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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
o 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: 000-51402
FEDERAL HOME LOAN BANK OF BOSTON
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
04-6002575
(I.R.S. Employer Identification Number)
800 Boylston Street
Boston, Massachusetts
(Address of principal executive offices)
 
02199
(Zip Code)
(617) 292-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class B Stock, par value $100 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o     No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or 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. (Check one):
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x

 
Smaller reporting company o Emerging growth company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No x
Registrant's stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. As of February 28, 2019, including mandatorily redeemable capital stock, we had zero outstanding shares of Class A stock and 19,831,378 outstanding shares of Class B stock.

DOCUMENTS INCORPORATED BY REFERENCE
None


FEDERAL HOME LOAN BANK OF BOSTON
2018 Annual Report on Form 10-K
Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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PART I

ITEM 1. BUSINESS

General

The Federal Home Loan Bank of Boston is a federally chartered corporation organized by the U.S. Congress (Congress) in 1932 pursuant to the Federal Home Loan Bank Act of 1932 (as amended, the FHLBank Act) and is a government-sponsored enterprise (GSE). Unless otherwise indicated or unless the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston. Our primary regulator is the Federal Housing Finance Agency (the FHFA).

We are a privately capitalized cooperative, and our mission is to provide highly reliable wholesale funding, liquidity, and a competitive return on investment to our members. We develop and deliver competitively priced financial products, services, and expertise that support housing finance, community development, and economic growth, including programs targeted to lower-income households. We serve the residential-mortgage and community-development lending activities of our members and certain nonmember institutions (referred to as housing associates) located in our district. Our district is comprised of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. There are 11 district Federal Home Loan Banks (the FHLBanks or the FHLBank System) located across the United States (the U.S.), each supporting the lending activities of its members within their districts. Each FHLBank is a separate entity with its own board of directors, management, and employees.

We are exempt from ordinary federal, state, and local taxation except for local real estate tax. However, we are required to set aside funds at a 10 percent rate on our income for our Affordable Housing Program (AHP). For additional information, see — AHP Assessment. We also have voluntarily put in place certain subsidized advance and bond purchasing programs including our Jobs for New England (JNE) program and our Helping to House New England (HHNE) program. For additional information, see — Targeted Housing and Community Investment Programs.

We are managed with the primary objectives of enhancing the value of our membership and fulfilling our public purpose. In pursuit of our primary objectives, we have adopted long-term strategic priorities in our strategic business plan, which are to:

•
position the Bank to compete effectively in the wholesale funding market and support members' and housing associates’ efforts to address the affordable housing and economic needs of their communities in New England;
•
maintain an appropriate and efficient capital structure considering our risk profile through proactive capital stock management and dividend strategies;
•
advocate stakeholder interests in policy matters, and effectively monitor and respond to pending GSE reform and other legislative and regulatory initiatives;
•
acquire, develop and retain the talent required to meet our current and future needs;
•
leverage the advantages of a diverse and inclusive organization in all aspects of our organizational efforts; and
•
continue to evolve as a strong and agile organization that responds quickly and effectively to emerging risks and opportunities while upholding our commitment to efficient and effective operations.

We combine private capital and public sponsorship in a way that is intended to enable our members and housing associates to assure the flow of credit and other services for housing finance, community development, and economic growth. We serve the public through our members and housing associates by providing these institutions with a readily available, low-cost source of funds, called advances, as well as other products and services that are intended to support the availability of residential-mortgage and community-investment credit. In addition, we provide liquidity by enabling members to sell mortgage loans through a mortgage loan purchase program. Under this program, we offer participating financial institutions the opportunity to originate mortgage loans for sale to us or to designated third-party investors. Our primary sources of income come from interest on invested capital as well as the spread between interest-earning assets and interest-bearing liabilities. We are generally able to borrow funds at favorable rates due to our GSE status. Our debt is not backed by the U.S. government, but it does represent the joint and several obligation of the 11 FHLBanks.

Our members and housing associates are comprised of institutions located throughout our district. Institutions eligible for membership include savings institutions (savings banks, savings and loan associations, and cooperative banks), commercial banks, credit unions, qualified community development financial institutions (CDFIs), and insurance companies that demonstrate that their home financing policy is consistent with the Bank's housing finance mission. We are also authorized to

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lend to housing associates such as state housing-finance agencies located in New England. Members are required to purchase and hold our capital stock as a condition of membership and for advances and certain other business activities transacted with us. Our capital stock is not publicly traded on any stock exchange and can only be transferred at par value of $100 per share. We are capitalized by the capital stock purchased by our members and by retained earnings. Members may receive dividends, which are determined by our board of directors, and may request redemption or, at our sole discretion, repurchase of their capital stock at par value subject to certain conditions, as discussed further in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital. The U.S. government does not guarantee either the members' investment in or any dividend on our stock.

Federal Housing Finance Agency

The FHFA, an independent agency in the executive branch of the U.S. government, supervises and regulates the FHLBanks. The FHFA is financed through assessments on the entities it regulates, which include the FHLBanks, as discussed under Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — FHFA Expenses.

The FHFA has broad supervisory authority over the FHLBanks, including, but not limited to, the power to suspend or remove any entity-affiliated party (including any director, officer, or employee) of an FHLBank who violates certain laws or commits certain other acts; to issue and serve a notice of charges upon an FHLBank or any entity-affiliated party; to issue a cease and desist order, or a temporary cease and desist order; to stop or prevent any unsafe or unsound practice or violation of law, order, rule, regulation, or condition imposed in writing; to impose civil money penalties against an FHLBank or an entity-affiliated party; to require an FHLBank to maintain capital levels in excess of usual regulatory requirements; to require an FHLBank to take certain actions, or refrain from certain actions, under the prompt corrective action provisions that authorize or require the FHFA to take certain supervisory actions, including the appointment of a conservator or receiver for an FHLBank under certain conditions; and to require any one or more of the FHLBanks to repay the primary obligations of another FHLBank on outstanding consolidated obligations (COs).

The FHFA conducts an annual onsite examination and other periodic reviews of our operations to assess our safety and soundness as well as our compliance with statutory and regulatory requirements. In addition, we are required to submit information on our financial condition and results of operations each month to the FHFA, and we are required to report other supplemental information to the FHFA on a quarterly basis. We are generally prohibited by FHFA regulations from disclosing the results of the FHFA's examinations and reviews. However, information from those examinations and reviews could become publicly available either through the FHFA or through the FHFA's Office of Inspector General, which can sometimes occur via their reports to Congress.

Additionally, we are subject to annual stress testing by the FHFA. The results of our most recent annual severely adverse economic conditions stress test were published to our public website, www.fhlbboston.com, on November 15, 2018. We expect to publish the results of our 2019 annual severely adverse economic conditions stress test to our public website between November 15 and 30, 2019.

Office of Finance 

The FHLBanks' Office of Finance (the Office of Finance) facilitates the issuing and servicing of FHLBank debt in the form of COs. The FHLBanks, through the Office of Finance as their agent, are the issuers of COs for which they are jointly and severally liable. The Office of Finance also provides the FHLBanks with market data. The Office of Finance publishes annual and quarterly combined financial reports on the financial condition and performance of the FHLBanks and also publishes certain data concerning debt issues and issuance. The FHLBanks are charged for the costs of operating the Office of Finance, as discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — Office of Finance Expenses. The Office of Finance is governed by a board of directors that is constituted of the FHLBank presidents and five independent directors.

Available Information

Our website, www.fhlbboston.com, provides a link to the section of the Electronic Data Gathering and Reporting (EDGAR) website, as maintained by the U.S. Securities and Exchange Commission (the SEC), containing all reports electronically filed, or furnished, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, and our current reports on Form 8-K as well as any amendments to such reports. These reports are made available free of charge through our website as soon as reasonably practicable after electronically filing or being furnished to the SEC. In addition, the SEC maintains a website that contains reports and other information regarding our electronic filings (located at http://www.sec.gov). The Bank's

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and the SEC's website addresses have been included as inactive textual references only. Information on those websites is not part of this report.

Employees

As of February 28, 2019, we had 199 full-time employees and one part-time employee.

Membership

Table 1 - Number of Members by Institution Type

 
 
December 31,
 
 
2018
 
2017
 
2016
Commercial banks
 
46

 
52

 
52

Credit unions
 
163

 
161

 
159

Insurance companies
 
55

 
51

 
46

Savings institutions
 
171

 
175

 
186

Community development financial institutions (CDFI), non-depository institutions
 
4

 
4

 
4

Total members
 
439

 
443

 
447


As of December 31, 2018, 2017, and 2016, 74.0 percent, 70.9 percent, and 70.5 percent, respectively, of our members had outstanding advances with us. These usage rates are calculated excluding housing associates and other nonmember borrowers. While eligible to borrow, housing associates are not members and, as such, cannot hold our capital stock. Other nonmember borrowers consist of institutions that are former members or that have acquired former members and assumed the advances held by those former members. These other nonmember borrowers are required to hold capital stock to support outstanding advances with us until those advances either mature or are paid off. In addition, nonmember borrowers are required to deliver all required collateral to us or our safekeeping agent until all outstanding advances either mature or are paid off. Other than housing associates, nonmember borrowers may not request new advances and are not permitted to extend or renew any advances they have assumed.

Our membership includes the majority of Federal Deposit Insurance Corporation (FDIC)-insured institutions and credit unions with more than $100 million in assets in our district that are eligible to become members. We do not anticipate that a substantial number of additional FDIC-insured institutions will become members. There are a number of other institutions that are eligible for membership, such as insurance companies, smaller credit unions, and CDFIs, which could become members in the future. We note that, for a variety of reasons, including merger of members, we could experience a contraction in our membership that could lower overall demand for our products and services.

Economic Conditions

While our membership is limited to institutions with their principal place of business located in our district, both U.S. national and New England economic conditions, particularly in the housing market, impact our results of operations, financial condition, and future prospects. For example, demand for advances is influenced in part by factors such as the level of our members' deposits, which serve as liquidity alternatives to advances, and demand for residential mortgage loans, which members can generally use as collateral for advances. For information on some of the economic factors that have impacted us in 2018 and are expected to impact us in 2019, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Economic Conditions.

Business Lines

Our business lines include offering credit products, such as advances, access to the Mortgage Partnership Finance® (MPF®) program, deposit and safekeeping services, and access to the AHP. We also maintain a portfolio of investments for liquidity
purposes and to supplement earnings.



"Mortgage Partnership Finance," "MPF," "eMPF" and "MPF Xtra" are registered trademarks of the Federal Home Loan Bank of Chicago.


5
Table of Contents



Advances. We serve as a source of liquidity and make advances to our members and housing associates secured by mortgage loans and other eligible collateral. We offer an array of fixed- and variable-rate advances products, with repayment terms intended to provide funding alternatives to our members in many interest-rate environments and situations. Principal repayment terms may be structured as 1) interest-only to maturity (sometimes referred to as bullet advances) or to an optional early termination date or series of dates or 2) amortizing advances, which are fixed-rate and term structures with equal monthly payments of interest and principal.

We price advances based on the estimated marginal cost of raising funding with a similar maturity profile as well as associated operating and administrative costs, while considering market rates for comparable competing wholesale funding alternatives. In accordance with the FHLBank Act and FHFA regulations, we price our advance products in a consistent and nondiscriminatory manner to all members. However, we are permitted to differentially price our products based on the creditworthiness of the member, volume, or other reasonable criteria applied consistently to all members.

Our major competitors are other sources of liquidity, including retail deposits, investment banks, commercial banks, wholesale/brokered deposits, and, in limited instances, other FHLBanks.

We had 325 members, five housing associates, and four nonmember institutions with advances outstanding as of December 31, 2018. For information on competition and trends in demand for advances, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary — Advances Balances.

Members that have an approved line of credit with us may from time to time overdraw their demand-deposit account. These overdrawn demand-deposit accounts are reported as advances in the statements of condition. These line of credit advances are fully secured by eligible collateral pledged by the member to us. In cases where the member overdraws its demand-deposit account by an amount that exceeds its approved line of credit, we may assess a penalty fee to the member.

In addition to making advances to members, we are permitted under the FHLBank Act to make advances to housing associates that are approved mortgagees under Title II of the National Housing Act. Housing associates must be chartered under law and have succession, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. Housing associates are not subject to capital stock investment requirements, however, they are subject to the same underwriting standards as members, but are more limited in the forms of collateral that they may pledge to secure advances.

Our advance products can also help members in their asset-liability management. For example, we offer advances that members can use to match the cash-flow patterns of their mortgage loans. Such advances can reduce a member's interest-rate risk associated with holding long-term, fixed-rate mortgages. As another example, we also offer advances with interest rates that vary based on changes in the yield curve. We may also offer advances that shift from fixed to floating rates or vice versa after a certain period or upon the occurrence of a certain condition.

Generally, advances may be prepaid at any time. We charge prepayment fees to make us financially indifferent to advance prepayments, except in cases where the prepayment of an advance does not have an adverse financial impact on us or where the pricing of the product compensates us for the value of the option to prepay the advance.

We also offer an advance restructuring program under which the prepayment fee on prepaid advances may be satisfied by the member's agreement to pay an interest rate on a new advance sufficient to amortize the prepayment fee by the maturity date of the new advance, rather than paying the fee in funds immediately available to us.

We have never experienced a credit loss on an advance.

Targeted Housing and Community Investment Programs. We offer several solutions that are targeted to meet the affordable housing or economic development needs of communities that our members serve. These programs include the AHP, the Equity Builder Program (EBP), Community Development Advances (CDAs), the New England Fund (NEF), JNE, and HHNE.

The AHP is a statutorily mandated program under which we provide subsidies in the form of direct grants or discounted interest rates on advances (AHP advances) to help fund affordable housing projects that are directly sponsored by members. AHP funds are required to be used for homeownership housing for households with incomes at or below 80 percent of the median income for the area, or rental housing in which 20 percent of the units are for households with incomes that do not exceed 50 percent of

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the median income for the area. Program funds must be used for the direct costs to purchase, construct, or rehabilitate affordable housing.

The EBP offers members grants to provide households with incomes at or below 80 percent of the area median income with down-payment, closing-cost, homebuyer counseling, and rehabilitation assistance. The EBP is funded with a portion of the AHP assessment. For further information about how AHP subsidies are funded, see AHP Assessment below.

CDAs are discounted advances offered at interest rates that are lower than our regular advance products for the purpose of helping our members fund community development efforts, such as supporting the growth of small businesses, and the development or renovation of roads and schools and expanding affordable housing for individuals with incomes at or below defined percentages of area median income.

NEF advances are targeted to support housing and community development initiatives that benefit moderate-income households and neighborhoods.

JNE, a program we first offered in 2016, provides advances to support small businesses in New England that create and/or retain jobs, or otherwise contribute to overall economic development activities. Examples of those activities include using funds to support the working capital, expansion, or financing needs of small businesses. The JNE program provides subsidies that are used to write down interest rates to a significant discount to market rates on eligible advances that finance qualifying loans to small businesses. The subsidy on advances disbursed during the year ended December 31, 2018, amounted to $5.0 million.

HHNE, which we also introduced in 2016, provides the six New England housing finance agencies (HFAs) with subsidies for targeted initiatives serving individuals and families who qualify for loans under the agencies' income guidelines. HHNE program subsidies are used to write down interest rates to a significant discount to market rates on eligible advances, to purchase bonds from the New England HFAs at deeply discounted yields for the purpose of expanding affordable rental and homeownership initiatives, or to provide direct grants for these purposes. Examples of uses include, but are not limited to, short-term construction lending, workforce housing, deferred loan programs for homeownership, multifamily loan refinance, and rental housing expansion, particularly in areas with job growth that exceeds the supply of rental units. For the year ended December 31, 2018, the subsidy expense for this program was allocated as follows: $2.0 million of subsidy was applied to zero interest-rate advances; $2.0 million of subsidy was applied to below-market yielding bonds issued by three HFAs (which will effectively be realized by the below-market yield over the life of the bond); and $1.0 million of subsidy was applied toward grants made to HFAs unable to execute an advance or bond, an option added to the program in 2017. For the year ended December 31, 2018, the subsidy expense for this program amounted to $1.0 million in grants.

Investments. We maintain a portfolio of investments for liquidity purposes and to supplement earnings. To better meet members' potential borrowing needs at times when access to the capital markets is unavailable (either due to requests that follow the end of daily debt issuance activities or due to a market disruption event impacting CO issuance) and in support of certain statutory and regulatory liquidity requirements, as discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources, we maintain a portfolio of short-term investments issued by highly-rated institutions, primarily consisting of federal funds, securities purchased under agreements to resell (secured by U.S. Department of the Treasury (U.S. Treasury) securities, or Government National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), or Federal Home Loan Mortgage Corporation (Freddie Mac) securities), and interest-bearing deposit accounts at banks.

