income$57,425 $70,276 $153,674 $235,978 

The accompanying notes are an integral part of these financial statements.
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Federal Home Loan Bank of Pittsburgh
Statements of Comprehensive Income (unaudited)
 Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Net income$57,425 $70,276 $153,674 $235,978 
Other comprehensive income (loss):
Net unrealized gains (losses) on AFS securities26,384 (5,595)47,574 39,623 
Net non-credit portion of OTTI gains (losses) on AFS securities
— (4,609)— (9,053)
Reclassification of net (gains) included in net income relating to hedging activities
— (10)(149)(25)
Pension and post-retirement benefits171 106 1,208 317 
Total other comprehensive income26,555 (10,108)48,633 30,862 
Total comprehensive income$83,980 $60,168 $202,307 $266,840 

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


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Federal Home Loan Bank of Pittsburgh
Statements of Condition (unaudited)
(in thousands)September 30, 2020December 31, 2019
ASSETS  
Cash and due from banks$1,386,471 $21,490 
Interest-bearing deposits (Note 2)1,084,526 1,476,890 
Federal funds sold (Note 2)1,950,000 3,770,000 
Securities purchased under agreements to resell (Note 2) 1,350,000 2,200,000 
Investment securities: (Note 2)
  
Trading securities
1,287,548 3,631,650 
AFS securities, net; amortized cost of $10,010,280 and $11,000,910, respectively
10,153,022 11,097,769 
 HTM securities; fair value of $2,047,354 and $2,440,288, respectively
1,967,036 2,395,691 
Total investment securities
13,407,606 17,125,110 
Advances (Note 3)35,841,036 65,610,075 
Mortgage loans held for portfolio, net (Note 4)5,089,745 5,114,625 
Banking on Business (BOB) loans, net 21,213 19,706 
Accrued interest receivable104,597 193,352 
Derivative assets (Note 5)160,986 140,251 
Other assets47,095 52,630 
Total assets$60,443,275 $95,724,129 
LIABILITIES AND CAPITAL  
Liabilities  
Deposits$990,571 $573,382 
Consolidated obligations: (Note 6)
  
Discount notes
13,995,722 23,141,362 
Bonds
41,583,307 66,807,807 
Total consolidated obligations55,579,029 89,949,169 
Mandatorily redeemable capital stock (Note 7)223,052 343,575 
Accrued interest payable93,364 205,118 
AHP payable107,142 112,289 
Derivative liabilities (Note 5)1,751 3,024 
Other liabilities76,388 64,736 
Total liabilities57,071,297 91,251,293 
Commitments and contingencies (Note 10)
Capital (Note 7)
  
Capital stock - putable ($100 par value) issued and outstanding
     18,804 and 30,550 shares, respectively
1,880,371 3,054,996 
Retained earnings:  
Unrestricted905,125 910,726 
Restricted446,023 415,288 
Total retained earnings1,351,148 1,326,014 
Accumulated Other Comprehensive Income (AOCI)140,459 91,826 
Total capital3,371,978 4,472,836 
Total liabilities and capital$60,443,275 $95,724,129 

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

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Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
 Nine months ended September 30,
(in thousands)20202019
OPERATING ACTIVITIES  
Net income$153,674 $235,978 
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization
(36,491)(43,187)
Net change in derivative and hedging activities
(281,783)(356,493)
Other adjustments
7,148 3,660 
Net change in:
Trading securities
2,344,102 (2,629,125)
Accrued interest receivable
88,926 24,378 
Other assets
(203)(3,699)
Accrued interest payable
(111,764)(4,458)
Other liabilities
(9,368)7,792 
Net cash provided by (used in) operating activities$2,154,241 $(2,765,154)
INVESTING ACTIVITIES  
Net change in:  
Interest-bearing deposits (including $(2,118) and $59 (to) from other FHLBanks for mortgage loan program)
$370,279 $513,383 
Securities purchased under agreements to resell
850,000 (800,000)
Federal funds sold
1,820,000 (2,195,000)
AFS securities:
Proceeds
1,756,311 1,674,435 
Purchases
(643,733)(4,188,255)
HTM securities:
Proceeds
1,155,297 1,522,679 
Purchases
(728,986)(871,744)
Advances:
Repaid
318,795,536 817,451,571 
Originated
(288,839,498)(804,957,652)
Mortgage loans held for portfolio:
Proceeds
1,073,253 389,771 
Purchases
(1,067,877)(768,024)
Other investing activities, net(295)2,856 
Net cash provided by investing activities$34,540,287 $7,774,020 

The accompanying notes are an integral part of these financial statements.
45

Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
(continued)
Nine months ended September 30,
(in thousands)20202019
FINANCING ACTIVITIES
Net change in deposits$411,903 $176,370 
Net proceeds from issuance of consolidated obligations:
Discount notes201,685,063 358,760,329 
Bonds35,760,761 52,331,314 
Payments for maturing and retiring consolidated obligations:
Discount notes(210,792,258)(367,478,383)
Bonds(60,971,215)(48,318,155)
Proceeds from issuance of capital stock2,706,902 4,863,370 
Payments for repurchase/redemption of capital stock(3,842,070)(5,156,630)
Payments for repurchase/redemption of mandatorily redeemable capital stock(159,980)(41,505)
Cash dividends paid(137,194)(203,107)
Partial recovery of prior capital distribution to Financing Corporation8,541 — 
Net cash provided by (used in) financing activities$(35,329,547)$(5,066,397)
Net increase (decrease) in cash and due from banks$1,364,981 $(57,531)
Cash and due from banks at beginning of the period21,490 71,320 
Cash and due from banks at end of the period$1,386,471 $13,789 
Supplemental disclosures:
Interest paid$795,385 $1,830,611 
AHP payments23,791 18,484 
Capital stock reclassified to mandatorily redeemable capital stock39,457 361,117 

The accompanying notes are an integral part of these financial statements.
46

Federal Home Loan Bank of Pittsburgh
Statements of Changes in Capital (unaudited)
 Capital Stock - PutableRetained Earnings  
(in thousands)SharesPar ValueUnrestrictedRestrictedTotalAOCITotal Capital
June 30, 201936,432 $3,643,190 $913,555 $385,044 $1,298,599 $114,116 $5,055,905 
Comprehensive income— — 56,221 14,055 70,276 (10,108)60,168 
Issuance of capital stock15,780 1,578,013 — — — — 1,578,013 
Repurchase/redemption of capital stock(18,483)(1,848,336)— — — — (1,848,336)
Cash dividends— — (60,100)— (60,100)— (60,100)
September 30, 201933,729 $3,372,867 $909,676 $399,099 $1,308,775 $104,008 $4,785,650 
June 30, 202023,714 $2,371,420 $898,980 $434,538 $1,333,518 $113,904 $3,818,842 
Comprehensive income— — 45,940 11,485 57,425 26,555 83,980 
Issuance of capital stock2,256 225,546 — — — — 225,546 
Repurchase/redemption of capital stock(7,166)(716,595)— — — — (716,595)
Cash dividends— — (39,795)— (39,795)— (39,795)
September 30, 202018,804 $1,880,371 $905,125 $446,023 $1,351,148 $140,459 $3,371,978 
 Capital Stock - PutableRetained Earnings  
(in thousands)SharesPar ValueUnrestrictedRestrictedTotalAOCITotal Capital
December 31, 201840,272 $4,027,244 $924,001 $351,903 $1,275,904 $73,146 $5,376,294 
Comprehensive income— — 188,782 47,196 235,978 30,862 266,840 
Issuance of capital stock48,634 4,863,370 — — — — 4,863,370 
Repurchase/redemption of capital stock(51,566)(5,156,630)— — — — (5,156,630)
Shares reclassified to mandatorily
redeemable capital stock		(3,611)(361,117)— — — — (361,117)
Cash dividends— — (203,107)— (203,107)— (203,107)
September 30, 201933,729 $3,372,867 $909,676 $399,099 $1,308,775 $104,008 $4,785,650 
December 31, 201930,550 $3,054,996 $910,726 $415,288 $1,326,014 $91,826 $4,472,836 
Adjustment for cumulative effect of accounting change - adoption of ASU 2016-13
— — 113 — 113 — 113 
Comprehensive income— — 122,939 30,735 153,674 48,633 202,307 
Issuance of capital stock27,069 2,706,902 — — — — 2,706,902 
Repurchase/redemption of capital stock(38,421)(3,842,070)— — — — (3,842,070)
Shares reclassified to mandatorily
redeemable capital stock		(394)(39,457)— — — — (39,457)
Partial recovery of prior capital distribution to Financing Corporation
— — 8,541 — 8,541 — 8,541 
Cash dividends— — (137,194)— (137,194)— (137,194)
September 30, 202018,804 $1,880,371 $905,125 $446,023 $1,351,148 $140,459 $3,371,978 

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

47

Federal Home Loan Bank of Pittsburgh
Notes to Unaudited Financial Statements

Background Information

The Bank, a federally chartered corporation, is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by increasing the availability of credit for residential mortgages and community development. The Bank provides a readily available, low-cost source of funds to its member institutions. The Bank is a cooperative, which means that current members own nearly all of the outstanding capital stock of the Bank. All holders of the Bank’s capital stock may, to the extent declared by the Board, receive dividends on their capital stock. Regulated financial depositories and insurance companies engaged in residential housing finance that maintain their principal place of business (as defined by Finance Agency regulation) in Delaware, Pennsylvania or West Virginia may apply for membership. Community Development Financial Institutions (CDFIs) which meet membership regulation standards are also eligible to become Bank members. State and local housing associates that meet certain statutory and regulatory criteria may also borrow from the Bank. While eligible to borrow, state and local housing associates are not members of the Bank and, as such, do not hold capital stock.

All members must purchase capital stock in the Bank. The amount of capital stock a member owns is based on membership requirements (membership asset value) and activity requirements (i.e., outstanding advances, letters of credit, and the principal balance of certain residential mortgage loans sold to the Bank). The Bank considers those members with capital stock outstanding in excess of 10% of total capital stock outstanding to be related parties. See Note 8 - Transactions with Related Parties for additional information.

The Federal Housing Finance Agency (Finance Agency) is the independent regulator of the FHLBanks. The mission of the Finance Agency is to ensure the FHLBanks operate in a safe and sound manner so they serve as a reliable source for liquidity and funding for housing finance and community investment. Each FHLBank operates as a separate entity with its own management, employees and board of directors. The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.

As provided by the Federal Home Loan Bank Act (FHLBank Act) or Finance Agency regulation, the Bank’s debt instruments, referred to as consolidated obligations, are joint and several obligations of all the FHLBanks and are the primary source of funds for the FHLBanks. These funds are primarily used to provide advances, purchase mortgages from members through the MPF® Program and purchase certain investments. See Note 6 - Consolidated Obligations for additional information. The Office of Finance (OF) is a joint office of the FHLBanks established to facilitate the issuance and servicing of the consolidated obligations of the FHLBanks and to prepare the combined quarterly and annual financial reports of all the FHLBanks. Deposits, other borrowings, and capital stock issued to members provide other funds. The Bank primarily invests these funds in short-term investments to provide liquidity. The Bank also provides member institutions with correspondent services, such as wire transfer, safekeeping and settlement with the Federal Reserve.

The accounting and financial reporting policies of the Bank conform to U.S. Generally Accepted Accounting Principles (GAAP). Preparation of the unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses. Actual results could differ from those estimates. In the opinion of management, all normal recurring adjustments have been included for a fair statement of this interim financial information. These unaudited financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2019 included in the Bank's 2019 Form 10-K.

48
Notes to Unaudited Financial Statements (continued)



Note 1 – Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations

    The Bank adopted the following new accounting standards during the nine months ended September 30, 2020.
StandardDescriptionAdoption Date and TransitionEffect on the Financial Statements or Other Significant Matters
ASU 2020-04: Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on
Financial Reporting
This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform with optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.The Bank adopted the amendments in this ASU on March 12, 2020 and will apply it prospectively through December 31, 2022.The adoption of this ASU did not impact the Bank’s financial condition or results of operation. The Bank is currently evaluating the optional expedients and exceptions and has not yet made any elections.
ASU 2018-15: Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Service Arrangement That Is a Service Contract
This ASU reduces diversity in practice by aligning the requirements for capitalizing implementation costs incurred in a hosting arrangement with internal-use software.
The Bank adopted this ASU on January 1, 2020 on a prospective basis.
The adoption of this ASU did not have a significant impact on the Bank’s financial condition or results of operations.
ASU 2018-13: Changes to the Disclosure Requirements for Fair Value Measurement
This ASU adds, removes, and modifies certain fair value disclosure requirements.
The Bank adopted this ASU on January 1, 2020.

