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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, 2021
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,PA15219
(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 11,920,785 shares of common stock with a par value of $100 per share outstanding at October 29, 2021.


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
Signatures


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 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 2020 Form 10-K (2020 Form 10-K), including Risk Factors included in Part I, 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.

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 derivatives. 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 maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield
1

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 markets continued to improve in the third quarter of 2021, but were tempered by the spread of the COVID-19 delta variant. In its September 2021 meeting, the Federal Reserve Board (Federal Reserve) maintained the Federal funds target range of 0% and 0.25% and signaled that it would likely make an announcement concerning the start of tapering at its next meeting in November. Yields on U.S. Treasuries were generally lower during the third quarter of 2021 relative to the prevailing yields during the second quarter of 2021, with the exception of the very short end of the curve. 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 $22.6 million for the third quarter of 2021, compared to $57.4 million for the third quarter of 2020. Lower net interest income was the primary driver for the year-over-year change. The net interest margin was 46 basis points in the third quarter of 2021 and 47 basis points in the third quarter of 2020. The decrease in net interest margin was primarily due to lower spreads on liquidity balances. For the nine months ended September 30, 2021, the Bank’s net income totaled $72.4 million, compared to $153.6 million for the same prior-year period. The $81.2 million decrease was driven primarily by lower net interest income, partially offset by an increase in other noninterest income. The net interest margin was 46 basis points for the first nine months of 2021 and 44 basis points for the first nine months of 2020. The increase in net interest margin was primarily due to advance prepayment fees, along with lower funding costs, and a higher percentage of MBS and Mortgage Partnership Finance® (MPF®) Program assets which have wider spreads.

Financial Condition. Advances. Advances totaled $13.0 billion at September 30, 2021, a decrease of $12.0 billion compared to $25.0 billion at December 31, 2020. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. The federal government liquidity programs continued to contribute to higher deposits at our members and decreased advance levels for the Bank. While the advance portfolio decreased compared to December 31, 2020, the par value of advances that had a remaining maturity of more than one year was relatively unchanged at 37% at September 30, 2021 compared to 40% at December 31, 2020.

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, certificates of 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, 2021, the Bank held $9.8 billion of liquid assets compared to $6.1 billion at December 31, 2020. The increase in the Bank's liquidity portfolio helps to optimize financial holdings while maintaining compliance with regulatory standards.

Investments. To enhance earnings, the Bank maintains investments classified as AFS and held-to-maturity (HTM) as well as certain trading securities. The Bank held $9.3 billion in its investment portfolio at September 30, 2021 compared with $11.5 billion at December 31, 2020, a decrease of $2.2 billion. Paydowns associated with the Bank's Agency MBS portfolio contributed to this decline. During 2021, the Bank’s MBS purchases have been restricted by Finance Agency regulations which limit the size of the MBS portfolio based on regulatory capital. In addition, narrow mortgage spreads, driven by the Federal Reserve's quantitative easing, have limited purchase opportunities.

Consolidated Obligations. The Bank's consolidated obligations totaled $33.2 billion at September 30, 2021, a decrease of $10.2 billion from December 31, 2020. At September 30, 2021, bonds represented 64% of the Bank's consolidated obligations, compared with 78% at December 31, 2020. Discount notes represented 36% of the Bank's consolidated obligations at September 30, 2021 compared with 22% at year-end 2020. The overall decrease in consolidated obligations outstanding is consistent with the decreased advances, investments and total asset balances.

Capital Position and Regulatory Requirements. Total capital at September 30, 2021 was $2.7 billion, compared to $3.0 billion at December 31, 2020. The decrease was primarily due to lower capital stock as a result of lower advances. Total retained earnings at September 30, 2021 were $1.4 billion, relatively unchanged from year-end 2020. Accumulated other comprehensive income (AOCI) was $126.3 million at September 30, 2021, a decrease of $11.0 million from December 31, 2020.

In October and July 2021, the Bank paid quarterly dividends of 5.25% annualized on activity stock and 1.25% annualized on membership stock. In April and February 2021, the Bank paid quarterly dividends of 5.75% annualized on activity stock and 2.50% annualized on membership stock. The dividends paid were based on stockholders' average balances for the fourth quarter
2

of 2020 (February dividend), the first quarter of 2021 (April dividend), the second quarter of 2021 (July dividend) and the third quarter of 2021 (October dividend).

The dividend rates based on the first three quarters of 2021 financial results are reflective of, and in line with, the Bank’s performance during the first nine months of the year, particularly given low 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. As always, the payment and level of any dividends are subject to changing market and business conditions, which can be unpredictable, on the Bank's financial performance and future dividends. The impact on the Bank's results of operations and financial condition might result in lower dividend levels in future periods.

The Bank met all of its capital requirements as of September 30, 2021, and in the Federal Housing Finance Agency's (Finance Agency) most recent determination, as of June 30, 2021, the Bank was deemed "adequately capitalized."

    COVID-19 Pandemic. During the pandemic, the Bank's leadership and Board of Directors have remained focused on the health and safety of our staff and being a reliable, readily available liquidity provider to our members. The Bank is well-capitalized and has remained fully operational during the pandemic. The Bank continues to monitor guidance from government authorities and is continuing to execute its plan for employees returning to office. In addition, the Bank consistently monitors member credit quality; to date no material deterioration due to the pandemic or other events has occurred.

Financial Highlights

The following are the financial highlights of the Bank. The Condensed Statements of Condition as of December 31, 2020 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)20212021202120202020
Net interest income$43.6 $38.9 $58.0 $82.0 $84.2 
Provision (reversal) for credit losses (0.9)(0.3)(1.1)(1.3)1.2 
Other noninterest income (loss)3.6 (3.0)9.4 6.9 5.0 
Other expense22.9 23.1 26.0 26.8 23.8 
Income before assessments25.2 13.1 42.5 63.4 64.2 
Affordable Housing Program (AHP) assessment (1)
2.6 1.4 4.4 6.6 6.8 
Net income$22.6 $11.7 $38.1 $56.8 $57.4 
Dividends (in millions)$12.8 $17.6 $21.8 $31.2 $39.8 
Dividends per share1.08 1.41 1.52 1.83 1.84 
Dividend payout ratio (2)
56.49 %150.15 %57.31 %54.90 %69.30 %
Weighted average dividend rate4.19 %5.05 %5.16 %5.80 %5.89 %
Return on average equity3.32 %1.70 %5.21 %7.05 %6.29 %
Return on average assets0.23 %0.12 %0.33 %0.41 %0.32 %
Net interest margin (3)
0.46 %0.41 %0.51 %0.60 %0.47 %
Regulatory capital ratio (4)
7.04 %6.37 %6.90 %6.39 %5.72 %
GAAP capital ratio (5)
7.32 %6.52 %6.98 %6.38 %5.58 %
Total average equity to average assets7.01 %7.11 %6.32 %5.82 %5.05 %
Notes:
(1) 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.
(2) Represents dividends paid as a percentage of net income for the respective periods presented.
(3) Net interest margin is net interest income before provision (reversal) for credit losses as a percentage of average interest-earning assets.
(4) 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.
(5) GAAP capital ratio is the sum of capital stock, retained earnings and AOCI as a percentage of total assets at period-end.


3

Nine months ended
(in millions)September 30, 2021September 30, 2020
Net interest income$140.5 $282.7 
Provision (reversal) for credit losses (2.3)5.6 
Other noninterest income (loss)10.0 (26.2)
Other expense72.0 78.7 
Income before assessments80.8 172.2 
AHP assessment (1)
8.4 18.6 
Net income$72.4 $153.6 
Dividends (in millions)$52.2 $137.2 
Dividends per share4.05 5.32 
Dividend payout ratio (2)
72.08 %89.28 %
Weighted average dividend rate4.85 %6.49 %
Return on average equity3.44 %5.13 %
Return on average assets0.23 %0.24 %
Net interest margin (3)
0.46 %0.44 %
Regulatory capital ratio (4)
7.04 %5.72 %
GAAP capital ratio (5)
7.32 %5.58 %
Total average equity to average assets6.78 %4.61 %
Notes:
(1) 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.
(2) Represents dividends paid as a percentage of net income for the respective periods presented.
(3) Net interest margin is net interest income before provision (reversal) for credit losses as a percentage of average interest-earning assets.
(4) 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.
(5) 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)20212021202120202020
Cash and due from banks$1,119.5 $545.1 $890.9 $1,036.5 $1,386.5 
Investments (1)
18,040.6 21,032.5 15,562.1 16,522.7 17,792.1 
Advances12,987.1 14,954.7 19,272.4 24,971.1 35,841.0 
Mortgage loans held for portfolio, net4,780.3 4,774.4 4,866.2 4,886.2 5,089.8 
Total assets37,247.6 41,662.2 40,914.3 47,712.9 60,443.3 
Consolidated obligations:
Discount notes
12,108.2 15,112.8 12,209.3 9,510.1 13,995.7 
Bonds
21,125.8 22,514.3 24,164.5 33,854.7 41,583.3 
Total consolidated obligations 33,234.0 37,627.1 36,373.8 43,364.8 55,579.0 
Deposits965.9 940.9 1,305.7 923.4 990.6 
Total liabilities34,522.6 38,944.7 38,059.3 44,671.0 57,071.3 
Capital stock - putable1,201.7 1,203.0 1,328.7 1,527.8 1,880.4 
Retained earnings1,397.0 1,387.1 1,393.0 1,376.8 1,351.1 
Total capital2,725.0 2,717.5 2,855.0 3,041.9 3,372.0 
Notes:
(1) Includes interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and trading, AFS and HTM investment securities.


4

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, 2021 and 2020, 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 2020 Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank's net income totaled $22.6 million for the third quarter of 2021, compared to $57.4 million for the third quarter of 2020. The $34.8 million decrease in net income was driven primarily by the following:

•Net interest income was $43.6 million for the third quarter of 2021, a decline of $40.6 million from $84.2 million during the same period in 2020.
◦Interest income was $98.8 million for the third quarter of 2021, compared to $185.9 million for the third quarter of 2020. This decrease was largely the result of lower average interest-earning asset balances.
◦Interest income also included net prepayment fees on advances of $4.3 million for the third quarter of 2021, compared with $13.8 million for the third quarter of 2020.
◦Interest expense was $55.2 million for the third quarter of 2021, compared to $101.7 million in the same prior-year period. This decrease was primarily the result of lower average consolidated obligations balances

The Bank's return on average equity for the third quarter of 2021 was 3.32% compared to 6.29% for the third quarter of 2020.

The Bank’s net income totaled $72.4 million for the nine months ended September 30, 2021, compared to $153.6 million for the same prior-year period. The $81.2 million decrease was driven primarily by the following:

•Net interest income was $140.5 million for the nine months ended September 30, 2021, a decline of $142.2 million from $282.7 million in the same prior-year period.
◦Interest income was $322.3 million for the nine months ended September 30, 2021, compared with $936.1 million for the same prior-year period. 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 $13.1 million for the nine months ended September 30, 2021 compared to $17.0 million for the same prior-year period.
◦Interest expense was $181.8 million for the nine months ended September 30, 2021, compared with $653.4 million in the same prior-year period. This decrease was primarily the result of lower average consolidated obligations balances as well as lower rates paid, driven by lower short-term interest rates.
•Other non-interest income was $10.0 million for the nine months ended September 30, 2021, compared with a loss of $26.2 million in the same prior-year period. This $36.2 million increase was due primarily to higher net gains on derivatives and hedging activities, partially offset by higher net losses on investment securities in 2021. The valuation changes of the financial instruments in these portfolios are primarily driven by changes in related interest rates.

    The Bank's return on average equity for the first nine months of 2021 was 3.44% compared to 5.13% for the same prior year period.

5

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, 2021 and 2020.

Average Balances and Interest Yields/Rates Paid
 Three months ended September 30,
 20212020
(dollars in millions)Average
Balance		Interest
Income/
Expense 		Avg.
Yield/
Rate
(%)		Average
Balance		Interest
Income/
Expense		Avg.
Yield/
Rate
(%)
Assets:     
Federal funds sold (1)
$3,085.4 $0.7 0.09 $4,513.3 $1.0 0.09 
Securities purchased under agreements to resell (1)
763.0 0.2 0.10 1,192.4 0.3 0.10 
Interest-bearing deposits (2)
647.2 0.2 0.13 1,469.8 0.6 0.17 
Investment securities (3)
14,308.3 34.4 0.96 14,728.0 52.9 1.43 
Advances (4)
14,007.1 31.3 0.89 43,729.1 95.2 0.87 
Mortgage loans held for portfolio (5)
4,759.7 32.0 2.67 5,178.2 35.9 2.76 
Total interest-earning assets37,570.7 98.8 1.04 70,810.8 185.9 1.04 
Other assets (6)
1,047.9   1,057.3 
Total assets$38,618.6   $71,868.1 
Liabilities and capital:      
Deposits (2)
$958.6 $0.1 0.05 $990.2 $— — 
Consolidated obligation discount notes12,888.2 1.4 0.04 20,993.1 17.0 0.32 
Consolidated obligation bonds (7)
21,346.0 53.0 0.99 45,320.9 80.6 0.71 
Other borrowings51.6 0.7 5.15 251.4 4.1 6.44 
Total interest-bearing liabilities35,244.4 55.2 0.62 67,555.6 101.7 0.60 
Other liabilities666.9 683.3 
Total capital2,707.3 3,629.2 
Total liabilities and capital$38,618.6 $71,868.1 
Net interest spread0.42 0.44 
Impact of noninterest-bearing funds0.04 0.03
Net interest income/net interest margin$43.6 0.46 $84.2 0.47 
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 $130.4 million in 2021and $462.4 million in 2020.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) Other assets include allowance for credit losses on investment securities and MPF.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $6.2 million in 2021 and $51.1 million in 2020.


6

 Nine months ended September 30,
 20212020
(dollars in millions)Average
Balance		Interest
Income/
Expense 		Avg.
Yield/
Rate
(%)		Average
Balance		Interest
Income/
Expense		Avg.
Yield/
Rate
(%)
Assets:    
Federal funds sold (1)
$3,399.4 $2.0 0.08 $7,249.5 $27.4 0.51 
Securities purchased under agreements to resell (1)
753.5 0.4 0.08 1,500.1 7.9 0.71 
Interest-bearing deposits (2)
778.3 0.8 0.14 1,629.8 6.0 0.49 
Investment securities (3)
13,320.0 111.4 1.12 16,026.7 224.3 1.87 
Advances (4)
17,355.2 112.6 0.87 54,008.3 549.0 1.36 
Mortgage loans held for portfolio (5)
4,814.1 95.1 2.64 5,205.4 121.5 3.12 
Total interest-earning assets40,420.5 322.3 1.07 85,619.8 936.1 1.46 
Other assets (6)
1,030.2   1,139.7 
Total assets$41,450.7   $86,759.5 
Liabilities and capital:   
Deposits (2)
$981.7 $0.1 0.03 $812.2 $1.8 0.3
Consolidated obligation discount notes12,164.0 5.6 0.06 28,794.1 175.50.81
Consolidated obligation bonds (7)
24,754.4 172.7 0.93 52,146.2 462.01.18
Other borrowings81.9 3.4 5.61 297.7 14.1 6.34 
Total interest-bearing liabilities37,982.0 181.8 0.64 82,050.2 653.4 1.06
Other liabilities656.3 705.5 
Total capital2,812.4 4,003.8 
Total liabilities and capital$41,450.7 $86,759.5 
Net interest spread0.43 0.40 
Impact of noninterest-bearing funds0.03 0.04
Net interest income/net interest margin$140.5 0.46 $282.7 0.44 
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 $168.5 million in 2021 and $409.4 million in 2020.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) Other assets include allowance for credit losses on investment securities and MPF.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $14.2 million in 2021 and $56.6 million in 2020.