We also leverage our capital to enhance our income and further support our contingent liquidity needs and mission by maintaining a longer-term investment portfolio. This portfolio includes debentures issued or guaranteed by U.S. government agencies and instrumentalities, as well as supranational institutions, mortgage-backed securities (MBS) that are issued by GSE mortgage agencies or by other private-sector entities, and asset-backed securities (ABS) that are issued by other private-sector entities. All securities must be rated in at least the third highest rating category from a nationally-recognized statistical rating organization (NRSRO) as of the date of purchase. Our ABS holdings are further limited to securities backed by loans secured by real estate. We also purchase securities issued by state or local HFAs that are rated in at least the second-highest rating category from an NRSRO as of the date of purchase. The long-term investment portfolio is intended to provide us with higher returns than those available in the short-term money markets. For a discussion of developments and factors that have impacted and could continue to impact the profitability of our investments, particularly our long-term investment portfolio, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Executive Summary.

Under our regulatory authority to purchase MBS, additional investments in MBS, ABS, and certain securities issued by the Small Business Administration (SBA) are prohibited if our investments in such securities exceed 300 percent of capital at the

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time of purchase. Capital for this calculation is defined as capital stock, mandatorily redeemable capital stock, and retained earnings. At December 31, 2018, and 2017, our MBS, ABS, and SBA holdings represented 166 percent and 230 percent of capital, respectively.

We conduct our investment activities so as to strive to comply with the FHFA’s core mission achievement advisory bulletin, which establishes a ratio by which the FHFA will assess each FHLBank’s core mission achievement. Core mission achievement is determined using a ratio of primary mission assets, which includes advances and acquired member assets (mortgage loans acquired from members), to COs. The core mission asset ratio is calculated using annual average par values.
 
The core mission advisory bulletin provides the FHFA’s expectations about the content of each FHLBank’s strategic plan based on its ratio, as follows:

•
when the ratio is at least 70 percent, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining this level;
•
when the ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plan to increase the ratio; and
•
when the ratio is below 55 percent, the strategic plan should include an explanation of the circumstances that caused the ratio to be at that level and detailed plans to increase the ratio. The advisory bulletin provides that if an FHLBank maintains a ratio below 55 percent over the course of several consecutive reviews, the FHLBank’s board of directors should consider possible strategic alternatives.

Our core mission achievement ratio for the years ended December 31, 2018 and 2017, was 75.2 percent and 74.2 percent, respectively.

Mortgage Loan Finance. We participate in the MPF program, which is a secondary mortgage market structure under which we either invest in or, for fees, facilitate third party investors' investment in eligible mortgage loans (referred to as MPF loans) from FHLBank members, referred to as "participating financial institutions". MPF loans are either conventional, residential, fixed-rate mortgage loans (conventional mortgage loans) or government fixed-rate mortgage loans that are insured or guaranteed by the Federal Housing Administration (the FHA), the U.S. Department of Veterans Affairs (the VA), the Rural Housing Service of the U.S. Department of Agriculture (RHS), or the U.S. Department of Housing and Urban Development (HUD) and are secured by one- to four-family residential properties with original maturities ranging from five years to 30 years or participations in such mortgage loans (government mortgage loans). For information on trends in the growth of the program in 2018, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans.

A variety of MPF loan products have been developed to meet the differing needs of participating financial institutions. We have offered our members MPF Original, MPF 125, MPF Plus, MPF 35, MPF Government, MPF Direct, MPF Government MBS and MPF Xtra, each being closed-loan products in which we (or a third party investor in the case of MPF Xtra, MPF Direct, or MPF Government MBS) invest in MPF loans that have been acquired or have already been closed by the participating financial institutions with its own funds. The products have different credit-risk-sharing characteristics based upon the different levels for the first loss account and credit enhancement and the types of credit-enhancement fees (performance-based, fixed amount, or none). In the case of MPF Xtra, MPF Direct and MPF Government MBS, each product facilitates the investment in MPF loans by third party investors for which we are paid fees and under which the related credit and market risks are transferred to the investors. There are no first loss account, credit enhancement, or credit-enhancement fees for MPF Xtra, MPF Direct, and MPF Government MBS because the loans are sold to third parties that assume the embedded credit risk. For government loans, participating financial institutions provide the required credit enhancement by delivering loans that are guaranteed or insured by a department or agency of the U.S. government.

The participating financial institution performs all of the traditional retail loan origination functions under all of these MPF loan products. A master commitment provides the terms under which the participating financial institution delivers mortgage loans to us. We continue to offer MPF Original, MPF 35, MPF Government, MPF Direct, MPF Government MBS, and MPF Xtra. We do not currently offer our members new master commitments under either MPF 125 or MPF Plus.

The FHLBank of Chicago (in this capacity, the MPF Provider) establishes general eligibility standards under which an FHLBank member may become a participating financial institution, the structure of MPF loan products, and the eligibility rules for MPF loans. In addition, the MPF Provider manages the delivery mechanism for MPF loans and the back-office processing of MPF loans as master servicer and master custodian. The FHLBanks that participate in the MPF Program (including the Bank, the MPF Banks) pay fees to the MPF Provider for these services.

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The MPF Provider has engaged Wells Fargo Bank N.A. as the vendor for master servicing and as the primary custodian for the MPF program (referred to herein as the master servicer). The MPF Provider also has contracted with other custodians meeting MPF program eligibility standards at the request of certain participating financial institutions. These other custodians are typically affiliates of participating financial institutions, and in some cases a participating financial institution may act as self-custodian.

The MPF Provider publishes and maintains:

•
the MPF Program Guide;
•
a Selling Guide for the MPF Direct product; and
•
a Selling Guide and a Servicing Guide for each of the remaining MPF products we have offered (collectively, the MPF guides), which together detail the requirements participating financial institutions must follow in originating, underwriting, selling and servicing MPF loans.  

The MPF Provider also maintains the infrastructure through which MPF Banks may purchase MPF loans through their participating financial institutions.

For conventional mortgage loan products (MPF loan products other than government mortgage loans and products in which we do not invest such as MPF Xtra), participating financial institutions assume or retain a portion of the credit risk on the MPF loans they sell to an MPF Bank by providing credit enhancement either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage guaranty insurance. The FHFA Acquired Member Assets (AMA) rule allows each FHLBank to utilize its own model to determine the credit enhancement for an AMA asset or pool of loans in lieu of a nationally recognized statistical ratings organization ratings model. We determined, based on documented analysis, that assets delivered to us had to be credit enhanced to at least a level at which we have a high degree of confidence that we will not bear material losses beyond the losses absorbed by our first loss account, even under reasonably likely adverse changes to expected economic conditions. Loans are assessed by a third party’s credit model at acquisition, and a credit enhancement is calculated based on loan attributes and our risk tolerance. Credit losses on a loan may only be absorbed by a credit enhancement amount stated in the master commitment related to the loan. The participating financial institution's credit enhancement covers losses for MPF loans in excess of the MPF Bank's allocated portion of credit losses up to an agreed upon amount, called the first loss account. Participating financial institutions are paid a credit-enhancement fee for providing credit enhancement and in some instances all or a portion of the credit-enhancement fee may be adjusted based upon the performance of loans purchased by the MPF Bank. Losses that exceed the amount of the participating financial institutions' credit enhancement obligation are borne by the MPF Bank that owns the loans.

Participating Financial Institution Eligibility

Members and eligible housing associates may apply to become a participating financial institution. All of the participating financial institution's obligations under the applicable agreement are secured in the same manner as the other obligations of the participating financial institution under its regular advances agreement with us. We have the right to request additional collateral to secure the participating financial institution's obligations.

Repurchases of MPF Loans

When a participating financial institution fails to comply with its representations and warranties concerning its duties and obligations described within applicable agreements, the MPF guides, applicable laws, or terms of mortgage documents, the participating financial institution may be required to repurchase the MPF loans that are impacted by such failure. Reasons that would require a participating financial institution to repurchase an MPF loan may include, but are not limited to, MPF loan ineligibility, failure to deliver documentation to an approved custodian, a servicing breach, fraud, or other misrepresentation. In such instances, we can require that the participating financial institution compensate us for any losses or costs that we incur.

MPF Servicing

The participating financial institution, or a servicer it engages, generally retains the right and responsibility for servicing MPF loans it delivers, including loan collections and remittances, default management, loss mitigation, foreclosure, and disposition of the real estate acquired through foreclosure or deed in lieu of foreclosure.


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If there is a loss on a conventional mortgage loan, the loss is allocated to the master commitment and shared in accordance with the risk-sharing structure for that particular master commitment. The servicer pays any gain on sale of real-estate-owned property (REO) to the related MPF Bank, or in the case of a participation, to us and other MPF Bank(s) based upon their respective interests in the MPF loan. However, the amount of the gain is available to reduce subsequent losses incurred under the master commitment before such losses are allocated between us and the participating financial institution.

Loss Allocation

Credit losses from conventional mortgage loans that are not covered by the borrower's equity in the mortgaged property, property insurance, or primary mortgage insurance are allocated between us and the participating financial institution as follows:

•
Credit losses are allocated first to us, up to an agreed-upon amount, called the first loss account determined for the MPF product as follows:

MPF Original. The first loss account starts out at zero on the day the first MPF loan under a master commitment is purchased but increases monthly over the life of the master commitment at a rate that ranges from 0.03 percent to 0.06 percent (three to six basis points) per annum based on the month-end outstanding aggregate principal balance of the master commitment. The first loss account is structured so that over time, it should cover expected losses on a master commitment, though losses early in the life of the master commitment could exceed the first loss account and be charged in part to the participating financial institution's credit enhancement.

MPF 125. The first loss account is equal to 1.00 percent (100 basis points) of the aggregate principal balance of the MPF loans funded under the master commitment. Once the master commitment is fully funded or expires, the first loss account is expected to cover expected losses on that master commitment, although we may recover a portion of losses incurred under the first loss account by withholding performance credit-enhancement fees payable to the participating financial institution.

MPF Plus. The first loss account is equal to an agreed-upon number of basis points of the aggregate principal balance of the MPF loans funded under the master commitment that is not less than the amount of expected losses on the master commitment. Once the master commitment is fully funded, the first loss account is expected to cover expected losses on that master commitment. We may recover a portion of losses incurred under the first loss account by withholding performance credit-enhancement fees payable to the participating financial institution.

MPF 35. The first loss account is equal to 35 basis points of the aggregate principal balance of the MPF loans funded under the master commitment. We may recover a portion of losses we absorb by withholding performance credit-enhancement fees that would otherwise be payable to the participating financial institution.

•
Credit losses are allocated second to the participating financial institution under its credit-enhancement obligation for losses in excess of the first loss account, if any, up to the amount of such credit enhancement. The credit enhancement may consist of a direct liability of the participating financial institution to pay credit losses up to a specified amount, a contractual obligation of the participating financial institution to provide supplemental mortgage guaranty insurance, or a combination of both.

•
Third, any remaining unallocated losses are absorbed by us.

We may invest in participation interests in MPF loans together with other MPF Banks. For participation interests, MPF loan losses (other than those allocable to the participating financial institution) are allocated among us and the participating MPF Bank(s) pro rata based upon the respective participation interests in the related master commitment.

Other Banking Activities. We engage in other banking activities including, among others:

•
offering standby letters of credit, which are financial instruments we issue for a fee under which we agree to honor payment demands made by a beneficiary in the event the primary obligor cannot fulfill its obligations; and
•
acting as a correspondent for deposit, funds transfer, and safekeeping services for which we earn a fee.

Consolidated Obligations


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We fund our activities principally through the sale of debt securities known as consolidated obligations, and referred to herein as COs. Our ability to access the money and capital markets through the sale of COs using a variety of debt structures and maturities has historically allowed us to manage our balance sheet effectively and efficiently. The FHLBanks are among the world's most active issuers of debt, issuing on a near-daily basis, including sometimes multiple issuances in a single day. The FHLBanks compete with Fannie Mae, Freddie Mac, and other GSEs for funds raised through the issuance of unsecured debt in the agency debt market.

COs, consisting of bonds and discount notes, represent our primary source of debt to fund advances, mortgage loans, and investments. All COs are issued on behalf of a single FHLBank (as the primary obligor) through the Office of Finance, but all COs are the joint and several obligations of all of the FHLBanks. COs are not obligations of the U.S. government and are not guaranteed by the U.S. government or any government agency. As of February 28, 2019, Moody's Investors Service Inc. (Moody's) rated COs Aaa/P-1, and Standard & Poor’s Financial Services LLC (S&P) rated them AA+/A-1+. The GSE status of the FHLBanks and the ratings of the COs have historically provided the FHLBanks with ready capital market access. For information on the market for COs during the period covered by this report, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity.

CO Bonds. CO bonds may have original maturities of up to 30 years (although there is no statutory or regulatory limit on maturities) and are generally issued to raise intermediate and long-term funds. CO bonds may also contain embedded options that affect the term or yield structure of the bond. Such options include call options under which we can redeem bonds prior to maturity.

CO bonds may be issued with either fixed-rate coupon-payment terms, zero-coupon terms, or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets including the London Interbank Offered Rate (LIBOR), the Secured Overnight Financing Rate (SOFR), and others. Some CO bonds may contain different coupon characteristics at different points in time.

CO bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. We frequently participate in these issuances. Each FHLBank requests funding through the Office of Finance, and the Office of Finance endeavors to issue the requested bonds and allocate proceeds in accordance with each FHLBank's requested funding. In some cases, proceeds from partially fulfilled offerings must be allocated among the requesting FHLBanks in accordance with predefined rules that apply to particular issuance programs. Conversely, under certain programs, proceeds from bond offerings that exceed aggregate FHLBank demand will be allocated to the FHLBanks in accordance with predefined rules that apply to particular issuance programs. The Office of Finance also prorates the amounts of fees paid to dealers in connection with the sale of COs to each FHLBank based upon the percentage of debt issued that is assumed by each FHLBank.

The Office of Finance has established an allocation methodology for the proceeds from the issuance of COs if COs cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. In general, this methodology provides that the proceeds in such circumstances will be allocated among the FHLBanks based on relative FHLBank total regulatory capital, with FHLBanks with greater total regulatory capital in absolute terms receiving greater allocations of issuance proceeds. The Office of Finance will use this method in such periods unless it determines that there is an overwhelming reason to adopt a different allocation method. As is the case during any instance of a disruption in our ability to access the capital markets, market conditions or this allocation could adversely impact our ability to finance our operations, financial condition, and results of operations.

CO Discount Notes. CO discount notes are short-term obligations issued at a discount to par with no coupon. Terms range from overnight up to one year. We generally participate in CO discount note issuance on a daily basis as a means of funding short-term assets and managing our short-term funding gaps. Each FHLBank submits commitments to issue CO discount notes in specific amounts with specific terms to the Office of Finance, which in turn, aggregates these commitments into offerings to securities dealers. Such commitments may specify yield limits that we have specified in our commitment, above which we will not accept funding. CO discount notes are sold either at auction on a scheduled basis or through a direct bidding process on an as-needed basis through a group of dealers known as the selling group, who may turn to other dealers to assist in the ultimate distribution of the securities to investors.

Negative Pledge Requirement. FHFA regulations require that each FHLBank maintain the following types of assets, free from any lien or pledge, in an amount at least equal to the amount of that FHLBank's participation in the total COs outstanding:

•
cash;

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•
obligations of, or fully guaranteed by, the U.S. government;
•
secured advances;
•
mortgages, which have any guaranty, insurance, or commitment from the U.S. government or any agency of the U.S.; and
•
investments described in Section 16(a) of the FHLBank Act, which, among other items, includes securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located.

Table 2 - Ratio of Non-Pledged Assets to Total Consolidated Obligations
(dollars in thousands)

 
 
December 31,
 
 
2018
 
2017
 
 
 
 
 
Cash and due from banks
 
$
10,431

 
$
261,673

Advances
 
43,192,222

 
37,565,967

Investments (1)
 
15,900,204

 
17,941,614

Mortgage loans, net
 
4,299,402

 
4,004,737

Accrued interest receivable
 
112,751

 
94,100

Less: pledged assets
 
(243,220
)
 
(287,852
)
Total non-pledged assets
 
$
63,271,790

 
$
59,580,239

Total consolidated obligations
 
$
58,978,506

 
$
56,065,529

Ratio of non-pledged assets to consolidated obligations
 
1.07

 
1.06

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

Joint and Several Liability. Although each FHLBank is primarily liable for the portion of COs corresponding to the proceeds received by that FHLBank, each FHLBank is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all COs. Under FHFA regulations, if the principal or interest on any CO issued on behalf of one of the FHLBanks is not paid in full when due, then the FHLBank primarily responsible for the payment may not pay dividends to, or redeem or repurchase shares of stock from, any member of such FHLBank. The FHFA, in its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation.