The adoption of this ASU did not have a significant impact on the Bank's disclosures.
ASU 2016-13: Financial Instruments - Credit Losses, as amended


This ASU makes substantial changes to the accounting for credit losses on certain financial instruments. It replaces the current incurred loss model with a new model based on lifetime expected credit losses, which the FASB believes will result in more timely recognition of credit losses.
The Bank adopted this ASU on January 1, 2020 on a modified retrospective basis, with the exception of previously-OTTI AFS debt securities, for which the guidance was applied prospectively.The adoption of this ASU did not have a significant impact on the Bank's financial statements. The Bank recognized zero credit losses on advances and GSE/U.S. investments. The impact on the Bank’s financial statements for all other financial instruments including securities purchased under agreements to resell, interest bearing deposits, federal funds sold, state or local agency obligations, private label MBS, BOB loans, and MPF loans was immaterial. See below for key changes to significant accounting policies.

49
Notes to Unaudited Financial Statements (continued)



    The following table provides a brief description of recently issued accounting standards which may have an impact on the Bank.
StandardDescriptionEffective Date and TransitionEffect on the Financial Statements or Other Significant Matters
ASU 2020-08: Codification Improvements to Subtopic 310-20, Receivables—Nonrefundable Fees and Other Costs
This ASU clarifies that an entity should reevaluate for each reporting period whether a callable debt security is within the scope of certain guidance in ASC 310-20 that was issued in ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
This ASU will be effective for the Bank beginning January 1, 2021 and will be applied on a prospective basis for existing or newly purchased callable debt securities.The adoption of this ASU will not have a significant impact on the Bank's financial statements.
ASU 2018-14: Changes to the Disclosure Requirements for Defined Benefit Plans
This ASU adds, removes, and clarifies certain disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.This ASU will be effective for the Bank for the year ending December 31, 2020.The adoption of this ASU will not have a significant impact on the Bank's disclosures, which will be revised as appropriate.

ASU 2016-13: Financial Instruments - Credit Losses, as amended

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 AFS to be recorded through the allowance for credit losses (ACL). Key changes as compared to prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. For information on the prior accounting treatment, see Note 1 - Summary of Significant Accounting Policies of the audited financial statements in the Bank’s 2019 Form 10-K.

    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 Statement of Condition.

These investments are evaluated quarterly for expected credit losses. If applicable, an ACL is recorded with a corresponding adjustment to the provision 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 2 - Investments for details on the allowance methodologies relating to these investments.

    Investment Securities.

    AFS. AFS securities are evaluated quarterly for expected credit losses on an individual security basis. In assessing whether a credit loss exists, the Bank considers whether there would be a shortfall in receiving all cash flows contractually due. If a shortfall is projected to occur, the Bank recognizes an ACL. The ACL is limited to the amount of the AFS security’s unrealized loss, if any. If the AFS security is in an unrealized gain position, the ACL is zero. The ACL excludes uncollectible accrued interest receivable, which is measured separately. Prior to January 1, 2020, credit losses were recorded as a direct write–down of the AFS security's amortized cost.

50
Notes to Unaudited Financial Statements (continued)



If the Bank intends to sell an AFS security in an unrealized loss position, or more likely than not will be required to sell the security, any ACL is written off and the amortized cost basis is written down to the security’s fair value with any incremental impairment reported in earnings as net gains (losses) on investment securities.

For AFS securities with OTTI recognized prior to January 1, 2020, the accretable yield continues to be used prospectively. Based on the quarterly assessment of expected credit losses, if there is an improvement, the Bank will first recognize a benefit for credit losses up to the amount of the ACL. If the ACL is zero and the increase in cash flows is significant, the Bank will adjust the accretable yield prospectively.

Effective January 1, 2020, the net non-credit portion of OTTI gains (losses) on AFS securities was reclassified to net unrealized gains (losses) on AFS securities within OCI.

HTM. Securities that the Bank has both the ability and intent to hold to maturity are classified as HTM and are carried at amortized cost, which is cost net of periodic principal repayments and amortization of premiums and accretion of discounts. Accrued interest receivable is recorded separately on the Statement 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 ACL is recorded with a corresponding adjustment to the provision for credit losses. The ACL excludes uncollectible accrued interest receivable, which is measured separately.

See Note 2 - Investments for details on the allowance methodologies relating to AFS and HTM securities.

    Advances. Advances are carried at amortized cost, which is cost net of periodic principal repayments, net of amortization of premiums and discounts (including discounts related to AHP) and hedging adjustments. Accrued interest receivable is recorded separately on the Combined Statement of Condition. Advances are evaluated quarterly for expected credit losses. If deemed necessary, an ACL is recorded with a corresponding adjustment to the provision for credit losses. See Note 3 - Advances for details on the allowance methodology relating to advances.

    Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio are recorded at amortized cost, which is cost, net of periodic principal repayments and amortization of premiums and accretion of discounts, hedging adjustments, and direct write-downs. Accrued interest receivable is recorded separately on the Statement of Condition. The Bank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. An ACL is recorded with a corresponding adjustment to the provision 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 ACL, the Bank measures the estimated loss over the life of a mortgage loan and incorporates the credit enhancements of the MPF Program. If a loan is purchased at a discount, the discount does not offset the ACL. The Bank includes estimates of expected recoveries within the ACL. 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. See Note 4 - Mortgage Loans for details on the allowance methodologies relating to mortgage loans.

    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 is recorded in other liabilities with a corresponding adjustment to the provision for credit losses. Commitments to purchase MPF Loans are derivatives and therefore do not require an assessment of expected credit losses.

Troubled Debt Restructuring Relief

    On March 27, 2020, the Coronavirus, Aid, Relief, and Economic Security Act (the CARES Act) providing optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs) was signed into law. Under the CARES Act, TDR relief is available to banks for loan modifications related to the adverse effects of COVID-19 (COVID-related modifications) granted to borrowers that are current as of December 31, 2019. TDR relief applies to COVID-
51
Notes to Unaudited Financial Statements (continued)



related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States. Beginning in second quarter 2020, the Bank elected to apply the TDR relief provided by the CARES Act.

Note 2 – Investments

The Bank has short-term investments and may make other investments in debt securities, which are classified as trading, AFS, or HTM as further described below.

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

The Bank makes short-term investments 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 BBB or greater (investment grade) by an NRSRO.

Interest-bearing deposits and Federal funds sold are unsecured investments. Federal funds sold 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 September 30, 2020 and December 31, 2019, all investments in interest-bearing deposits and Federal funds sold were repaid according to the contractual terms; no ACL was recorded for these assets at September 30, 2020 and December 31, 2019. Carrying values of interest-bearing deposits and Federal funds exclude accrued interest receivable which was immaterial for all periods presented. At September 30, 2020, none of these investments were with counterparties rated below BBB or with unrated counterparties. These may differ from any internal ratings of the investments by the Bank, if applicable.

Securities purchased under agreements to resell are secured investments. Securities purchased under agreements to resell are generally transacted on an overnight term and have standard market practices that include collateral maintenance provisions. As such, they are evaluated regularly to determine that the securities purchased under agreements to resell are fully collateralized. The counterparty is required to deliver additional collateral if the securities purchased under agreements to resell become under-collateralized, generally by the next business day. At September 30, 2020 and December 31, 2019, all investments in securities purchased under agreements to resell were repaid according to the contractual terms; no ACL was recorded for these assets at September 30, 2020 and December 31, 2019. Carrying value of securities purchased under agreements to resell exclude accrued interest receivable which was immaterial for all periods presented. At September 30, 2020, none of these investments were with counterparties rated below BBB or with unrated counterparties. These may differ from any internal ratings of the investments by the Bank, if applicable.

Debt Securities

The Bank invests in debt securities, which are classified as trading, AFS, or HTM. Within these investments, the Bank is primarily subject to credit risk related to private label MBS that are supported by underlying mortgage or asset-backed loans. In 2007, the Bank discontinued the purchase of private label MBS. 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, other than certain investments targeted at low-income persons or communities.

    Trading Securities. The following table presents trading securities as of September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
U.S. Treasury obligations$1,028,642 $3,390,772 
GSE and TVA obligations258,906 240,878 
Total$1,287,548 $3,631,650 


52
Notes to Unaudited Financial Statements (continued)



The following table presents net gains (losses) on trading securities for the third quarter and first nine months of 2020 and 2019.
 Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Net unrealized gains (losses) on trading securities held at period-end
$(3,447)$5,429 $28,640 $22,840 
Net unrealized and realized gains (losses) on trading securities sold/matured during the period
(1,876)12 25,228 515 
Net gains (losses) on trading securities$(5,323)$5,441 $53,868 $23,355 

AFS Securities. The following tables present AFS securities as of September 30, 2020 and December 31, 2019.
 September 30, 2020
(in thousands)
Amortized Cost (1)
Allowance for Credit Losses (2)
Gross Unrealized GainsGross Unrealized LossesFair Value
Non-MBS:     
GSE and TVA obligations
$1,607,356 $— $51,315 $— $1,658,671 
State or local agency obligations234,097 — 13,793 — 247,890 
Total non-MBS$1,841,453 $— $65,108 $— $1,906,561 
MBS:     
U.S. obligations single-family MBS$651,330 $— $7,490 $(133)$658,687 
GSE single-family MBS 3,675,908 — 28,991 (362)3,704,537 
GSE multifamily MBS 3,608,683 — 11,649 (4,719)3,615,613 
Private label MBS232,906 (1,691)36,749 (340)267,624 
Total MBS$8,168,827 $(1,691)$84,879 $(5,554)$8,246,461 
Total AFS securities$10,010,280 $(1,691)$149,987 $(5,554)$10,153,022 
 December 31, 2019
(in thousands)
Amortized Cost (1)
OTTI Recognized in AOCIGross Unrealized GainsGross Unrealized LossesFair Value
Non-MBS:     
GSE and TVA obligations
$1,508,264 $— $42,435 $— $1,550,699 
State or local agency obligations238,496 — 9,398 — 247,894 
Total non-MBS$1,746,760 $— $51,833 $— $1,798,593 
MBS:     
U.S. obligations single-family MBS$805,294 $— $3,590 $(1,298)$807,586 
GSE single-family MBS 4,053,700 — 9,574 (7,415)4,055,859 
GSE multifamily MBS 4,120,532 — 4,581 (15,528)4,109,585 
Private label MBS274,624 — 51,704 (182)326,146 
Total MBS$9,254,150 $— $69,449 $(24,423)$9,299,176 
Total AFS securities$11,000,910 $— $121,282 $(24,423)$11,097,769 
Notes:
(1) Includes adjustments made to the cost basis of an investment for accretion, amortization, OTTI and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of $19.3 million and $24.4 million at September 30, 2020 and December 31, 2019.
(2) Due to the adoption of ASU 2016-13, effective January 1, 2020, the Bank recorded an ACL for expected credit losses on AFS securities.

53
Notes to Unaudited Financial Statements (continued)



The following tables summarize the AFS securities with unrealized losses as of September 30, 2020 and December 31, 2019. The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.
 September 30, 2020
 Less than 12 MonthsGreater than 12 MonthsTotal
(in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
MBS:      
U.S. obligations single-family MBS$— $— $56,485 $(133)$56,485 $(133)
GSE single-family MBS 49,120 (86)228,764 (276)277,884 (362)
GSE multifamily MBS 214,578 (269)2,487,327 (4,450)2,701,905 (4,719)
Private label MBS1,799 (22)2,611 (318)4,410 (340)
Total MBS$265,497 $(377)$2,775,187 $(5,177)$3,040,684 $(5,554)
Total$265,497 $(377)$2,775,187 $(5,177)$3,040,684 $(5,554)
 December 31, 2019
 Less than 12 MonthsGreater than 12 MonthsTotal
(in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
MBS:
U.S. obligations single-family MBS$492,038 $(1,022)$46,104 $(276)$538,142 $(1,298)
GSE single-family MBS 2,458,728 (6,318)221,806 (1,097)2,680,534 (7,415)
GSE multifamily MBS 2,515,001 (10,683)1,181,509 (4,845)3,696,510 (15,528)
Private label MBS— — 2,979 (182)2,979 (182)
Total MBS$5,465,767 $(18,023)$1,452,398 $(6,400)$6,918,165 $(24,423)
Total$5,465,767 $(18,023)$1,452,398 $(6,400)$6,918,165 $(24,423)

Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of September 30, 2020 and December 31, 2019 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
(in thousands)September 30, 2020December 31, 2019
Year of MaturityAmortized CostFair ValueAmortized CostFair Value
Non-MBS:
Due in one year or less$65,371 $65,586 $— $— 
Due after one year through five years545,669 557,360 525,301 534,642 
Due after five years through ten years795,744 823,978 700,613 719,672 
Due after ten years434,669 459,637 520,846 544,279 
Total non-MBS1,841,453 1,906,561 1,746,760 1,798,593 
MBS8,168,827 8,246,461 9,254,150 9,299,176 
Total AFS securities$10,010,280 $10,153,022 $11,000,910 $11,097,769 