Net interest income for the third quarter of 2021 decreased $40.6 million from the same prior-year period due to a decrease in interest income, partially offset by lower interest expense. Interest income on all interest-earning assets declined primarily due to lower volumes. Interest-earning assets decreased 47% primarily due to lower average advances. The rate earned on interest-earning assets was consistent with the rate earned from the same prior-year period. Interest-bearing liabilities declined 48% compared with the prior-year period. However, the rate paid on interest-bearing liabilities increased 2 basis points due primarily to higher rates paid on consolidated obligation bonds. In addition, the net interest margin was 46 basis points for the third quarter of 2021 and 47 basis points for the third quarter of 2020. The decrease in net interest margin was primarily due to lower spreads on liquidity balances.

Net interest income for the first nine months of 2021 decreased $142.2 million from the same prior-year period due to a decrease in interest income, partially offset by lower interest expense. Interest income on all interest-earning assets declined primarily due to lower volumes and lower yields across all categories. Interest-earning assets decreased 53% primarily due to lower average advances. The yield earned on interest-earning assets decreased 39 basis points. The rate paid on interest-bearing liabilities decreased 42 basis points due primarily to lower rates paid on consolidated obligation bonds and discount notes. In addition, the net interest margin was 46 basis points for the first nine months of 2021 and 44 basis points for the same prior year period. The increase in net interest margin was primarily due to lower funding costs, impact from prepayment fees and a change in balance sheet mix. Higher yielding MBS and MPF loans now make up a larger percentage of the balance sheet with advance balances down in 2021.

7

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table presents and attribution of net interest income between volume and rate for the three and nine months ended September 30, 2021 and 2020.
 Increase (Decrease) in Interest Income/Expense Due to Changes in Rate/Volume 2021 compared to 2020
 Three months ended September 30,Nine months ended September 30,
(in millions)VolumeRateTotalVolumeRateTotal
Federal funds sold $(0.3)$— $(0.3)$(9.8)$(15.6)$(25.4)
Securities purchased under agreements to resell (0.1)— (0.1)(2.7)(4.8)(7.5)
Interest-bearing deposits(0.3)(0.1)(0.4)(2.2)(3.0)(5.2)
Investment securities(1.5)(17.0)(18.5)(33.5)(79.4)(112.9)
Advances(66.1)2.2 (63.9)(284.9)(151.5)(436.4)
Mortgage loans held for portfolio(2.7)(1.2)(3.9)(8.7)(17.7)(26.4)
Total interest-earning assets
$(71.0)$(16.1)$(87.1)$(341.8)$(272.0)$(613.8)
Deposits$— $0.1 $0.1 $0.3 $(2.0)$(1.7)
Consolidated obligation discount notes(4.8)(10.8)(15.6)(65.3)(104.6)(169.9)
Consolidated obligation bonds(52.2)24.6 (27.6)(206.3)(83.0)(289.3)
Other borrowings(2.7)(0.7)(3.4)(9.2)(1.5)(10.7)
Total interest-bearing liabilities
$(59.7)$13.2 $(46.5)$(280.5)$(191.1)$(471.6)
Total decrease in net interest income
$(11.3)$(29.3)$(40.6)$(61.3)$(80.9)$(142.2)

Interest income and interest expense both decreased in both quarter-over-quarter and year-over-year comparisons. Lower rates and lower volume drove the decrease in interest income while lower volumes, partially offset by higher rates on consolidated obligations, drove the decrease in interest expense in the quarter-over-quarter comparison. Lower rates and lower volume drove the decreases in both interest income and interest expense in the year-over-year comparison. The rate decrease was primarily due to a decrease in market interest rates as a result of the Federal Reserve lowering the Federal funds target rate in response to the economic impacts of the COVID-19 pandemic. Lower volumes were primarily due to decreases in member advance activity as the federal government liquidity programs continued to contribute to higher deposits at our members and decreased advance levels for the Bank. In addition, Federal funds sold and securities purchased under agreements to resell and investment securities decreased due to a reduction in short-term liquidity balances and paydowns on Agency mortgage-backed securities.

8

    Derivative Effects on Net Interest Income. The following tables quantify the effects of the Bank's derivative activities on net interest income for the three and nine months ended September 30, 2021 and 2020.
Three Months Ended
September 30, 2021		AdvancesInvestmentsMortgage LoansBondsTotal
Amortization/accretion of hedging activities in net interest income$— $— $(0.8)$— $(0.8)
Gains (losses) on designated fair value hedges(0.1)0.3 — (0.1)0.1 
Net interest settlements included in net interest income(33.9)(14.5)— 16.0 (32.4)
Total effect on net interest income$(34.0)$(14.2)$(0.8)$15.9 $(33.1)
Nine Months Ended
September 30, 2021		AdvancesInvestmentsMortgage LoansBondsTotal
Amortization/accretion of hedging activities in net interest income$— $(0.1)$(2.8)$0.1 $(2.8)
Gains (losses) on designated fair value hedges(0.1)1.7 — (0.1)1.5 
Net interest settlements included in net interest income(108.7)(32.6)— 32.1 (109.2)
Total effect on net interest income$(108.8)$(31.0)$(2.8)$32.1 $(110.5)
Three Months Ended
September 30, 2020		AdvancesInvestmentsMortgage LoansBondsTotal
Amortization/accretion of hedging activities in net interest income$— $— $(1.0)$(0.1)$(1.1)
Gains (losses) on designated fair value hedges— 0.5 — 0.2 0.7 
Net interest settlements included in net interest income(69.6)(7.1)— 21.7 (55.0)
Total effect on net interest income$(69.6)$(6.6)$(1.0)$21.8 $(55.4)
Nine Months Ended
September 30, 2020		AdvancesInvestmentsMortgage LoansBondsTotal
Amortization/accretion of hedging activities in net interest income$— $(0.1)$(2.1)$— $(2.2)
Gains (losses) on designated fair value hedges(0.1)(3.1)— 0.6 (2.6)
Net interest settlements included in net interest income(136.7)(13.7)— 54.4 (96.0)
Total effect on net interest income$(136.8)$(16.9)$(2.1)$55.0 $(100.8)

The variances in the 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 fixed rate assets and fixed rate bonds, 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 net interest spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.

In addition, 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. The provision (reversal) for credit losses in the third quarter of 2021 was a reversal of $(0.9) million compared with a provision of $1.2 million in the third quarter of 2020. For the nine months ended September 30, 2021, the reversal for credit losses was $(2.3) million compared with a provision of $5.6 million for the same prior-year period. The reversals reflected in the 2021 periods were driven primarily by the MPF portfolio due to improvements in the Bank's assumptions used to estimate expected credit losses, including forecasted housing prices, and a decline in delinquent loan balances.

The Bank's provision for credit losses in 2020 was impacted by the economic conditions resulting from the COVID-19 pandemic and reflected higher expected credit losses primarily driven by lower forecasted housing prices. The provision for the three months ended September 30, 2020 was primarily driven by a provision on the Bank's MPF portfolio. For the nine months
9

ended September 30, 2020, the Bank recorded a provision for credit losses on its MPF portfolio, private label MBS classified as AFS, and the Banking on Business (BOB) loan program.

Other Noninterest Income
 Three months ended September 30,Nine months ended September 30,
(in millions)2021202020212020
Net gains (losses) on investment securities$(3.1)$(5.3)$(15.8)$53.9 
Net gains (losses) on derivatives and hedging activities
(0.4)3.6 5.3 (97.7)
Standby letters of credit fees5.9 5.4 17.5 16.0 
Other, net1.2 1.3 3.0 1.6 
Total other noninterest income (loss)$3.6 $5.0 $10.0 $(26.2)

    The Bank's change in total other noninterest income (loss) for the third quarter of 2021 and first nine months of 2021 compared to the same prior year period was primarily due to the net gains (losses) on derivatives and hedging activities and the net gains (losses) on investment securities. The valuation changes of the financial instruments in these portfolios are driven by changes in related interest rates. The activity related to derivatives and hedging is discussed in more detail below. The net gains (losses) on investment securities are primarily due to the 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.


10

    The following tables detail the net effect of derivatives and hedging activities on noninterest income for the three and nine months ended September 30, 2021 and 2020.
 
Three months ended September 30, 2021
(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
$— $0.8 $(1.6)$0.4 $— $— $(0.4)
Total net gains (losses) on derivatives and hedging activities
$— $0.8 $(1.6)$0.4 $— $— $(0.4)
Nine months ended September 30, 2021
(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
$— $7.9 $(2.7)$0.1 $— $— $5.3 
Total net gains (losses) on derivatives and hedging activities
$— $7.9 $(2.7)$0.1 $— $— $5.3 
 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 
Total net gains (losses) on derivatives and hedging activities
$0.1 $1.4 $2.1 $— $— $— $3.6 
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)
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. For economic hedges, the Bank recorded net losses of $(0.4) million in the third quarter of 2021 compared to net gains of $3.6 million for the third quarter of 2020. The higher net losses observed during the third quarter of 2021 were primarily on the Bank’s asset swaps and were attributable to decreases in mid and long term interest rates early in the quarter. The Bank subsequently terminated certain asset swaps which limited the impacts of rising mid and long term rates later in the quarter. The asset swap gains observed during the third quarter of 2020 are reflective of the overall interest rate increases throughout the quarter. For the nine months ended September 30, 2021, the Bank recorded net gains of $5.3 million compared to net losses of $(98.0) million for the same prior-year period. Although there were decreases in mid and long term interest rate during the third quarter of 2021, the overall change for the first nine months of 2021 was a slight increase. These mid and long term rate increases led to overall net gains for the nine month period ended September 30, 2021. In comparison, the significant losses observed during the same nine month period in 2020 were attributed to significant decreases in interest rates during the first quarter of that year in response to the COVID-19 pandemic. The total notional amount of economic hedges, which includes mortgage delivery commitments, decreased to $2.2 billion at September 30, 2021 from $3.1 billion at December 31, 2020.
11


Other Expense

The Bank's total other expenses decreased $0.9 million to $22.9 million for the third quarter of 2021, compared with the same prior-year period. The decrease was primarily due to lower compensation and benefits expenses, partially offset by higher technology related costs. Total other expenses for the first nine months of 2021 were $72.0 million, down $6.7 million from the first nine months of 2020. This decline reflected the Bank's voluntary donation to its Home4Good initiative in the second quarter of 2020. The Bank has not yet made a similar donation through September 30, 2021. The Bank expects to make its planned contribution in the fourth quarter of 2021.
    
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 2020 Form 10-K.

Assets

    Total assets were $37.2 billion at September 30, 2021, compared with $47.7 billion at December 31, 2020, a decrease of $10.5 billion. The decrease was primarily due to advances, partially offset by an increase in the liquidity portfolio. Advances totaled $13.0 billion at September 30, 2021, a decrease of $12.0 billion compared to $25.0 billion at December 31, 2020. The federal government liquidity programs continued to contribute to higher deposits at our members and decreased advance levels for the Bank.

    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 certain U.S. Treasury securities using full year average balances, was 64.8% as of September 30, 2021 and 74.5% as of December 31, 2020. The decrease in the core mission asset ratio was primarily due to the decrease in average advances.

    Advances. Advances (par) totaled $12.9 billion at September 30, 2021 compared to $24.7 billion at December 31, 2020. At September 30, 2021, the Bank had advances to 129 borrowing members, compared to 146 borrowing members at December 31, 2020. Advances outstanding to the Bank’s five largest borrowers decreased to 58.7% of total advances as of September 30, 2021, compared to 61.4% at December 31, 2020.

12

The following table provides information on advances at par by redemption terms at September 30, 2021 and December 31, 2020.
(in millions)September 30, 2021December 31, 2020
Fixed-rate
Due in 1 year or less (1)
$7,210.4 $6,607.2 
Due after 1 year through 3 years2,995.4 7,182.3 
Due after 3 years through 5 years1,280.9 2,192.5 
Thereafter159.7 169.2 
Total par value$11,646.4 $16,151.2 
Fixed-rate, callable or prepayable(1)
Due after 1 year through 3 years$— $50.0 
Total par value$— $50.0 
Variable-rate
Due in 1 year or less (1)
$815.8 $6,664.6 
Due after 1 year through 3 years100.0 100.0 
Due after 3 years through 5 years3.1 3.1 
Total par value$918.9 $6,767.7 
Variable-rate, callable or prepayable(2)
Due in 1 year or less$10.0 $1,400.0 
Due after 1 year through 3 years40.0 10.0 
Due after 3 years through 5 years— 40.0 
Total par value$50.0 $1,450.0 
Other(3)
Due in 1 year or less$102.9 $89.0 
Due after 1 year through 3 years90.8 120.8 
Due after 3 years through 5 years51.8 55.2 
Thereafter27.5 41.0 
Total par value$273.0 $306.0 
Total par balance$12,888.3 $24,724.9 
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, 2021 or December 31, 2020.
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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 September 30, 2021 and 2020. Commercial Bank, Savings Institution, and Credit Union members are classified by asset size as follows: Super-Regional (over $150 billion), Regional ($25 billion to $150 billion), Mid-size ($1.2 billion to $25 billion) and Community Financial Institutions (CFIs) (under $1.2 billion). Credit Union and Insurance members are classified separately.
Member ClassificationSeptember 30, 2021September 30, 2020
Super-Regional3 2 
Regional4 3 
Mid-size40 42 
CFI 113 111 
Credit Union30 28 
Insurance15 16 
Total borrowing members during the period205 202 
Total membership282 278 
Percentage of members borrowing during the period72.7 %72.7 %
    
The following table provides information at par on advances by member classification at September 30, 2021 and December 31, 2020.
(in millions)September 30, 2021December 31, 2020
Member Classification
Super-Regional$4,650.0 $9,350.0 
Regional1,980.0 3,366.0 
Mid-size1,966.1 3,938.7 
CFI2,000.1 2,510.9 
Credit Union906.5 1,002.2 
Insurance875.1 1,044.0 
Non-member510.5 3,513.1 
Total$12,888.3 $24,724.9 

    As of September 30, 2021, total advances decreased 48% compared with balances at December 31, 2020. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. The federal government liquidity programs continued 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, 2021.