To the extent that an FHLBank makes any payment on a CO on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank otherwise responsible for the payment. However, if the FHFA determines that an FHLBank is unable to satisfy its obligations, then the FHFA may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding, or on any other basis the FHFA may determine.

Neither the FHFA nor any predecessor to it has ever required us to repay obligations in excess of our participation nor have they allocated to us any outstanding liability of any other FHLBank's COs.
Capital Resources

As a cooperative, we are owned by our member institutions, which are required to purchase shares of our capital stock as a condition of membership in us and to support the capital requirements for certain credit products that we provide. All issuances and repurchases/redemptions of our capital stock are effected at a par value of $100 per share. We currently issue one class of stock, Class B, which shareholders may redeem five years after providing a written redemption request. Our equity capital also includes retained earnings.

Total Stock-Investment Requirement (TSIR). Each member is required to satisfy its TSIR at all times, which is an amount of stock equal to its activity-based stock-investment requirement plus its membership stock-investment requirement. Any stock held by a member in excess of its TSIR is referred to as excess stock. At December 31, 2018, members and nonmembers with capital stock outstanding held excess capital stock totaling $88.7 million, representing approximately 3.5 percent of total capital stock outstanding.

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Membership Stock-Investment Requirement (MSIR). As of January 16, 2019, the MSIR is equal to 0.20 percent of the value of certain member assets eligible to secure advances subject to a current minimum balance of $10,000 and a current maximum balance of $10.0 million. Prior to January 16, 2019, the MSIR was equal to 0.35 percent of the value of certain member assets eligible to secure advances subject to a minimum balance of $10,000 and a maximum balance of $25.0 million.

Activity-Based Stock-Investment Requirement (ABSIR). Certain activity with us has an associated ABSIR. For example, advances have an ABSIR that varies by term with longer terms typically requiring a higher ABSIR.

Redemption of Excess Stock. Members may submit a written request for redemption of excess stock. The stock subject to the request will be redeemed at par value by us upon expiration of the stock-redemption period, which is five years for Class B stock, provided that the stock is not required to support the member's TSIR. The stock-redemption period also applies (with certain exceptions) to stock held by a member that (1) gives notice of intent to withdraw from membership or (2) becomes a nonmember due to merger or acquisition, charter termination, or involuntary termination of membership. At the end of the stock-redemption period, we must comply with the redemption request unless doing so would cause us to fail to comply with our minimum regulatory capital requirements, cause the member to fail to comply with its TSIR, or violate any other applicable limitation or prohibition.
 
Repurchase of Excess Stock. Our capital plan provides us with the authority and discretion to repurchase excess stock from any shareholder at par value upon 15 days prior written notice to the member, unless a shorter notice period is agreed to in writing with the member, so long as the repurchase will not cause us to fail to meet any of our regulatory capital requirements or violate any other applicable limitation or prohibition. It is our practice to repurchase daily the excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s TSIR, subject to a minimum repurchase of $100,000. In addition to daily repurchases, shareholders may request that we voluntarily repurchase excess stock shares at any time. In either case, we retain sole discretion over any voluntary repurchases of excess stock in accordance with our capital plan. During the year ended December 31, 2018, we repurchased $1.6 billion of excess capital stock, of which $4.4 million was mandatorily redeemable capital stock.

Statutory and Regulatory Restrictions on Capital-Stock Redemption and Repurchases. By law our stock is putable by the member. However, there are significant statutory and regulatory restrictions on our obligation to redeem a member's outstanding stock, including the following:

•
Our board of directors, or a committee of the board, may decide to suspend redemptions if it reasonably believes that continued redemptions would cause us to fail to meet any of our minimum capital requirements, prevent us from maintaining adequate capital against potential risks that are not adequately reflected in our minimum capital requirements, or otherwise prevent us from operating in a safe and sound manner.
•
We may not redeem or repurchase any capital stock without the prior written approval of the FHFA if our board of directors or the FHFA determine that we have incurred or are likely to incur losses that result in or are likely to result in charges against our capital stock while such charges are continuing or expected to continue.
•
If, during the period between receipt of a stock-redemption notification from a member and the actual redemption, we become insolvent and are either liquidated or forced to merge with another FHLBank, the redemption value of the stock will be established either through the market-liquidation process or through negotiation with a merger partner. In either case, all senior claims must first be settled, and there are no claims which are subordinated to the rights of FHLBank stockholders.
•
We can only redeem stock investments that exceed the members' TSIR.
•
If we are liquidated, after payment in full to our creditors, our stockholders will be entitled to receive the par value of their capital stock as well as any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation, our board of directors shall determine the rights and preferences of our stockholders, subject to any terms and conditions imposed by the FHFA.

Additionally, we cannot redeem or repurchase shares of capital stock from any of our members if:

•
following such redemption, we would fail to satisfy our minimum capital requirements;
•
we become undercapitalized or our capital would be insufficient to maintain a classification of adequately capitalized after redeeming or repurchasing shares, except, in this latter case, with the Director of the FHFA's permission;
•
the principal or interest due on any CO issued through the Office of Finance on which we are the primary obligor has not been paid in full when due;

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•
we fail to provide to the FHFA a certain quarterly certification required by the FHFA's regulations prior to declaring or paying dividends for a quarter;
•
we fail to certify in writing to the FHFA that we will remain in compliance with our liquidity requirements and will remain capable of making full and timely payment of all of our current obligations;
•
we notify the FHFA that we cannot provide the required certification, project we will fail to comply with statutory or regulatory liquidity requirements, or will be unable to timely and fully meet all of our current obligations; or
•
we actually fail to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of our current obligations, or negotiate to enter or enter into an agreement with one or more other FHLBanks to obtain financial assistance to meet our current obligations.

Our board of directors also has a statutory obligation to review and adjust member capital stock purchase requirements to comply with our minimum capital requirements, and each member must comply promptly with any such requirement. However, a member may be able to reduce its outstanding business with us as an alternative to purchasing additional capital stock.

Mandatory Purchases of Capital Stock. Our board of directors has a right and an obligation to call for additional capital-stock purchases by our members in accordance with our capital plan, if needed to satisfy statutory and regulatory capital requirements. Our board of directors has never called for any additional capital-stock purchases by members under our capital plan.
Retained Earnings. Our current minimum retained earnings target, as set by our board of directors, is $700.0 million, which was selected for the reasons discussed under Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Internal Capital Practices and Policies — Minimum Retained Earnings Target.
 
As of December 31, 2018, our retained earnings totaled $1.4 billion. Of that amount, $310.7 million is in a restricted retained earnings account and is not available to pay dividends, as discussed under Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. We are required to allocate 20 percent of net income to this restricted retained earnings account in accordance with our capital plan and a joint capital enhancement agreement (as amended, the Joint Capital Agreement) among the FHLBanks.
Dividends. We may pay dividends from current net earnings or unrestricted retained earnings, subject to certain limitations and conditions. For additional information see Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Interest-Rate-Exchange Agreements

In general, we use interest-rate-exchange agreements (derivatives) in three ways: 1) as a fair-value hedge of a hedged financial instrument or a firm commitment, 2) as a cash-flow hedge of a hedged financial instrument or a forecasted transaction, or 3) as economic hedges in asset-liability management that are not designated as hedges. In addition to using derivatives to manage mismatches of interest rates between assets and liabilities, we also use derivatives to manage embedded options in assets and liabilities and to hedge the market value of existing assets, liabilities, and anticipated transactions. We may also enter into derivatives concurrently with the issuance of COs to reduce funding costs. We enter into derivatives directly with principal counterparties and also enter into centrally-cleared derivatives where our counterparty is a derivatives clearing organization (DCO). FHFA regulations require the documentation of nonspeculative use of these instruments and the establishment of limits to credit risk arising from these instruments.

AHP Assessment

Annually, the FHLBanks collectively must set aside for the AHP the greater of $100 million or 10 percent of the current year's net income before interest expense associated with mandatorily redeemable capital stock and the assessment for AHP. For the year ended December 31, 2018, our AHP assessment was $24.3 million.

If the result of the aggregate 10 percent calculation described above is less than $100 million for all FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equals $100 million. The shortfall would be allocated among the FHLBanks based upon the ratio of each FHLBank's income before AHP to the sum of the income before AHP of the FHLBanks combined, except that the required annual AHP contribution for an FHLBank cannot exceed its net earnings for the year. Accordingly, the actual amount of each

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future AHP assessment is dependent upon both our net income before interest expense associated with mandatorily redeemable capital stock and the income of the other FHLBanks. Thus, future AHP assessments are not determinable.

Risk Management

We have a comprehensive risk-governance structure. We have identified the following major risk categories relevant to business activities:

•
Credit risk, the risk to earnings or capital due to an obligor's failure to meet the terms of any contract with us or otherwise perform as agreed;
•
Market risk, the risk to earnings or shareholder value due to adverse movements in interest rates, market prices, or interest-rate spreads;
•
Liquidity risk, the risk that we may be unable to meet our funding requirements, or meet the credit needs of members, at a reasonable cost and in a timely manner;
•
Leverage risk, the risk that our capital is not sufficient to support the level of assets that can result from a deterioration of our capital base, a deterioration of the assets, or from overbooking assets;
•
Business risk, the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions, or from external factors as may occur in both the short- and long-run, including from legislative and regulatory developments;
•
Operational risk, the risk of unexpected loss resulting from ineffective people, processes or systems, whether emanating internally or externally. Operational risk also includes model risk (the risk of loss resulting from model errors or the incorrect use or application of model output), compliance risk (the risk of non-compliance with the Bank’s obligations and commitments), and the risk of internal or external fraud; and
•
Reputation risk, the risk to earnings or capital arising from negative public opinion, which can affect our ability to establish new business relationships or maintain existing business relationships.

Credit, market, liquidity, and leverage risks are discussed in greater detail throughout Item 7 —Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 7A — Quantitative and Qualitative Disclosures About Market Risk. Business, operational, and reputation risks are discussed in greater detail below.

The board of directors provides risk oversight through the review and approval of our risk-management policy and also evaluates and approves risk tolerances and risk limits. The board of directors' Risk Committee provides additional oversight of the Bank's risk governance structure. The board of directors also reviews the results of an annual risk assessment that we perform for our major business processes.

Management establishes a quantifiable connection between our desired risk profile and our risk tolerances and risk limits as expressed in our risk-management policy. Management is responsible for maintaining internal policies consistent with the risk-management policy and maintains various standing committees intended to assess and manage each of the major risk categories relevant to our business activities. Our chief risk officer is responsible for communicating material changes to these internal policies to the board of directors' Risk Committee. Management is also responsible for monitoring, measuring, and reporting risk exposures to the board of directors. Additionally, our Internal Audit department may report to the board's Audit Committee the results of internal audit work on the effectiveness of management's risk management processes and controls.

Business Risk

Management's strategies for mitigating business risk include annual and long-term strategic planning exercises; continually monitoring key economic indicators, projections, competitive threats, and our external environment; and developing contingency plans where appropriate.

Operational Risk

We are subject to operational risk which can result from human error, fraud, vendor or third-party failure, unenforceability of legal contracts, or deficiencies in internal controls or information systems.

We have policies and procedures intended to mitigate operational risks. We train our employees for their roles and maintain written policies and procedures for our key functions. We maintain a system of internal controls designed to adequately segregate responsibilities and appropriately monitor and report on our activities to management and the board of directors. Our

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Internal Audit department, which reports directly to the Audit Committee of the board of directors, regularly monitors our adherence to established policies and procedures. Some operational risks are beyond our control, and the failure of other parties to adequately address their operational risks could adversely impact us.

Operational risk includes risk arising from breaches of our cybersecurity or other cyber incidents that could result in a failure or interruption of our information technology systems. We have not experienced a disruption in our information systems that has had a material adverse impact on us. However, we rely heavily on our information systems to conduct and manage our business, and failures or interruptions of these information systems could have a material adverse impact on our financial condition and results of operations. We take many steps to protect our information systems and data, including operational redundancy and supplier diversity, monitored physical and logical security controls, mandatory staff training and testing on cyber risks, and third party facilitated penetration testing.

Additionally, most of our information systems have either been placed with infrastructure-as-a-service (IaaS) providers or have been co-located with a third-party service provider. Both types of environments are designed to host information systems with specialized environmental controls, certain power, heating and cooling system redundancies, 24-hour onsite staffing, and physical security. We rely on these service providers to continue to provide secure locations and stable operating environments for the systems deployed there. Any failure to provide such stability or security by the third-party service provider could result in failures or interruptions in our ability to conduct business. We take several steps to mitigate the risks of our reliance on these third-party service providers, including physical and/or monitored logical security controls and hosted data along with maintaining redundancy of systems at alternate locations for disaster-recovery and business continuity. Data for critical computer systems is backed up regularly and stored offsite to avoid disruption in the event of a computer failure. Additionally, we review the providers' controls report annually and monitor and meet with providers on a regular basis. We maintain disaster-recovery sites intended to provide continuity of operations in the event that our primary information systems become unavailable, but there can be no complete assurance that those disaster-recovery sites will work as intended in the event of an actual disruption or failure. Moreover, certain of our application vendors host their applications in either a software-as-a-service framework or a hosted service model, either on their own hardware or with a third-party. We have executed contracts with these providers stipulating standards for control intended to mitigate our risks based on loss of access or security breaches. Additionally, we actively manage these service providers through our vendor management program.

Further, our AHP, MPF, and certain collateral activities rely on the secure processing, storage, and transmission of private borrower information, such as names, residential addresses, social security numbers, credit rating data, and other consumer financial information. We take several steps to protect such data, including information technology and security, general computing controls governing access to programs and data, along with physical and logical security. Additionally, we review related third-party service organizations' controls report annually. Despite these steps, this information could be exposed in several ways, including through unauthorized access to our computer systems, computer viruses that attack our computer systems, software or networks, accidental delivery of information to an unauthorized party, and loss of storage media containing this information. Any of these events could result in financial losses, legal and regulatory sanctions, and reputational damage.

We are implementing a multi-year strategy to modernize most of our mission critical applications and supporting infrastructure.  The pace of change in our information technology increases the risk of failures or interruptions of information systems or other technology, which could have a material adverse impact on our financial condition and results of operations.  We have taken steps to mitigate the risks arising from the pace of change by strictly adhering to our information technology-related policies, guidelines, procedures and industry best practices and engaging third party experts to guide and advise on the strategy as a whole and on particular components, and we intend to follow these practices during the remainder of the implementation of this program. Furthermore, our senior management approves and provides oversight of all major information technology-related investments.

Disaster-Recovery/Business Continuity Provisions. We maintain a business continuity site in Massachusetts to provide continuity of operations in the event that our Boston headquarters becomes unavailable. We also have a reciprocal back-up agreement in place with the FHLBank of Topeka to provide short-term coverage for a limited set of services in the event that our facilities are inoperable.

Insurance Coverage. We have insurance coverage for employee fraud, forgery, alteration, and embezzlement, computer systems fraud, as well as director and officer liability protection for, among other things, breach of duty, negligence, and acts of omission. Additionally, insurance coverage is currently in place for commercial property and general liability, bankers professional liability, employment practices liability, cyber liability, and fiduciary liability. We maintain additional insurance protection as deemed appropriate, including coverage for liability arising from automobiles, and business-travel accidents. In addition to using an insurance broker to place our insurance coverage, we use the services of an independent insurance

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consultant who periodically conducts a review of our insurance coverage levels and provides other advice about our insurance program.

Reputation Risk

We take several steps to manage reputation risk. We have established a code of ethics and business conduct and operational risk-management procedures intended to ensure ethical behavior among our staff and directors and require all employees annually to certify compliance with our code of ethics. We work to ensure that all communications are presented accurately, consistently, and in a timely way to multiple audiences and stakeholders. In particular, we regularly conduct outreach efforts with our membership and with housing and economic-development advocacy organizations throughout our district. We also maintain relationships with government officials at the federal, state, and municipal levels; key media outlets; nonprofit housing and community-development organizations; and regional and national trade and business associations to foster awareness of our mission, activities, and value to members. We work with the Council of FHLBanks and the Office of Finance to coordinate communications on a broader scale.

ITEM 1A. RISK FACTORS

The following discussion summarizes some of the most important risks that we face. This discussion is not exhaustive, and there may be other risks that we face, which are not described below. The risks described below, if realized, may result in us being prohibited from paying dividends and/or repurchasing and redeeming our capital stock, and could adversely impact our business operations, financial condition, and future results of operations.

BUSINESS AND REPUTATION RISKS

Sustained low advances balances and/or limited opportunities for loan purchases at our offered pricing could adversely impact results of operations.