54
Notes to Unaudited Financial Statements (continued)



Interest Rate Payment Terms.  The following table details interest payment terms at September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Amortized cost of AFS non-MBS:  
 Fixed-rate
$1,841,453 $1,746,760 
 Variable-rate
— — 
Total non-MBS$1,841,453 $1,746,760 
Amortized cost of AFS MBS:  
Fixed-rate$1,619,573 $1,444,111 
Variable-rate6,549,254 7,810,039 
Total MBS$8,168,827 $9,254,150 
Total amortized cost of AFS securities$10,010,280 $11,000,910 

    HTM Securities. The following tables present HTM securities as of September 30, 2020 and December 31, 2019.
 September 30, 2020
(in thousands)
Amortized Cost (1)
Gross Unrealized Holding GainsGross Unrealized Holding LossesFair Value
MBS:   
U.S. obligations single-family MBS$176,039 $1,384 $— $177,423 
GSE single-family MBS1,158,572 26,140 (709)1,184,003 
GSE multifamily MBS531,098 55,058 — 586,156 
Private label MBS101,327 301 (1,856)99,772 
Total MBS$1,967,036 $82,883 $(2,565)$2,047,354 
Total HTM securities (2)
$1,967,036 $82,883 $(2,565)$2,047,354 
 December 31, 2019
(in thousands)
Amortized Cost (1)
Gross Unrealized Holding GainsGross Unrealized Holding LossesFair Value
Non-MBS:    
State or local agency obligations$94,310 $— $(3,394)$90,916 
MBS:   
U.S. obligations single-family MBS$250,195 $1,087 $(78)$251,204 
GSE single-family MBS1,156,545 20,896 (254)1,177,187 
GSE multifamily MBS770,823 26,231 (252)796,802 
Private label MBS123,818 881 (520)124,179 
Total MBS$2,301,381 $49,095 $(1,104)$2,349,372 
Total HTM securities $2,395,691 $49,095 $(4,498)$2,440,288 
Notes:
(1) Includes adjustments made to the cost basis of an investment for accretion and amortization and excludes accrued interest receivable of $4.5 million and $6.2 million at September 30, 2020 and December 31, 2019.
(2) Due to the adoption of ASU 2016-13, effective January 1, 2020, the Bank was required to record an ACL on HTM securities. However, no credit loss was determined for these securities as of September 30, 2020.

Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of September 30, 2020 and December 31, 2019 are presented below. Expected maturities of some securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
55
Notes to Unaudited Financial Statements (continued)



(in thousands)September 30, 2020December 31, 2019
Year of MaturityAmortized CostFair ValueAmortized CostFair Value
Non-MBS:    
Due in one year or less$— $— $— $— 
Due after one year through five years— — — — 
Due after five years through ten years— — 31,925 31,381 
Due after ten years— — 62,385 59,535 
Total non-MBS— — 94,310 90,916 
MBS1,967,036 2,047,354 2,301,381 2,349,372 
Total HTM securities$1,967,036 $2,047,354 $2,395,691 $2,440,288 

Interest Rate Payment Terms. The following table details interest rate payment terms at September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Amortized cost of HTM non-MBS:  
Fixed-rate$— $— 
Variable-rate— 94,310 
Total non-MBS$— $94,310 
Amortized cost of HTM MBS:  
Fixed-rate
$1,659,123 $1,878,151 
Variable-rate
307,913 423,230 
Total MBS$1,967,036 $2,301,381 
Total HTM securities$1,967,036 $2,395,691 

    Debt Securities ACL. An ACL on AFS and HTM securities was required to be assessed upon adoption of ASU 2016-13, effective January 1, 2020. For HTM securities, there is no ACL at September 30, 2020. For AFS securities, the Bank recorded an ACL only on its private label MBS at September 30, 2020.

AFS Debt Securities - Rollforward of ACL. The following table presents a rollforward of the ACL on AFS securities for the three and nine months ended September 30, 2020.
(in thousands)Private label MBS
September 30, 2020
Three months ended Nine months ended
Balance, beginning of period$1,574 $— 
Additional increases (decreases) for securities in which a previous allowance or credit loss was recorded
117 1,691 
Balance, end of period$1,691 $1,691 

Debt Securities ACL Methodology. To evaluate investment securities for credit losses at September 30, 2020, the Bank employs the following methodologies by major security type.

GSE and Other U.S. Obligations. The Bank invests in GSE and other U.S. obligations, which includes Tennessee Valley Authority obligations, single-family MBS, and GSE single-family and multifamily MBS. These securities are issued by Federal Agencies or U.S. government corporations and include MBS issued by these same entities that are directly supported by underlying mortgage loans. All of these securities carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero. As a result, no ACL was recorded on GSE and other U.S. obligations at September 30, 2020.

56
Notes to Unaudited Financial Statements (continued)



The Bank only purchases GSE and other U.S. obligations considered investment quality. At September 30, 2020, all of these GSE and other U.S. obligations, based on amortized cost, were rated BBB or above by a 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, if applicable.

State or Local Agency Obligations. The Bank invests in state or local agency obligations, such as municipal securities. These securities are subject to credit risk related to a portfolio of state and local agency obligations (i.e., Housing Finance Agency bonds) that are directly or indirectly supported by underlying mortgage loans and carry an implicit or explicit guarantee of the state or local agency. The Bank has not experienced any payment defaults on these instruments.

    The Bank only purchases state or local agency obligations considered investment quality. At September 30, 2020, all of these state or local agency obligations, based on amortized cost, were rated BBB or above by a 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, if applicable.

The Bank evaluates AFS state or local agency obligations for an ACL based on a credit assessment of the issuer, or guarantor. If the Bank determines that an ACL should be recognized, it is limited to the unrealized loss of the state or local agency obligation, including zero if it is in an unrealized gain position. At September 30, 2020, the Bank expects to receive all cash flows contractually due, and no ACL was recorded on AFS state or local agency obligations.

    Private Label MBS. The Bank also holds investments in private label MBS. The Bank has not purchased any private label MBS since 2007. However, many of these securities have subsequently experienced significant credit deterioration. As of September 30, 2020, 20.6% of private label MBS (AFS and HTM combined, based on amortized cost) were rated BBB or above by a NRSRO and the remaining securities were either rated less than BBB or were unrated. To determine whether an ACL is necessary on these securities, the Bank uses cash flow analyses.

The Bank's evaluation includes estimating the projected cash flows that the Bank is likely to collect based on an assessment of available information, including the structure of the applicable security and certain assumptions such as:

•the remaining payment terms for the security;
•prepayment speeds based on underlying loan-level borrower and loan characteristics;
•expected default rates based on underlying borrower and loan characteristics;
•expected loss severity based on underlying borrower and loan characteristics;
•expected housing price changes; and
•expected interest-rate assumptions.

The Bank performed a cash flow analysis using a third-party model to assess whether the entire amortized cost basis of its private label MBS securities will be recovered. The projected cash flows are based on a number of assumptions and expectations, and the results of the model can vary significantly with changes in assumptions and expectations. The projected cash flows, determined based on the model approach, reflect a best estimate scenario and include a base case housing price forecast.

57
Notes to Unaudited Financial Statements (continued)



Note 3 – Advances

    General Terms. The Bank offers a wide-range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate advances generally have maturities ranging from overnight to 30 years. Variable-rate advances generally have maturities ranging from overnight to 10 years, and the interest rates reset periodically at a fixed spread to LIBOR, SOFR or other specified indices.

At September 30, 2020 and December 31, 2019, the Bank had advances outstanding with interest rates ranging from 0.03% to 6.77% and 1.15% to 7.40%, respectively.

The following table details the Bank’s advances portfolio by year of redemption as of September 30, 2020 and December 31, 2019.
(dollars in thousands)September 30, 2020December 31, 2019
Year of RedemptionAmountWeighted Average Interest RateAmountWeighted Average Interest Rate
Due in 1 year or less$22,167,019 0.78 %$41,261,372 1.97 %
Due after 1 year through 2 years7,958,117 2.20 15,285,269 2.31 
Due after 2 years through 3 years2,686,918 2.34 6,065,460 2.52 
Due after 3 years through 4 years1,226,558 1.95 1,305,453 2.50 
Due after 4 years through 5 years1,235,193 1.99 869,892 2.10 
Thereafter208,778 2.57 651,673 2.76 
Total par value35,482,583 1.31 %65,439,119 2.12 %
Deferred prepayment fees
(2,744) (1,814)
Hedging adjustments
361,197  172,770 
Total book value (1)
$35,841,036  $65,610,075 
Notes:
(1) Amounts exclude accrued interest receivable of $49.2 million and $119.7 million at September 30, 2020 and December 31, 2019.

The Bank also offers convertible advances. Convertible advances allow the Bank to convert an advance from one interest rate structure to another. When issuing convertible advances, the Bank may purchase put options from a member that allow the Bank to convert the fixed-rate advance to a variable-rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity, fixed-rate advance without the conversion feature. In addition, the Bank offers certain advances to members that provide a member the right, based upon predetermined exercise dates, to prepay the advance prior to maturity without incurring prepayment or termination fees (returnable advances).

At September 30, 2020 and December 31, 2019, the Bank did not have any advances with embedded features that met the requirements to separate the embedded feature from the host contract and designate the embedded feature as a stand-alone derivative.

58
Notes to Unaudited Financial Statements (continued)



The following table summarizes advances by the earlier of (i) year of redemption or next call date and (ii) year of redemption or next convertible date as of September 30, 2020 and December 31, 2019.
 Year of Redemption or
Next Call Date		Year of Redemption or Next Convertible Date
(in thousands)September 30, 2020December 31, 2019September 30, 2020December 31, 2019
Due in 1 year or less$22,267,019 $42,556,372 $22,187,019 $41,281,372 
Due after 1 year through 2 years7,898,117 14,060,269 7,958,117 15,285,269 
Due after 2 years through 3 years2,686,918 6,035,460 2,680,918 6,065,460 
Due after 3 years through 4 years1,186,558 1,305,453 1,226,558 1,299,453 
Due after 4 years through 5 years1,235,193 829,892 1,221,193 864,892 
Thereafter208,778 651,673 208,778 642,673 
Total par value$35,482,583 $65,439,119 $35,482,583 $65,439,119 

Interest Rate Payment Terms.  The following table details interest rate payment terms by year of redemption for advances as of September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Fixed-rate – overnight$711,891 $3,847,547 
Fixed-rate – term:
Due in 1 year or less
8,783,285 18,059,289 
Thereafter
12,437,464 16,424,647 
Total fixed-rate21,932,640 38,331,483 
Variable-rate:
Due in 1 year or less
12,671,843 19,354,536 
Thereafter
878,100 7,753,100 
Total variable-rate13,549,943 27,107,636 
Total par value$35,482,583 $65,439,119 

Credit Risk Exposure and Security Terms. The Bank’s potential credit risk from advances is primarily concentrated in commercial banks. As of September 30, 2020, the Bank had advances of $24.4 billion outstanding to the five largest borrowers, which represented 68.9% of the total principal amount of advances outstanding. Of these five, three had outstanding advance balances that were each in excess of 10% of the total portfolio at September 30, 2020.

As of December 31, 2019, the Bank had advances of $50.8 billion outstanding to the five largest borrowers, which represented 77.7% of the total principal amount of advances outstanding. Of these five, four had outstanding advance balances that were each in excess of 10% of the total portfolio at December 31, 2019.

Advances ACL. The Bank manages its total credit exposure (TCE), which includes advances, letters of credit, advance commitments, and other credit product exposure, through an integrated approach. This approach generally requires a credit limit to be established for each borrower and 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 each borrower's need for a reliable source of funding. Eligible collateral and collateral requirements can vary based on the type of member: commercial banks, insurance companies, credit unions, de novo banks and CDFIs.

In addition, the Bank lends to its members in accordance with the FHLBank Act and Finance Agency regulations. Specifically, the FHLBank Act requires the Bank to obtain collateral to fully secure credit products. The estimated value of the collateral required to secure each member’s credit products is calculated by applying collateral weightings, or haircuts, to the value of the collateral. The Bank primarily accepts cash, certain investment securities, residential mortgage loans, deposits, and other real estate related assets as collateral. In addition, Community Financial Institutions (CFIs) are eligible to utilize expanded statutory collateral provisions for small business, agriculture, and community development loans. The Bank’s capital stock owned by the borrowing member is pledged as secondary collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower.
59
Notes to Unaudited Financial Statements (continued)



The Bank can require additional or substitute collateral to help ensure that credit products continue to be secured by adequate collateral. Management of the Bank believes that these policies effectively manage the Bank’s credit risk from credit products.