    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 an ACL at September 30, 2021 or December 31, 2020. 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, was $4.8 billion at September 30, 2021 and $4.9 billion at December 31, 2020.

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 insurance. The Bank has a loan modification program for participating financial institutions (PFIs) under the MPF Program.
14

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 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 2021 and 2020. Balances regarding the Bank’s loan products are summarized below.
(in millions)September 30, 2021December 31, 2020
Advances (1)
$12,987.1 $24,971.1 
Mortgage loans held for portfolio, net (2)
4,780.3 4,886.2 
Nonaccrual mortgage loans (3)
42.5 90.8 
Mortgage loans 90 days or more delinquent and still accruing interest (4)
3.4 5.3 
BOB loans, net 23.2 21.2 
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 amounts include approximately $24.9 million and $62.3 million related to loans in forbearance or repayment programs as a result of COVID-19 at September 30, 2021 and December 31, 2020, respectively.
(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 improved slightly compared to December 31, 2020, and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of September 30, 2021, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.5% of the MPF Original portfolio, 2.2% of the MPF Plus portfolio, and 1.0% of the MPF 35 portfolio, compared with 1.1%, 3.5%, and 2.4%, respectively, at December 31, 2020. The amount of seriously delinquent loans declined across the Bank's MPF portfolio compared to December 31, 2020, as loans continued to exit forbearance and repayment programs related to 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.

15

The Bank recognizes 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, 2021 and December 31, 2020.

 MPF CE structure
September 30, 2021		ACL
September 30, 2021
(in millions)FLAAvailable CEEstimate of Credit Loss
Estimate of Recovery (1)
Charge-offsReduction to the ACL due
to CE		ACL
MPF Original $7.2 $105.3 $1.6 $(2.5)$(0.3)$(0.3)$(1.5)
MPF 3515.7 154.4 2.3 (0.7)— (2.3)(0.7)
MPF Plus15.0 2.8 7.0 (1.7)— (0.2)5.1 
Total$37.9 $262.5 $10.9 $(4.9)$(0.3)$(2.8)$2.9 
 MPF CE structure
December 31, 2020		ACL
December 31, 2020
(in millions)FLAAvailable CEEstimate of Credit Loss
Estimate of Recovery (1)
Charge-offsReduction to the ACL due
to CE		ACL
MPF Original $6.7 $96.2 $4.2 $(2.6)$(0.5)$(1.9)$(0.8)
MPF 3513.2 130.9 6.2 (0.6)— (4.6)1.0 
MPF Plus15.3 4.4 7.2 (1.9)— (0.5)4.8 
Total$35.2 $231.5 $17.6 $(5.1)$(0.5)$(7.0)$5.0 
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 $2.1 million during the first nine months of 2021 primarily due to lower estimates of expected credit losses for the MPF Original and MPF 35 products, which were primarily driven by an improvement in forecasted housing prices and a decline in delinquent loan balances.

The Bank continued to consider potential economic impacts resulting from the COVID-19 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.
16

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, certificates of deposits and U.S. Treasury obligations classified as trading or AFS. The liquidity portfolio at September 30, 2021 increased by approximately $3.7 billion compared to December 31, 2020. The increase in the Bank's liquidity portfolio helps to optimize financial holdings while maintaining compliance with regulatory standards.

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 $9.3 billion at September 30, 2021 and $11.5 billion at December 31, 2020. Paydowns associated with the Bank's Agency MBS portfolio contributed to this decline. In addition, during 2021, the Bank’s MBS purchases have been restricted by Finance Agency regulations which limit the size of the MBS portfolio based on regulatory capital. In addition, narrow mortgage spreads, driven by the Federal Reserve's quantitative easing, have limited purchase opportunities.

Investment securities, including all trading, AFS, and HTM securities, totaled $14.0 billion at September 30, 2021, compared to $13.1 billion at December 31, 2020. Details of the investment securities portfolio follow.
 Carrying Value
(in millions)September 30, 2021December 31, 2020
Trading securities:  
Non-MBS:
U.S. Treasury obligations$261.9 $899.4 
Government-sponsored enterprises (GSE) and Tennessee Valley Authority (TVA) obligations
246.6 256.6 
Total trading securities$508.5 $1,156.0 
Yield on trading securities2.95 %2.31 %
AFS securities: 
U.S. Treasury obligations$4,405.3 $— 
GSE and TVA obligations1,519.4 1,643.7 
State or local agency obligations220.9 241.7 
MBS:
      U.S. obligations single-family MBS437.3 602.1 
      GSE single-family MBS 2,303.1 3,262.9 
      GSE multifamily MBS 3,096.5 3,473.4 
Private label MBS205.7 252.6 
Total AFS securities$12,188.2 $9,476.4 
Yield on AFS securities1.24 %1.56 %
HTM securities:  
Certificates of deposit
$— $750.0 
MBS:
      U.S. obligations single-family MBS90.6 120.6 
      GSE single-family MBS 635.5 989.8 
      GSE multifamily MBS 513.5 530.2 
Private label MBS75.8 93.1 
Total HTM securities$1,315.4 $2,483.7 
Yield on HTM securities2.75 %1.99 %
Total investment securities$14,012.1 $13,116.1 
Yield on investment securities1.44 %1.70 %
17


As of September 30, 2021, 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$4,520.9 $4,535.7 
Freddie Mac2,052.8 2,081.4 
Federal Farm Credit Banks1,655.8 1,655.8 
U.S. Treasury4,667.2 4,667.2 
Ginnie Mae527.9 529.1 
Total$13,424.6 $13,469.2 

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, 2021 and December 31, 2020, these investments were repaid according to the contractual terms. No ACL was recorded for these assets at September 30, 2021 or December 31, 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 $2.1 million at September 30, 2021 and $2.4 million at December 31, 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, 2021 or December 31, 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, 2021 increased to $965.9 million from $923.4 million at December 31, 2020.

    Consolidated Obligations. Consolidated obligations consist of bonds and discount notes. The Bank's consolidated obligations totaled $33.2 billion at September 30, 2021, a decrease of $10.2 billion from December 31, 2020. The overall decrease in consolidated obligations outstanding is consistent with the decreased advances and total asset balances. At September 30, 2021, the Bank’s bonds outstanding decreased to $21.1 billion compared to $33.9 billion at December 31, 2020. Discount notes outstanding at September 30, 2021 increased to $12.1 billion from $9.5 billion at December 31, 2020. The increase in discount notes is consistent with the increase in the Bank's liquidity portfolio.

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 9 to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data of the Bank's 2020 Form 10-K.

Commitments and Off-Balance Sheet Items. As of September 30, 2021, the Bank was obligated to fund approximately $1.0 million in additional advances and BOB loans, $65.3 million of mortgage loans, and to issue $1.2 billion in consolidated obligations. In addition, the Bank had $20.4 billion in outstanding standby letters of credit as of September 30, 2021. 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, 2021December 31, 2020
Commercial banks132 $941.8 135 $1,262.3 
Savings institutions51 111.1 51 114.3 
Insurance companies34 83.0 30 83.6 
Credit unions63 65.4 63 67.2 
Community Development Financial Institution (CDFI)2 0.4 2 0.4 
Total member institutions / total GAAP capital stock282 $1,201.7 281 $1,527.8 
Mandatorily redeemable capital stock23.3 142.8 
Total capital stock$1,225.0 $1,670.6 

    The total number of members as of September 30, 2021 increased by one member compared to December 31, 2020. The Bank added four new members and lost three members. Two members merged with other institutions within the Bank's district and one member merged its charter with an entity outside the Banks' district.

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, 2021 and December 31, 2020.

(dollars in millions)September 30, 2021
Member Capital Stock% of Total
Ally Bank, Midvale, UT (1)
$223.8 18.3 %
TD Bank N.A., Wilmington, DE154.4 12.6 
First National Bank of Pennsylvania, Greenville, PA135.3 11.0 
(dollars in millions)December 31, 2020
Member Capital Stock% of Total
Ally Bank, Midvale, UT (1)
$276.5 16.6 %
PNC Bank, N.A., Wilmington, DE (1)
185.0 11.1 
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. In addition to the retained earnings target for risk, the framework considers the amount of retained earnings needed for compliance with the capital-to-asset ratio regulatory minimum in determining an overall retained earnings need. The framework assists management in its overall analysis of the level of future dividends. The framework generated a retained earnings target of $322 million and an overall retained earnings need of $587 million as of September 30, 2021. The Bank's retained earnings were $1,397.0 million at September 30, 2021.

Retained earnings increased slightly to $1,397.0 million at September 30, 2021, compared to $1,376.8 million at December 31, 2020. The increase reflected net income that was largely offset by dividends paid. Total retained earnings at September 30,
19

2021 included unrestricted retained earnings of $939.6 million and restricted retained earnings (RRE) of $457.4 million. At September 30, 2021, the balance in RRE exceeded the threshold for the contribution requirement. Accordingly, no allocation of net income was made to RRE in the first nine months of 2021. For additional information, see Note 7 - Capital in this Form 10-Q.

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 2020 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, 2021December 31, 2020
Permanent capital:  
Capital stock (1)
$1,225.0 $1,670.6 
Retained earnings
1,397.0 1,376.8 
Total permanent capital$2,622.0 $3,047.4 
RBC requirement:  
Credit risk capital
$166.9 $189.3 
Market risk capital
138.3 211.2 
Operations risk capital
91.5 120.2 
Total RBC requirement$396.7 $520.7 
Excess permanent capital over RBC requirement$2,225.3 $2,526.7 
Note:
(1) Capital stock includes mandatorily redeemable capital stock.

The decrease in the total RBC requirement as of September 30, 2021 is mainly related to the decrease in the market risk capital requirement. The decrease was primarily driven by changes to the Finance Agency's scenario methodology used to determine the required market risk capital. Despite the 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 28, 2021, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2021. 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, 2021.

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 2020 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 2020 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, 2021.

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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.

Legislative and Regulatory Developments

FHLBank Membership

On September 9, 2021, the Finance Agency published a Supervisory Letter on FHLBank Membership Issues covering five issues, including (1) Requirements for De Novo Community Development Financial Institutions, (2) Automatic Transfer of Membership, (3) Large Non-Member Institution Merging with a Small Member, (4) Applicant’s Compliance with “Financial Condition” Requirement, and (5) Definition of Insurance Company. The Supervisory Letter is intended to provide uniform guidance to the FHLBanks in the event they encounter similar circumstances. The Bank continues to evaluate the Supervisory Letter and its effect on Bank membership.

Regulatory Interpretation on Eligibility of Mortgage Participations as Collateral for FHLBank Advances

On October 4, 2021, the Finance Agency published a Regulatory Interpretation on Eligibility of Mortgage Loan Participations as Collateral for Federal Home Loan Bank Advances. The Regulatory Interpretation addresses whether an FHLBank can accept as collateral to secure advances mortgage loan participations that cannot be readily liquidated in the form in which they are to be pledged. The Regulatory Interpretation concludes that mortgage loan participations must meet the requirements of Finance Agency regulation 12 CFR 1266.7(a)(4), including the requirement that the collateral can be “liquidated in due course” in order to be eligible to secure FHLBank advances. It further concludes that participations for which there would be a known impediment to liquidation do not meet such requirement and therefore are not eligible collateral for advances. Finally, the Regulatory Interpretation rescinds prior guidance from the Finance Agency and its predecessor agency(ies) that provide mortgage loan participations may be eligible as collateral under regulatory provisions other than 12 CFR 1266.7(a)(4). The Regulatory Interpretation becomes effective on December 13, 2021.

Although the Bank does not currently expect the Regulatory Interpretation to have a material impact on its financial condition or results of operations, this restriction on collateral may negatively impact future borrowing by certain members.

Fair Housing and Fair Lending Enforcement

On July 9, 2021, the Finance Agency published a Policy Statement on Fair Lending to communicate the Finance Agency’s general position on monitoring and information gathering, supervisory examinations, and administrative enforcement related to the Equal Credit Opportunity Act, the Fair Housing Act, and the Federal Housing Enterprises Financial Safety and Soundness Act. The Policy Statement became effective on the date of publication.

On August 12, 2021, the Finance Agency and the U.S. Department of Housing and Urban Development announced they had entered into a Memorandum of Understanding regarding fair housing and fair lending enforcement. Under the Memorandum of Understanding, the two agencies will focus on enhancing their enforcement of the Fair Housing Act, and their oversight of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

The Bank continues to monitor these actions and guidance as they evolve and to evaluate their potential impact on the Bank.

COVID-19 Developments

In light of the COVID-19 pandemic, the Presidents of the United States, through executive orders, governmental agencies, including the SEC, the Office of the Comptroller of the Currency, Federal Reserve, Federal Deposit Insurance Corporation, National Credit Union Administration, Commodity Futures Trading Commission 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, and the Congress has enacted and may continue to enact pandemic relief legislation, 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.


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U.S. Treasury and Fannie Mae Preferred Stock Purchase Agreement

On January 14, 2021, the U.S. Treasury and Fannie Mae entered into a letter agreement amending the terms of their Preferred Stock Purchase Agreement, which could impact PFIs that participate in the MPF Program’s MPF Xtra product (where MPF loans acquired are concurrently sold to Fannie Mae). Under the Preferred Stock Purchase Agreement, the U.S. Treasury provides liquidity to Fannie Mae in exchange for senior preferred stock. Under the Preferred Stock Purchase Agreement amendment, which was to take effect January 1, 2022, the Finance Agency (acting as conservator for Fannie Mae) and the U.S. Treasury agreed to limit the dollar volume of loans Fannie Mae could purchase from a single seller through Fannie Mae’s cash window to $1.5 billion per year. As administrator of the MPF Program, the FHLBank of Chicago purchases MPF Xtra loans from PFIs and sells them to Fannie Mae via the cash window process. Based on volumes for the MPF Xtra product program, the Preferred Stock Purchase Agreement amendment would significantly curtail MPF Xtra cash window sales. On September 14, 2021, the Finance Agency and the U.S. Treasury temporarily suspended certain provisions of the Preferred Stock Purchase Agreement, including limits on Fannie Mae’s cash window limits, until at least September 14, 2022.

Although the Bank does not currently expect the cash window limits to have a material impact on its financial condition or results of operations, they may negatively impact the volume of loans that PFIs are able to sell through the MPF Program.

Other Legislative Matters

As previously disclosed, legislation has been introduced in the U.S. Senate and House of Representatives that, if enacted in its proposed form, would require that the FHLBanks set aside higher percentages of their earnings for their affordable housing and community investment programs than is required under the current law. As part of the Congressional budget reconciliation process, a legislative proposal is under consideration to set aside fifteen percent of an FHLBank’s net income, in each year from 2022 to 2027, for its affordable housing program. The FHLBanks continue to closely monitor these proposals and developments.

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 2020 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 2020 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
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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 224.6% at September 30, 2021 and 188.2% at December 31, 2020. The increase was primarily due to the decrease in capital stock as a result of lower advances.