Our primary business is providing liquidity to our members by making advances to, and purchasing residential mortgage loans from, our members. Many of our competitors are not subject to the same body of regulation applicable to us. This is one factor among several that may enable our competitors to offer wholesale funding or purchase residential mortgage loans on terms that we are not able to offer and that members deem more desirable than the terms we offer on our advances or purchases of residential mortgage loans.

The availability to our members of different products from alternative sources, with terms more attractive than the terms of products we offer, as can happen from time-to-time, may significantly decrease the demand for our advances and/or loan purchases. Further, any changes we make in the pricing of our advances or for residential mortgage loans in an effort to compete effectively with these competitive funding sources could decrease the profitability of advances, which could reduce earnings. More generally, a decrease in the demand for advances and/or loan purchases, or a decrease in the profitability of advances and/or mortgage loan investments, could adversely impact our financial condition and results of operations.

The loss of significant members could result in lower demand for our products and services.

At December 31, 2018, our five largest stock-holding members held 28.9 percent of our stock. The loss of significant members or a significant reduction in the level of business they conduct with us would likely lower overall demand for our products and services in the future and adversely impact our performance.

Also, consolidations within the financial services industry could reduce the number of current and potential members in our district. Industry consolidation could also cause us to lose multiple members whose business and ownership of our stock are so substantial that their loss could threaten our viability. In turn, we might be forced to consider strategic alternatives, which could include a merger with another FHLBank.

We are subject to a complex body of laws and regulations, as well as U.S. government monetary policies, which could change in a manner detrimental to our business operations and/or financial condition.

The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and as such, are governed by federal laws and by regulations promulgated, adopted, and applied by the FHFA, an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, Fannie Mae, and Freddie Mac. Congress may amend the FHLBank Act or other statutes in ways that significantly affect 1) the rights and obligations of the FHLBanks and 2) the manner in which the FHLBanks carry out their mission and business operations. New or modified legislation enacted by Congress or regulations

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adopted by the FHFA or other financial services regulators could adversely impact our ability to conduct business or the cost of doing business.

For example, we note that, from time to time, the executive branch, Congress, and various independent federal agencies have advanced plans to reform the federal support of U.S. housing finance, specifically targeting Fannie Mae and Freddie Mac. If implemented, these plans are likely to also directly and indirectly impact other GSEs that support the U.S. housing market, including the FHLBanks. In addition, recent tax changes have reduced the tax incentive for home ownership slightly. Any such changes or reforms that are implemented could adversely impact the profitability of the FHLBanks or limit future growth opportunities.

We cannot predict what regulations will be issued or revised or what legislation will be enacted or repealed, and we cannot predict the effect of any such regulations or legislation on our business operations and/or financial condition. Changes in regulatory or statutory requirements could result in, for example, an increase in the FHLBanks' cost of funding, a change in permissible business activities, limitations on advances made to our members, or a decrease in the size, scope, or nature of the FHLBanks' lending, investment, or mortgage-financing activities, all and any of which could adversely impact our financial condition and results of operations.

The businesses and results of operations of the FHLBanks are significantly affected by the monetary policies of the U.S. government and its agencies, including the Federal Reserve. The Federal Reserve Board of Governors' policies directly and indirectly influence the yield on interest-earning assets and the yield on interest-bearing liabilities and could adversely affect the demand for advances and for COs. These policies could also adversely affect the FHLBanks through lower yields on our investments, higher yields on our debt, or both, which could then adversely affect our financial condition and results of operations. In addition, the FHLBanks currently play a predominant role as lenders in the federal funds market; therefore, any disruption in the federal funds market or any related regulatory or policy change may adversely affect the FHLBanks’ cash management activities, results of operations, and reputation.

Our dividend practices could decrease demand for our products that require capital stock purchases and/or result in withdrawals from membership.

Historically, our board of directors has varied dividend declarations based on our financial condition, performance, outlook and economic environment. If our financial performance or condition were to deteriorate significantly in the future, our board of directors could determine to reduce or eliminate dividends.

Should the board of directors determine to suspend or lower dividend declarations, we could experience decreased member demand for our products requiring capital stock purchases, reduced ability to add new members, and/or withdrawals from membership that could adversely impact our business operations and financial condition.

Limiting or ending repurchases of excess stock from members could decrease demand for advance products and increase membership withdrawals.

From December 8, 2008, until January 1, 2015, we maintained a general moratorium on shareholder-initiated excess stock repurchases although we completed several Bank-initiated partial repurchases of excess stock during the latter part of that period. We rescinded the moratorium; however, that period of constrained excess stock repurchases and the potential for another such period could provide an incentive for members to limit certain of their business with us to avoid associated stock purchase requirements and a disincentive to prospective members from becoming members, either of which could adversely impact our business operations and financial condition.

An NRSRO's downgrade of the U.S. federal government's credit ratings could adversely impact our funding costs and/or access to the capital markets, and/or adversely impact demand for certain of our products.

Certain NRSROs have indicated that the credit ratings of the FHLBanks are constrained by the credit ratings of the U.S. federal government. Accordingly, a downgrade of the U.S. federal government's credit rating by an NRSRO is likely to be followed by a similar downgrade of the FHLBanks. Prolonged or repeated shutdowns of the U.S. federal government, such as that experienced in early 2019, among other things, could be followed by a downgrade of the credit ratings of the U.S. federal government. Downgrades of the U.S. federal government's credit rating (and, in turn, the FHLBanks' credit rating) are possible, and any resulting downgrades to our credit ratings could adversely impact our funding costs and/or access to the capital markets. Further, member and housing associate demand for certain of our products, such as letters of credit, is influenced by our credit ratings, and downgrade of our credit ratings could weaken or eliminate demand for such products. To the extent that

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we cannot access funding when needed on acceptable terms to effectively manage our cost of funds or demand for our products falls, our financial condition and results of operations could be adversely impacted.

Negative information about the FHLBanks or housing GSEs in general could adversely impact our cost and availability of financing, or could limit membership growth.

Negative information about us or any other FHLBank, such as material losses or increased risk of losses, could also adversely impact our cost of funds. More broadly, negative information about housing GSEs, in general, could adversely impact us. Potential sources of negative information about the FHLBanks include NRSROs, the FHFA, and its Office of Inspector General. Further, an FHFA rule annually requires us, and the other FHLBanks, to perform stress tests under various scenarios and make the results of a severely adverse economic conditions test publicly available. The results of the stress test, or the public’s reaction to the results, could adversely impact the Bank.

The housing GSEs Fannie Mae, Freddie Mac, and the FHLBanks issue highly rated agency debt to fund their operations. From time to time negative announcements by any of the housing GSEs concerning topics such as accounting problems, risk-management issues, and regulatory enforcement actions have created pressure on debt pricing for all GSEs, as investors have perceived such instruments as bearing increased risk.

Any such negative information or other factors could result in the FHLBanks having to pay a higher rate of interest on COs to make them attractive to investors. If we maintain our existing pricing on our advances products and other services notwithstanding increases in CO interest rates, the spreads we earn would fall and our results of operations would be adversely impacted. If, in response to this decrease in spreads, we change the pricing of our advances, the advances may be less attractive to members, and the amount of new advances and our outstanding advance balances may decrease. In either case, the increased cost of issuing COs could adversely impact our financial condition and results of operations. Moreover, such negative information could deter prospective members from becoming members and could adversely impact our financial condition and results of operations.

We could fail to meet our minimum regulatory capital requirements and/or maintain a capital classification of "adequately capitalized," which could result in prohibitions on dividends, excess stock repurchases, capital stock redemptions, and additional regulatory prohibitions.

We are required to satisfy certain minimum regulatory capital requirements, including risk-based capital requirements and certain regulatory capital and leverage ratios, and are subject to the FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule), as described in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital. Any failure to satisfy these requirements would result in our becoming subject to certain capital restoration requirements and being prohibited from paying dividends and redeeming or repurchasing capital stock without the prior approval of the FHFA.

The Capital Rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. We satisfied these requirements at December 31, 2018. However, pursuant to the Capital Rule, the FHFA has discretion to reclassify an FHLBank and modify or add to corrective action requirements for a particular capital classification. If we become classified into a capital classification other than adequately capitalized, we would be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock.

We could be subject to enforcement action by the FHFA that could result in prohibitions on dividends, excess stock repurchases, and capital stock redemptions and/or adversely impact our results of operations.

The FHFA is the FHLBank System's safety and soundness regulator and has broad powers to cause us to take or refrain from taking certain actions including, but not limited to, paying dividends, repurchasing excess stock, redeeming capital stock, increasing or decreasing our total assets, and curtailing our investing activities.

Our efforts to maintain adequate capital levels could impede our ability to generate asset growth including, but not limited to, meeting member advance requests.

We are mandated to maintain minimum regulatory capital thresholds including, but not limited to, a minimum regulatory capital ratio of 4.0 percent, which is a percentage equal to regulatory capital divided by total assets. Moreover, we have a policy that requires us to maintain a minimum regulatory capital amount equal to 4.0 percent of total assets plus our calculated

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economic capital requirement. As a condition for borrowing advances from us, members are required to invest in capital stock, and members are permitted to leverage their stock investment to borrow at multiples of that stock investment. In certain scenarios, members seeking to leverage their excess stock availability may be unable to borrow at the fullest capacity if overall asset growth causes our total regulatory capital ratio to fall below 4.0 percent, even after discretionary assets, including, but not limited to, short-term investments, are disposed.

We could become primarily liable for all or a portion of the COs of one or more other FHLBanks, which could adversely impact our financial condition and results of operations.

Each of the FHLBanks relies upon the issuance of COs as a primary source of funds. COs are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, we are jointly and severally liable with the other FHLBanks for the COs issued by the FHLBanks through the Office of Finance, regardless of whether we receive all or any portion of the proceeds from any particular issuance of COs. The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any COs, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, we could incur significant liability beyond our primary obligation under COs due to the failure of other FHLBanks to meet their obligations, which could adversely impact our financial condition and results of operations.

Compliance with regulatory contingency liquidity requirements could adversely impact our results of operations.

We are required to maintain sufficient liquidity through short-term investments in an amount at least equal to our cash outflows under two different scenarios, as discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. The requirement is designed to enhance our protection against temporary disruptions in access to the capital markets resulting from a rise in capital markets volatility. To satisfy this requirement, we maintain balances in shorter-term investments, which could earn lower interest rates than alternate investment options and could, in turn, adversely impact net interest income. In certain circumstances, we may need to fund overnight or shorter-term advances with short-term discount notes that have maturities beyond the maturities of the related advances, thus increasing our short-term advance pricing or reducing net income through lower net interest spread. To the extent these increased prices make our advances less competitive, advance levels and, therefore, our net interest income could be adversely impacted. Moreover, any changes in regulatory liquidity requirements could adversely affect our financial condition and results of operations.

MARKET AND LIQUIDITY RISKS

Changes in interest rates could adversely impact our financial condition and results of operations.

Like many financial institutions, we realize a significant portion of our income from the spread between interest earned on our outstanding loans and investments and interest paid on our borrowings and other liabilities, as measured by our net interest spread. Although we use various methods and procedures to monitor and manage exposures due to changes in interest rates, we could experience instances when either our interest-bearing liabilities will be more sensitive to changes in interest rates than our interest-earning assets, or vice versa. These impacts could be exacerbated by prepayment risk, which is the risk that mortgage-related assets will be refinanced and prepaid in low interest-rate environments. The realization of such risk could require us to reinvest the proceeds of prepaid assets at lower, and possibly negative, spreads, or such assets will remain outstanding at below-market yields when interest rates increase. Moreover, accelerated prepayments in a low interest-rate environment could result in elevated levels of premium expense recognition due to the fact that the majority of our mortgage assets were purchased at premium prices.

Any inability or curtailment of our ability to access the capital markets could adversely impact our business operations, financial condition, and results of operations.

Our primary source of funds is the issuance of COs in the capital markets. Our ability to obtain funds through the sale of COs depends in part on prevailing conditions in the capital markets at that time, which are beyond our control. Accordingly, we cannot make any assurance that we will be able to obtain funding on terms acceptable to us, if at all. If we cannot access funding when needed, our ability to support and continue our operations would be adversely impacted, which would thereby adversely impact our financial condition and results of operations.

Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.


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In July 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. The FCA and the submitting LIBOR banks have indicated that they will support the LIBOR indices through 2021 to allow for an orderly transition to alternative reference rates. In April 2018, the Federal Reserve Bank of New York began publishing SOFR, which the Alternative Reference Rates Committee recommended as the alternative reference rate to U.S. dollar LIBOR. During 2018, certain market participants began moving more aggressively towards the use of SOFR as a possible LIBOR replacement by issuing debt securities indexed to SOFR. In November 2018, the FHLBank System offered its first SOFR-linked CO. As noted throughout this report, we have assets and liabilities, including derivative assets and derivative liabilities, and member-pledged collateral indexed to LIBOR. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. Alternatives may or may not be developed with additional complications. The market transition away from LIBOR and towards SOFR, which will include the development of term and credit adjustments to accommodate differences between LIBOR and SOFR, is expected to be gradual and complicated. Transition in the markets and in our systems could be disruptive. Given the large volume of LIBOR-based mortgages and financial instruments, the basis adjustment to the replacement floating rate will receive extraordinary scrutiny, but whether the net impact is positive or negative cannot yet be ascertained. Risks relating to the effect of changes in legacy contractual interest rate terms on our financial assets and liabilities and the ability to renegotiate contractual terms, as well as risks relating to the market demand for our products, the market value of pledged collateral, and critical vendors being able to adjust systems to properly process and account for an alternative rate are additional examples of the risks. We are not able to predict whether or when LIBOR publication will be discontinued, whether an alternative rate, such as SOFR, will become a widely accepted reference rate in place of LIBOR, or what impact the transition from LIBOR may have on our or our members’ business, financial condition, and results of operations.

CREDIT RISKS

We are subject to credit-risk exposures related to the loans that back our investments. Increased delinquency rates and credit losses beyond those currently expected could adversely impact the yield on or value of those investments.

We invested in private-label MBS until the third quarter of 2007. These investments are backed by prime, subprime, and/or Alt-A hybrid and pay-option adjustable-rate mortgage loans. Many of these investments have sustained and may sustain further credit losses under current modeling assumptions, and have been downgraded by various NRSROs. Other-than-temporary-impairment assessment is a subjective and complex determination by management. The assumptions we made for our other-than-temporary-impairment assessments of our private-label MBS resulted in projected future credit losses, thereby causing other-than-temporary-impairment losses from certain of these securities. We incurred credit losses of $532,000 for private-label MBS that we determined were other-than-temporarily impaired for the year ended December 31, 2018. If macroeconomic trends or collateral credit performance within our private-label MBS portfolio deteriorate further than currently anticipated, or if foreclosures or similar activity are delayed or impeded, we may use even more stressful assumptions, including, but not limited to, lower house prices, higher loan-default rates, and higher loan-loss severities in future other-than-temporary impairment assessments.

Declines in U.S. home prices or in activity in the U.S. housing market or rising delinquency or default rates on mortgage loans could result in credit losses and adversely impact our business operations and/or financial condition.

A deterioration of the U.S. housing market and national decline in home prices could adversely impact the financial condition of a number of our borrowers, particularly those whose businesses are concentrated in the mortgage industry. One or more of our borrowers may default on their obligations to us for a number of reasons, such as changes in financial condition, a reduction in liquidity, operational failures, or insolvency. In addition, the value of residential mortgage loans pledged to us as collateral may decrease. If a borrower defaults, and we are unable to obtain additional collateral to make up for the reduced value of such residential mortgage loan collateral, we could incur losses. A default by a borrower lacking sufficient collateral to cover its obligations to us could result in significant financial losses, which would adversely impact our results of operations and financial condition.

Further our methodology for determining our allowance for loan losses is determined based on our investments in MPF loans and considers factors relevant to those investments. Important factors in determining this allowance are the delinquency rates and trends in the delinquency rates on our investments in conventional mortgage loans. If delinquency or default rates rise for these investments or other factors in determining the allowance worsen, we may determine to increase our allowance for loan losses, which would adversely impact our results of operations and financial condition.

We have geographic concentrations that could adversely impact our business operations and/or financial condition.


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We, by nature of our charter and our business operations, are exposed to credit risk resultant from limited geographic diversity. Our advances business is generally limited to operations within our district. While we employ conservative credit rating and collateral practices to limit exposure, a decline in our district's economic conditions could create a credit exposure to our members' advances obligations in excess of collateral held.