Based upon the financial condition of the member, the Bank either allows a member to retain physical possession of the collateral assigned to the Bank or requires the member to specifically deliver physical possession or control of the collateral to the Bank or its custodians. However, regardless of the member's financial condition, the Bank always takes possession or control of securities used as collateral. The Bank perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the Bank by a member (or an affiliate of a member) priority over the claims or rights of any other party, except for claims or rights of a third party that would be otherwise entitled to priority under applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the Bank considers the payment status, collateral types and concentration levels, and borrower’s financial condition to be indicators of credit quality on its credit products. At September 30, 2020 and December 31, 2019, the Bank had rights to collateral on a member-by-member basis with a value in excess of its outstanding extensions of credit.

    The Bank continues to evaluate and, as necessary, make changes to its collateral guidelines based on current market conditions. At September 30, 2020 and December 31, 2019, the Bank did not have any credit products that were past due, on nonaccrual status, or considered impaired. In addition, the Bank did not have any credit products considered to be TDRs.

The Bank evaluates its advances for an ACL on a collective, or pooled basis unless an individual assessment is deemed necessary because the instruments do not possess similar risk characteristics. The Bank pools advances by member type, as noted above. Based on the collateral held as security, the Bank's credit extension and collateral policies and repayment history on advances, including that the Bank has not incurred any credit losses since inception, the Bank has not recorded any ACL at September 30, 2020 or December 31, 2019.

60
Notes to Unaudited Financial Statements (continued)



Note 4 – Mortgage Loans Held for Portfolio

Under the MPF Program, the Bank invests in mortgage loans that it purchases from its participating members and housing associates. The Bank’s participating members originate, service, and credit enhance residential mortgage loans that are sold to the Bank. See Note 8 for further information regarding transactions with related parties.

The following table presents balances as of September 30, 2020 and December 31, 2019 for mortgage loans held for portfolio.
(in thousands)September 30, 2020December 31, 2019
Fixed-rate long-term single-family mortgages (1)
$4,818,470 $4,863,177 
Fixed-rate medium-term single-family mortgages (1)
178,619 167,156 
Total par value4,997,089 5,030,333 
Premiums87,883 82,108 
Discounts(2,776)(3,616)
Hedging adjustments14,203 13,632 
Total mortgage loans held for portfolio (2)
$5,096,399 $5,122,457 
Allowance for credit losses on mortgage loans(6,654)(7,832)
Mortgage loans held for portfolio, net$5,089,745 $5,114,625 
Note:
(1) Long-term is defined as greater than 15 years. Medium-term is defined as a term of 15 years or less.
(2) Amounts exclude accrued interest receivable of $27.2 million and $26.9 million at September 30, 2020 and December 31, 2019.

The following table details the par value of mortgage loans held for portfolio outstanding categorized by type as of September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Conventional loans$4,831,899 $4,856,543 
Government-guaranteed/insured loans165,190 173,790 
Total par value$4,997,089 $5,030,333 

Purchases, Sales and Reclassifications. During the nine months ended September 30, 2020 and 2019, there were no significant purchases or sales of financing receivables. Furthermore, none of the financing receivables were reclassified to held-for-sale.

Conventional MPF Loans - Credit Enhancements (CE). The conventional MPF loans held for portfolio are required to be credit enhanced as determined through the use of a validated model so the risk of loss is limited to the losses within the Bank's risk tolerance. The Bank and its participating financial institution (PFI) share the risk of credit losses on conventional MPF loan products held for portfolio, by structuring potential losses into layers with respect to each master commitment. After considering the borrower’s equity and any Primary Mortgage Insurance (PMI), credit losses on mortgage loans in a master commitment are then absorbed by the Bank’s First Loss Account (FLA). If applicable to the MPF product, the Bank will withhold a PFI’s scheduled performance CE fee in order to reimburse the Bank for any losses allocated to the FLA (recaptured CE Fees). If the FLA is exhausted, the credit losses are then absorbed by the PFI up to an agreed upon CE amount. The CE amount could be covered by supplemental mortgage insurance (SMI) obtained by the PFI. Thereafter, any remaining credit losses are absorbed by the Bank.

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 nonaccrual loans and loans in process of foreclosure.

61
Notes to Unaudited Financial Statements (continued)



Credit Quality Indicator for Conventional Mortgage Loans. The following table presents the payment status for conventional mortgage loans at September 30, 2020 and December 31, 2019.
September 30, 2020
(in thousands)Origination Year
Payment Status, at amortized cost (1)
Prior to 20162016 to 2020Total
Past due 30-59 days$15,526 $26,498 $42,024 
Past due 60-89 days7,299 23,754 31,053 
Past due 90 days or more24,825 82,906 107,731 
Total past due loans$47,650 $133,158 $180,808 
Current loans1,230,149 3,515,988 4,746,137 
Total conventional loans (2)
$1,277,799 $3,649,146 $4,926,945 
Payment Status, at recorded investment (1)
December 31, 2019
Past due 30-59 days$43,872 
Past due 60-89 days8,601 
Past due 90 days or more12,826 
Total past due loans$65,299 
Current loans4,904,683 
Total conventional loans$4,969,982 
Note:
(1) The recorded investment at December 31, 2019 includes accrued interest receivable whereas the amortized cost at September 30, 2020 excludes accrued interest receivable.
(2) Includes approximately $128.8 million par value of loans in a forbearance or repayment plan as a result of COVID-19, of which approximately $1.2 million was current, $16.1 million was 30-59 days past due, $23.0 million was 60-89 days past due, and $88.5 million was 90 days or more past due at September 30, 2020.

Other Delinquency Statistics. The following table presents the delinquency statistics for the Bank’s mortgage loans at September 30, 2020 and December 31, 2019.
September 30, 2020
(dollars in thousands)Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
In process of foreclosures, included above (1)
$9,872 $3,026 $12,898 
Serious delinquency rate (2)
2.3 %5.7 %2.4 %
Past due 90 days or more still accruing interest$— $7,893 $7,893 
Loans on nonaccrual status (3)
$123,935 $— $123,935 
December 31, 2019
(dollars in thousands)Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
In process of foreclosures, included above (1)
$4,740 $1,110 $5,850 
Serious delinquency rate (2)
0.3 %1.9 %0.3 %
Past due 90 days or more still accruing interest$— $3,363 $3,363 
Loans on nonaccrual status (3)
$14,890 $— $14,890 
Note:
(1) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(2) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total loan portfolio class.
(3) All conventional mortgage loans on non-accrual status had an associated ACL or available credit enhancements to absorb expected credit losses.
62
Notes to Unaudited Financial Statements (continued)




Mortgage Loans Held for Portfolio ACL. For information on the prior methodology for evaluating credit losses, as well as a discussion on classes of financing receivables, the Bank’s policies for impairing financing receivables, placing them on non-accrual status, and charging them off when necessary, see Note 10 - Allowance for Credit Losses of the audited financial statements in the Bank’s 2019 Form 10-K.

    Conventional MPF - Expected Losses. Conventional loans are evaluated collectively when similar risk characteristics exist. 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. The Bank uses a third-party model to estimate expected credit losses over the life of the loans. The estimate of the expected credit losses includes coverage of certain losses by PMI, if applicable. The model relies on a number of inputs, such as housing price forecasts and interest rates as well as historical borrower behavior experience. The Bank’s reasonable and supportable forecast for housing prices is two years. The Bank then reverts to historic averages over a three year period. The Bank may incorporate a qualitative adjustment to the model results, if deemed appropriate, based on current market conditions or results.

The estimated credit loss on collateral dependent loans is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. 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 expected credit loss of a collateral dependent mortgage loan to determine the charge-off 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 estimate of the expected credit losses includes coverage of certain losses by PMI, if applicable. The estimated fair value of the collateral is determined based on a value provided by a third-party’s retail-based Automated Valuation Model (AVM). The Bank adjusts the AVM based on the amount it has historically received on liquidations. Expected recoveries of prior charge-offs, as determined by a third-party model, if any, are included in the allowance for credit losses.

Conventional MPF - COVID-19-Related Modifications. Through the MPF Program, the Bank may grant a forbearance period to borrowers due to COVID-19-related difficulties regardless of the status of the loan at the time of the request. The Bank continues to apply its accounting policy for determining days past due, non-accrual, and charge-offs during the forbearance period. For MPF loans that have received COVID-19-related forbearance and meet certain criteria, the Bank may not charge-off the MPF loan, including when it is 180 or more days delinquent, if the Bank expects to recover its amortized cost. After the forbearance period, the Bank may modify the borrower's MPF loan. The Bank has elected to suspend TDR accounting for eligible modifications under Section 4013 of the CARES Act. For additional information regarding the CARES Act, refer to Note 1 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations in this Form 10-Q.

As of September 30, 2020, there was approximately $128.8 million in par value of conventional loans in a forbearance or repayment plan as a result of COVID-19, which represented approximately 3% of our mortgage loans held for portfolio at September 30, 2020. Of the conventional loans in a forbearance plan as a result of COVID-19, approximately 95% of the loans were not deemed to be collateral dependent and not charged-off.

Conventional MPF - Expected Recoveries. With the adoption of ASU 2016-13, the Bank is permitted to recognize a recovery through the provision for credit losses where expected lifetime credit losses are less than the amounts previously charged-off. This includes potentially recording a negative ACL for certain of the Bank's MPF products. The reduction to the ACL for expected recoveries is partially offset by a reversal of expected CE, resulting in a net impact to the Bank's Statements of Condition.

Conventional MPF - Application of CE. The Bank also incorporates associated CE, if any, to determine its estimate of expected credit losses. The Bank records an ACL for expected credit losses that exceed the amount the Bank expects to receive from available CE. Potential recoveries from CE for conventional loans are evaluated at the individual master commitment level to determine the CE available to recover losses on loans under each individual master commitment.

63
Notes to Unaudited Financial Statements (continued)



Conventional MPF - Rollforward of ACL
Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Balance, beginning of period$5,900 $8,493 $7,832 $7,309 
Adjustment for cumulative effect of accounting change - adoption of ASU 2016-13(1)
— — (3,875)— 
(Charge-offs) Recoveries, net (2)
(584)(172)(428)(85)
Provision for credit losses1,338 (61)3,125 1,036 
Balance, September 30$6,654 $8,260 $6,654 $8,260 
Note:
(1) As a result of adopting ASU 2016-13, the reduction to the Bank's ACL of $3.9 million was largely offset by a reversal of CE receivable of $3.8 million, resulting in a net impact of adoption of $0.1 million.
(2) Net charge-offs that the Bank does not expect to recover through CE receivable.

Government-Guaranteed or Insured Mortgage Loans. The Bank invests in government-guaranteed or insured fixed-rate mortgage loans secured by one-to-four family residential properties. Government-guaranteed or insured mortgage loans are those insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), the Rural Housing Service (RHS) of the Department of Agriculture and/or by Housing and Urban Development (HUD). The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer 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-guaranteed or insured mortgage loans. Any losses on these loans that are not recovered from the issuer or the guarantor are absorbed by the servicer. Therefore, the Bank only has credit risk for these loans if the servicer fails to pay for losses not covered by the guarantee or insurance. Based on the Bank's assessment of its servicers and the collateral backing the loans, the risk of loss was immaterial. Consequently, the Bank has not recorded an ACL for government-guaranteed or insured mortgage loans at September 30, 2020 or December 31, 2019. Furthermore, none of these mortgage loans has 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.

Real Estate Owned (REO). The Bank had $1.0 million and $2.0 million of REO reported in Other assets on the Statement of Condition at September 30, 2020 and December 31, 2019, respectively.

64
Notes to Unaudited Financial Statements (continued)



Note 5 – 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 interest-bearing liabilities that finance these assets. 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 that include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the Bank monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities. For additional information on the Bank's derivative transactions, see Note 11 - Derivatives and Hedging Activities to the audited financial statements in the Bank's 2019 Form 10-K.

Derivative transactions may be executed either with a counterparty (referred to as uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivatives Clearing Organization (referred to as cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearing House), the executing counterparty is replaced with the Clearing House. The Bank is not a derivatives dealer and does not trade derivatives for short-term profit. The Bank transacts uncleared derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute consolidated obligations.