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 2021, 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, 2021 and December 31, 2020. Given the low level of interest rates, an instantaneous parallel interest rate shock of "down 200 basis points" and "down 100 basis points" could not be meaningfully measured for these periods and therefore is not presented.
(in years)Base
Case		Up 100
 basis points		Up 200
 basis points
Actual Duration of Equity:
September 30, 2021(0.5)0.51.5
December 31, 2020(0.9)0.93.2

    Duration of equity changes in the first nine months of 2021 were mainly the result of funding actions, primarily the issuance of discount notes and prepayment model changes noted above, which outweighed the impact of the increase in long-
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term interest rates. 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.

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 and temporarily suspended the “down 100 basis points parallel” and “100 basis point steeper” shocks.
ROE Spread Volatility Increase/(Decline)
(in basis points)Down 100 bps
Longer Term Rate Shock		100 bps FlatterUp 200 bps
Parallel Shock
September 30, 2021(58)3482
December 31, 2020(32)40118

    Changes in ROE spread volatility in the first nine months of 2021 primarily reflect the impact of funding actions, mainly the issuance of discount notes and prepayment model changes noted above, which outweighed the impact of the increase in long-term interest rates. 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, 2021 and December 31, 2020.

    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.


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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, 2021, aggregate TCE was $36.1 billion, comprised of approximately $12.9 billion in advance principal outstanding, $22.8 billion in letters of credit (including forward commitments), and $353.7 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 2020 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, 2021 and December 31, 2020, 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 numerical rating 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.

As noted above, the Bank monitors member credit quality on a regular basis. To date, no material deterioration due to the COVID-19 pandemic has occurred. 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, 2021.
September 30, 2021
(dollars in millions)TCE% of Total
TD Bank, National Association, DE$15,275.6 42.4 %
Ally Bank, UT (1)
4,664.6 12.9 
Fulton Bank, N.A., PA1,689.7 4.7 
First National Bank of Pennsylvania, PA1,593.7 4.4 
Univest Bank & Trust Co., PA1,032.6 2.9 
24,256.2 67.3 
Other financial institutions11,797.6 32.7 
Total TCE outstanding$36,053.8 100.0 %
Notes:
(1) For Bank membership purposes, principal place of business is Horsham, PA.

    Member Advance Concentration Risk. The following table lists the Bank’s top five borrowers based on advance balances at par as of September 30, 2021.
September 30, 2021
(dollars in millions)Advance Balance% of Total
Ally Bank, UT (1)
$4,650.0 36.1 %
First National Bank of Pennsylvania, PA1,230.0 9.6 
Santander Bank, National Association, DE (2)
750.0 5.8 
Brighthouse Life Insurance Company, DE (3)
500.0 3.9 
American Heritage Federal Credit Union, PA430.0 3.3 
7,560.0 58.7 
Other borrowers5,328.3 41.3 
Total advances$12,888.3 100.0 %
Notes:
(1) For Bank membership purposes, principal place of business is Horsham, PA.
(2) Santander Bank, N.A. is a subsidiary of Banco Santander, which is located in Spain.
(3) In 2018, Brighthouse Life Insurance Company relocated its principal place of business and became a member of another FHLBank.

The average year-to-date September 30, 2021 balances for the five largest borrowers totaled $9.8 billion, or 56.8% 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 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 $20.4 billion at September 30, 2021 and $19.7 billion at December 31, 2020, primarily related to public unit deposits. Available master standby letters of credit of $2.2 billion at September 30, 2021 and $1.2 billion at December 31, 2020 are not included in these totals. The Bank had a concentration of letters of credit with one member (TD Bank) of $14.3 billion or 70% of the total at September 30, 2021 and $12.6 billion or 64% of the total at December 31, 2020.

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 2020 Form 10-K for additional information related to the Bank’s Collateral Policy. Beginning in the first quarter of 2021, the Bank accepts certain electronic mortgage notes (eNotes) that comply with the Bank’s Collateral Policy. Consistent with recent regulatory guidance, the Bank has made collateral policy changes associated with LIBOR-linked collateral that are effective January 2022.

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
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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 2020 Form 10-K.

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-minus, 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-minus 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 weekly ratings reviews. Reported amount also includes pledged FHLBank 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, 2021 and December 31, 2020.
September 30, 2021
(dollars in millions)Blanket LienListingDeliveryTotal
Amount%Amount%Amount%Amount%
One-to-four single-family residential
  mortgage loans		$93,274.0 47.2 %$139.0 8.9 %$8.2 0.7 %$93,421.2 46.6 %
High quality investment securities1,185.0 0.6 1,240.5 79.0 1,068.6 95.4 3,494.1 1.7 
ORERC/CFI eligible collateral84,894.5 42.9 169.5 10.8 43.9 3.9 85,107.9 42.5 
Multi-family residential mortgage
  loans		18,389.0 9.3 20.9 1.3 — — 18,409.9 9.2 
Total eligible collateral value$197,742.5 100.0 %$1,569.9 100.0 %$1,120.7 100.0 %$200,433.1 100.0 %
Total TCE$34,449.1 95.6 %$919.1 2.5 %$685.6 1.9 %$36,053.8 100.0 %
Number of members159 85.5 %13 7.0 %14 7.5 %186 100.0 %
December 31, 2020
(dollars in millions)Blanket LienListingDeliveryTotal
Amount%Amount%Amount%Amount%
One-to-four single-family residential
  mortgage loans		$94,362.6 45.7 %$211.7 12.2 %$5,211.0 77.6 %$99,785.3 46.4 %
High quality investment securities1,485.9 0.7 1,376.5 79.2 1,475.5 21.9 4,337.9 2.0 
ORERC/CFI eligible collateral89,983.1 43.5 136.3 7.8 35.6 0.5 90,155.0 41.9 
Multi-family residential mortgage
  loans		20,852.3 10.1 13.8 0.8 — — 20,866.1 9.7 
Total eligible collateral value$206,683.9 100.0 %$1,738.3 100.0 %$6,722.1 100.0 %$215,144.3 100.0 %
Total TCE$41,277.4 89.7 %$980.2 2.1 %$3,783.4 8.2 %$46,041.0 100.0 %
Number of members16785.6 %147.2 %147.2 %195100.0 %


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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, NRSROs credit ratings and/or the financial health of the underlying issuer.
    
Investment Quality and External Credit Ratings. The following tables present the Bank’s investment carrying values as of September 30, 2021 and December 31, 2020, based on the lowest credit rating from the NRSROs (Moody’s, S&P and Fitch).
September 30, 2021(1)
Long-Term Rating
(in millions)AAAAAABBBBelow Investment GradeUnratedTotal
Money market investments:
  Interest-bearing deposits$— $— $342.9 $205.1 $— $— $548.0 
  Securities purchased under agreements to resell— — 1,000.0 — — — 1,000.0 
  Federal funds sold— 425.0 2,050.0 — — — 2,475.0 
Total money market investments— 425.0 3,392.9 205.1 — — 4,023.0 
Investment securities:
  U.S. Treasury obligations— 4,667.2 — — — — 4,667.2 
  GSE and TVA obligations— 1,766.0 — — — — 1,766.0 
  State or local agency obligations21.3 199.6 — — — — 220.9 
Total non-MBS21.3 6,632.8 — — — — 6,654.1 
  U.S. obligations single-family MBS— 527.9 — — — — 527.9 
  GSE single-family MBS— 2,938.6 — — — — 2,938.6 
  GSE multifamily MBS— 3,610.0 — — — — 3,610.0 
  Private label MBS — 7.7 26.1 19.5 87.7 140.5 281.5 
Total MBS— 7,084.2 26.1 19.5 87.7 140.5 7,358.0 
Total investments$21.3 $14,142.0 $3,419.0 $224.6 $87.7 $140.5 $18,035.1 
December 31, 2020 (1)
Long-Term Rating
(in millions)AAAAAABBBBelow Investment GradeUnratedTotal
Money market investments:
  Interest-bearing deposits$— $— $950.8 $— $— $— $950.8 
  Securities purchased under agreements to resell— — 500.0 100.0 — — 600.0 
  Federal funds sold— — 1,850.0 — — — 1,850.0 
Total money market investments— — 3,300.8 100.0 — — 3,400.8 
Investment securities:
  U.S. Treasury obligations— 899.4 — — — — 899.4 
  Certificates of deposit— 250.0 500.0 — — — 750.0 
  GSE and TVA obligations— 1,900.3 — — — — 1,900.3 
  State or local agency obligations26.0 215.7 — — — — 241.7 
Total non-MBS26.0 3,265.4 500.0 — — — 3,791.4 
  U.S. obligations single-family MBS— 722.7 — — — — 722.7 
  GSE single-family MBS— 4,252.7 — — — — 4,252.7 
  GSE multifamily MBS— 4,003.6 — — — — 4,003.6 
  Private label MBS — 14.6 18.5 14.2 111.3 187.1 345.7 
Total MBS— 8,993.6 18.5 14.2 111.3 187.1 9,324.7 
Total investments$26.0 $12,259.0 $3,819.3 $114.2 $111.3 $187.1 $16,516.9 
Notes:
(1) Balances exclude total accrued interest of $29.4 million for September 30, 2021 and $28.2 million for December 31, 2020.

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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 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, 2021, the Bank had unsecured exposure to 10 counterparties totaling $3.0 billion, with six counterparties each 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, 2021 and December 31, 2020. The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period.
(in millions)
Carrying Value (1) (2)
September 30, 2021December 31, 2020
Interest-bearing deposits$548.0 $950.8 
Certificates of deposit— 750.0 
Federal funds sold2,475.0 1,850.0 
Total$3,023.0 $3,550.8 
Note:
(1) Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies and instrumentalities, GSEs, and supranational entities.
(2) Excludes a $339.8 million compensating balance account with a counterparty which is non-interest bearing.

    As of September 30, 2021, 81.9% 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 counterparties.

    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 internal 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 internal 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 internal credit rating. As of September 30, 2021, 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
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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, 2021 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
AAABBBTotal
Domestic$— $342.9 $205.1 $548.0 
U.S. branches and agency offices of foreign commercial banks:
  Australia— 675.0 — 675.0 
  Canada— 425.0 — 425.0 
  Finland425.0 — — 425.0 
  France— 100.0 — 100.0 
  Germany— 425.0 — 425.0 
  Netherlands— 425.0 — 425.0 
  Total U.S. branches and agency offices of foreign commercial banks425.0 2,050.0 — 2,475.0 
Total unsecured investment credit exposure$425.0 $2,392.9 $205.1 $3,023.0 
(in millions)
December 31, 2020 (1) (2)
Carrying Value
Domicile of Counterparty
Investment Grade (3) (4)
AAATotal
Domestic$— $950.8 $950.8 
U.S. branches and agency offices of foreign commercial banks:
  Australia— 750.0 750.0 
  Canada250.0 1,100.0 1,350.0 
  Netherlands— 500.0 500.0 
  Total U.S. branches and agency offices of foreign commercial banks250.0 2,350.0 2,600.0 
Total unsecured investment credit exposure$250.0 $3,300.8 $3,550.8 
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.


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    The following table presents the remaining contractual maturity of the Bank's unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. subsidiaries or branches and agency offices of foreign commercial banks. The Bank also mitigates the credit risk on investments by generally investing in investments that have short-term maturities.
(in millions)
September 30, 2021
Carrying Value
Domicile of CounterpartyOvernightDue 2 days through 30 daysDue 31 days through 90 daysTotal
Domestic$548.0 $— $— $548.0 
U.S. branches and agency offices of foreign commercial banks:
  Australia675.0 — — 675.0 
  Canada425.0 — — 425.0 
  Finland425.0 — — 425.0 
  France100.0 — — 100.0 
  Germany425.0 — — 425.0 
  Netherlands425.0 — — 425.0 
  Total U.S. branches and agency offices of foreign commercial banks2,475.0 — — 2,475.0 
Total unsecured investment credit exposure$3,023.0 $— $— $3,023.0 
(in millions)
December 31, 2020
Carrying Value
Domicile of CounterpartyOvernightDue 2 days through 30 daysDue 31 days through 90 daysTotal
Domestic$950.8 $— $— $950.8 
U.S. branches and agency offices of foreign commercial banks:
  Australia750.0 — — 750.0 
  Canada600.0 500.0 250.0 1,350.0 
  Netherlands500.0 — — 500.0 
  Total U.S. branches and agency offices of foreign commercial banks1,850.0 500.0 250.0 2,600.0 
Total unsecured investment credit exposure$2,800.8 $500.0 $250.0 $3,550.8 

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 $4.7 billion at September 30, 2021 and $0.9 billion at December 31, 2020.

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 $8.8 billion at September 30, 2021 and $10.9 billion at December 31, 2020.

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 $220.9 million at September 30, 2021 and $241.7 million at December 31, 2020.

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 ratings downgrades. In 2007, the Bank discontinued the purchase of private label MBS. The carrying value of the Bank’s private label MBS portfolio was $281.5 million at September 30, 2021 and $345.7 million at December 31, 2020.

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. The Bank expects to receive all cash flows contractually due with respect to its HTM private label MBS and therefore has no ACL related to this portfolio. With respect to its AFS private label MBS, the Bank has an ACL of $2.1 million and $2.4 million as of September 30, 2021 and December 31, 2020,
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respectively. For its AFS 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.

The Bank recorded a reversal for credit losses of $0.5 million on its AFS private label MBS for the third quarter of 2021 and an immaterial provision for credit losses for the third quarter of 2020. For the nine months ended September 30, 2021, the Bank recorded a reversal for credit losses of $0.3 million and a provision for credit losses of $1.7 million for the same prior-year period. Because the Bank does not intend to sell and will not be required to sell its AFS private label MBS with recorded credit losses before anticipated recovery of their amortized cost basis, the Bank did not write down any of its AFS private label MBS securities amortized cost basis for the difference between amortized cost and fair value.

For those AFS private label MBS with a credit loss previously recorded, 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 reversal 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 was $3.2 million and $4.1 million for the third quarter of 2021 and 2020, respectively, and $10.2 million and $12.2 million for the first nine months of 2021 and 2020, respectively.

Management will continue to evaluate its private label MBS. Material credit losses have occurred on AFS 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 AFS private label MBS with expected credit losses may result in the Bank recording an ACL. Those AFS private label MBS 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.

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. The Bank had net mortgage loans held for portfolio of $4.8 billion at September 30, 2021 and $4.9 billion at December 31, 2020, after an allowance for credit losses of $2.9 million at September 30, 2021 and $5.0 million at December 31, 2020.

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.

When a conventional mortgage loan requires PMI, the MPF Program modeling applied to the Bank’s acquisitions requires additional CE from the PFI to compensate for the mortgage insurer rating when it is below BBB+.

The MPF Plus product required SMI under the MPF Program when each pool was established. At September 30, 2021, 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-. As of September 30, 2021, 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, 2021 was $14.8 million and $4.6 million, respectively. The corresponding amounts at December 31, 2020 were $30.0 million and $8.9 million.