We have concentrations of mortgage loans in some geographic areas based on our investments in MPF loans and private-label MBS and on our receipt of collateral pledged for advances. See Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans for additional information on these concentrations. To the extent that any of these geographic areas experience significant declines in the local housing markets, declining economic conditions, or a natural disaster, we could experience increased losses on our investments in the MPF loans or the related MBS or be exposed to a greater risk that the pledged collateral securing related advances would be inadequate in the event of default on such an advance.

Counterparty credit risk could adversely impact us.

We assume counterparty credit risk through our money-market and derivatives transactions. Our counterparties include major domestic and international financial institutions. The insolvency or other inability of a significant counterparty to perform its obligations under such transactions or other agreements could have an adverse impact on our financial condition and results of operations.

OPERATIONAL RISKS

The inability to retain key personnel could adversely impact our operations.

We rely on key personnel for many of our functions and have a relatively small workforce, given the size and complexity of our business. Our ability to retain such personnel is important for us to conduct our operations and measure and maintain risk and financial controls. Our ability to retain key personnel could be challenged as the U.S. employment market continues to improve, particularly in the Boston area.

We rely heavily upon information systems and other technology and any disruption or failure of such information systems or other technology could adversely impact our reputation, financial condition, and results of operations.

We rely heavily on our information systems and other technology to conduct and manage our business. We take steps to mitigate the risks of such reliance, as discussed under Item 1 — Business — Risk Management — Operational Risk, however failures or interruptions of these information systems or other technology could have a material adverse impact on our financial condition and results of operations. Additionally, most of our information systems have been co-located with a third-party service provider, or are hosted with IaaS providers, on which we are reliant to provide a secure location and a stable operating environment for these systems. Any failure to provide such stability or security by the third-party service provider, or IaaS providers, could result in failures or interruptions in our ability to conduct business. Further, our AHP, MPF, and certain collateral activities rely on the secure processing, storage, and transmission of private borrower information, such as names, residential addresses, social security numbers, credit rating data, and other consumer financial information. This information could be exposed in several ways, including through unauthorized access to our computer systems, computer viruses that attack our computer systems, software or networks, accidental delivery of information to an unauthorized party, and loss of encrypted media containing this information. Any of these events could result in financial losses, legal and regulatory sanctions, and reputational damage.

We are implementing a multi-year strategy to modernize most of our mission critical applications and supporting infrastructure.  The increased pace of change to our information technology environment can elevate the risk of failures or interruptions of information systems or other technology, which could have a material adverse impact on our financial condition and results of operations.

We rely on third parties for certain important services and could be adversely impacted by disruptions in those services.

For example, in participating in the MPF program, we rely on the FHLBank of Chicago in its capacity as the MPF Provider. Our investments in mortgage loans through the MPF program account for 6.8 percent of our total assets as of December 31, 2018, and 9.6 percent of interest income for the year ended December 31, 2018. If the FHLBank of Chicago changes, or ceases to operate the MPF program or experiences a failure or interruption in its information systems and other technology in its operation of the MPF program, our mortgage-investment business could be adversely impacted, and we could experience a related decrease in net interest margin, financial condition, and profitability. In the same way, we could be adversely impacted

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if any of the FHLBank of Chicago's third-party vendors engaged in the operation of the MPF program were to experience operational or technological difficulties.

As another example, we rely on the Office of Finance for, among other things, the placement of COs, our primary source of funds. A disruption in this service would disrupt our access to these funds, as also discussed under — Market and Liquidity Risks — Any inability or curtailment of our ability to access the capital markets could adversely impact our business operations, financial condition, and results of operations.

We rely on models for many of our business operations and changes in the assumptions used could have a significant effect on our financial position, results of operations, and assessments of risk exposure.

For example, we use models to assist in our determination of the fair values of financial instruments. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. Pricing models and changes in their underlying assumptions are based on our best estimates for discount rates, prepayments, market volatility, and other factors. These assumptions could have a significant effect on the reported fair values of assets and liabilities, including derivatives, the related income and expense, and the expected future behavior of assets and liabilities. While the models we use to value instruments and measure risk exposures are subject to periodic validation by our staff and by independent parties, rapid changes in market conditions in the interim could impact our financial position. The use of different models and assumptions, as well as changes in market conditions, could significantly impact our financial condition and results of operations.

We use derivatives to manage interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms.

We use derivatives to manage interest-rate risk. If, due to an absence of creditworthy swap dealers or guarantors, or to a decline in our own creditworthiness, we are unable to manage our hedging positions properly, or we are unable to enter into hedging instruments upon acceptable terms, we could be unable to effectively manage our interest-rate and other risks without altering our business strategies, which could adversely impact our financial condition and results of operations. In addition, many of our derivatives are based on LIBOR, and there can be no assurances that ongoing efforts to transition away from LIBOR, including the market’s adoption of alternative benchmarks and new contractual terms for legacy transactions, will not adversely affect the trading or market value of derivatives. If we are unable to manage our hedging positions properly or are unable to enter into hedging instruments upon acceptable terms, the effectiveness of our management of interest-rate and other risks may be adversely affected, or we may be required to change our investment strategies and advance product offerings, which could adversely affect our financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

We occupy approximately 54,000 rentable square feet in the Prudential Tower, 800 Boylston Street, Boston, Massachusetts 02199 that serves as our headquarters. We also maintain 7,461 square feet of leased property for a business continuity site in Massachusetts.

We believe our properties are adequate to meet our requirements for the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

Private-label MBS Complaint

On April 20, 2011, we filed a complaint in the Superior Court Department of the Commonwealth of Massachusetts in Suffolk County (the Massachusetts Superior Court) against various securities dealers, underwriters, control persons, issuers/depositors, and credit rating agencies based on our investments in certain private-label MBS issued by 115 securitization trusts for which we originally paid approximately $5.8 billion. We are seeking various forms of relief including rescission, recovery of

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damages, recovery of purchase consideration plus interest (less income received to date), and recovery of reasonable attorneys' fees and costs of suit.

Although the case was removed by the defendants to the United States District Court for the District of Massachusetts (Massachusetts District Court), and was pending there for several years, in 2017 it was remanded to the Massachusetts Superior Court, based upon a January 2017 U.S. Supreme Court decision (Lightfoot v. Cendant Mortgage Corp.) Although we have resolved our claims against most of the originally named defendants, the case remains pending in the Massachusetts Superior Court against Credit Suisse (USA), Inc.; Nomura Holding America, Inc.; and RBS Holdings USA Inc. and certain affiliates of each of them (collectively the securities defendants).

While the case was pending in the Massachusetts District Court, we filed an amended complaint (in June 2012) that reduced the number of MBS in the case to 111 securitizations for which we originally paid approximately $5.7 billion. The amended complaint asserts, as the original complaint had asserted, claims against the securities defendants based on untrue or misleading statements in the sale of securities, signing or circulating securities documents that contained material misrepresentations and omissions, negligent misrepresentation, unfair or deceptive trade practices, and controlling person liability. In September 2013, the Massachusetts District Court ruled upon the defendants’ motions to dismiss, denying such motions with respect to certain of our claims (our negligent misrepresentation and unfair and deceptive trade practices claims, and our Massachusetts Uniform Securities Act Claims with respect to certain defendants), and granting such motions with respect to certain other claims (our Massachusetts Uniform Securities Act Claims with respect to certain other defendants).

Our original (and amended) complaint also asserted fraud claims against certain rating agency defendants. However, in January 2017, while the case was pending in the Massachusetts District Court, the court, upon our motion (following our successful appeal to the United States Court of Appeals for the First Circuit of an earlier adverse ruling dismissing our claims), severed our claims against the rating agency defendants that remained in the litigation at that time (Moody's Investors Service, Inc. and Moody's Corporation; collectively referred to as Moody's), and transferred the severed claims to the United States District Court for the Southern District of New York (S.D.N.Y.). Shortly thereafter, based upon the Supreme Court’s Lightfoot v. Cendant Mortgage Corp. decision, the S.D.N.Y. dismissed our claims against Moody’s. On November 2, 2017, we refiled our complaint against Moody’s in the Supreme Court of New York, and subsequently amended such complaint on February 5, 2018. On February 26, 2018, Moody’s filed a motion to dismiss our New York state complaint, and such motion is currently pending.

Over the past seven years, we have agreed with certain defendants in our private-label MBS litigation to settle our claims against them for an aggregate amount of $335.2 million (which amount is net of legal fees and expenses). Of that amount, $12.8 million represents net settlements during the year ended December 31, 2018.

Other Legal Proceedings

From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The par value of our capital stock is $100 per share. Our stock is not publicly traded and can be purchased only by our members at par. As of February 28, 2019, 441 members and eight nonmembers held a total of 19.8 million shares of our Class B stock. Our capital plan provides us with the authority to issue Class A capital stock, $100 par value per share (Class A stock). However, we have not issued and do not intend to issue Class A stock at this time.

Dividends are solely within the discretion of our board of directors. The board of directors declared dividends during 2018, 2017, and 2016 as set forth in Table 3 below. Dividend rates are quoted in the form of an interest rate, which is then applied to each stockholder's average capital-stock-balance outstanding during the preceding calendar quarter to determine the dollar amount of the dividend that each stockholder will receive. The dividend rate was based upon a spread to average short-term interest rates experienced during the quarter.
Table 3 - Quarterly Dividends Declared
(dollars in thousands)

 
 
2018
 
2017
 
2016
Dividends Declared in the Quarter Ending
 
Average
Capital Stock (1) during preceding quarter
 
Dividend
Amount (2)
 
Annualized
Dividend Rate
 
Average
Capital Stock (1) during preceding quarter
 
Dividend
 Amount (2)
 
Annualized
Dividend Rate
 
Average
Capital Stock (1) during preceding quarter
 
Dividend
 Amount (2)
 
Annualized
Dividend Rate
March 31
 
$
2,216,994

 
$
27,884

 
4.99
%
 
$
2,384,803

 
$
23,619

 
3.94
%
 
$
2,265,359

 
$
19,529

 
3.42
%
June 30
 
2,370,734

 
31,917

 
5.46

 
2,467,425

 
24,822

 
4.08

 
2,343,265

 
21,148

 
3.63

September 30
 
2,401,299

 
35,143

 
5.87

 
2,436,766

 
25,637

 
4.22

 
2,377,314

 
21,574

 
3.65

December 31
 
2,376,532

 
35,162

 
5.87

 
2,268,722

 
24,762

 
4.33

 
2,388,743

 
22,818

 
3.80

_________________________
(1)
Average capital stock amounts do not include average balances of mandatorily redeemable stock.
(2)
The dividend amounts do not include the interest expense on mandatorily redeemable stock.

On February 14, 2019, our board of directors declared a cash dividend that was equivalent to an annual yield of 6.17 percent, the approximate daily average three-month LIBOR for the fourth quarter of 2018 plus 350 basis points. The dividend amount, based on average daily balances of Class B shares outstanding for the fourth quarter of 2018 totaled $37.3 million and was paid on March 4, 2019. In declaring the dividend, the board stated that it expects to follow this formula for declaring cash dividends through 2019, though a quarterly loss or a significant adverse event or trend could cause a dividend to be reduced or suspended.

Dividends are declared and paid in accordance with a schedule adopted by the board of directors that enables our board of directors to declare each quarterly dividend after net income is known, rather than basing the dividend on estimated net income. For example, in 2018, quarterly dividends were declared in February, April, July, and October based on the immediately preceding quarter's net income and were paid on the second business day of the month that followed the month of declaration. We expect to continue this approach through 2019.

Dividends may be paid only from current net earnings or previously retained earnings. In accordance with the FHLBank Act and FHFA regulations, we may not declare a dividend if we are not in compliance with our minimum capital requirements or if we would fall below our minimum capital requirements or would not be adequately capitalized as a result of a dividend except, in this latter case, with the Director of the FHFA's permission. Further, we may not pay dividends if the principal and interest due on any CO issued through the Office of Finance on which we are the primary obligor has not been paid in full when due, or under certain circumstances, if we become a noncomplying FHLBank as that term is defined in FHFA regulations as a result of any inability to either comply with regulatory liquidity requirements or satisfy our current obligations.

We maintain a policy providing that if our minimum retained earnings target exceeds the level of our retained earnings, the quarterly dividend payout cannot exceed 40 percent of our net income for the quarter. Our minimum retained earnings target was $700.0 million as of December 31, 2018, compared with $1.4 billion in retained earnings at December 31, 2018.


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We may not pay dividends in the form of capital stock or issue new excess stock to members if our excess stock exceeds 1.0 percent of our total assets or if the issuance of excess stock would cause our excess stock to exceed 1.0 percent of our total assets. At December 31, 2018, we had excess stock outstanding totaling $88.7 million or 0.1 percent of our total assets.

Should we determine to issue Class A stock, dividends declared on Class A stock may differ from dividends declared on Class B stock but may not exceed dividends declared on Class B stock.

We maintain a policy establishing a minimum capital level in excess of regulatory requirements to provide further protection for our capital base. This adopted minimum capital level provides that we will maintain a minimum capital level equal to 4.0 percent of total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model, an amount equal to $3.1 billion at December 31, 2018. Our permanent capital level was $4.0 billion at December 31, 2018, so we were in excess of this requirement by $866.0 million on that date. If necessary to satisfy this adopted minimum capital level, however, we will take steps to control asset growth and/or maintain capital levels, the latter of which may limit future dividends.

Our capital plan and the Joint Capital Agreement require us to allocate 20 percent of our net income to a separate restricted retained earnings account. The Joint Capital Agreement requires each FHLBank to make such contributions until the total amount in the restricted retained earnings account is at least equal to 1.0 percent of the daily average carrying value of that FHLBank's outstanding total COs (excluding fair-value adjustments) for the calendar quarter. Amounts in the restricted retained earnings account cannot be used to pay dividends. As of December 31, 2018, $310.7 million of our retained earnings are amounts in the restricted retained earnings account compared with our total contribution requirement of $574.3 million at that date. For additional information on the Joint Capital Agreement, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Internal Capital Practices and Policies — Restricted Retained Earnings and the Joint Capital Agreement.

ITEM 6. SELECTED FINANCIAL DATA

We derived the selected results of operations for the years ended December 31, 2018, 2017, and 2016, and the selected statement of condition data as of December 31, 2018 and 2017, from financial statements included elsewhere herein. We derived the selected results of operations for the years ended December 31, 2015 and 2014, and the selected statement of condition data as of December 31, 2016, 2015, and 2014, from financial statements not included herein. This selected financial data should be read in conjunction with the financial statements and the related notes appearing in this report.



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Table 4 - Selected Financial Data
(dollars in thousands)

 
 
December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Statement of Condition
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
63,593,317

 
$
60,361,946

 
$
61,545,586

 
$
58,102,669

 
$
55,106,677

Investments(1)
 
15,900,204

 
17,941,614

 
18,031,331

 
18,019,181

 
16,879,299

Advances
 
43,192,222

 
37,565,967

 
39,099,339

 
36,076,167

 
33,482,074

Mortgage loans held for portfolio, net(2)
 
4,299,402

 
4,004,737

 
3,693,894

 
3,581,788

 
3,483,948

Deposits and other borrowings
 
474,878

 
477,069

 
482,163

 
482,602

 
369,331

Consolidated obligations:
 
 
 
 
 
 
 
 
 
 
Bonds
 
25,912,684

 
28,344,623

 
27,171,434

 
25,427,277

 
25,505,774

Discount notes
 
33,065,822

 
27,720,906

 
30,053,964

 
28,479,097

 
25,309,608

Total consolidated obligations
 
58,978,506

 
56,065,529

 
57,225,398

 
53,906,374

 
50,815,382

Mandatorily redeemable capital stock
 
31,868

 
35,923

 
32,687

 
41,989

 
298,599

Class B capital stock outstanding-putable(3)
 
2,528,854

 
2,283,721

 
2,411,306

 
2,336,662

 
2,413,114

Unrestricted retained earnings
 
1,084,342

 
1,041,033

 
987,711

 
934,214

 
764,888

Restricted retained earnings
 
310,670

 
267,316

 
229,275

 
194,634

 
136,770

Total retained earnings
 
1,395,012

 
1,308,349

 
1,216,986

 
1,128,848

 
901,658

Accumulated other comprehensive loss
 
(316,507
)
 
(326,940
)
 
(383,514
)
 
(442,597
)
 
(436,986
)
Total capital
 
3,607,359

 
3,265,130

 
3,244,778

 
3,022,913

 
2,877,786

Results of Operations
 
 
 
 
 
 
 
 
 
 
Net interest income after provision for credit losses
 
$
312,144

 
$
277,099

 
$
252,026

 
$
226,027

 
$
213,231

Net impairment losses on held-to-maturity securities recognized in earnings
 
(532
)
 
(1,454
)
 
(3,310
)
 
(4,059
)
 
(1,579
)
Litigation settlements
 
12,769

 
20,761

 
39,211

 
184,879

 
22,000

Other income (loss), net
 
8,589

 
3,605

 
(6,577
)
 
(8,819
)
 
(586
)
Other expense
 
91,902

 
88,501

 
88,746

 
76,382

 
65,655

AHP assessments
 
24,299

 
21,307

 
19,397

 
32,328

 
17,623

Net income
 
$
216,769

 
$
190,203

 
$
173,207

 
$
289,318

 
$
149,788

Other Information
 

 

 



 

Dividends declared
 
$
130,106

 
$
98,840

 
$
85,069

 
$
62,128

 
$
36,920

Dividend payout ratio
 
60.02
%
 
51.97
%
 
49.11
%
 
21.47
%
 
24.65
%
Weighted-average dividend rate(4)
 
5.56

 
4.14

 
3.63

 
2.54

 
1.49

Return on average equity(5)
 
6.38

 
5.83

 
5.49

 
9.54

 
5.24

Return on average assets
 
0.35

 
0.32

 
0.29

 
0.52

 
0.29

Net interest margin(6)
 
0.51

 
0.47

 
0.43

 
0.41

 
0.41

Average equity to average assets
 
5.49

 
5.49

 
5.35

 
5.45

 
5.50

Total regulatory capital ratio(7)
 
6.22

 
6.01

 
5.95

 
6.04

 
6.56

_______________________
(1)
Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.
(2)
The allowance for credit losses amounted to $500,000, $500,000, $650,000, $1.0 million, and $2.0 million, as of December 31, 2018, 2017, 2016, 2015, and 2014, respectively.
(3)
Capital stock is putable at the option of a member upon five years' written notice, subject to applicable restrictions. We also initiated daily repurchases of excess stock from members on June 1, 2017. See below under Liquidity and Capital Resources - Internal Capital Practices and Policies.