Financial Statement Effect and Additional Financial Information. The following tables summarize the notional amount and fair value of derivative instruments and total derivatives 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.
 September 30, 2020
(in thousands)Notional Amount of DerivativesDerivative AssetsDerivative Liabilities
Derivatives designated as hedging instruments:   
Interest rate swaps
$19,000,868 $5,978 $3,124 
Derivatives not designated as hedging instruments:   
Interest rate swaps
$1,926,488 $430 $2,102 
Interest rate caps or floors
1,205,000 995 — 
Mortgage delivery commitments
68,027 49 103 
Total derivatives not designated as hedging instruments:$3,199,515 $1,474 $2,205 
Total derivatives before netting and collateral adjustments$22,200,383 $7,452 $5,329 
Netting adjustments and cash collateral (1)
 153,534 (3,578)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition		 $160,986 $1,751 
 December 31, 2019
(in thousands)Notional Amount of DerivativesDerivative AssetsDerivative Liabilities
Derivatives designated as hedging instruments:   
Interest rate swaps
$34,572,128 $14,079 $4,148 
Derivatives not designated as hedging instruments:   
Interest rate swaps
$10,413,906 $1,676 $4,642 
Interest rate caps or floors
1,330,000 417 — 
Mortgage delivery commitments
73,574 29 79 
Total derivatives not designated as hedging instruments:$11,817,480 $2,122 $4,721 
Total derivatives before netting and collateral adjustments$46,389,608 $16,201 $8,869 
Netting adjustments and cash collateral (1)
 124,050 (5,845)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition		 $140,251 $3,024 
Note:
65
Notes to Unaudited Financial Statements (continued)



(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions, cash collateral and related accrued interest held or placed with the same clearing agent and/or counterparties. Cash collateral posted and related accrued interest was $160.0 million and $138.1 million at September 30, 2020 and December 31, 2019, respectively. Cash collateral received was $2.9 million for September 30, 2020 and $8.2 million for December 31, 2019.

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the Bank’s net interest income. Also included is the amortization of basis adjustments related to mortgage delivery commitments, which are characterized as derivatives, but are not designated in fair value hedge relationships.
(in thousands)Gains/(Losses) on DerivativeGains/ (Losses) on Hedged Item Net Interest SettlementsEffect of Derivatives on Net Interest IncomeTotal Interest Income/ (Expense) Recorded in the Statement of Income
Three months ended September 30, 2020  
Hedged item type:  
Advances
$124,582 $(124,569)$(69,603)$(69,590)$95,201 
AFS securities
9,402 (8,918)(7,070)(6,586)31,996 
Mortgage loans held for portfolio
— (1,035)— (1,035)35,932 
Consolidated obligations – bonds
(21,443)21,693 21,635 21,885 (80,579)
Total$112,541 $(112,829)$(55,038)$(55,326)
Nine months ended September 30, 2020 
Hedged item type:
Advances
$(188,539)$188,424 $(136,712)$(136,827)$548,953 
AFS securities
(103,292)100,135 (13,734)(16,891)138,565 
Mortgage loans held for portfolio
— (2,118)— (2,118)121,561 
Consolidated obligations – bonds
4,938 (4,287)54,393 55,044 (462,006)
Total$(286,893)$282,154 $(96,053)$(100,792)
(in thousands)Gains/(Losses) on DerivativeGains/ (Losses) on Hedged Item Net Interest SettlementsEffect of Derivatives on Net Interest IncomeTotal Interest Income/ (Expense) Recorded in the Statement of Income
Three months ended September 30, 2019
Hedged item type:
Advances
$(34,790)$34,652 $8,521 $8,383 $478,477 
AFS securities
(30,639)29,136 2,918 1,415 71,884 
Mortgage loans held for portfolio
— (755)— (755)42,452 
Consolidated obligations – bonds
15,163 (15,402)(12,098)(12,337)(413,901)
Total$(50,266)$47,631 $(659)$(3,294)
Nine months ended September 30, 2019
Hedged item type:
Advances
$(347,838)$347,605 $51,693 $51,460 $1,508,189 
AFS securities
(102,668)98,539 1,534 (2,595)201,198 
Mortgage loans held for portfolio
— (2,320)— (2,320)126,922 
Consolidated obligations – bonds
162,570 (164,114)(63,985)(65,529)(1,259,974)
$(287,936)$279,710 $(10,758)$(18,984)


66
Notes to Unaudited Financial Statements (continued)



The following table presents the cumulative amount of fair value hedging adjustments and the related carrying amount of the hedged items.
(in thousands)September 30, 2020
Hedged item type
Carrying Amount of Hedged Assets/Liabilities (1)
Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of the Hedged Assets/LiabilitiesFair Value Hedging Adjustments for Discontinued Hedging RelationshipsCumulative Amount of Fair Value Hedging Adjustments
Advances$12,964,844 $361,223 $(25)$361,198 
AFS securities1,509,667 149,180 1,182 150,362 
Consolidated obligations – bonds5,060,725 37,015 318 37,333 
(in thousands)December 31, 2019
Hedged item type
Carrying Amount of Hedged Assets/Liabilities (1)
Cumulative Amount of Fair Value Hedging Adjustments Included in the Carrying Amount of the Hedged Assets/LiabilitiesFair Value Hedging Adjustments for Discontinued Hedging RelationshipsCumulative Amount of Fair Value Hedging Adjustments
Advances$16,724,094 $172,779 $(9)$172,770 
AFS securities1,391,938 48,946 1,281 50,227 
Consolidated obligations – bonds16,715,492 32,886 160 33,046 
Note:
(1) Includes carrying value of hedged items in current fair value hedging relationships.

The following table presents net gains (losses) related to derivatives and hedging activities in other noninterest income.
 Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Derivatives not designated as hedging instruments:  
Economic hedges:  
Interest rate swaps
$4,588 $(15,873)$(92,864)$(49,797)
Interest rate caps or floors
(57)(1,129)578 (1,933)
Net interest settlements
(1,726)(676)(8,891)(3,642)
       To Be Announced (TBA)— (21)38 (21)
Mortgage delivery commitments772 (11)3,138 17 
Other(1)10 148 25 
Total net gains (losses) related to derivatives not designated as hedging instruments
$3,576 $(17,700)$(97,853)$(55,351)
Other - price alignment amount on cleared derivatives (1)
13 303 168 150 
Net gains (losses) on derivatives and hedging activities
$3,589 $(17,397)$(97,685)$(55,201)
Notes:
(1) This amount is for derivatives for which variation margin is characterized as a settled to market.

The Bank had no active cash flow hedging relationships during the first nine months of 2020 or 2019.

Managing Credit Risk on Derivatives. The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. The Bank manages counterparty credit risk through credit analysis, collateral requirements, and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

Uncleared Derivatives. For uncleared derivatives, the degree of credit risk depends on the extent to which netting arrangements are included in such contracts to mitigate the risk. The Bank requires collateral agreements with collateral delivery thresholds on all uncleared derivatives.
67
Notes to Unaudited Financial Statements (continued)




Generally, the Bank is subject to certain ISDA agreements for uncleared derivatives that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank's credit rating and the net liability position exceeds the relevant threshold. If the Bank’s credit rating were to be lowered by a major credit rating agency, the Bank would 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 require the Bank to deliver additional collateral due to a credit downgrade and were in a net liability position (before cash collateral and related accrued interest) at September 30, 2020 was $1.3 million. The Bank had no collateral posted against this position and even if the Bank’s credit rating had been lowered one notch (i.e., from its current rating to the next lower rating), the Bank would not have been required to deliver additional collateral to its derivative counterparties at September 30, 2020.

    Cleared Derivatives. For cleared derivatives, Derivative Clearing Organizations (Clearing Houses) are the Bank's counterparties. The Clearing House notifies the clearing agent of the required initial and variation margin. The requirement that the Bank post initial margin and exchange variation margin settlement payments through the clearing agent, which notifies the Bank on behalf of the Clearing Houses, exposes the Bank to institutional credit risk in the event that the clearing agent or the Clearing Houses fail to meet their respective obligations. The use of cleared derivatives is intended to mitigate credit risk exposure through the use of a central counterparty instead of individual counterparties. Collateral postings and variation margin settlement payments are made daily, through a clearing agent, for changes in the value of cleared derivatives. Initial margin is the amount calculated based on anticipated exposure to future changes in the value of a swap and protects the Clearing Houses from market risk in the event of default by one of their respective clearing agents. Variation margin is paid daily to settle the exposure arising from changes in the market value of the position. The Bank uses CME Clearing as the Clearing House for all cleared derivative transactions. Variation margin payments are characterized as settled to market, rather than collateral. Initial margin is considered collateralized to market.

Based on credit analyses and collateral requirements, the Bank does not anticipate credit losses related to its derivative agreements. See Note 9 - Estimated Fair Values for discussion regarding the Bank's fair value methodology for derivative assets and liabilities, including an evaluation of the potential for the fair value of these instruments to be affected by counterparty credit risk.

    For cleared derivatives, the Clearing House determines initial margin requirements and 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 by its clearing agents to post additional initial margin at September 30, 2020.

    Offsetting of Derivative Assets and Derivative Liabilities. When it has met the netting requirements, 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. The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and 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 Clearing Houses or the Bank’s clearing agent, or both. Based on this analysis, the Bank nets derivative fair values on all of its transactions through a particular clearing agent with a particular Clearing House (including settled variation margin) into one net asset or net liability exposure.  Initial margin posted to the clearing house is presented as a derivative asset.

68
Notes to Unaudited Financial Statements (continued)



    The following tables present separately the fair value of derivative instruments meeting or not meeting netting requirements. Gross recognized amounts do not include the related collateral received from or pledged to counterparties. Net amounts reflect the adjustments of collateral received from or pledged to counterparties.
Derivative Assets
(in thousands)September 30, 2020December 31, 2019
Derivative instruments meeting netting requirements:
Gross recognized amount:
        Uncleared derivatives$4,306 $8,743 
      Cleared derivatives3,097 7,429 
 Total gross recognized amount
7,403 16,172 
Gross amounts of netting adjustments and cash collateral
        Uncleared derivatives(3,793)(7,631)
      Cleared derivatives157,327 131,681 
Total gross amounts of netting adjustments and cash collateral
153,534 124,050 
Net amounts after netting adjustments and cash collateral
        Uncleared derivatives513 1,112 
      Cleared derivatives160,424 139,110 
Total net amounts after netting adjustments and cash collateral
160,937 140,222 
 Derivative instruments not meeting netting requirements: (1)
     Uncleared derivatives49 29 
     Cleared derivatives— — 
     Total derivative instruments not meeting netting requirements:49 29 
Total derivative assets:
       Uncleared derivatives562 1,141 
     Cleared derivatives160,424 139,110 
Total derivative assets as reported in the Statement of Condition160,986 140,251 
Net unsecured amount:
       Uncleared derivatives562 1,141 
       Cleared derivatives160,424 139,110 
Total net unsecured amount$160,986 $140,251 
69
Notes to Unaudited Financial Statements (continued)



Derivative Liabilities
(in thousands)September 30, 2020December 31, 2019
Derivative instruments meeting netting requirements:
Gross recognized amount:
        Uncleared derivatives$4,778 $7,135 
      Cleared derivatives448 1,655 
     Total gross recognized amount5,226 8,790 
Gross amounts of netting adjustments and cash collateral
        Uncleared derivatives(3,130)(4,190)
      Cleared derivatives(448)(1,655)
Total gross amounts of netting adjustments and cash collateral
(3,578)(5,845)
Net amounts after netting adjustments and cash collateral
        Uncleared derivatives1,648 2,945 
      Cleared derivatives— — 
Total net amounts after netting adjustments and cash collateral
1,648 2,945 
 Derivative instruments not meeting netting requirements: (1)
        Uncleared derivatives103 79 
      Cleared derivatives— — 
     Total derivative instruments not meeting netting requirements:103 79 
Total derivative liabilities
        Uncleared derivatives1,751 3,024 
      Cleared derivatives— — 
Total derivative liabilities as reported in the Statement of Condition1,751 3,024 
Net unsecured amount:
        Uncleared derivatives1,751 3,024 
      Cleared derivatives— — 
Total net unsecured amount$1,751 $3,024 
Note:
(1) Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

70
Notes to Unaudited Financial Statements (continued)



Note 6 – Consolidated Obligations

Consolidated obligations consist of consolidated bonds and consolidated discount notes. The FHLBanks issue consolidated obligations through the OF as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants to have issued on its behalf. The OF tracks the amount of debt issued on behalf of each FHLBank. The Bank records as a liability its specific portion of consolidated obligations for which it is the primary obligor.
Although the Bank is primarily liable for its portion of consolidated obligations, the Bank is also jointly and severally liable with the other ten FHLBanks for the payment of principal and interest on all consolidated obligations of each of the FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations whether or not the consolidated obligation represents a primary liability of such FHLBank.
Although an FHLBank has never paid the principal or interest payments due on a consolidated obligation on behalf of another FHLBank, if one FHLBank is required to make such payments, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank for any payments made on its behalf and other associated costs including interest to be determined by the Finance Agency. If the Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment obligations, then the Finance Agency may allocate the outstanding liabilities of the non-complying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding. However, the Finance Agency reserves the right to allocate the outstanding liabilities for the consolidated obligations among the FHLBanks in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. The par amounts of the 11 FHLBanks’ outstanding consolidated obligations were $819.9 billion and $1,025.9 billion at September 30, 2020 and December 31, 2019, respectively.
Additional detailed information regarding consolidated obligations including general terms and interest rate payment terms can be found in Note 13 to the audited financial statements in the Bank's 2019 Form 10-K.