    BOB Loans. See Note 1 - Summary of Significant Accounting Policies in Item 8 in the Bank's 2020 Form 10-K for a description of the BOB program. The allowance for credit losses on BOB loans was $3.3 million at September 30, 2021 and $3.1 million at December 31, 2020.

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
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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 either CME Clearing or LCH Ltd. as the Clearing House for its 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, 2021. The Bank’s total net credit exposure to uncleared derivative counterparties is immaterial.

    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, 2021.

    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, 2021 and December 31, 2020.
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(in millions)September 30, 2021
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$680.0 $0.1 $— $0.1 
  Cleared derivatives15,926.0 — 172.7 172.7 
Liability positions with credit exposure:
  Uncleared derivatives
    A1,770.0 (1.2)2.4 1.2 
    BBB3,435.3 (4.0)6.0 2.0 
Total derivative positions with credit exposure to non-member counterparties
21,811.3 (5.1)181.1 176.0 
Member institutions (2)
65.3 — — — 
Total$21,876.6 $(5.1)$181.1 $176.0 
Derivative positions without credit exposure
2,319.2 
Total notional
$24,195.8 
(in millions)December 31, 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
    A$805.0 $0.3 $— $0.3 
  Cleared derivatives16,077.1 — 135.6 135.6 
Liability positions with credit exposure:
  Uncleared derivatives
    A27.3 (0.3)0.5 0.2 
    BBB234.2 (1.0)1.2 0.2 
Total derivative positions with credit exposure to non-member counterparties
17,143.6 (1.0)137.3 136.3 
Member institutions (2)
60.6 0.7 — 0.7 
Total$17,204.2 $(0.3)$137.3 $137.0 
Derivative positions without credit exposure
237.8 
Total notional
$17,442.0 
Notes:
(1) This table does not reflect any changes in rating, outlook or watch status occurring after September 30, 2021. 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) Member institutions include mortgage delivery commitments.

    The Bank annually underwrites each counterparty and country and regularly monitors NRSRO rating actions and other publications to assess credit risk and determine if there have been any changes to credit quality. This includes actively monitoring counterparties with an elevated risk profile and assessing approximate indirect exposure to foreign sovereign debt.

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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, 2021. 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, certificates of deposit, 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 membership needs and 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. Excess contingency liquidity was approximately $16.7 billion at September 30, 2021 and $15.7 billion at December 31, 2020.

    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 2021, the Bank maintained continual access to funding. 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, including 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 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 Office of Finance (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
35

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. One scenario assumes that the Bank cannot access the capital markets for a period of 20 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, 2021. Refer to the Liquidity and Funding Risk section in Item 7. of the Bank's 2020 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 6 - Consolidated Obligations of the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in the Bank's 2020 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 Committee monitors economic indicators and the external environment in which the Bank operates for alignment with the Bank's risk appetite.

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    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).  In March 2021, the FCA confirmed that key LIBOR settings will cease as of June 30, 2023. The Bank has developed a LIBOR transition plan which addresses considerations such as: exposure, fallback language, systems preparation, and balance sheet management. In addition, 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 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 contractual maturity as of September 30, 2021.

(in millions)Prior to June 30, 2023ThereafterTotal
Assets Indexed to LIBOR
Principal Amount:
   Advances$785.0 $93.1 $878.1 
   Investments:
      MBS13.6 5,007.2 5,020.8 
Derivatives Hedging Assets (Receive Leg LIBOR)
   Notional Amount:
      Cleared3,921.0 1,976.4 5,897.4 
      Uncleared24.5 26.0 50.5 
 Total Principal/Notional Amounts$4,744.1 $7,102.7 $11,846.8 
Liabilities Indexed to LIBOR
Principal Amount:
   Consolidated Obligations$545.0 $— $545.0 
Derivatives Hedging Liabilities (Pay Leg LIBOR)
   Notional Amount:
      Cleared968.3 60.0 1,028.3 
      Uncleared25.0 — 25.0 
 Total Principal/Notional Amounts$1,538.3 $60.0 $1,598.3 
    
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 7 in the Bank's 2020 Form 10-K 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, 2021.
(in millions)LIBORSOFROISOtherTotal
Assets Indexed to a Variable Rate
Principal Amount:
   Advances$878.1 $50.7 $— $40.1 $968.9 
   Investments:
      MBS5,020.8 223.4 — 74.4 5,318.6 
Derivatives Hedging Assets (Receive Leg Variable Rate)
   Notional Amount5,947.9 6,802.4 1,031.9 — 13,782.2 
 Total Principal/Notional Amounts$11,846.8 $7,076.5 $1,031.9 $114.5 $20,069.7 
Liabilities Indexed to a Variable Rate
Principal Amount:
   Consolidated Obligations$545.0 $1,125.0 $— $— $1,670.0 
Derivatives Hedging Liabilities (Pay Leg Variable Rate)
   Notional Amount1,053.3 7,370.0 900.0 — 9,323.3 
 Total Principal/Notional Amounts$1,598.3 $8,495.0 $900.0 $— $10,993.3 

On July 1, 2021, the Finance Agency issued a Supervisory Letter to the FHLBanks regarding its expectations regarding an FHLBank’s use of alternative rates other than SOFR or other rates currently used by the Bank. The Supervisory Letter provides guidance on considerations, such as volume of underlying transactions, credit sensitivity, modeling risk and others, that an FHLBank should take into account prior to employing an alternative reference rate. In addition, if the Bank intends to use an alternative rate not already used, it needs to provide notice to the Finance Agency.

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 2020 Form 10-K as well as Legislative and Regulatory Developments in Item 2. in this Form 10-Q.

38

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)2021202020212020
Interest income:    
Advances
$31,298 $95,201 $112,582 $548,953 
Interest-bearing deposits
214 638 800 6,005 
Securities purchased under agreements to resell
185 294 449 7,923 
Federal funds sold
692 1,000 2,004 27,454 
Trading securities2,972 9,055 11,548 41,786 
Available-for-sale (AFS) securities
23,769 31,996 74,066 138,565 
Held-to-maturity (HTM) securities
7,746 11,816 25,871 43,932 
Mortgage loans held for portfolio
31,996 35,932 95,114 121,561 
Total interest income98,872 185,932 322,434 936,179 
Interest expense:   
Consolidated obligations - discount notes1,378 16,980 5,473 175,414 
Consolidated obligations - bonds53,035 80,579 172,777 462,006 
Deposits
122 26 186 1,827 
Mandatorily redeemable capital stock and other borrowings
670 4,072 3,437 14,127 
Total interest expense55,205 101,657 181,873 653,374 
Net interest income43,667 84,275 140,561 282,805 
Provision (reversal) for credit losses(874)1,243 (2,292)5,635 
Net interest income after provision (reversal) for credit losses44,541 83,032 142,853 277,170 
Other noninterest income (loss):
Net gains (losses) on investment securities (Note 2)(3,113)(5,323)(15,827)53,868 
Net gains (losses) on derivatives and hedging activities (Note 5)(411)3,589 5,323 (97,685)
Standby letters of credit fees
5,905 5,407 17,465 16,019 
Other, net
1,240 1,405 3,078 1,688 
Total other noninterest income (loss)3,621 5,078 10,039 (26,110)
Other expense:
Compensation and benefits 11,220 12,844 38,431 39,190 
Other operating
8,939 7,871 25,312 29,869 
Finance Agency
1,617 1,894 4,852 5,688 
Office of Finance
1,133 1,243 3,434 3,995 
Total other expense22,909 23,852 72,029 78,742 
Income before assessments25,253 64,258 80,863 172,318 
Affordable Housing Program (AHP) assessment
2,592 6,833 8,430 18,644 
Net income$22,661 $57,425 $72,433 $153,674 

The accompanying notes are an integral part of these financial statements.
39

Federal Home Loan Bank of Pittsburgh
Statements of Comprehensive Income (unaudited)
 Three months ended September 30,Nine months ended September 30,
(in thousands)2021202020212020
Net income$22,661 $57,425 $72,433 $153,674 
Other comprehensive income (loss):
Net unrealized gains (losses) on AFS securities(1,284)26,384 (13,058)47,574 
Reclassification of net (gains) included in net income relating to hedging activities
— — — (149)
Pension and post-retirement benefits196 171 2,048 1,208 
Total other comprehensive income (loss)(1,088)26,555 (11,010)48,633 
Total comprehensive income$21,573 $83,980 $61,423 $202,307 

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


40

Federal Home Loan Bank of Pittsburgh
Statements of Condition (unaudited)
(in thousands)September 30, 2021December 31, 2020
ASSETS  
Cash and due from banks$1,119,508 $1,036,459 
Interest-bearing deposits (Note 2)553,458 956,628 
Federal funds sold (Note 2)2,475,000 1,850,000 
Securities purchased under agreements to resell (Note 2) 1,000,000 600,000 
Investment securities: (Note 2)
  
Trading securities
508,517 1,156,003 
AFS securities, net; amortized cost of $12,059,746 and $9,335,210, respectively
12,188,192 9,476,385 
 HTM securities; fair value of $1,360,318 and $2,557,128, respectively
1,315,420 2,483,730 
Total investment securities
14,012,129 13,116,118 
Advances (Note 3)12,987,117 24,971,119 
Mortgage loans held for portfolio, net (Note 4)4,780,274 4,886,207 
Banking on Business (BOB) loans, net 23,227 21,236 
Accrued interest receivable77,573 90,702 
Derivative assets (Note 5)176,035 137,042 
Other assets43,251 47,380 
Total assets$37,247,572 $47,712,891 
LIABILITIES AND CAPITAL  
Liabilities  
Deposits$965,933 $923,371 
Consolidated obligations: (Note 6)
  
Discount notes
12,108,212 9,510,085 
Bonds
21,125,761 33,854,754 
Total consolidated obligations33,233,973 43,364,839 
Mandatorily redeemable capital stock (Note 7)23,273 142,807 
Accrued interest payable64,787 64,950 
AHP payable86,856 102,186 
Derivative liabilities (Note 5)12,585 4,459 
Other liabilities135,177 68,361 
Total liabilities34,522,584 44,670,973 
Commitments and contingencies (Note 10)
Capital (Note 7)
  
Capital stock - putable ($100 par value) issued and outstanding
     12,017 and 15,278 shares, respectively
1,201,698 1,527,841 
Retained earnings:  
Unrestricted939,596 919,373 
Restricted457,378 457,378 
Total retained earnings1,396,974 1,376,751 
Accumulated Other Comprehensive Income (AOCI)126,316 137,326 
Total capital2,724,988 3,041,918 
Total liabilities and capital$37,247,572 $47,712,891 

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

41

Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
 Nine months ended September 30,
(in thousands)20212020
OPERATING ACTIVITIES  
Net income$72,433 $153,674 
Adjustments to reconcile net income to net cash provided by
  (used in) operating activities:
Depreciation and amortization9,175 (36,491)
Net change in derivatives and hedging activities196,913 (281,783)
Net change in fair value adjustments on trading securities15,827 — 
Other adjustments, net(846)7,148 
Net change in:
Trading securities— 2,344,102 
Accrued interest receivable13,138 88,926 
Other assets2,060 (203)
Accrued interest payable(163)(111,764)
Other liabilities(26,849)(9,368)
Net cash provided by (used in) operating activities$281,688 $2,154,241 
INVESTING ACTIVITIES  
Net change in:  
Interest-bearing deposits (including $353 and $(2,118) from (to) other FHLBanks)
$357,530 $370,279 
Federal funds sold(625,000)1,820,000 
Securities purchased under agreements to resell(400,000)850,000 
Trading securities:
Proceeds1,026,553 — 
Purchases(399,875)— 
AFS securities:
Proceeds1,841,239 1,756,311 
Purchases(4,550,532)(643,733)
HTM securities:
Proceeds1,663,579 1,155,297 
Purchases(500,000)(728,986)
Advances:
Repaid24,135,278 318,795,536 
Originated(12,301,266)(288,839,498)
Mortgage loans held for portfolio:
Proceeds1,209,685 1,073,253 
Purchases(1,128,656)(1,067,877)
Other investing activities, net(1,631)(295)
Net cash provided by (used in) investing activities$10,326,904 $34,540,287 

The accompanying notes are an integral part of these financial statements.
42

Federal Home Loan Bank of Pittsburgh
Statements of Cash Flows (unaudited)
(continued)
Nine months ended September 30,
(in thousands)20212020
FINANCING ACTIVITIES
Net change in deposits$42,840 $411,903 
Net proceeds from issuance of consolidated obligations:
Discount notes97,758,921 201,685,063 
Bonds17,583,228 35,760,761 
Payments for maturing and retiring consolidated obligations:
Discount notes(95,159,250)(210,792,258)
Bonds(30,253,395)(60,971,215)
Proceeds from issuance of capital stock560,153 2,706,902 
Payments for repurchase/redemption of capital stock(885,227)(3,842,070)
Payments for repurchase/redemption of mandatorily redeemable capital stock(120,603)(159,980)
Cash dividends paid(52,210)(137,194)
Partial recovery of prior capital distribution to Financing Corporation— 8,541 
Net cash provided by (used in) financing activities$(10,525,543)$(35,329,547)
Net increase (decrease) in cash and due from banks$83,049 $1,364,981 
Cash and due from banks at beginning of the period1,036,459 21,490 
Cash and due from banks at end of the period$1,119,508 $1,386,471 
Supplemental disclosures:
Interest paid$211,473 $795,385 
AHP payments23,761 23,791 
Non-cash activities:
Capital stock reclassified to mandatorily redeemable capital stock1,069 39,457 

The accompanying notes are an integral part of these financial statements.
43

Federal Home Loan Bank of Pittsburgh
Statements of Changes in Capital (unaudited)
 Capital Stock - PutableRetained Earnings  
(in thousands)SharesPar ValueUnrestrictedRestrictedTotalAOCITotal Capital
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 
June 30, 202112,030 $1,202,989 $929,737 $457,378 $1,387,115 $127,404 $2,717,508 
Comprehensive income— — 22,661 — 22,661 (1,088)21,573 
Issuance of capital stock1,928 192,791 — — — — 192,791 
Repurchase/redemption of capital stock(1,930)(193,013)— — — — (193,013)
Shares reclassified to mandatorily
    redeemable capital stock		(11)(1,069)— — — — (1,069)
Cash dividends— — (12,802)— (12,802)— (12,802)
September 30, 202112,017 $1,201,698 $939,596 $457,378 $1,396,974 $126,316 $2,724,988 
 Capital Stock - PutableRetained Earnings  
(in thousands)SharesPar ValueUnrestrictedRestrictedTotalAOCITotal Capital
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 
December 31, 202015,278 $1,527,841 $919,373 $457,378 $1,376,751 $137,326 $3,041,918 
Comprehensive income— — 72,433 — 72,433 (11,010)61,423 
Issuance of capital stock5,602 560,153 — — — — 560,153 
Repurchase/redemption of capital stock(8,852)(885,227)— — — — (885,227)
Shares reclassified to mandatorily
    redeemable capital stock		(11)(1,069)— — — — (1,069)
Cash dividends— — (52,210)— (52,210)— (52,210)
September 30, 202112,017 $1,201,698 $939,596 $457,378 $1,396,974 $126,316 $2,724,988 
The accompanying notes are an integral part of these financial statements.