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(4)
Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends. See Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities for additional information.
(5)
Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss and total retained earnings.
(6)
Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.
(7)
Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets. See Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 16 — Capital.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
 
This report includes statements describing anticipated developments, projections, estimates, or predictions of ours that are “forward-looking statements.” These statements may involve matters related to, but not limited to, projections of revenues, income, earnings, capital expenditures, dividends, capital structure, or other financial items; repurchases of excess stock, our minimum retained earnings target, or the interest-rate environment in which we do business; statements of management’s plans or objectives for future operations; expectations of future economic performance; or statements of assumptions underlying certain of the foregoing types of statements. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors and the risks set forth below. 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. As a result, you are cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.

Some of the risks and uncertainties that could affect our forward-looking statements include the following:

•
the effects of economic, financial, credit, and market conditions on our financial and regulatory condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, employment rates, interest rates, interest rate spreads, interest rate volatility, changes in benchmark interest rates, mortgage originations, prepayment activity, housing prices, asset delinquencies, members’ deposit flows, liquidity needs, and loan demand; changes in the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government; the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments; the condition of the capital markets on our COs;
•
issues and events across the FHLBank System and in the political arena that may lead to executive branch, legislative, regulatory, judicial, or other developments impacting the scope of our business, investor demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, our counterparties, the manner in which we operate, or the organization and structure of the FHLBank System;
•
our ability to declare and pay dividends consistent with past practices as well as any plans to repurchase excess capital stock;
•
competitive forces including, without limitation, other sources of funding available to our members and other entities borrowing funds in the capital markets;
•
changes in the value and liquidity of collateral we hold as security for obligations of our members and counterparties;
•
the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules;
•
changes in the fair value and economic value of, impairments of, and risks, including risks related to changes in or cessation of benchmark interest rates, associated with the Bank’s investments in mortgage loans and MBS or other assets and the related credit enhancement protections;
•
membership conditions and changes, including changes resulting from member failures, mergers or changing financial health, changes due to member eligibility, changes in the principal place of business of members, or the addition of new members;

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•
external events, such as general economic and financial instabilities, political instability, wars and natural disaster, including disasters caused by significant climate change, which could damage the facilities of our members, damage or destroy collateral that members have pledged to secure advances or mortgages that we hold for our portfolio, and which could cause us to experience losses or be exposed to a greater risk that pledged collateral would be inadequate in the event of a default;
•
the pace of technological change and our ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we face, including but not limited to, cyberattacks and other business interruptions; and
•
our ability to attract and retain skilled employees.

These risk factors are not exhaustive. New risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements.

EXECUTIVE SUMMARY

For the year ended December 31, 2018, net income increased to $216.8 million, from $190.2 million for the year ended December 31, 2017, largely the result of an increase of $35.0 million in net interest income after provision for credit losses which was offset in part by a decrease of $8.0 million in litigation settlement income. Our return on average equity was 6.38 percent for the year ended December 31, 2018, compared with 5.83 percent for the year ended December 31, 2017, an increase of 55 basis points. The increase in return on average equity was largely a result of the aforementioned increase in net interest income after provision for credit losses. Our financial condition continued to strengthen with retained earnings growing to $1.4 billion at December 31, 2018, from $1.3 billion at December 31, 2017, a surplus of $695.0 million over our minimum retained earnings target, as we continue to satisfy all regulatory capital requirements as of December 31, 2018. We also provided a dividend spread of 350 basis points over the daily average three-month LIBOR in 2018.

Net Interest Margin

In 2018, net interest margin was 0.51 percent, an increase of four basis points from the year ended December 31, 2017. The net interest margin benefited from an increase in interest rates, as the economy continued to strengthen as discussed under — Economic Conditions — Interest-Rate Environment. Higher interest rates resulted in higher yields on assets funded by equity capital and lower premium amortization on Agency MBS as projected refinancing activity declined.

Advances Balances

We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled $43.2 billion at December 31, 2018, compared to $37.6 billion at December 31, 2017. The increase in advances was primarily in variable-rate advances and short-term fixed-rate advances.

Accretable yields from investments in private-label MBS

For the years ended December 31, 2018 and 2017, we recognized $32.5 million and $33.7 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition.

The amortized cost of our total investments in private-label MBS and ABS backed by home-equity loans has declined to $688.9 million at December 31, 2018. Other-than-temporary impairment credit losses were $532,000 for the year ending December 31, 2018.

Regulatory Developments

The FHFA and other regulators with authority over us or our way of doing business have issued or proposed multiple regulations and other forms of guidance during the year and into 2019 as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact the way we satisfy our mission as well as the value of our membership.


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Table of Contents

ECONOMIC CONDITIONS

Economic Environment

The U.S. economy grew in 2018 at an annualized rate of 2.9 percent, up 0.7 percent from 2017. The labor market continued to strengthen and was considered by many economists to be at or near full employment. The unemployment rate in January 2019 stood at 4.0 percent, down 0.1 percent year over year. The economy added an average of 233,000 jobs per month in 2018. The New England region’s unemployment rate was 3.4 percent in December 2018, 0.5 percent lower than for the U.S., and 0.3 percent lower year over year.

The gradual recovery in the housing market continued in 2018. The FHFA reported that house prices were up 5.7 percent in the fourth quarter of 2018 from a year earlier. Year-over-year changes were positive in all fifty states, reflecting a broad housing market recovery across the nation. The housing market provided a significant boost to the New England economy in 2018 with rising prices and construction activity.

According to recent forecasts, the U.S. and New England economies appear likely to grow modestly in 2019 at a reduced pace relative to 2018.

Interest-Rate Environment

On March 20, 2019, the Federal Open Market Committee (FOMC) maintained the target range for the federal funds rate at 2.25 percent to 2.50 percent. The FOMC stated that it views sustained economic expansion, strong labor market conditions, and inflation near the FOMC’s 2.0 percent objective to be the most likely scenario going forward. The FOMC further stated that in light of global economic and financial developments and muted inflationary pressures, the FOMC will be patient in determining future adjustments to the fed funds rate.

While short-term interest rates have moved up in line with the federal funds rate, long-term interest rates have increased less, resulting in a flattening yield curve. The 10-year/3-month Treasury spread fell from over 100 basis points in January 2018 to approximately 30 basis points in January 2019.

Table 5 - Key Interest Rates

 
2018
 
2017
 
2016
 
Ending
 
Average
 
Ending
 
Average
 
Ending
 
Average
Federal funds effective rate
2.40%
 
1.83%
 
1.33%
 
1.00%
 
0.55%
 
0.39%
3-month LIBOR
2.81%
 
2.31%
 
1.69%
 
1.26%
 
1.00%
 
0.74%
3-month U.S. Treasury yield
2.37%
 
1.96%
 
1.38%
 
0.94%
 
0.50%
 
0.31%
2-year U.S. Treasury yield
2.49%
 
2.52%
 
1.88%
 
1.39%
 
1.19%
 
0.83%
5-year U.S. Treasury yield
2.51%
 
2.75%
 
2.21%
 
1.91%
 
1.93%
 
1.33%
10-year U.S. Treasury yield
2.69%
 
2.91%
 
2.41%
 
2.33%
 
2.44%
 
1.84%
________________
Source: Bloomberg

RESULTS OF OPERATIONS

Comparison of the year ended December 31, 2018, versus the year ended December 31, 2017

Net income increased to $216.8 million for the year ended December 31, 2018, from $190.2 million for the year ended December 31, 2017. The reasons for the increase are discussed under — Executive Summary.

Net Interest Income

Net interest income after provision for credit losses for the year ending December 31, 2018, was $312.1 million, compared with $277.1 million for 2017. The $35.0 million increase in net interest income after provision for credit losses was mainly a result of a higher interest-rate environment, which led to higher income on capital and lower premium amortization on U.S. Agency

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MBS; and a $2.7 billion increase in average earning assets primarily consisting of $2.0 billion increase in average advances and $290.1 million increase in average mortgage loans. Offsetting the increases to net interest income after provision for credit losses was a $1.3 million decrease of accretion of significant improvement in projected cash flows associated with previously impaired private-label MBS, from $33.7 million in the year ending December 31, 2017, to $32.5 million in the year ending December 31, 2018. For additional information see — Rate and Volume Analysis.

Net interest spread was 0.38 percent for the year ended December 31, 2018, a two basis point decrease from 2017, and net interest margin was 0.51 percent, a four basis point increase from 2017. The decrease in net interest spread reflects a 72 basis point increase in the average yield on earning assets and a 74 basis point increase in the average yield on interest-bearing liabilities. The decrease in net interest spread was primarily attributable to a $619.8 million decrease in the average balance of MBS and higher funding costs for short-term investments. The increase in net interest margin was primarily attributable to the impact of higher interest rates on earning assets, which are partially funded by non-interest-bearing capital.

Table 6 presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.

Table 6 - Net Interest Spread and Margin
(dollars in thousands)

 
 
For the Year Ended December 31,
 
 
2018
 
2017
 
2016
 
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
 
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advances
 
$
38,964,665

 
$
867,431

 
2.23
%
 
$
36,943,396

 
$
515,074

 
1.39
%
 
$
36,042,906

 
$
340,903

 
0.95
%
Securities purchased under agreements to resell
 
4,025,447

 
77,718

 
1.93

 
3,038,178

 
27,486

 
0.90

 
3,394,038

 
11,474

 
0.34

Federal funds sold
 
5,919,666

 
108,144

 
1.83

 
5,757,038

 
58,642

 
1.02

 
5,707,301

 
22,562

 
0.40

Investment securities(1)
 
8,390,634

 
230,633

 
2.75

 
9,255,905

 
208,597

 
2.25

 
9,641,477

 
212,777

 
2.21

Mortgage loans
 
4,108,704

 
136,672

 
3.33

 
3,818,639

 
125,002

 
3.27

 
3,637,645

 
119,910

 
3.30

Other earning assets
 
278,342

 
5,455

 
1.96

 
209,508

 
2,088

 
1.00

 
177,628

 
538

 
0.30

Total interest-earning assets
 
61,687,458

 
1,426,053

 
2.31

 
59,022,664

 
936,889

 
1.59

 
58,600,995

 
708,164

 
1.21

Other non-interest-earning assets
 
274,422

 
 
 
 
 
342,940

 
 
 
 
 
338,118

 
 
 
 
Fair-value adjustments on investment securities
 
(111,902
)
 
 
 
 
 
(22,728
)
 
 
 
 
 
26,624

 
 
 
 
Total assets
 
$
61,849,978

 
$
1,426,053

 
2.31
%
 
$
59,342,876

 
$
936,889

 
1.58
%
 
$
58,965,737

 
$
708,164

 
1.20
%
Liabilities and capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
$
30,078,903

 
$
561,443

 
1.87
%
 
$
26,489,602

 
$
233,081

 
0.88
%
 
$
26,979,622

 
$
93,362

 
0.35
%
Bonds
 
27,216,512

 
545,228

 
2.00

 
28,414,427

 
421,622

 
1.48

 
27,487,501

 
361,006

 
1.31

Deposits
 
497,418

 
5,311

 
1.07

 
473,134

 
3,615

 
0.76

 
490,359

 
679

 
0.14

Mandatorily redeemable capital stock
 
32,966

 
1,923

 
5.83

 
35,292

 
1,558

 
4.41

 
36,397

 
1,364

 
3.75

Other borrowings
 
2,260

 
38

 
1.68

 
995

 
10

 
1.01

 
654

 
4

 
0.61

Total interest-bearing liabilities
 
57,828,059

 
1,113,943

 
1.93

 
55,413,450

 
659,886

 
1.19

 
54,994,533

 
456,415

 
0.83

Other non-interest-bearing liabilities
 
625,472

 
 
 
 
 
669,030

 
 
 
 
 
818,814

 
 
 
 
Total capital
 
3,396,447

 
 
 
 
 
3,260,396

 
 
 
 
 
3,152,390

 
 
 
 
Total liabilities and capital
 
$
61,849,978

 
$
1,113,943

 
1.80
%
 
$
59,342,876

 
$
659,886

 
1.11
%
 
$
58,965,737

 
$
456,415

 
0.77
%
Net interest income
 
 

 
$
312,110

 
 
 
 

 
$
277,003

 
 
 
 

 
$
251,749

 
 
Net interest spread
 
 

 
 

 
0.38
%
 
 

 
 

 
0.40
%
 
 

 
 

 
0.38
%
Net interest margin
 
 

 
 

 
0.51
%
 
 

 
 

 
0.47
%
 
 

 
 

 
0.43
%

31
Table of Contents

_________________________
(1)
The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 7 summarizes changes in interest income and interest expense for the years ended December 31, 2018 and 2017. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.
 
Table 7 - Rate and Volume Analysis
(dollars in thousands)

 
 
 
For the Year Ended
 December 31, 2018 vs. 2017
 
For the Year Ended
 December 31, 2017 vs. 2016
 
 
Increase (Decrease) due to
 
Increase (Decrease) due to
 
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest income
 
 
 
 
 
 
 
 

 
 

 
 

Advances
 
$
29,593

 
$
322,764

 
$
352,357

 
$
8,719

 
$
165,452

 
$
174,171

Securities purchased under agreements to resell
 
11,188

 
39,044

 
50,232

 
(1,322
)
 
17,334

 
16,012

Federal funds sold
 
1,702

 
47,800

 
49,502

 
198

 
35,882

 
36,080

Investment securities
 
(20,779
)
 
42,815

 
22,036

 
(8,627
)
 
4,447

 
(4,180
)
Mortgage loans
 
9,622

 
2,048

 
11,670

 
5,930

 
(838
)
 
5,092

Other earning assets
 
854

 
2,513

 
3,367

 
113

 
1,437

 
1,550

Total interest income
 
32,180

 
456,984

 
489,164

 
5,011

 
223,714

 
228,725

Interest expense
 
 
 
 
 
 
 
 

 
 

 
 

Consolidated obligations
 
 
 
 
 
 
 
 

 
 

 
 

Discount notes
 
35,400

 
292,962

 
328,362

 
(1,727
)
 
141,446

 
139,719

Bonds
 
(18,444
)
 
142,050

 
123,606

 
12,500

 
48,116

 
60,616

Deposits
 
194

 
1,502

 
1,696

 
(25
)
 
2,961

 
2,936

Mandatorily redeemable capital stock
 
(108
)
 
473

 
365

 
(42
)
 
236

 
194

Other borrowings
 
18

 
10

 
28

 
3

 
3

 
6

Total interest expense
 
17,060

 
436,997

 
454,057

 
10,709

 
192,762

 
203,471

Change in net interest income
 
$
15,120

 
$
19,987

 
$
35,107

 
$
(5,698
)
 
$
30,952

 
$
25,254


Average Balance of Advances Outstanding

The average balance of total advances increased $2.0 billion, or 5.5 percent, for the year ended December 31, 2018, compared with the same period in 2017. The increase in advances was primarily in short-term fixed-rate advances. We cannot predict whether this trend will continue.

Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $1.2 billion, or 13.5 percent, for the year ended December 31, 2018, compared with the same period in 2017. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold increased from 1.02 percent during the year ended December 31, 2017 to 1.83 percent during the year ended December 31, 2018, while average yields on securities purchased under agreements to resell increased from 0.90 percent for the year ended December 31, 2017 to 1.93 percent for the year ended December 31, 2018. These investments are used for liquidity

32
Table of Contents

management and to manage our leverage ratio in response to fluctuations in other asset balances. For the year ended December 31, 2018, the average balances of securities purchased under agreements to resell and federal funds sold increased $987.3 million and $162.6 million, respectively, in comparison to the year ended December 31, 2017.

Average investment-securities balances decreased $865.3 million, or 9.3 percent for the year ended December 31, 2018, compared with the same period in 2017, a decrease consisting primarily of $619.8 million in MBS and $253.6 million in U.S. Treasury obligations.

Average Balance of COs

Average CO balances increased $2.4 billion, or 4.4 percent, for the year ended December 31, 2018, compared with the same period in 2017, resulting from our increased funding needs principally due to the increase in our average advances balances. This overall increase consisted of an increase of $3.6 billion in CO discount notes and a decrease of $1.2 billion in CO bonds.

The average balance of CO discount notes represented approximately 52.5 percent of total average COs during the year ended December 31, 2018, compared with 48.2 percent of total average COs during the year ended December 31, 2017. The average balance of CO bonds represented 47.5 percent and 51.8 percent of total average COs outstanding during the years ended December 31, 2018 and 2017, respectively.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy.

Table 8 - Effect of Derivative and Hedging Activities
(dollars in thousands)

 
 
For the Year Ended December 31, 2018
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(1,475
)
 
$
—

 
$
(399
)
 
$
945

 
$
—

 
$
(929
)
Net interest settlements included in net interest income (2)
 
51,522

 
(26,040
)
 
—

 
(27,895
)
 
—

 
(2,413
)
Total net interest income
 
50,047

 
(26,040
)
 
(399
)
 
(26,950
)
 
—

 
(3,342
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
704

 
1,749

 
—

 
(426
)
 
—

 
2,027

Gains on cash-flow hedges
 
—

 
—

 
—

 
227

 
—

 
227

(Losses) gains on derivatives not receiving hedge accounting
 
(72
)
 
754

 
—

 
—

 
—

 
682

Mortgage delivery commitments
 
—

 
—

 
421

 
—

 
—

 
421

Price alignment amount(3)
 
—

 
—

 
—

 
—

 
(1,021
)
 
(1,021
)
Net gains (losses) on derivatives and hedging activities
 
632

 
2,503

 
421

 
(199
)
 
(1,021
)
 
2,336

 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
50,679

 
(23,537
)
 
22

 
(27,149
)
 
(1,021
)
 
(1,006
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 
—

 
(4,465
)
 
—

 
—

 
—

 
(4,465
)
Total net effect of derivatives and hedging activities
 
$
50,679

 
$
(28,002
)
 
$
22

 
$
(27,149
)
 
$
(1,021
)
 
$
(5,471
)
_____________________

33
Table of Contents

(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.

Table 8 - Effect of Derivative and Hedging Activities
(dollars in thousands)

 
 
For the Year Ended December 31, 2017
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Other
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(2,176
)
 
$
—

 
$
(277
)
 
$
1,903

 
$
—

 
$
(550
)
 
Net interest settlements included in net interest income (2)
 
(24,663
)
 
(32,053
)
 
—

 
6,694

 
—

 
(50,022
)
 
Total net interest income
 
(26,839
)
 
(32,053
)
 
(277
)
 
8,597

 
—

 
(50,572
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (losses) gains on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
 
 
(Losses) gains on fair-value hedges
 
(578
)
 
1,736

 
—

 
(3,466
)
 
—

 
(2,308
)
 
Gains on cash-flow hedges
 
—

 
—

 
—

 
280

 
—

 
280

 
(Losses) gains on derivatives not receiving hedge accounting
 
(4
)
 
434

 
—

 
4

 
—

 
434

 
Mortgage delivery commitments
 
—

 
—

 
1,768

 
—

 
—

 
1,768

 
Price alignment amount(3)
 
—

 
—

 
—

 
—

 
377

 
377

 
Net (losses) gains on derivatives and hedging activities
 
(582
)
 
2,170

 
1,768

 
(3,182
)
 
377

 
551

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(27,421
)
 
(29,883
)
 
1,491

 
5,415

 
377

 
(50,021
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 
—

 
(6,089
)
 
—

 
—

 
—

 
(6,089
)
 
Total net effect of derivatives and hedging activities
 
$
(27,421
)
 
$
(35,972
)
 
$
1,491

 
$
5,415

 
$
377

 
$
(56,110
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.
(3)
Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.


34
Table of Contents

Table 8 - Effect of Derivative and Hedging Activities
(dollars in thousands)

 
 
For the Year Ended December 31, 2016
 
Net Effect of Derivatives and Hedging Activities
 
Advances
 
Investments
 
Mortgage Loans
 
CO Bonds
 
Total
 
Net interest income
 
 
 
 
 
 
 
 
 
 
 
Amortization / accretion of hedging activities in net interest income (1)
 
$
(2,692
)
 
$
—

 
$
(651
)
 
$
(5,682
)
 
$
(9,025
)
 
Net interest settlements included in net interest income (2)
 
(96,079
)
 
(35,203
)
 
—

 
27,182

 
(104,100
)
 
Total net interest income
 
(98,771
)
 
(35,203
)
 
(651
)
 
21,500

 
(113,125
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair-value hedges
 
1,592

 
1,819

 
—

 
(10,409
)
 
(6,998
)
 
Gains on cash-flow hedges
 
—

 
—

 
—

 
29

 
29

 
(Losses) gains on derivatives not receiving hedge accounting
 
(12
)
 
(1,379
)
 
—

 
39

 
(1,352
)
 
Mortgage delivery commitments
 
—

 
—

 
(270
)
 
—

 
(270
)
 
Net gain (losses) on derivatives and hedging activities
 
1,580

 
440

 
(270
)
 
(10,341
)
 
(8,591
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Subtotal
 
(97,191
)
 
(34,763
)
 
(921
)
 
11,159

 
(121,716
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses on trading securities
 
—

 
(4,300
)
 
—

 
—

 
(4,300
)
 
Total net effect of derivatives and hedging activities
 
$
(97,191
)
 
$
(39,063
)
 
$
(921
)
 
$
11,159

 
$
(126,016
)
 
_____________________
(1)
Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.
(2)
Represents interest income/expense on derivatives included in net interest income.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $2.5 million and $4.7 million for the years ended December 31, 2018 and 2017, respectively.

Other Income (Loss)
  

35
Table of Contents

Table 9 - Other Income (Loss)
(dollars in thousands)

 
 
For the Year Ended December 31,
 
 
2018
 
2017
 
2016
Gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Net gains (losses) related to fair-value hedge ineffectiveness
 
$
2,027

 
$
(2,308
)
 
$
(6,998
)
Net gains related to cash-flow hedge ineffectiveness
 
227

 
280

 
29

Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with:
 
 
 
 
 
 
Advances
 
(72
)
 
(3
)
 
(12
)
Trading securities
 
3,241

 
5,096

 
4,477

CO Bonds
 
—

 
29

 
33

Mortgage delivery commitments
 
421

 
1,768

 
(270
)
Net interest-accruals related to derivatives not receiving hedge accounting
 
(2,487
)
 
(4,688
)
 
(5,850
)
Price alignment amount(1)
 
(1,021
)
 
377

 
—

Net gains (losses) on derivatives and hedging activities
 
2,336

 
551

 
(8,591
)
Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income
 
(532
)
 
(1,454
)
 
(3,310
)
Litigation settlements
 
12,769

 
20,761

 
39,211

Service-fee income
 
10,268

 
8,697

 
7,701

Net unrealized losses on trading securities
 
(4,515
)
 
(6,078
)
 
(4,410
)
Other
 
500

 
435

 
(1,277
)
Total other income
 
$
20,826

 
$
22,912

 
$
29,324

_____________________
(1) Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.

Litigation settlement income declined in 2018. We continue to pursue private-label MBS claims against two remaining defendant groups, and unless those claims are settled, we expect to commence trial in 2019 or early 2020. As a result, income from litigation settlements or judgments in 2019 and 2020 may vary materially from 2018.

Comparison of the year ended December 31, 2017, versus the year ended December 31, 2016
 
For the year ended December 31, 2017, net income increased to $190.2 million, from $173.2 million for the year ended December 31, 2016, largely the result of an increase of $25.1 million in net interest income after provision for credit losses and a $9.1 million decrease in net losses on derivatives and hedging activities, which were offset in part by a decrease of $18.5 million in litigation settlement income. Our return on average equity was 5.83 percent for the year ended December 31, 2017, compared with 5.49 percent for the year ended December 31, 2016, an increase of 34 basis points. The increase in return on average equity was largely a result of the aforementioned increase in net interest income after provision for credit losses. Our financial condition continued to strengthen with retained earnings growing to $1.3 billion at December 31, 2017, from $1.2 billion at December 31, 2016, a surplus of $608.3 million over our minimum retained earnings target, as we continue to satisfy all regulatory capital requirements as of December 31, 2017. We also provided a dividend spread of 300 basis points over the daily average three-month LIBOR in 2017.

Net interest income after provision for credit losses for the year ending December 31, 2017, was $277.1 million, compared with $252.0 million for 2016. The $25.1 million increase in net interest income after provision for credit losses was primarily attributable to higher interest rates, a two basis point increase in our net interest spread, and an increase of net interest income resulting from an increase of $421.7 million in average earning assets, from $58.6 billion for 2016, to $59.0 billion for 2017. The increase in average earning assets was driven by a $900.5 million increase in average advances balances, partially offset by a $659.8 million decrease in average investments balances. Offsetting the increase to net interest income after provision for credit losses was a $3.1 million decrease in net prepayment fees from advances and investments from $4.2 million in the year ending December 31, 2016, to $1.1 million in the year ending December 31, 2017.


36
Table of Contents

Net interest spread was 0.40 percent for the year ended December 31, 2017, a two basis point increase from 2016, and net interest margin was 0.47 percent, a four basis point increase from 2016. The increase in net interest spread reflects a 38 basis point increase in the average yield on earning assets and a 36 basis point increase in the average yield on interest-bearing liabilities.

FINANCIAL CONDITION

Advances

At December 31, 2018, the advances portfolio totaled $43.2 billion, an increase of $5.6 billion compared with $37.6 billion at December 31, 2017.
 
Table 10 - Advances Outstanding by Product Type
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
 
Par Value
 
Percent of Total
 
Par Value
 
Percent of Total
Fixed-rate advances
 

 
 

 
 

 
 

Short-term
$
15,325,612

 
35.4
%
 
$
13,533,417

 
35.9
%
Long-term
13,415,001

 
31.0

 
14,188,347

 
37.7

Overnight
3,075,277

 
7.1

 
1,717,823

 
4.6

Amortizing
920,088

 
2.1

 
943,956

 
2.5

Putable
791,700

 
1.9

 
1,242,750

 
3.3

All other fixed-rate advances
42,600

 
0.1

 
32,000

 
0.1

 
33,570,278

 
77.6

 
31,658,293

 
84.1

 
 
 
 
 
 
 
 
Variable-rate advances
 

 
 

 
 

 
 

Simple variable (1)
8,908,875

 
20.6

 
5,143,175

 
13.7

Putable
733,300

 
1.7

 
775,400

 
2.0

All other variable-rate indexed advances
55,932

 
0.1

 
70,298

 
0.2

 
9,698,107

 
22.4

 
5,988,873

 
15.9

Total par value
$
43,268,385

 
100.0
%
 
$
37,647,166

 
100.0
%
_____________________
(1)
Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.
 
See Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 9 — Advances for disclosures relating to redemption terms of the advances portfolio.

Advances Credit Risk

We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance, as applicable, based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral. We have never experienced a credit loss on an advance.

We monitor the financial condition of all members and housing associates by reviewing available financial data, such as regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, we have access to most members' regulatory examination reports. We analyze this information on a regular basis.


37
Table of Contents

Over the past year, our members exhibited stability in key financial metrics. Aggregate nonperforming assets for depository institution members were not materially changed over the year ending September 30, 2018, and as a percentage of assets were 0.35 percent at September 30, 2018 compared to 0.36 percent as of September 30, 2017. September 30, 2018, is the date of our most recent data on our membership for this report. All the Bank’s members had positive tangible capital at September 30, 2018. There were no member failures during 2018. All of our extensions of credit to members are secured by eligible collateral as noted herein. However, we could incur losses if a member were to default, if the value of the collateral pledged by the member declined to a point such that we were unable to realize sufficient value from the pledged collateral to cover the member’s obligations, and we were unable to obtain additional collateral to make up for the reduction in value of such collateral.

We assign each non-insurance company borrower to one of the following three credit status categories based on our assessment of the borrower's overall financial condition and other factors:

•
Category-1: members that are generally in satisfactory financial condition;
•
Category-2: members that show financial weakness or weakening financial trends in key financial indices and/or regulatory findings; and
•
Category-3: members with financial weaknesses that present an elevated level of concern.

We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral.

Each credit status category reflects our increasing level of control over the collateral pledged by the borrower.

•
Category-1 borrowers retain possession of all mortgage loan collateral pledged to us, provided the borrower executes a written security agreement and agrees to hold such collateral for our benefit. Category-1 borrowers must specifically list with us all mortgage loan collateral other than loans secured by first-mortgage loans on owner-occupied one- to four-family residential property.
•
Category-2 borrowers retain possession of eligible mortgage loan collateral, however, we require such borrowers to specifically list all loan collateral pledged to us.
•
Category-3 borrowers are required to place physical possession of all pledged eligible collateral with us or an approved safekeeping agent, with which we have a control agreement.

All securities pledged to us by our borrowers must be delivered to us, delivered to an approved safekeeping agent, or held by the borrower's securities corporation in a custodial account with us. We have control agreements with approved safekeeping agents which are intended to give us appropriate control over the related collateral.

Our agreements with our borrowers require each borrower to have sufficient eligible collateral pledged to us to fully secure all outstanding extensions of credit, including advances, accrued interest receivable, standby letters of credit, MPF credit-enhancement obligations, and lines of credit (collectively, extensions of credit) at all times. We generally accept the following types of assets as collateral:

•
fully disbursed, first-mortgage loans on improved residential property (provided that the borrower is not in arrears by two or more payments), or securities representing a whole interest in such mortgages;
•
securities issued, insured, or guaranteed by the U.S. government or any agency thereof (including without limitation, MBS issued or guaranteed by Freddie Mac, Fannie Mae, and Ginnie Mae);
•
cash or deposits in a collateral account with us; and
•
other real-estate-related collateral acceptable to us if such collateral has a readily ascertainable value and we can perfect our security interest in the collateral.

In addition, in the case of any community financial institution, as defined in accordance with the FHLBank Act, we may accept as collateral secured loans for small business and agriculture, or securities representing a whole interest in such secured loans.

To mitigate the credit risk, market risk, liquidity risk, and operational risk associated with collateral, we discount the book value or market value of pledged collateral to establish the lending value. Collateral that we have determined to contain a low level of risk, such as U.S. government obligations, is discounted at a lower rate than collateral that carries a higher level of risk, such as commercial real estate mortgage loans. We periodically analyze the discounts applied to all eligible collateral types to verify that current discounts are sufficient to secure us against losses in the event of a borrower default. Our agreements with our

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borrowers grant us authority, in our sole discretion, to adjust the discounts applied to collateral at any time based on our assessment of the borrower's financial condition, the quality of collateral pledged, or the overall volatility of the value of the collateral.

We generally require our members and housing associates to execute a security agreement that grants us a blanket lien on all assets of such borrower that consist of, among other things: fully disbursed whole first-mortgage loans and deeds of trust constituting first liens against real property; U.S. federal, state, and municipal obligations; GSE securities; corporate debt obligations; commercial paper; funds placed in deposit accounts with us, such as other items or property that are offered to us by the borrower as collateral; and all proceeds of all of the foregoing. In the case of insurance companies, housing associates, and CDFIs, in some instances we establish a specific lien instead of a blanket lien subject to safeguards including, among other things, larger haircuts on collateral. We protect our security interest in pledged assets by filing a Uniform Commercial Code (UCC) financing statement in the appropriate jurisdiction, or by taking possession or control of such collateral, or by taking other appropriate steps. We conduct onsite reviews of loan collateral pledged by borrowers to determine that the pledged collateral conforms to our eligibility requirements, and to adjust, if warranted, the lendable value of loan collateral pledged. We may conduct an onsite collateral review at any time.