The following table details interest rate payment terms for the Bank's consolidated obligation bonds as of September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Par value of consolidated bonds:  
Fixed-rate$19,844,650 $29,292,200 
Step-up40,000 705,000 
Floating-rate21,573,250 36,707,000 
Total par value41,457,900 66,704,200 
Bond premiums
100,567 85,028 
Bond discounts
(7,683)(8,350)
Concession fees
(4,810)(6,118)
Hedging adjustments
37,333 33,047 
Total book value$41,583,307 $66,807,807 

71
Notes to Unaudited Financial Statements (continued)



Maturity Terms. The following table presents a summary of the Bank’s consolidated obligation bonds outstanding by year of contractual maturity as of September 30, 2020 and December 31, 2019.
 September 30, 2020December 31, 2019
(dollars in thousands)
Year of Contractual Maturity		AmountWeighted Average Interest RateAmountWeighted Average Interest Rate
Due in 1 year or less$30,135,080 0.48 %$50,306,900 1.83 %
Due after 1 year through 2 years4,160,445 2.13 7,268,705 2.10 
Due after 2 years through 3 years1,805,650 2.39 2,705,420 2.36 
Due after 3 years through 4 years1,257,825 2.47 1,469,400 2.58 
Due after 4 years through 5 years1,107,625 1.78 947,375 2.69 
Thereafter2,991,275 2.14 4,006,400 2.73 
Total par value$41,457,900 0.94 %$66,704,200 1.96 %

The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Noncallable$36,784,650 $61,597,600 
Callable4,673,250 5,106,600 
Total par value$41,457,900 $66,704,200 

The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of September 30, 2020 and December 31, 2019.
(in thousands)
Year of Contractual Maturity or Next Call Date		September 30, 2020December 31, 2019
Due in 1 year or less$32,028,080 $54,157,900 
Due after 1 year through 2 years4,171,445 6,573,705 
Due after 2 years through 3 years1,793,650 2,623,420 
Due after 3 years through 4 years1,142,825 1,063,400 
Due after 4 years through 5 years812,625 827,375 
Thereafter1,509,275 1,458,400 
Total par value$41,457,900 $66,704,200 

Consolidated Obligation Discount Notes. Consolidated obligation discount notes are issued to raise short-term funds. Discount notes are consolidated obligations with original maturities up to one year. These notes are issued at less than their face amount and redeemed at par value when they mature. The following table details the Bank’s consolidated obligation discount notes as of September 30, 2020 and December 31, 2019.
(dollars in thousands)September 30, 2020December 31, 2019
Book value $13,995,722 $23,141,362 
Par value13,999,828 23,211,524 
Weighted average interest rate (1)
0.16 %1.61 %
Note:
(1) Represents an implied rate.

72
Notes to Unaudited Financial Statements (continued)



Note 7 – Capital

    The Bank is subject to three capital requirements under its current Capital Plan Structure and the Finance Agency rules and regulations: (1) risk-based capital; (2) total regulatory capital; and (3) leverage capital. Regulatory capital does not include AOCI, but does include mandatorily redeemable capital stock. See details regarding these requirements and the Bank’s Capital Plan in Note 15 to the audited financial statements in the Bank’s 2019 Form 10-K. At September 30, 2020, the Bank was in compliance with all regulatory capital requirements.

The Bank has two subclasses of capital stock: B1 membership stock and B2 activity stock. The Bank had $0.3 billion and $1.5 billion in B1 membership stock and B2 activity stock, respectively, at September 30, 2020. The Bank had $0.3 billion and $2.7 billion in B1 membership stock and B2 activity stock, respectively, at December 31, 2019.

The following table demonstrates the Bank’s compliance with the regulatory capital requirements at September 30, 2020 and December 31, 2019.
 September 30, 2020December 31, 2019
(dollars in thousands)RequiredActualRequiredActual
Regulatory capital requirements:    
RBC$506,766 $3,454,571 $610,573 $4,724,586 
Total capital-to-asset ratio4.0 %5.7 %4.0 %4.9 %
Total regulatory capital2,417,731 3,454,571 3,828,965 4,724,586 
Leverage ratio5.0 %8.6 %5.0 %7.4 %
Leverage capital3,022,164 5,181,857 4,786,206 7,086,879 

The Finance Agency has established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On September 25, 2020, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2020. As of the date of this filing, the Bank has not received final notice from the Finance Agency regarding its capital classification for the quarter ended September 30, 2020.

Mandatorily Redeemable Capital Stock. The Bank is a cooperative whose member financial institutions and former members own all of the relevant Bank's issued and outstanding capital stock. Shares cannot be purchased or sold except between the Bank and its members at the shares' par value of $100, as mandated by the Bank's capital plan.

At September 30, 2020 and December 31, 2019, the Bank had $223.1 million and $343.6 million, respectively, in capital stock subject to mandatory redemption with payment subject to a five-year waiting period and the Bank meeting its minimum regulatory capital requirements. The estimated dividends on mandatorily redeemable capital stock recorded as interest expense was $4.1 million and $14.1 million during the three and nine months ended September 30, 2020, respectively. Estimated dividends on mandatorily redeemable capital stock recorded as interest expense was $6.7 million and $10.6 million during the three and nine months ended September 30, 2019, respectively

The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the nine months ended September 30, 2020 and 2019.
 Nine months ended September 30,
(in thousands)20202019
Balance, beginning of the period$343,575 $24,099 
Capital stock subject to mandatory redemption reclassified from capital39,457 361,117 
Redemption/repurchase of mandatorily redeemable stock(159,980)(41,505)
Balance, end of the period$223,052 $343,711 

    As of September 30, 2020, the total mandatorily redeemable capital stock reflected the balance for six institutions. Four institutions were merged out of district and are considered to be non-members and one relocated and became a member of another FHLBank at which time the membership with the Bank terminated.  One other institution has notified the Bank of its
73
Notes to Unaudited Financial Statements (continued)



intention to voluntarily redeem its capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at September 30, 2020 and December 31, 2019.
(in thousands)September 30, 2020December 31, 2019
Due in 1 year or less$— $3,316 
Due after 1 year through 2 years— — 
Due after 2 years through 3 years20,021 21 
Due after 3 years through 4 years200,000 20,000 
Due after 4 years through 5 years19 320,000 
Past contractual redemption date due to remaining activity3,012 238 
Total$223,052 $343,575 

Under the terms of the Bank’s Capital Plan, membership capital stock is redeemable five years from the date of membership termination or withdrawal notice from the member. If the membership is terminated due to a merger or consolidation, the membership capital stock is deemed to be excess stock and is repurchased. The activity capital stock (i.e., supporting advances, letters of credit and MPF) relating to termination, withdrawal, mergers or consolidation is recalculated based on the underlying activity. Any excess activity capital stock is repurchased on an ongoing basis as part of the Bank’s excess stock repurchase program that is in effect at the time. Therefore, the redemption period could be less than five years if the stock becomes excess stock. However, the redemption period could extend beyond five years if the underlying activity is still outstanding.

Partial Recovery of Prior Capital Distribution to Financing Corporation. The Competitive Equality Banking Act of 1987 provided for the recapitalization of the Federal Savings and Loan Insurance Corporation through a newly-chartered entity, the Financing Corporation (FICO). The capitalization of FICO was provided by capital distributions from the FHLBanks to FICO in exchange for FICO nonvoting capital stock. Capital distributions totaling $680.0 million were made by the FHLBanks in 1987 through 1989. Upon passage of Financial Institutions Reform, Recovery and Enforcement Act of 1989, the FHLBanks’ previous investment in capital stock of FICO was determined to be non-redeemable and the FHLBanks charged-off their prior capital distributions to FICO directly against retained earnings.

FICO paid off its last long-term debt obligation in September 2019, and the following month began the process of dissolution in accordance with relevant statutory requirements of the FHFA. FICO determined that approximately $200.0 million in excess funds were available for distribution to its stockholders, the FHLBanks. The Bank’s partial recovery of prior capital distributions in the second quarter of 2020 totaled $8.5 million based on its share of the $680 million originally contributed. These funds are accounted for as a return of the FHLBanks’ investment in FICO capital stock as a partial recovery of the prior capital distributions and credited to the Bank's unrestricted retained earnings account.

Dividends and Retained Earnings. The Bank is required to contribute 20% of its net income each quarter to a restricted retained earnings (RRE) account until the balance of that account equals at least 1% of the Bank's average balance of outstanding consolidated obligations for the previous quarter. These RRE will not be available to pay dividends. At September 30, 2020, retained earnings were $1,351.1 million, including $905.1 million of unrestricted retained earnings and $446.0 million of RRE.

Dividends paid by the Bank are subject to Board approval and may be paid in either capital stock or cash; historically, the Bank has paid cash dividends only. These dividends are based on stockholders' average balances for the previous quarter. Dividends paid through the third quarter of 2020 and 2019 are presented in the table below.
Dividend - Annual Yield
20202019
MembershipActivityMembershipActivity
February4.50 %7.75 %4.50 %7.75 %
April3.00 %6.25 %4.50 %7.75 %
July3.00 %6.25 %4.50 %7.75 %
74
Notes to Unaudited Financial Statements (continued)




    In October 2020, the Bank paid a quarterly dividend equal to an annual yield of 3.00% and 6.25% on membership and activity stock, respectively.

    The following table summarizes the changes in AOCI for the three and nine months ended September 30, 2020 and 2019.
(in thousands)Net Unrealized Gains(Losses) on AFSNon-credit OTTI Gains(Losses) on AFSNet Unrealized Gains (Losses) on Hedging ActivitiesPension and Post-Retirement PlansTotal
June 30, 2019$55,105 $60,689 $161 $(1,839)$114,116 
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)(5,595)(4,880)— — (10,475)
Non-credit OTTI to credit OTTI— 271 — — 271 
Amortization on hedging activities— — (10)— (10)
Pension and post-retirement— — — 106 106 
September 30, 2019$49,510 $56,080 $151 $(1,733)$104,008 
June 30, 2020$118,049 $— $— $(4,145)$113,904 
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)26,384 — — — 26,384 
Pension and post-retirement— — — 171 171 
September 30, 2020$144,433 $— $— $(3,974)$140,459 
December 31, 2018$9,887 $65,133 $176 $(2,050)$73,146 
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)39,623 (9,383)— — 30,240 
Noncredit OTTI to credit OTTI— 330 — — 330 
Amortization on hedging activities— — (25)— (25)
Pension and post-retirement— — — 317 317 
September 30, 2019$49,510 $56,080 $151 $(1,733)$104,008 
December 31, 2019$45,155 $51,704 $149 $(5,182)$91,826 
Other comprehensive income (loss) before reclassification:
Adoption of ASU 2016-13 51,704 (51,704)— — — 
Net unrealized gains (losses)47,574 — — — 47,574 
Amortization on hedging activities— — (149)— (149)
Pension and post-retirement— — — 1,208 1,208 
September 30, 2020$144,433 $— $— $(3,974)$140,459 

75
Notes to Unaudited Financial Statements (continued)



Note 8 – Transactions with Related Parties

The following table includes significant outstanding related party member-activity balances.
(in thousands)September 30, 2020December 31, 2019
Advances$15,976,534 $34,748,867 
Letters of credit (1)
2,953,466 2,418,025 
MPF loans498,825 455,600 
Deposits22,395 17,904 
Capital stock777,966 1,574,659 
Note:
(1) Letters of credit are off-balance sheet commitments.

The following table summarizes the effects on the Statement of Income corresponding to the related party member balances above. Amounts related to interest expense on deposits were immaterial for the periods presented.
 Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Interest income on advances$91,749 $280,009 $362,346 $980,227 
Interest income on MPF loans6,101 6,774 19,021 21,603 
Letters of credit fees797 1,333 2,209 4,446 

The following table summarizes the effect of the MPF activities with FHLBank of Chicago.
 Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Servicing fee expense$988 $911 $2,958 $2,613 
(in thousands)September 30, 2020December 31, 2019
Interest-bearing deposits maintained with FHLBank of Chicago$7,291 $5,173 

From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. During the three months and nine months ended September 30, 2020, the total amount loaned to and repaid by other FHLBanks was $25.0 million. There was no lending activity during the three months ended September 30, 2019. During the nine months ended September 30, 2019, the total amount loaned to and repaid by other FHLBanks was $500.0 million. There was no borrowing activity during the three and nine months ended September 30, 2020 and 2019.