44

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, 2020 included in the Bank's 2020 Form 10-K.

45
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, 2021.
StandardDescriptionAdoption 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 was 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 did not have a significant impact on the Bank's financial statements.

    The Bank did not have any recently issued accounting standards which may have an impact on the Bank for the nine months ended September 30, 2021.

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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020. Carrying values of interest-bearing deposits and Federal funds exclude accrued interest receivable which was immaterial for all periods presented. At September 30, 2021, 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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020. Carrying value of securities purchased under agreements to resell exclude accrued interest receivable which was immaterial for all periods presented. At September 30, 2021, 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
46
Notes to Unaudited Financial Statements (continued)
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, 2021 and December 31, 2020.

(in thousands)September 30, 2021December 31, 2020
U.S. Treasury obligations$261,870 $899,421 
GSE and TVA obligations246,647 256,582 
Total$508,517 $1,156,003 

The following table presents net gains (losses) on trading securities for the third quarter and first nine months of 2021 and 2020.
 Three months ended September 30,Nine months ended September 30,
(in thousands)2021202020212020
Net unrealized gains (losses) on trading securities held at period-end
$(2,979)$(3,447)$(13,087)$28,640 
Net gains (losses) on trading securities sold/matured during the period(134)(1,876)(2,740)25,228 
Net gains (losses) on trading securities$(3,113)$(5,323)$(15,827)$53,868 

AFS Securities. The following tables present AFS securities as of September 30, 2021 and December 31, 2020.

 September 30, 2021
(in thousands)
Amortized Cost (1)
Allowance for Credit LossesGross Unrealized GainsGross Unrealized LossesFair Value
Non-MBS:     
U.S. Treasury obligations$4,396,710 $— $8,691 $(44)$4,405,357 
GSE and TVA obligations
1,473,234 — 46,122 — 1,519,356 
State or local agency obligations212,164 — 8,766 — 220,930 
Total non-MBS$6,082,108 $— $63,579 $(44)$6,145,643 
MBS:     
U.S. obligations single-family MBS$431,963 $— $5,382 $(51)$437,294 
GSE single-family MBS 2,281,070 — 22,269 (260)2,303,079 
GSE multifamily MBS 3,091,172 — 6,708 (1,407)3,096,473 
Private label MBS173,433 (2,088)34,445 (87)205,703 
Total MBS$5,977,638 $(2,088)$68,804 $(1,805)$6,042,549 
Total AFS securities$12,059,746 $(2,088)$132,383 $(1,849)$12,188,192 
47
Notes to Unaudited Financial Statements (continued)
 December 31, 2020
(in thousands)
Amortized Cost (1)
Allowance for Credit LossesGross Unrealized GainsGross Unrealized LossesFair Value
Non-MBS:     
GSE and TVA obligations
$1,590,661 $— $53,072 $— $1,643,733 
State or local agency obligations227,248 — 14,382 — 241,630 
Total non-MBS$1,817,909 $— $67,454 $— $1,885,363 
MBS:    
U.S. obligations single-family MBS$595,215 $— $6,994 $(61)$602,148 
GSE single-family MBS 3,237,124 — 25,969 (213)3,262,880 
GSE multifamily MBS 3,466,937 — 10,235 (3,778)3,473,394 
Private label MBS218,025 (2,417)37,149 (157)252,600 
Total MBS$7,517,301 $(2,417)$80,347 $(4,209)$7,591,022 
Total AFS securities$9,335,210 $(2,417)$147,801 $(4,209)$9,476,385 
Notes:
(1) Includes adjustments made to the cost basis of an investment for accretion, amortization and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of $24.6 million and $16.9 million at September 30, 2021 and December 31, 2020.

The following tables summarize the AFS securities with unrealized losses as of September 30, 2021 and December 31, 2020. 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, 2021
 Less than 12 MonthsGreater than 12 MonthsTotal
(in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Non-MBS:      
U.S. Treasury obligations$99,418 $(44)$— $— $99,418 $(44)
MBS:      
U.S. obligations single-family MBS$21,512 $(51)$— $— $21,512 $(51)
GSE single-family MBS 149,651 (260)— — 149,651 (260)
GSE multifamily MBS 467,068 (555)524,485 (852)991,553 (1,407)
Private label MBS70 (1)2,463 (86)2,533 (87)
Total MBS$638,301 $(867)$526,948 $(938)$1,165,249 $(1,805)
Total$737,719 $(911)$526,948 $(938)$1,264,667 $(1,849)
 December 31, 2020
 Less than 12 MonthsGreater than 12 MonthsTotal
(in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
MBS:
U.S. obligations single-family MBS$8,591 $(17)$25,713 $(44)$34,304 $(61)
GSE single-family MBS 54,657 (21)217,942 (192)272,599 (213)
GSE multifamily MBS 156,006 (70)2,276,207 (3,708)2,432,213 (3,778)
Private label MBS1,767 (10)2,631 (147)4,398 (157)
Total MBS$221,021 $(118)$2,522,493 $(4,091)$2,743,514 $(4,209)
Total$221,021 $(118)$2,522,493 $(4,091)$2,743,514 $(4,209)


48
Notes to Unaudited Financial Statements (continued)
Redemption Terms. The amortized cost and fair value of AFS securities by contractual maturity as of September 30, 2021 and December 31, 2020 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, 2021December 31, 2020
Year of MaturityAmortized CostFair ValueAmortized CostFair Value
Non-MBS:
Due in one year or less$196,493 $198,694 $73,115 $73,276 
Due after one year through five years3,031,519 3,041,043 570,540 581,853 
Due after five years through ten years2,590,569 2,629,311 789,408 820,239 
Due after ten years263,527 276,595 384,846 409,995 
Total non-MBS6,082,108 6,145,643 1,817,909 1,885,363 
MBS5,977,638 6,042,549 7,517,301 7,591,022 
Total AFS securities$12,059,746 $12,188,192 $9,335,210 $9,476,385 

Interest Rate Payment Terms.  The following table details interest payment terms at September 30, 2021 and December 31, 2020.
(in thousands)September 30, 2021December 31, 2020
Amortized cost of AFS non-MBS:  
 Fixed-rate
$6,082,108 $1,817,909 
 Variable-rate
— — 
Total non-MBS$6,082,108 $1,817,909 
Amortized cost of AFS MBS:  
Fixed-rate$887,774 $1,382,062 
Variable-rate5,089,864 6,135,239 
Total MBS$5,977,638 $7,517,301 
Total amortized cost of AFS securities$12,059,746 $9,335,210 

    HTM Securities. The following tables present HTM securities as of September 30, 2021 and December 31, 2020.
 September 30, 2021
(in thousands)
Amortized Cost (1)
Gross Unrealized Holding GainsGross Unrealized Holding LossesFair Value
MBS:   
U.S. obligations single-family MBS$90,598 $1,218 $— $91,816 
GSE single-family MBS635,540 10,776 (6,925)639,391 
GSE multifamily MBS513,475 39,514 — 552,989 
Private label MBS75,807 814 (499)76,122 
Total MBS$1,315,420 $52,322 $(7,424)$1,360,318 
Total HTM securities (2)
$1,315,420 $52,322 $(7,424)$1,360,318 
49
Notes to Unaudited Financial Statements (continued)
 December 31, 2020
(in thousands)
Amortized Cost (1)
Gross Unrealized Holding GainsGross Unrealized Holding LossesFair Value
Non-MBS:    
Certificates of deposit$750,000 $77 $— $750,077 
MBS:   
U.S. obligations single-family MBS$120,539 $1,213 $— $121,752 
GSE single-family MBS989,824 20,337 (1,053)1,009,108 
GSE multifamily MBS530,240 53,555 — 583,795 
Private label MBS93,127 582 (1,313)92,396 
Total MBS$1,733,730 $75,687 $(2,366)$1,807,051 
Total HTM securities (2)
$2,483,730 $75,764 $(2,366)$2,557,128 
Notes:
(1) Includes adjustments made to the cost basis of an investment for accretion and amortization and excludes accrued interest receivable of $2.9 million and $4.1 million at September 30, 2021 and December 31, 2020.
(2) No ACL was recorded for these securities as of September 30, 2021 and December 31, 2020.

Redemption Terms. The amortized cost and fair value of HTM securities by contractual maturity as of September 30, 2021 and December 31, 2020 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, 2021December 31, 2020
Year of MaturityAmortized CostFair ValueAmortized CostFair Value
Non-MBS:    
Due in one year or less$— $— $750,000 $750,077 
Due after one year through five years— — — — 
Due after five years through ten years— — — — 
Due after ten years— — — — 
Total non-MBS— — 750,000 750,077 
MBS1,315,420 1,360,318 1,733,730 1,807,051 
Total HTM securities$1,315,420 $1,360,318 $2,483,730 $2,557,128 

Interest Rate Payment Terms. The following table details interest rate payment terms at September 30, 2021 and December 31, 2020.
(in thousands)September 30, 2021December 31, 2020
Amortized cost of HTM non-MBS:  
Fixed-rate$— $750,000 
Variable-rate— — 
Total non-MBS$— $750,000 
Amortized cost of HTM MBS:  
Fixed-rate
$1,129,418 $1,493,149 
Variable-rate
186,002 240,581 
Total MBS$1,315,420 $1,733,730 
Total HTM securities$1,315,420 $2,483,730 

    Debt Securities ACL. For HTM securities, there was no ACL at September 30, 2021 and December 31, 2020. For AFS securities, the Bank recorded an ACL only on its private label MBS at September 30, 2021 and December 31, 2020.


50
Notes to Unaudited Financial Statements (continued)
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, 2021 and 2020.
Private label MBS
Three months ended September 30,Nine months ended September 30,
(in thousands)2021202020212020
Balance, beginning of period$2,624 $1,574 $2,417 $— 
Increases (decreases) for securities in which a previous ACL or OTTI was recorded(536)117 (329)1,691 
Balance, end of period$2,088 $1,691 $2,088 $1,691 

Debt Securities ACL Methodology. To evaluate investment securities for credit losses at September 30, 2021, the Bank employs the following methodologies by major security type.

Certificates of Deposits. The Bank invests in short-term investments, such as certificates of deposits, primarily to manage liquidity. The Bank’s certificates of deposits, which are unsecured, have original contractual maturities of one year or less. The Bank only purchases certificates of deposits considered investment quality. The Bank did not own certificates of deposits at September 30, 2021. Due to their short duration, high credit quality, and insignificant expected credit losses, no ACL was recorded on certificates of deposits at December 31, 2020.

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, 2021 or December 31, 2020.

The Bank only purchases GSE and other U.S. obligations considered investment quality. At September 30, 2021, 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, 2021, 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, 2021 and December 31, 2020, the Bank expected 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, 2021, 21.4% 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;
51
Notes to Unaudited Financial Statements (continued)
•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 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.

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 up to five years, and the interest rates reset periodically at a fixed spread to LIBOR or SOFR.

The following table details the Bank’s advances portfolio by year of redemption as of September 30, 2021 and December 31, 2020.
(dollars in thousands)September 30, 2021December 31, 2020
Year of RedemptionAmountWeighted Average Interest RateAmountWeighted Average Interest Rate
Due in 1 year or less$8,139,089 1.54 %$14,760,790 0.84 %
Due after 1 year through 2 years2,194,831 2.29 5,878,635 2.25 
Due after 2 years through 3 years1,031,406 1.79 1,584,471 2.08 
Due after 3 years through 4 years1,116,493 2.02 1,126,992 1.85 
Due after 4 years through 5 years219,231 1.09 1,163,781 1.91 
Thereafter187,205 2.54 210,220 2.55 
Total par value12,888,255 1.74 %24,724,889 1.37 %
Deferred prepayment fees
(1,035) (3,673)
Hedging adjustments
99,897  249,903 
Total book value (1)
$12,987,117  $24,971,119 
Notes:
(1) Amounts exclude accrued interest receivable of $25.4 million and $36.6 million at September 30, 2021 and December 31, 2020.

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, 2021 and December 31, 2020, 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.

52
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, 2021 and December 31, 2020.
 Year of Redemption or
Next Call Date		Year of Redemption or Next Convertible Date
(in thousands)September 30, 2021December 31, 2020September 30, 2021December 31, 2020
Due in 1 year or less$8,179,089 $14,860,790 $8,159,089 $14,780,790 
Due after 1 year through 2 years2,194,831 5,818,635 2,188,831 5,878,635 
Due after 2 years through 3 years991,406 1,584,471 1,031,406 1,578,471 
Due after 3 years through 4 years1,116,493 1,086,992 1,102,493 1,121,992 
Due after 4 years through 5 years219,231 1,163,781 219,231 1,154,781 
Thereafter187,205 210,220 187,205 210,220 
Total par value$12,888,255 $24,724,889 $12,888,255 $24,724,889 

Interest Rate Payment Terms.  The following table details interest rate payment terms by year of redemption for advances as of September 30, 2021 and December 31, 2020.
(in thousands)September 30, 2021December 31, 2020
Fixed-rate – overnight$239,667 $37,225 
Fixed-rate – term:
Due in 1 year or less
7,073,579 6,658,991 
Thereafter
4,606,066 9,810,998 
Total fixed-rate11,919,312 16,507,214 
Variable-rate:
Due in 1 year or less
825,843 8,064,575 
Thereafter
143,100 153,100 
Total variable-rate968,943 8,217,675 
Total par value$12,888,255 $24,724,889 

Credit Risk Exposure and Security Terms. The Bank’s potential credit risk from advances is primarily concentrated in commercial banks. As of September 30, 2021, the Bank had advances of $7.6 billion outstanding to the five largest borrowers, which represented 58.7% of the total principal amount of advances outstanding. Of these five, one had outstanding advance balances that were in excess of 10% of the total portfolio at September 30, 2021.

As of December 31, 2020, the Bank had advances of $15.2 billion outstanding to the five largest borrowers, which represented 61.4% of the total principal amount of advances outstanding. Of these five, three had outstanding advance balances that were in excess of 10% of the total portfolio at December 31, 2020.

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.
53
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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, 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, 2021 or December 31, 2020.

54
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, 2021 and December 31, 2020 for mortgage loans held for portfolio.
(in thousands)September 30, 2021December 31, 2020
Fixed-rate long-term single-family mortgages (1)
$4,512,619 $4,610,761 
Fixed-rate medium-term single-family mortgages (1)
177,370 181,535 
Total par value4,689,989 4,792,296 
Premiums87,316 87,424 
Discounts(1,907)(2,439)
Hedging adjustments7,749 13,898 
Total mortgage loans held for portfolio (2)
$4,783,147 $4,891,179 
Allowance for credit losses on mortgage loans(2,873)(4,972)
Mortgage loans held for portfolio, net$4,780,274 $4,886,207 
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 $22.6 million at September 30, 2021 and $25.7 million at December 31, 2020.