Subject to mutually agreed upon terms, on occasion, an FHLBank may transfer at fair value its primary debt obligations to another FHLBank. During the nine months ended September 30, 2020 and 2019, there were no transfers of debt between the Bank and another FHLBank.

From time to time, a member of one FHLBank may be acquired by a member of another FHLBank. When such an acquisition occurs, the two FHLBanks may agree to transfer at fair value the loans of the acquired member to the FHLBank of the surviving member. The FHLBanks may also agree to the purchase and sale of any related hedging instrument. The Bank had no such activity during the nine months ended September 30, 2020 and 2019.

    In the ordinary course of business, the Bank may utilize products and services, provided at normal market rates and terms, from its members to support its operations. Additional discussions regarding related party transactions can be found in Note 17 to the audited financial statements in the Bank's 2019 Form 10-K.

76
Notes to Unaudited Financial Statements (continued)



Note 9 – Estimated Fair Values

Fair value amounts have been determined by the Bank using available market information and 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., an exit price). These estimates are based on recent market data and other pertinent information available to the Bank at September 30, 2020 and December 31, 2019. Although the management of the Bank believes that the valuation methods are appropriate and provide a reasonable determination of the fair value of these financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values are not necessarily equal to the amounts that would be realized in current market transactions, although they do reflect the Bank’s judgment of how a market participant would estimate the fair values.

The carrying value and estimated fair value of the Bank’s financial instruments at September 30, 2020 and December 31, 2019 are presented in the table below.
Fair Value Summary Table
 September 30, 2020
(in thousands)Carrying
Value		Level 1Level 2 Level 3
Netting Adjustment and Cash Collateral (1)
Estimated
Fair Value
                       Assets:      
Cash and due from banks$1,386,471 $1,386,471 $— $— $— $1,386,471 
Interest-bearing deposits1,084,526 1,077,235 7,291 — — 1,084,526 
Federal funds sold1,950,000 — 1,949,997 — — 1,949,997 
Securities purchased under agreement to resell (2)
1,350,000 — 1,349,998 — — 1,349,998 
Trading securities1,287,548 — 1,287,548 — — 1,287,548 
AFS securities10,153,022 — 9,885,398 267,624 — 10,153,022 
HTM securities1,967,036 — 1,947,582 99,772 — 2,047,354 
Advances35,841,036 — 35,981,783 — — 35,981,783 
Mortgage loans held for portfolio, net5,089,745 — 5,398,229 — — 5,398,229 
BOB loans, net21,213 — — 21,213 — 21,213 
Accrued interest receivable104,597 — 104,597 — — 104,597 
Derivative assets160,986 — 7,452 — 153,534 160,986 
                     Liabilities:       
Deposits$990,571 $— $990,571 $— $— $990,571 
Discount notes13,995,722 — 13,997,567 — — 13,997,567 
Bonds41,583,307 — 42,067,719 — — 42,067,719 
Mandatorily redeemable capital stock (3)
223,052 227,124 — — — 227,124 
Accrued interest payable (3)
93,364 — 89,292 — — 89,292 
Derivative liabilities1,751 — 5,329 — (3,578)1,751 
77
Notes to Unaudited Financial Statements (continued)



December 31, 2019
(in thousands)Carrying
Value		Level 1Level 2Level 3
Netting Adjustment and Cash Collateral (1)
Estimated
Fair Value
                       Assets:      
Cash and due from banks$21,490 $21,490 $— $— $— $21,490 
Interest-bearing deposits1,476,890 1,471,717 5,173 — — 1,476,890 
Federal funds sold3,770,000 — 3,769,965 — — 3,769,965 
Securities purchased under agreement to resell (2)
2,200,000 — 2,199,973 — — 2,199,973 
Trading securities3,631,650 — 3,631,650 — — 3,631,650 
AFS securities11,097,769 — 10,771,623 326,146 — 11,097,769 
HTM securities2,395,691 — 2,316,109 124,179 — 2,440,288 
Advances65,610,075 — 65,662,578 — — 65,662,578 
Mortgage loans held for portfolio, net5,114,625 — 5,313,973 — — 5,313,973 
BOB loans, net19,706 — — 19,706 — 19,706 
Accrued interest receivable193,352 — 193,352 — — 193,352 
Derivative assets 140,251 — 16,201 — 124,050 140,251 
                        Liabilities:     
Deposits$573,382 $— $573,382 $— $— $573,382 
Discount notes23,141,362 — 23,142,588 — — 23,142,588 
Bonds66,807,807 — 66,981,400 — — 66,981,400 
Mandatorily redeemable capital stock (3)
343,575 350,287 — — — 350,287 
Accrued interest payable (3)
205,118 — 198,406 — — 198,406 
Derivative liabilities 3,024 — 8,869 — (5,845)3,024 
Notes:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral held and related interest accrued or placed by the Bank with the same clearing agent and/or counterparties.
(2) Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. There were no offsetting liabilities related to these securities at September 30, 2020 and December 31, 2019. These instruments’ maturity term is overnight.
(3) The estimated fair value amount for the mandatorily redeemable capital stock line item includes accrued dividend interest; this amount is excluded from the estimated fair value for the accrued interest payable line item.

Fair Value Hierarchy. The fair value hierarchy is used to prioritize the inputs used to measure fair value by maximizing the use of observable inputs. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the 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 reporting entity can access on the measurement date. An active market for the 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.

    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: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active or in which little information is released publicly; (3) 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 (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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

78
Notes to Unaudited Financial Statements (continued)



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. These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur.

Summary of Valuation Methodologies and Primary Inputs

    The valuation methodologies 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 nonrecurring basis in the Statement of Condition are listed below.

    Investment Securities – non-MBS. The Bank uses either the income or market approach to determine the estimated fair value of non-MBS investment securities.

    For instruments that use the income approach, the significant inputs include a market-observable interest rate curve and a discount spread, if applicable. The market-observable interest rate curves and the related instrument types are as follows:

•LIBOR Swap curve: certificates of deposit
•CO curve: GSE and other U.S. obligations

    The Bank uses a market approach for its state and local agency bonds and U.S. Treasury obligations. For state and local agency bonds, the Bank obtains prices from multiple designated third-party vendors when available, and the default price is the average of the prices obtained. Otherwise, the approach is generally consistent with the approach outlined below for Investment Securities - MBS. For U.S. Treasury obligations, prices are obtained from a third-party vendor based on daily trade activity or dealer quotes. For certain short-term U.S. Treasury obligations, market prices are not available, and the Bank uses an income approach.

Investment Securities – MBS.  To value MBS holdings, the Bank obtains prices from multiple third-party pricing vendors, when available. The pricing vendors use various proprietary models to price MBS. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Since many MBS do not trade on a daily basis, the pricing vendors use available information such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities, as applicable. Each pricing vendor has an established challenge process in place for all MBS valuations, which facilitates resolution of potentially erroneous prices identified by the Bank.

During the year, the Bank conducts reviews of its pricing vendors to enhance its understanding of the vendors' pricing processes, methodologies and control procedures. To the extent available, the Bank also reviews the vendors' independent auditors' reports regarding the internal controls over their valuation processes.

The Bank's valuation technique 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. 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 price rather than the default price. If, on the other hand, 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. If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.
 
As of September 30, 2020, for substantially all of its MBS, the Bank received a price from all of its vendors and the default price was the final price. Based on the Bank's reviews of the pricing methods including inputs and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices (or, in those instances in which there were outliers or significant yield variances, the Bank's additional analyses), the Bank believes the 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. There continues to be unobservable inputs and a lack of significant market activity for private label MBS; therefore, the Bank classified private label MBS as Level 3.

Derivative Assets/Liabilities. The Bank bases the fair values of derivatives with similar terms on market prices, when available. However, market prices do not exist for many types of derivative instruments. Consequently, fair values for these
79
Notes to Unaudited Financial Statements (continued)



instruments are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar instruments. Estimates developed using these methods are highly subjective and require judgment regarding significant matters such as the amount and timing of future cash flows, volatility of interest rates and the selection of discount rates that appropriately reflect market and credit risks. In addition, the fair value estimates for these instruments include accrued interest receivable/payable which approximate their carrying values due to their short-term nature.

    The discounted cash flow analysis used to determine the net present value of derivative instruments utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). Inputs by class of derivative are as follows:

    Interest-rate related:
•Discount rate assumption. SOFR curve for SOFR indexed swaps. Overnight Index Swap (OIS) curve for all other swaps.
•Forward interest rate assumption (rates projected in order to calculate cash flows through the designated term of the hedge relationship). LIBOR Swap curve, OIS curve or SOFR curve.
•Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

    Mortgage delivery commitments:
•TBA securities prices. Market-based prices of TBAs are determined by coupon class and expected term until settlement and a pricing adjustment reflective of the secondary mortgage market.

The Bank is subject to credit risk on uncleared derivatives transactions due to the potential nonperformance by the derivatives counterparties. To mitigate this risk, the Bank has entered into netting arrangements and security agreements that provide for delivery of collateral at specified levels. As a result, uncleared derivatives are recognized as collateralized-to-market and the fair value of uncleared derivatives excludes netting adjustments and collateral. The Bank has evaluated the potential for fair value adjustment due to uncleared counterparty credit risk and has concluded that no adjustments are necessary.

The Bank's credit risk exposure on cleared derivatives is mitigated through the delivery of initial margin to offset future changes in value and daily delivery of variation margin to offset changes in market value. This is executed through the use of a central counterparty, CME. Variation margin payments are daily settlement payments rather than collateral. Initial margin continues to be treated as collateral and accounted for separately.

The fair values of derivatives are netted by clearing agent and/or by counterparty pursuant to the provisions of each of the Bank’s netting agreements. If these netted amounts are positive, they are classified as an asset and, if negative, as a liability.

    Impaired Mortgage Loans Held for Portfolio and REO. The estimated fair values of impaired mortgage loans held for portfolio and real estate owned are determined based on values provided by a third party's retail-based AVM. The Bank adjusts the AVM value based on the amount it has historically received on liquidation.

    Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods described above 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. These estimates are susceptible to material near term changes because they are made as of a specific point in time.

80
Notes to Unaudited Financial Statements (continued)



Fair Value Measurements. The following tables present, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on a recurring or non-recurring basis on its Statement of Condition at September 30, 2020 and December 31, 2019. The Bank measures certain mortgage loans held for portfolio at fair value when a charge-off is recognized and subsequently when the fair value of collateral less costs to sell is lower than the carrying amount. Real estate owned is measured using fair value when the assets' fair value less costs to sell is lower than the carrying amount.
 September 30, 2020
(in thousands)Level 1Level 2Level 3
Netting Adjustment and Cash Collateral(1)
Total
Recurring fair value measurements - Assets     
Trading securities:     
Non MBS:
U.S. Treasury obligations
$— $1,028,642 $— $— $1,028,642 
GSE and TVA obligations
— 258,906 — — 258,906 
Total trading securities$— $1,287,548 $— $— $1,287,548 
AFS securities:     
Non MBS:
GSE and TVA obligations$— $1,658,671 $— $— $1,658,671 
State or local agency obligations— 247,890 — — 247,890 
MBS:
 U.S. obligations single-family MBS
— 658,687 — — 658,687 
 GSE single-family MBS
— 3,704,537 — — 3,704,537 
 GSE multifamily MBS
— 3,615,613 — — 3,615,613 
 Private label MBS
— — 267,624 — 267,624 
Total AFS securities$— $9,885,398 $267,624 $— $10,153,022 
Derivative assets:    
Interest rate related
$— $7,403 $— $153,534 $160,937 
Mortgage delivery commitments
— 49 — — 49 
Total derivative assets$— $7,452 $— $153,534 $160,986 
Total recurring assets at fair value$— $11,180,398 $267,624 $153,534 $11,601,556 
Recurring fair value measurements - Liabilities     
Derivative liabilities:     
Interest rate related
$— $5,226 $— $(3,578)$1,648 
Mortgage delivery commitments
— 103 — — 103 
Total recurring liabilities at fair value (2)
$— $5,329 $— $(3,578)$1,751 
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio
$— $— $14,931 $— $14,931 
REO
— — 1,112 — 1,112 
Total non-recurring assets at fair value $— $— $16,043 $— $16,043 
81
Notes to Unaudited Financial Statements (continued)



 December 31, 2019
(in thousands)Level 1Level 2Level 3
Netting Adjustment and Cash Collateral(1)
Total
Recurring fair value measurements - Assets     
Trading securities:     
Non MBS:
U.S. Treasury obligations
$— $3,390,772 $— $— $3,390,772 
GSE and TVA obligations
— 240,878 — — 240,878 
Total trading securities$— $3,631,650 $— $— $3,631,650 
AFS securities:     
Non MBS:
GSE and TVA obligations$— $1,550,699 $— $— 1,550,699 
State or local agency obligations— 247,894 — — 247,894 
MBS:
 U.S. obligations single-family MBS
— 807,586 — — 807,586 
 GSE single-family MBS
— 4,055,859 — — 4,055,859 
 GSE multifamily MBS
— 4,109,585 — — 4,109,585 
Private label MBS— — 326,146 — 326,146 
Total AFS securities$— $10,771,623 $326,146 $— $11,097,769 
Derivative assets:     
Interest rate related
$— $16,172 $— $124,050 $140,222 
Mortgage delivery commitments
— 29 — — 29 
Total derivative assets$— $16,201 $— $124,050 $140,251 
Total recurring assets at fair value$— $14,419,474 $326,146 $124,050 $14,869,670 
Recurring fair value measurements - Liabilities     
Derivative liabilities:     
Interest rate related
$— $8,790 $— $(5,845)$2,945 
Mortgage delivery commitments
— 79 — — 79 
Total recurring liabilities at fair value (2)
$— $8,869 $— $(5,845)$3,024 
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio
$— $— $7,850 $— $7,850 
REO
— — 2,449 — 2,449 
Total non-recurring assets at fair value $— $— $10,299 $— $10,299 
Notes:
(1) Amounts represent the application of the netting requirements that allow the Bank to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the Bank with the same clearing agent and/or counterparties.
(2) Derivative liabilities represent the total liabilities at fair value.
82
Notes to Unaudited Financial Statements (continued)



Level 3 Disclosures for all Assets and Liabilities That Are Measured at Fair Value on a Recurring Basis. The following table presents a reconciliation of all assets and liabilities that are measured at fair value on the Statement of Condition using significant unobservable inputs (Level 3) for the nine months ended September 30, 2020 and 2019. For instruments carried at fair value, the Bank reviews the fair value hierarchy classifications each quarter. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value in the quarter in which the changes occur. Transfers are reported as of the beginning of the period. There were no Level 3 transfers during the first nine months of 2020 or 2019.
AFS Private Label MBS
Three months ended September 30,Nine months ended September 30,
(in thousands)2020201920202019
Balance, beginning of period$280,882 $371,402 $326,146 $409,550 
Total gains (losses) (realized/unrealized) included in: 
(Provision) benefit for credit losses (1)
(117)— (1,691)— 
Accretion of credit losses in interest income
3,000 4,794 8,938 11,589 
Net OTTI losses, credit portion
— (271)— (330)
Net unrealized gains (losses) on AFS in OCI
1,400 (14)(15,114)18 
Reclassification of non-credit portion included in net income
— 271 — 330 
Unrealized gains (losses) on OTTI AFS in OCI
— (4,880)— (9,383)
Purchases, issuances, sales, and settlements: 
Settlements(17,541)(26,796)(50,655)(67,268)
Balance at September 30$267,624 $344,506 $267,624 $344,506 
Total amount of gains for the periods presented included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at September 30$2,883 $3,558 $7,247 $8,887 
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held September 30 (2)
$1,400 N/A$(15,114)N/A
Notes:
(1) Due to the adoption of ASU 2016-13, effective January 1, 2020, the Bank was required to record an ACL for expected credit losses on AFS securities.
(2) Due to the prospective adoption of ASU 2018-13: Changes to the Disclosure Requirements for Fair Value Measurement, effective January 1, 2020, this is not applicable for 2019.

83
Notes to Unaudited Financial Statements (continued)



Note 10 – Commitments and Contingencies

The following table presents the Bank's various off-balance sheet commitments which are described in detail below.
(in thousands)September 30, 2020December 31, 2019
Notional amountExpiration Date Within One Year Expiration Date After One YearTotalTotal
Standby letters of credit outstanding (1) (2)
$19,605,400 $— $19,605,400 $17,370,617 
Commitments to fund additional advances and BOB loans1,643 — 1,643 19,796
Commitments to purchase mortgage loans68,027 — 68,027 73,574
Unsettled consolidated obligation bonds, at par39,000 — 39,000 62,000
Unsettled consolidated obligation discount notes, at par65,000 — 65,000 1,083,406
Notes:
(1) Excludes approved requests to issue future standby letters of credit of $461.2 million and $23.9 million at September 30, 2020 and December 31, 2019, respectively.
(2) Letters of credit in the amount of $4.9 billion and $4.3 billion at September 30, 2020 and December 31, 2019, respectively, have renewal language that permits the letter of credit to be renewed for an additional period with a maximum renewal period of approximately 5 years.

Commitments to Extend Credit on Standby Letters of Credit, Additional Advances and BOB Loans. Standby letters of credit are issued on behalf of members for a fee. A standby letter of credit is a financing arrangement between the Bank and its member. If the Bank is required to make payment for a beneficiary’s draw, these amounts are withdrawn from the member’s Demand Deposit Account (DDA). Any remaining amounts not covered by the withdrawal from the member’s DDA are converted into a collateralized overnight advance.

    Unearned fees related to standby letters of credit are recorded in other liabilities and had a balance of $3.0 million and $3.5 million at September 30, 2020 and December 31, 2019, respectively. The Bank manages the credit risk of each member on the basis of the member's TCE to the Bank which includes its standby letters of credit. The Bank has established parameters for the review, assessment, monitoring and measurement of credit risk related to these standby letters of credit as described in Note 3 - Advances.

Based on management’s credit analyses, collateral requirements, and adherence to the requirements set forth in Bank policy and Finance Agency regulations, the Bank has not recorded any additional liability on these commitments and standby letters of credit. Excluding BOB, commitments and standby letters of credit are collateralized at the time of issuance. The Bank records a liability with respect to BOB commitments, which is reflected in Other liabilities on the Statement of Condition.

The Bank does not have any legally binding or unconditional unused lines of credit for advances at September 30, 2020 and December 31, 2019. However, within the Bank's Open RepoPlus advance product, there were conditional lines of credit outstanding of $12.3 billion and $9.8 billion at September 30, 2020 and December 31, 2019, respectively.

Commitments to Purchase Mortgage Loans. The Bank may enter into commitments that unconditionally obligate the Bank to purchase mortgage loans under the MPF Program. These delivery commitments are generally for periods not to exceed 60 days. Such commitments are recorded as derivatives.

Pledged Collateral. The Bank may pledge cash and securities, as collateral, related to derivatives. Refer to Note 5 - Derivatives and Hedging Activities in this Form 10-Q for additional information about the Bank's pledged collateral and other credit-risk-related contingent features.

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

Notes 3, 5, 6, 7, and 8 also discuss other commitments and contingencies.
84

Item 3: Quantitative and Qualitative Disclosures about Market Risk

See the Risk Management section in Part I, Item 2. Management’s Discussion and Analysis in this Form 10-Q.

Item 4: Controls and Procedures

Under the supervision and with the participation of the Bank’s management, including the chief executive officer, chief operating officer (principal financial officer), and chief accounting officer, the Bank conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the 1934 Act). Based on this evaluation, the Bank’s chief executive officer, chief operating officer (principal financial officer), and chief accounting officer concluded that the Bank’s disclosure controls and procedures were effective as of September 30, 2020.

Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the third quarter of 2020 that have materially affected, or are reasonably likely to materially affect, the Bank’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1: Legal Proceedings

    The Bank may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.

Item 1A: Risk Factors

    For a complete discussion of Risk Factors, see Part I, Item 1A. Risk Factors in the Bank's 2019 Annual Report on Form 10-K and Part II, Item 1A. Risk Factors in the Bank’s Quarterly Report on Form 10-Q for the second quarter 2020. Other than as noted below, there have been no material changes from the Risk Factors disclosed in the Bank's 2019 Form 10-K as updated in the second quarter 2020 Form 10-Q.

The COVID-19 pandemic has created economic and financial disruptions, including lower interest rates, that have negatively impacted the Bank’s business, operations, and financial results. The ultimate impact will depend on future developments, which are unpredictable, including the scope and duration of the pandemic and any additional actions taken by governmental authorities in response to the related economic effects.

The COVID-19 pandemic has disrupted the global economy resulting in equity market volatility, lower interest rates, and greatly increased unemployment levels. In addition, the pandemic has resulted in temporary and permanent closures of many businesses along with social distancing measures and sheltering-in-place requirements in many states and communities. These items reduced the demand for the Bank’s products and services, coupled with reduced net interest income due to lower interest rates. Ultimately, the COVID-19 pandemic has begun to impact the overall credit quality of the Bank's members, counterparties and MPF portfolio, however the duration and magnitude of credit quality deterioration caused by the pandemic is uncertain. Loan forbearance granted by the Bank’s members to their borrowers has provided temporary payment relief and helped lessen disruptions caused by the pandemic.

Furthermore, the demand for the Bank’s consolidated obligations and advance products were impacted due to new government programs that provided alternative financing. The CARES Act as well as the Paycheck Protection Program (PPP) provided additional funding to individual Americans and small businesses. This additional inflow of cash to the balance sheet of the Bank’s members resulted in a decline in the demand for the Bank’s advance products and impacted the Bank’s financial results. More legislative and regulatory actions taken in response to the COVID-19 pandemic could further reduce demand for the Bank’s products and services. While there was uncertainty in the financial markets along with severe volatility, the Bank’s access to liquidity and the cost of funds was not adversely impacted. However, the economic impact as a result of COVID-19 is not fully realized. There may be new volatility events, as markets transition, that may adversely impact the Bank's access to liquidity and associated cost of funds.
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Severe market volatility also impacts the Bank’s ability to model and manage market and other risks, along with determining collateral values. While the Bank has been able to manage these risks, they could affect the Bank’s ability to make business decisions and limit members’ ability to do business with the Bank. Similarly, because of changing economic and market conditions affecting the Bank’s investments, the Bank may be required to recognize further impairments on securities held, which may result in additional provision for credit losses on private label MBS or reduced comprehensive income depending on the classification of the investment. Additionally, the Bank continues to monitor the Bank's members, counterparties and MPF portfolio, as further and material credit deterioration could occur.

While the Bank’s business operations have not been significantly disrupted to date, they may be disrupted if significant portions of the Bank’s workforce are unable to work effectively due to illness, quarantines, government actions, or other restrictions in connection with the pandemic. Cyber-security risk is elevated with employees working remotely. This presents additional opportunities for cyber-criminals to exploit potential vulnerabilities. While there are continued attempts to penetrate the Bank’s security, such as phishing and malware attacks, the Bank has not experienced a breach of its security during the pandemic.

The Bank is reliant on third-party vendors who are also impacted by the COVID-19 pandemic. Vendor personnel may be working remotely and/or the vendors could have a shortage of personnel. While the Bank has not materially experienced this during the pandemic to date, a disruption, delay or failure of a critical third-party vendor’s services as a result of these factors could impact the Bank’s operating results, and the Bank’s ability to provide services to the membership.

The extent to which the COVID-19 pandemic impacts the Bank’s business, results of operations, and financial condition, including expectations regarding the payment and levels of dividends, will depend on future developments. These developments continue to be highly uncertain and cannot be predicted, including the scope and duration of the pandemic; the continued effectiveness of the Bank’s business continuity plan; and actions taken by governmental authorities and other third parties in response to the pandemic. The pandemic may also cause prolonged recessionary economic conditions or longer lasting effects on economic conditions than currently exist, which could have a material adverse effect on the Bank’s business, results of operations and financial condition.

The COVID-19 pandemic may heighten many of the other risks described in the section entitled “Risk Factors” in the Bank’s most recent Annual Report on Form 10-K, the second quarter 2020 Form 10-Q and any subsequent Quarterly Report on Form 10-Q or Current Report on Form 8-K including, but not limited to, risks of interest rate changes, market and liquidity disruptions, legislative and regulatory developments, market volatility, member and counterparty credit instability, impairment of investments, cyber-security breaches and technology interruptions.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3: Defaults upon Senior Securities

None.

Item 4: Mine Safety Disclosures

Not applicable.

Item 5: Other Information

    None.

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Item 6: Exhibits
Exhibit No.DescriptionMethod of Filing
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Executive OfficerFiled herewith.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Principal Financial OfficerFiled herewith.
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting OfficerFiled herewith.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Executive OfficerFurnished herewith.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Principal Financial OfficerFurnished herewith.
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Chief Accounting OfficerFurnished herewith.
101.INSXBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.Filed herewith.
101.SCHXBRL Taxonomy Extension Schema DocumentFiled herewith.
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentFiled herewith.
101.LABXBRL Taxonomy Extension Label Linkbase DocumentFiled herewith.
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentFiled herewith.
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentFiled herewith.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)Filed herewith.


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 Pittsburgh
(Registrant)


By: /s/ David G. Paulson
David G. Paulson
Chief Operating Officer
(Principal Financial Officer and Authorized Officer)


By: /s/ Edward V. Weller
Edward V. Weller
Chief Accounting Officer
(Authorized Officer)


Date: November 10, 2020

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