The following table details the par value of mortgage loans held for portfolio outstanding categorized by type as of September 30, 2021 and December 31, 2020.
(in thousands)September 30, 2021December 31, 2020
Conventional loans$4,552,754 $4,633,848 
Government-guaranteed/insured loans137,235 158,448 
Total par value$4,689,989 $4,792,296 

Purchases, Sales and Reclassifications. During the nine months ended September 30, 2021 and 2020, 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.

55
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, 2021 and December 31, 2020.
September 30, 2021
(in thousands)Origination Year
Payment Status, at amortized cost (1)
Prior to 20172017 to 2021Total
Past due 30-59 days$11,005 $16,002 $27,007 
Past due 60-89 days2,245 3,591 5,836 
Past due 90 days or more13,853 23,800 37,653 
Total past due loans$27,103 $43,393 $70,496 
Current loans1,209,257 3,362,793 4,572,050 
Total conventional loans (2)
$1,236,360 $3,406,186 $4,642,546 
December 31, 2020
Origination Year
Payment Status, at amortized cost (1)
Prior to 20162016 to 2020Total
Past due 30-59 days$14,211 $26,825 $41,036 
Past due 60-89 days5,719 10,950 16,669 
Past due 90 days or more18,070 61,185 79,255 
Total past due loans$38,000 $98,960 $136,960 
Current loans1,132,774 3,458,941 4,591,715 
Total conventional loans (3)
$1,170,774 $3,557,901 $4,728,675 
Note:
(1) The amortized cost at September 30, 2021 and December 31, 2020 excludes accrued interest receivable.
(2) Includes approximately $32.6 million par value of loans in a forbearance or repayment plan as a result of COVID-19, of which approximately $0.9 million was current, $4.3 million was 30-59 days past due, $2.5 million was 60-89 days past due, and $24.9 million was 90 days or more past due at September 30, 2021.
(3) Includes approximately $83.9 million par value of loans in a forbearance or repayment plan as a result of COVID-19, of which approximately $1.7 million was current, $10.3 million was 30-59 days past due, $9.6 million was 60-89 days past due, and $62.3 million was 90 days or more past due at December 31, 2020.

Other Delinquency Statistics. The following table presents the delinquency statistics for the Bank’s mortgage loans at September 30, 2021 and December 31, 2020.
September 30, 2021
(dollars in thousands)Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
In process of foreclosures, included above (1)
$2,094 $516 $2,610 
Serious delinquency rate (2)
0.8 %2.5 %0.9 %
Past due 90 days or more still accruing interest$— $3,502 $3,502 
Loans on nonaccrual status (3)
$42,112 $— $42,112 
December 31, 2020
(dollars in thousands)Conventional MPF Loans
Government-Guaranteed or Insured Loans (2)
Total
In process of foreclosures, included above (1)
$8,238 $1,667 $9,905 
Serious delinquency rate (2)
1.7 %3.7 %1.8 %
Past due 90 days or more still accruing interest$— $5,483 $5,483 
Loans on nonaccrual status (3)
$91,201 $— $91,201 
Note:
56
Notes to Unaudited Financial Statements (continued)
(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.

Mortgage Loans Held for Portfolio ACL. 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 - Summary of Significant Accounting Policies in the Bank's 2020 Form 10-K.

The par value of conventional loans in a forbearance or repayment plan as a result of the COVID-19 pandemic was $32.6 million at September 30, 2021 and $83.9 million at December 31, 2020. These amounts represented 0.7% of mortgage loans held for portfolio at September 30, 2021 and 1.8% at December 31, 2020. Of the conventional loans in a forbearance plan as a result of COVID-19, approximately 89% and 93% of the loans were not deemed to be collateral dependent and not charged-off as of September 30, 2021 and December 31, 2020, respectively.

Conventional MPF - Expected Recoveries. The Bank recognizes a recovery through the provision for credit losses when 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.

57
Notes to Unaudited Financial Statements (continued)
Conventional MPF - Rollforward of ACL
Three months ended September 30,Nine months ended September 30,
(in thousands)2021202020212020
Balance, beginning of period$3,225 $5,900 $4,972 $7,832 
Adjustment for cumulative effect of accounting change - adoption of ASU 2016-13(1)
— — — (3,875)
(Charge-offs) Recoveries, net (2)
27 (584)533 (428)
Provision (reversal) for credit losses(379)1,338 (2,632)3,125 
Balance, September 30$2,873 $6,654 $2,873 $6,654 
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, 2021 or December 31, 2020. 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 $0.4 million and $0.8 million of REO reported in Other assets on the Statement of Condition at September 30, 2021 and December 31, 2020, respectively.

58
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 7 - Derivatives and Hedging Activities to the audited financial statements in the Bank's 2020 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, 2021
(in thousands)Notional Amount of DerivativesDerivative AssetsDerivative Liabilities
Derivatives designated as hedging instruments:   
Interest rate swaps
$21,953,509 $3,965 $22,074 
Derivatives not designated as hedging instruments:   
Interest rate swaps
$1,151,988 $710 $2,163 
Interest rate caps or floors
1,025,000 1,243 — 
Mortgage delivery commitments
65,331 1 359 
Total derivatives not designated as hedging instruments:$2,242,319 $1,954 $2,522 
Total derivatives before netting and collateral adjustments$24,195,828 $5,919 $24,596 
Netting adjustments and cash collateral (1)
 170,116 (12,011)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition		 $176,035 $12,585 
 December 31, 2020
(in thousands)Notional Amount of DerivativesDerivative AssetsDerivative Liabilities
Derivatives designated as hedging instruments:   
Interest rate swaps
$14,307,383 $1,494 $5,193 
Derivatives not designated as hedging instruments:   
Interest rate swaps
$1,868,988 $71 $2,386 
Interest rate caps or floors
1,205,000 1,173 — 
Mortgage delivery commitments
60,622 675 11 
Total derivatives not designated as hedging instruments:$3,134,610 $1,919 $2,397 
Total derivatives before netting and collateral adjustments$17,441,993 $3,413 $7,590 
Netting adjustments and cash collateral (1)
 133,629 (3,131)
Derivative assets and derivative liabilities as reported on the Statement of
  Condition		 $137,042 $4,459 
Note:
59
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 including accrued interest held or placed with the same clearing agent and/or counterparties. Cash collateral posted including accrued interest was $183.5 million for September 30, 2021 and $137.9 million for December 31, 2020. Cash collateral received was $1.4 million for September 30, 2021 and $1.1 million for December 31, 2020.

The following table presents, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships, which also includes amortization of basis adjustments related to hedged items in discontinued fair value hedge 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, 2021  
Hedged item type:  
Advances
$34,946 $(35,065)$(33,835)$(33,954)$31,298 
AFS securities
26,630 (26,434)(14,422)(14,226)23,769 
Mortgage loans held for portfolio
— (823)— (823)31,996 
Consolidated obligations – bonds
(15,405)15,370 15,950 15,915 (53,035)
Total$46,171 $(46,952)$(32,307)$(33,088)
Nine months ended September 30, 2021 
Hedged item type:
Advances
$149,894 $(150,010)$(108,662)$(108,778)$112,582 
AFS securities
66,531 (65,003)(32,560)(31,032)74,066 
Mortgage loans held for portfolio
— (2,844)— (2,844)95,114 
Consolidated obligations – bonds
(35,880)35,904 32,093 32,117 (172,777)
Total$180,545 $(181,953)$(109,129)$(110,537)
(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)
$(286,893)$282,154 $(96,053)$(100,792)


60
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, 2021
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 RelationshipsTotal Amount of Fair Value Hedging Adjustments
Advances$7,545,407 $99,918 $(21)$99,897 
AFS securities5,783,783 66,484 1,047 67,531 
Consolidated obligations – bonds8,762,313 (11,098)180 (10,918)
(in thousands)December 31, 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 RelationshipsTotal Amount of Fair Value Hedging Adjustments
Advances$10,369,813 $249,927 $(24)$249,903 
AFS securities1,507,492 131,386 1,148 132,534 
Consolidated obligations – bonds2,838,505 24,701 284 24,985 
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)2021202020212020
Derivatives not designated as hedging instruments:  
Economic hedges:  
Interest rate swaps
$348 $4,588 $14,021 $(92,864)
Interest rate caps or floors
227 (57)69 578 
Net interest settlements
(640)(1,726)(4,860)(8,891)
       To Be Announced (TBA)— — — 38 
Mortgage delivery commitments(349)772 (3,916)3,138 
Other— (1)— 148 
Total net gains (losses) related to derivatives not designated as hedging instruments
$(414)$3,576 $5,314 $(97,853)
Other - price alignment amount on cleared derivatives (1)
3 13 9 168 
Net gains (losses) on derivatives and hedging activities
$(411)$3,589 $5,323 $(97,685)
Notes:
(1) This amount is for derivatives for which variation margin is characterized as a daily settled contract.

The Bank had no active cash flow hedging relationships during the first nine months of 2021 or 2020.

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.

61
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, 2021 was $0.7 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, 2021.

    Cleared Derivatives. For cleared derivatives, Derivative Clearing Organizations (Clearing Houses) are the Bank's counterparties. The Clearing Houses notify 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 either CME Clearing or LCH Ltd. 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, 2021.

    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.

62
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, 2021December 31, 2020
Derivative instruments meeting netting requirements:
Gross recognized amount:
        Uncleared derivatives$5,680 $2,355 
      Cleared derivatives238 383 
 Total gross recognized amount
5,918 2,738 
Gross amounts of netting adjustments and cash collateral
        Uncleared derivatives(2,384)(1,632)
      Cleared derivatives172,500 135,261 
Total gross amounts of netting adjustments and cash collateral
170,116 133,629 
Net amounts after netting adjustments and cash collateral
        Uncleared derivatives3,296 723 
      Cleared derivatives172,738 135,644 
Total net amounts after netting adjustments and cash collateral
176,034 136,367 
 Derivative instruments not meeting netting requirements: (1)
     Uncleared derivatives1 675 
     Cleared derivatives— — 
     Total derivative instruments not meeting netting requirements:1 675 
Total derivative assets:
       Uncleared derivatives3,297 1,398 
     Cleared derivatives172,738 135,644 
Total derivative assets as reported in the Statement of Condition176,035 137,042 
Net unsecured amount:
       Uncleared derivatives3,297 1,398 
       Cleared derivatives172,738 135,644 
Total net unsecured amount$176,035 $137,042 
63
Notes to Unaudited Financial Statements (continued)
Derivative Liabilities
(in thousands)September 30, 2021December 31, 2020
Derivative instruments meeting netting requirements:
Gross recognized amount:
        Uncleared derivatives$13,405 $4,282 
      Cleared derivatives10,832 3,297 
     Total gross recognized amount24,237 7,579 
Gross amounts of netting adjustments and cash collateral
        Uncleared derivatives(11,773)(2,748)
      Cleared derivatives(238)(383)
Total gross amounts of netting adjustments and cash collateral
(12,011)(3,131)
Net amounts after netting adjustments and cash collateral
        Uncleared derivatives1,632 1,534 
      Cleared derivatives10,594 2,914 
Total net amounts after netting adjustments and cash collateral
12,226 4,448 
 Derivative instruments not meeting netting requirements: (1)
        Uncleared derivatives359 11 
      Cleared derivatives— — 
     Total derivative instruments not meeting netting requirements:359 11 
Total derivative liabilities
        Uncleared derivatives1,991 1,545 
      Cleared derivatives10,594 2,914 
Total derivative liabilities as reported in the Statement of Condition12,585 4,459 
Net unsecured amount:
        Uncleared derivatives1,991 1,545 
      Cleared derivatives10,594 2,914 
Total net unsecured amount$12,585 $4,459 
Note:
(1) Represents derivatives that are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

64
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 was $641.4 billion at September 30, 2021 and $746.8 billion at December 31, 2020. Additional detailed information regarding consolidated obligations including general terms and interest rate payment terms can be found in Note 9 to the audited financial statements in the Bank's 2020 Form 10-K.
The following table details interest rate payment terms for the Bank's consolidated obligation bonds as of September 30, 2021 and December 31, 2020.
(in thousands)September 30, 2021December 31, 2020
Par value of consolidated bonds:  
Fixed-rate$18,288,620 $17,148,965 
Step-up1,146,000 40,000 
Floating-rate1,645,000 16,561,250 
Total par value21,079,620 33,750,215 
Bond premiums
69,081 91,225 
Bond discounts
(7,943)(7,524)
Concession fees
(4,079)(4,147)
Hedging adjustments
(10,918)24,985 
Total book value$21,125,761 $33,854,754 

65
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, 2021 and December 31, 2020.
 September 30, 2021December 31, 2020
(dollars in thousands)
Year of Contractual Maturity		AmountWeighted Average Interest RateAmountWeighted Average Interest Rate
Due in 1 year or less$7,240,445 1.23 %$24,233,615 0.49 %
Due after 1 year through 2 years2,251,650 1.83 3,024,625 2.19 
Due after 2 years through 3 years1,804,625 1.77 1,545,000 2.33 
Due after 3 years through 4 years1,477,625 1.41 1,164,475 2.41 
Due after 4 years through 5 years4,553,300 1.03 961,725 1.69 
Thereafter3,751,975 1.87 2,820,775 2.05 
Total par value$21,079,620 1.42 %$33,750,215 0.96 %

The following table presents the Bank’s consolidated obligation bonds outstanding between noncallable and callable as of September 30, 2021 and December 31, 2020.
(in thousands)September 30, 2021December 31, 2020
Noncallable$13,542,620 $28,583,715 
Callable7,537,000 5,166,500 
Total par value$21,079,620 $33,750,215 

The following table presents consolidated obligation bonds outstanding by the earlier of contractual maturity or next call date as of September 30, 2021 and December 31, 2020.
(in thousands)
Year of Contractual Maturity or Next Call Date		September 30, 2021December 31, 2020
Due in 1 year or less$14,436,445 $25,737,615 
Due after 1 year through 2 years2,449,650 3,038,625 
Due after 2 years through 3 years1,217,625 1,602,000 
Due after 3 years through 4 years864,625 1,089,475 
Due after 4 years through 5 years601,300 759,725 
Thereafter1,509,975 1,522,775 
Total par value$21,079,620 $33,750,215 

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, 2021 and December 31, 2020.
(dollars in thousands)September 30, 2021December 31, 2020
Book value $12,108,212 $9,510,085 
Par value12,109,109 9,512,324 
Weighted average interest rate (1)
0.03 %0.11 %
Note:
(1) Represents an implied rate.

66
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 11 to the audited financial statements in the Bank’s 2020 Form 10-K. At September 30, 2021, 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 in B1 membership stock and $0.9 billion in B2 activity stock at September 30, 2021. The Bank had $0.3 billion in B1 membership stock and $1.2 billion in B2 activity stock at December 31, 2020.

The following table demonstrates the Bank’s compliance with the regulatory capital requirements at September 30, 2021 and December 31, 2020.
 September 30, 2021December 31, 2020
(dollars in thousands)RequiredActualRequiredActual
Regulatory capital requirements:    
RBC$396,746 $2,621,946 $520,696 $3,047,399 
Total capital-to-asset ratio4.0 %7.0 %4.0 %6.4 %
Total regulatory capital1,489,903 2,621,946 1,908,516 3,047,399 
Leverage ratio5.0 %10.6 %5.0 %9.6 %
Leverage capital1,862,379 3,932,918 2,385,645 4,571,099 

The Finance Agency has established four capital classifications for the FHLBanks: adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. On September 28, 2021, the Bank received final notification from the Finance Agency that it was considered "adequately capitalized" for the quarter ended June 30, 2021. 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, 2021.

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, 2021 and December 31, 2020, the Bank had $23.3 million and $142.8 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 were $0.7 million and $3.4 million during the three and nine months ended September 30, 2021, respectively. The estimated dividends on mandatorily redeemable capital stock recorded as interest expense were $4.1 million and $14.1 million during the three and nine months ended September 30, 2020, respectively.

The following table provides the related dollar amounts for activities recorded in mandatorily redeemable capital stock during the nine months ended September 30, 2021 and 2020.
 Nine months ended September 30,
(in thousands)20212020
Balance, beginning of the period$142,807 $343,575 
Capital stock subject to mandatory redemption reclassified from capital1,069 39,457 
Redemption/repurchase of mandatorily redeemable stock(120,603)(159,980)
Balance, end of the period$23,273 $223,052 

    As of September 30, 2021, the total mandatorily redeemable capital stock reflected the balance for seven 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.  Two other institutions have notified the Bank of their intention to voluntarily redeem their capital stock and withdraw from membership. These institutions will continue to be members of the Bank until the withdrawal period is completed.
67
Notes to Unaudited Financial Statements (continued)

The following table shows the amount of mandatorily redeemable capital stock by contractual year of redemption at September 30, 2021 and December 31, 2020.
(in thousands)September 30, 2021December 31, 2020
Due in 1 year or less$— $— 
Due after 1 year through 2 years20,020 21 
Due after 2 years through 3 years— 20,000 
Due after 3 years through 4 years26 120,000 
Due after 4 years through 5 years1,069 19 
Past contractual redemption date due to remaining activity2,158 2,767 
Total$23,273 $142,807 

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 approximated $8.5 million based on its share of the $680.0 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. In accordance with the Joint Capital Enhancement Agreement (JCEA), entered into by the Bank, as amended, the Bank allocates on a quarterly basis 20% of its net income to a separate restricted retained earnings account (RRE) until the account balance equals at least 1% of the Bank's average balance of outstanding consolidated obligations for the current quarter. These RRE are not available to pay dividends and are presented separately from other retained earnings on the Statement of Condition. At September 30, 2021, the balance in RRE exceeded the threshold for the contribution requirement. Accordingly, no allocation of net income was made to RRE in the first nine months of 2021. At September 30, 2021, retained earnings were $1,397.0 million, including $939.6 million of unrestricted retained earnings and $457.4 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 2021 and 2020 are presented in the table below.
Dividend - Annual Yield
20212020
MembershipActivityMembershipActivity
February2.50 %5.75 %4.50 %7.75 %
April2.50 %5.75 %3.00 %6.25 %
July1.25 %5.25 %3.00 %6.25 %
68
Notes to Unaudited Financial Statements (continued)

    In October 2021, the Bank paid a quarterly dividend equal to an annual yield of 1.25% on membership stock and 5.25% on activity stock.
    
The following table summarizes the changes in AOCI for the three and nine months ended September 30, 2021 and 2020.
(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, 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 
June 30, 2021$131,818 $— $— $(4,414)$127,404 
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)(1,284)— — — (1,284)
Pension and post-retirement— — — 196 196 
September 30, 2021$130,534 $— $— $(4,218)$126,316 
December 31, 2019$45,155 $51,704 $149 $(5,182)$91,826 
Other comprehensive income (loss) before reclassification:
Adoption of ASU 2016-1351,704 (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 
December 31, 2020$143,592 $— $— $(6,266)$137,326 
Other comprehensive income (loss) before reclassification:
Net unrealized gains (losses)(13,058)— — — (13,058)
Pension and post-retirement— — — 2,048 2,048 
September 30, 2021$130,534 $— $— $(4,218)$126,316 

69
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, 2021December 31, 2020
Advances$6,595,309 $10,856,363 
Letters of credit (1)
16,167,276 2,730,541 
MPF loans1,872,702 483,983 
Deposits112,280 31,269 
Capital stock580,814 573,392 
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)2021202020212020
Interest income on advances (1)
$37,102 $91,749 $119,556 $362,346 
Interest income on MPF loans15,429 6,101 48,865 19,021 
Letters of credit fees4,652 797 13,707 2,209 
Note:
(1) Interest income on advances includes contractual interest income and prepayment fees. The effect of derivative activities is not included.

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)2021202020212020
Servicing fee expense$916 $988 $2,748 $2,958 
(in thousands)September 30, 2021December 31, 2020
Interest-bearing deposits maintained with FHLBank of Chicago$5,503 $5,856 

From time to time, the Bank may borrow from or lend to other FHLBanks on a short-term uncollateralized basis. During the three and nine months ended September 30, 2021, the Bank borrowed and repaid $5.0 million. During the three and nine months ended September 30, 2020, the Bank borrowed and repaid $25.0 million. There was no lending activity during the nine months ended September 30, 2021 and September 30, 2020.

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, 2021 and 2020, 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, 2021 and 2020.

    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 13 to the audited financial statements in the Bank's 2020 Form 10-K.

70
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, 2021 and December 31, 2020. 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, 2021 and December 31, 2020 are presented in the table below.
Fair Value Summary Table
 September 30, 2021
(in thousands)Carrying
Value		Level 1Level 2 Level 3
Netting Adjustment and Cash Collateral (1)
Estimated
Fair Value
                       Assets:      
Cash and due from banks$1,119,508 $1,119,508 $— $— $— $1,119,508 
Interest-bearing deposits553,458 547,955 5,503 — — 553,458 
Federal funds sold2,475,000 — 2,475,002 — — 2,475,002 
Securities purchased under agreement to resell (2)
1,000,000 — 1,000,001 — — 1,000,001 
Trading securities508,517 — 508,517 — — 508,517 
AFS securities12,188,192 — 11,982,489 205,703 — 12,188,192 
HTM securities1,315,420 — 1,284,196 76,122 — 1,360,318 
Advances12,987,117 — 13,066,795 — — 13,066,795 
Mortgage loans held for portfolio, net4,780,274 — 4,885,125 — — 4,885,125 
BOB loans, net23,227 — — 23,227 — 23,227 
Accrued interest receivable77,573 — 77,573 — — 77,573 
Derivative assets176,035 — 5,919 — 170,116 176,035 
                     Liabilities:       
Deposits$965,933 $— $965,933 $— $— $965,933 
Discount notes12,108,212 — 12,108,390 — — 12,108,390 
Bonds21,125,761 — 21,343,528 — — 21,343,528 
Mandatorily redeemable capital stock (3)
23,273 23,943 — — — 23,943 
Accrued interest payable (3)
64,787 — 64,118 — — 64,118 
Derivative liabilities12,585 — 24,596 — (12,011)12,585 
71
Notes to Unaudited Financial Statements (continued)
December 31, 2020
(in thousands)Carrying
Value		Level 1Level 2Level 3
Netting Adjustment and Cash Collateral (1)
Estimated
Fair Value
                       Assets:      
Cash and due from banks$1,036,459 $1,036,459 $— $— $— $1,036,459 
Interest-bearing deposits956,628 950,772 5,856 — — 956,628 
Federal funds sold1,850,000 — 1,850,009 — — 1,850,009 
Securities purchased under agreement to resell (2)
600,000 — 600,003 — — 600,003 
Trading securities1,156,003 — 1,156,003 — — 1,156,003 
AFS securities9,476,385 — 9,223,785 252,600 — 9,476,385 
HTM securities2,483,730 — 2,464,732 92,396 — 2,557,128 
Advances24,971,119 — 25,097,529 — — 25,097,529 
Mortgage loans held for portfolio, net4,886,207 — 5,084,683 — — 5,084,683 
BOB loans, net21,236 — — 21,236 — 21,236 
Accrued interest receivable90,702 — 90,702 — — 90,702 
Derivative assets 137,042 — 3,413 — 133,629 137,042 
                        Liabilities:     
Deposits$923,371 $— $923,371 $— $— $923,371 
Discount notes9,510,085 — 9,510,584 — — 9,510,584 
Bonds33,854,754 — 34,282,476 — — 34,282,476 
Mandatorily redeemable capital stock (3)
142,807 145,282 — — — 145,282 
Accrued interest payable (3)
64,950 — 62,475 — — 62,475 
Derivative liabilities 4,459 — 7,590 — (3,131)4,459 
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, 2021 and December 31, 2020. 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 - Valuations derived from techniques in which one or more significant inputs are not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.

72
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.

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:

•U.S. Treasury 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, 2021, 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 instruments are estimated using standard valuation techniques such as discounted cash flow analysis and comparisons to similar
73
Notes to Unaudited Financial Statements (continued)
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 cleared derivatives. Overnight Index Swap (OIS) curve for uncleared derivatives.
•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, either CME Clearing or LCH Ltd. 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.

74
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, 2021 and December 31, 2020. 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, 2021
(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
$— $261,870 $— $— $261,870 
GSE and TVA obligations
— 246,647 — — 246,647 
Total trading securities$— $508,517 $— $— $508,517 
AFS securities:     
Non MBS:
U.S. Treasury obligations$— $4,405,357 $— $— $4,405,357 
GSE and TVA obligations— 1,519,356 — — 1,519,356 
State or local agency obligations— 220,930 — — 220,930 
MBS:
 U.S. obligations single-family MBS
— 437,294 — — 437,294 
 GSE single-family MBS
— 2,303,079 — — 2,303,079 
 GSE multifamily MBS
— 3,096,473 — — 3,096,473 
 Private label MBS
— — 205,703 — 205,703 
Total AFS securities$— $11,982,489 $205,703 $— $12,188,192 
Derivative assets:    
Interest rate related
$— $5,918 $— $170,116 $176,034 
Mortgage delivery commitments
— 1 — — 1 
Total derivative assets$— $5,919 $— $170,116 $176,035 
Total recurring assets at fair value$— $12,496,925 $205,703 $170,116 $12,872,744 
Recurring fair value measurements - Liabilities     
Derivative liabilities:     
Interest rate related
$— $24,237 $— $(12,011)$12,226 
Mortgage delivery commitments
— 359 — — 359 
Total recurring liabilities at fair value (2)
$— $24,596 $— $(12,011)$12,585 
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio
$— $— $9,018 $— $9,018 
REO
— — 356 — 356 
Total non-recurring assets at fair value $— $— $9,374 $— $9,374 
75
Notes to Unaudited Financial Statements (continued)
 December 31, 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
$— $899,421 $— $— $899,421 
GSE and TVA obligations
— 256,582 — — 256,582 
Total trading securities$— $1,156,003 $— $— $1,156,003 
AFS securities:     
Non MBS:
GSE and TVA obligations$— $1,643,733 $— $— 1,643,733 
State or local agency obligations— 241,630 — — 241,630 
MBS:
 U.S. obligations single-family MBS
— 602,148 — — 602,148 
 GSE single-family MBS
— 3,262,880 — — 3,262,880 
 GSE multifamily MBS
— 3,473,394 — — 3,473,394 
Private label MBS— — 252,600 — 252,600 
Total AFS securities$— $9,223,785 $252,600 $— $9,476,385 
Derivative assets:     
Interest rate related
$— $2,738 $— $133,629 $136,367 
Mortgage delivery commitments
— 675 — — 675 
Total derivative assets$— $3,413 $— $133,629 $137,042 
Total recurring assets at fair value$— $10,383,201 $252,600 $133,629 $10,769,430 
Recurring fair value measurements - Liabilities     
Derivative liabilities:     
Interest rate related
$— $7,579 $— $(3,131)$4,448 
Mortgage delivery commitments
— 11 — — 11 
Total recurring liabilities at fair value (2)
$— $7,590 $— $(3,131)$4,459 
Non-recurring fair value measurements - Assets
Impaired mortgage loans held for portfolio
$— $— $18,382 $— $18,382 
REO
— — 1,270 — 1,270 
Total non-recurring assets at fair value $— $— $19,652 $— $19,652 
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.
76
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, 2021 and 2020. 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. There were no Level 3 transfers during the first nine months of 2021 or 2020.
AFS Private Label MBS
Three months ended September 30,Nine months ended September 30,
(in thousands)2021202020212020
Balance, beginning of period$220,558 $280,882 $252,600 $326,146 
Total gains (losses) (realized/unrealized) included in: 
(Provision) reversal for credit losses 536 (117)329 (1,691)
Accretion of credit losses in interest income
2,522 3,000 7,719 8,938 
Net unrealized gains (losses) on AFS in OCI
(728)1,400 (2,633)(15,114)
Purchases, issuances, sales, and settlements: 
Settlements(17,185)(17,541)(52,312)(50,655)
Balance at September 30$205,703 $267,624 $205,703 $267,624 
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$3,059 $2,883 $7,823 $7,247 
Change in unrealized gains (losses) for the period included in other comprehensive income for assets held at September 30$(728)$1,400 $(2,633)$(15,114)
77
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, 2021December 31, 2020
Notional amountExpiration Date Within One Year Expiration Date After One YearTotalTotal
Standby letters of credit outstanding (1) (2)
$20,403,323 $— $20,403,323 $19,723,286 
Commitments to fund additional advances and BOB loans1,043 — 1,043 760
Commitments to purchase mortgage loans65,331 — 65,331 60,622
Unsettled consolidated obligation bonds, at par1,169,000 — 1,169,000 15,000
Unsettled consolidated obligation discount notes, at par— — — 950
Notes:
(1) Excludes approved requests to issue future standby letters of credit of $245.4 million at September 30, 2021 and $30.9 million at December 31, 2020.
(2) Letters of credit in the amount of $4.2 billion at September 30, 2021 and $5.0 billion at December 31, 2020, have renewal language that permits the letter of credit to be renewed for an additional period with a maximum renewal period of approximately five 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 $3.3 million at September 30, 2021 and $3.9 million at December 31, 2020. 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, 2021 or December 31, 2020. However, within the Bank's Rollover (weekly/monthly) advance product, there were conditional lines of credit outstanding of $12.3 billion at both September 30, 2021 and December 31, 2020.

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.
78

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, 2021.

Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the third quarter of 2021 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

    There are no material changes in the Bank's Risk Factors from those previously disclosed in Part I, Item 1A. Risk Factors in the Bank’s 2020 Form 10-K.

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.INSInline XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.Filed herewith.
101.SCHInline XBRL Taxonomy Extension Schema DocumentFiled herewith.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentFiled herewith.
101.LABInline XBRL Taxonomy Extension Label Linkbase DocumentFiled herewith.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentFiled herewith.
101.DEFInline XBRL 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 9, 2021

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