Our agreements with borrowers allow us, at our sole discretion, to refuse to make extensions of credit against any collateral, restrict the maturity on the extension of credit, require substitution of collateral, or adjust the discounts applied to collateral at any time. We also may require members to pledge additional collateral regardless of whether the collateral would be eligible to originate a new extension of credit. Our agreements with borrowers also afford us the right, at our sole discretion, to declare any borrower to be in default if we deem ourselves to be insecure.

Beyond our practice of taking security interests in collateral, Section 10(e) of the FHLBank Act affords any security interest granted to us by a federally-insured depository institution member or such a member's affiliate priority over the claims or rights of any other party, including any receiver, conservator, trustee, or similar entity that has the rights of a lien creditor, unless these claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that are secured by actual perfected security interests. In this regard, the priority granted to our security interests under Section 10(e) may not apply when lending to insurance company members due to the anti-preemption provision contained in the McCarran-Ferguson Act in which Congress declared that federal law would not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to us. However, we protect our security interests in the collateral pledged by our borrowers, including insurance company members, by filing UCC financing statements, by taking possession or control of such collateral, or by taking other appropriate steps. We have not experienced any rehabilitation, conservatorship, receivership, liquidation or other insolvency event for an insurance company member and therefore have continuing uncertainty on the potential inapplicability of Section 10(e). Additionally, we note that the relevant state insolvency authority could take actions that could impede our ability to sell collateral that any such insolvent member has pledged to us. To protect ourselves from the potential inapplicability of Section 10(e), we require the delivery of collateral from non-depository members which currently encompass insurance companies, nonmember housing associates and CDFIs.

Table 11 - Advances Outstanding by Borrower Credit Status Category
(dollars in thousands)

 
As of December 31, 2018
 
Number of Borrowers
 
Par Value of Advances Outstanding
 
Discounted Collateral
 
Ratio of Discounted Collateral to Advances
Category-1
278

 
$
38,634,695

 
$
100,087,396

 
259.1
%
Category-2
14

 
427,978

 
889,466

 
207.8

Category-3
20

 
442,778

 
608,742

 
137.5

Insurance companies
22

 
3,762,934

 
5,029,210

 
133.7

Total
334

 
$
43,268,385

 
$
106,614,814

 
246.4
%

The method by which a borrower pledges collateral is dependent upon the type of borrower (depository vs. non-depository), the category to which the borrower is assigned, and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are permitted to specifically list and identify single-family owner-occupied residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.

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The Bank may adjust the credit status category of a member from time to time based on the financial reviews and other conditions of the members. The Bank requires Category-3 members (as well as all non-depository members) to deliver collateral to the Bank or its custodian, and all securities collateral is delivered, regardless of category.

We have not recorded any allowance for credit losses on advances at December 31, 2018, and 2017, for the reasons discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 11 — Allowance for Credit Losses.

Table 12 - Top Five Advance-Borrowing Institutions
(dollars in thousands)

 
 
December 31, 2018
 
 
Name
 
Par Value of Advances
 
Percent of Total Par Value of Advances
 
Weighted-Average Rate (1)
 
Advances Interest Income for the
Year Ended December 31, 2018
Citizens Bank, N.A.
 
$
7,656,146

 
17.7
%
 
2.72
%
 
$
134,753

People's United Bank, N.A.
 
2,391,073

 
5.6

 
2.55

 
53,337

State Street Bank and Trust Company
 
2,000,000

 
4.6

 
2.68

 
897

Webster Bank, N.A.
 
1,826,808

 
4.2

 
2.52

 
27,561

Berkshire Bank
 
1,428,283

 
3.3

 
2.49

 
25,670

Total of top five advance-borrowing institutions
 
$
15,302,310

 
35.4
%
 
 
 
$
242,218

_______________________
(1)
Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments.

Investments
 
At December 31, 2018, investment securities and short-term money-market instruments totaled $15.9 billion, a decrease from $17.9 billion at December 31, 2017.

Short-term money-market investments decreased $207.0 million to $8.6 billion at December 31, 2018, compared with December 31, 2017. The decrease was attributable to a $2.0 billion decrease in federal funds sold offset by a $1.2 billion increase in securities purchased under agreements to resell, and a $593.0 million increase in interest bearing deposits.

Investment securities declined $1.8 billion to $7.3 billion at December 31, 2018, compared with December 31, 2017. The decrease was attributable to a decline of $1.8 billion in MBS.

Held-to-Maturity Securities

Certain investments for which we have both the ability and intent to hold to maturity are classified as held-to-maturity.


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Table 13 - Held-to-Maturity Securities
(dollars in thousands)

 
 
December 31,
 
 
2018
 
2017
 
2016
 
 
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total Carrying Value
 
Total Carrying Value
 
Total Carrying Value
Non-MBS
 
 
 
 
 
 
 
 
 
 
U.S. agency obligations
 
$
208

$
—

$
—

$
—

$
208

 
$
1,042

 
$
2,159

State or local housing-finance-agency obligations (HFA securities) (1)
 
835

6,205

16,865

80,560

104,465

 
146,410

 
162,568

Total non-MBS
 
1,043

6,205

16,865

80,560

104,673

 
147,452

 
164,727

MBS (1)
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family
 
—

—

155

8,018

8,173

 
10,097

 
12,719

U.S. government guaranteed - multifamily
 
—

—

—

—

—

 
280

 
1,532

GSEs - single-family
 
7

1,035

29,683

381,914

412,639

 
568,948

 
812,836

GSEs - multifamily
 
—

209,786

—

—

209,786

 
214,641

 
318,667

Private-label - residential
 
—

—

4,578

548,411

552,989

 
676,876

 
807,345

ABS backed by home equity loans
 
—

—

216

6,547

6,763

 
7,828

 
12,941

Total MBS
 
7

210,821

34,632

944,890

1,190,350

 
1,478,670

 
1,966,040

Total held-to-maturity securities
 
$
1,050

$
217,026

$
51,497

$
1,025,450

$
1,295,023

 
$
1,626,122

 
$
2,130,767

Yield on held-to-maturity securities
 
7.58
%
3.75
%
3.59
%
5.33
%
 
 
 
 
 
________________________
(1)
Maturity ranges are based on the contractual final maturity of the security.

Available-for-Sale Securities

We classify certain investment securities as available-for-sale to enable liquidation at a future date or to enable the application of hedge accounting using interest-rate swaps. By classifying investments as available-for-sale, we can consider these securities to be a source of short-term liquidity, if needed. We own certain securities that were hedged by matched-term interest rate swaps to achieve a LIBOR-based variable yield, particularly when we can earn a wider interest spread between the swapped yield on the investment and short-term debt instruments than we can earn between the bond's fixed yield and comparable-term fixed-rate debt. We classify these investments as available-for-sale because an interest-rate swap can only be designated as a hedge of an available-for-sale investment security.

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Table 14 - Available-for-Sale Securities
(dollars in thousands)

 
 
December 31,
 
 
2018
 
2017
 
2016
 
 
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total Carrying Value
 
Total Carrying Value
 
Total Carrying Value
Non-MBS
 
 
 
 
 
 
 
 
 
 
HFA securities
 
$
—

$
49,601

$
—

$
—

$
49,601

 
$
37,683

 
$
8,146

Supranational institutions
 
—

—

405,155

—

405,155

 
418,285

 
422,620

U.S. government corporations
 
—

—

—

273,169

273,169

 
292,077

 
271,957

GSEs
 
—

—

44,947

70,680

115,627

 
121,343

 
117,468

Total non-MBS
 
—

49,601

450,102

343,849

843,552

 
869,388

 
820,191

MBS (1)
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family
 
—

16,403

—

59,255

75,658

 
95,777

 
124,727

U.S. government guaranteed - multifamily
 
—

—

—

361,134

361,134

 
443,373

 
563,361

GSEs - single-family
 
—

—

221,033

3,341,126

3,562,159

 
4,562,992

 
4,403,855

GSEs - multifamily
 
—

278,890

728,551

—

1,007,441

 
1,353,206

 
676,530

Total MBS
 
—

295,293

949,584

3,761,515

5,006,392

 
6,455,348

 
5,768,473

Total available-for-sale securities
 
$
—

$
344,894

$
1,399,686

$
4,105,364

$
5,849,944

 
$
7,324,736

 
$
6,588,664

Yield on available-for-sale securities
 
—
%
2.61
%
3.51
%
0.87
%
 
 
 
 
 
________________________
(1)
MBS maturity ranges are based on the contractual final maturity of the security.

Trading Securities

We classify certain investments acquired for purposes of meeting short-term contingency liquidity needs and asset/liability management as trading securities and carry them at fair value. However, we do not participate in speculative trading practices and we hold these investments indefinitely as we periodically evaluate our liquidity needs.

Table 15 - Trading Securities
(dollars in thousands)

 
 
December 31,
 
 
2018
 
2017
 
2016
 
 
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total Carrying Value
 
Total Carrying Value
 
Total Carrying Value
Non-MBS
 
 
 
 
 
 
 
 
 
 
Corporate bonds
 
$
—

$
6,102

$
—

$
—

$
6,102

 
$
—

 
$
—

U.S. Treasury obligations
 
—

—

—

—

—

 
—

 
399,521

MBS (1)
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family
 
—

757

4,587

—

5,344

 
6,807

 
8,494

GSEs - single-family
 
2

84

14

48

148

 
346

 
768

GSEs - multifamily
 
151,444

—

—

—

151,444

 
184,357

 
203,839

Total MBS
 
151,446

841

4,601

48

156,936

 
191,510

 
213,101

Total trading securities
 
$
151,446

$
6,943

$
4,601

$
48

$
163,038

 
$
191,510

 
$
612,622

Yield on trading securities
 
4.21
%
6.19
%
3.43
%
4.69
%
 
 
 
 
 

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Table of Contents

________________________
(1)
MBS maturity ranges are based on the contractual final maturity of the security.
Certain Investment Concentrations
Table 16 - Securities from issuers which Represent Total Carrying Value Greater than 10 Percent of Our Total Capital
(dollars in thousands)

 
 
As of December 31, 2018
Name of Issuer
 
Carrying
Value(1)
 
Fair
Value
Non-MBS:
 
 
 
 
GSEs
 
 
 
 
Fannie Mae
 
$
115,627

 
$
115,627

 
 
 
 
 
Supranational institution
 
 
 
 
Inter-American Development Bank
 
405,155

 
405,155

 
 
 
 
 
MBS:
 
 
 
 
Freddie Mac
 
2,810,867

 
2,814,757

Fannie Mae
 
2,532,750

 
2,536,060

Ginnie Mae
 
433,906

 
434,064

_______________________
(1)
Carrying value for trading securities and available-for-sale securities represents fair value.

Investments Credit Risk

We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning one year and under to maturity and currently only consisting of overnight risk) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. Currently we place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis. All of these placements currently either expire within one day or are payable upon demand.

In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.

We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, and sovereign support as well as related market signals such as credit default swap spreads. We may reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.


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Table of Contents

Table 17 - Credit Ratings of Investments at Carrying Value
(dollars in thousands)


 
 
As of December 31, 2018
 
 
Long-Term Credit Rating (1)
Investment Category
 
Triple-A
 
Double-A
 
Single-A
 
Triple-B
 
Below
Triple-B
 
Unrated
Money-market instruments: (2)
 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits
 
$
—

 
$
174

 
$
593,025

 
$
—

 
$
—

 
$
—

Securities purchased under agreements to resell
 
—

 
1,250,000

 
3,250,000

 
1,999,000

 
—

 
—

Federal funds sold
 
—

 
500,000

 
1,000,000

 
—

 
—

 
—

Total money-market instruments
 
—

 
1,750,174

 
4,843,025

 
1,999,000

 
—

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-MBS:
 
 

 
 

 
 

 
 

 
 

 
 
U.S. agency obligations
 
—

 
208

 
—

 
—

 
—

 
—

Corporate bonds
 
—

 
—

 
—

 
—

 
—

 
6,102

U.S. government-owned corporations
 
—

 
273,169

 
—

 
—

 
—

 
—

GSEs
 
—

 
115,627

 
—

 
—

 
—

 
—

Supranational institutions
 
405,155

 
—

 
—

 
—

 
—

 
—

HFA securities
 
37,031

 
58,145

 
22,775

 
36,115

 
—

 
—

Total non-MBS
 
442,186

 
447,149

 
22,775

 
36,115

 
—

 
6,102

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed - single-family (2)
 
—

 
89,175

 
—

 
—

 
—

 
—

U.S. government guaranteed - multifamily(2)
 
—

 
361,134

 
—

 
—

 
—

 
—

GSE – single-family (2)
 
—

 
3,974,946

 
—

 
—

 
—

 
—

GSE – multifamily (2)
 
—

 
1,368,671

 
—

 
—

 
—

 
—

Private-label – residential
 
5,244

 
22,170

 
14,554

 
20,793

 
433,685

 
56,543

ABS backed by home-equity loans
 
251

 
—

 
4,247

 
1,941

 
324

 
—

Total MBS
 
5,495

 
5,816,096

 
18,801

 
22,734

 
434,009

 
56,543


 


 


 
 
 
 
 
 
 
 
Total investment securities
 
447,681

 
6,263,245

 
41,576

 
58,849

 
434,009

 
62,645

 
 
 
 
 
 
 
 
 
 
 
 
 
Total investments
 
$
447,681

 
$
8,013,419

 
$
4,884,601

 
$
2,057,849

 
$
434,009

 
$
62,645

_______________________
(1)
Ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of December 31, 2018. If there is a split rating, the lowest rating is used.
(2)
The issuer rating is used for these investments, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.

FHFA regulations include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of regulatory capital and the counterparty's long-term unsecured credit rating. Under these regulations, the level of regulatory capital is determined as the lesser of our total regulatory capital or the regulatory capital of the counterparty. The applicable regulatory capital is then multiplied by a specified percentage for each counterparty, which product is the maximum amount of unsecured credit exposure we may extend to that counterparty. The

44
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percentage that we may offer for extensions of unsecured credit other than overnight sales of federal funds ranges from one to 15 percent based on the counterparty's credit rating. See — Derivative Instruments Credit Risk for additional information related to derivatives exposure.

FHFA regulations allow additional unsecured credit for sales of overnight federal funds. The specified percentage of regulatory capital used for determining the maximum amount of unsecured credit exposure we may offer to a counterparty for overnight sales of federal funds is twice the amount that we may extend to that counterparty for extensions of credit other than overnight sales of federal funds reduced by the amount of any other unsecured credit exposure attributable to other than overnight sales of federal funds.

We are generally prohibited by FHFA regulations from investing in financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks. We are also prohibited by FHFA regulations from investing in financial instruments issued by foreign sovereign governments. Our unsecured money-market credit risk to U.S. branches and agency offices of foreign commercial banks includes, among other things, the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Notwithstanding the foregoing credit limits based on FHFA regulations, from time to time, we impose internal limits on all or specific individual counterparties that are lower than the maximum credit limits allowed by regulation.

Table 18 - Unsecured Money-Market Instruments and Debentures by Carrying Value
(dollars in thousands)

 
 
Carrying Value
 
 
December 31, 2018
 
December 31, 2017
Federal funds sold
 
$
1,500,000

 
$
3,450,000

Supranational institutions
 
405,155

 
418,285

Interest bearing deposits
 
593,199

 
246

U.S. government-owned corporations
 
273,169

 
292,077

GSEs
 
115,627

 
121,343

U.S. agency obligations
 
208

 
1,042

Loans to other FHLBanks
 
—

 
400,000


Table 19 - Issuers / Counterparties Representing Greater Than 10 Percent of Total Unsecured Credit Related to Money-Market Instruments and to Debentures

 
 
As of December 31, 2018
Issuer / counterparty
 
Percent
Australia and New Zealand Bank
 
17.2
%
Inter-American Development Bank
 
14.1

PNC Bank N.A.
 
10.3

Citibank N.A.
 
10.1


Private-Label MBS

Table 20 provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The table sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS. Average current credit enhancements as of December 31, 2018, reflect the percentage of subordinated class outstanding balances as of December 31, 2018, to our senior class outstanding balances as of December 31, 2018, weighted by the par value of our respective senior class securities. Average current credit enhancements as of December 31, 2018, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.


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Table of Contents

Table 20 - Private-Label Residential MBS and Home Equity ABS
(dollars in thousands)

 
As of December 31, 2018
 
Total
Par value by credit rating
 

Triple-A
$
5,495

Double-A
22,170

Single-A
20,217

Triple-B
22,734

Below Investment Grade
 
Double-B
12,041

Single-B
23,631

Triple-C
409,848

Double-C
275,021

Single-C
12,059

Single-D
30,027

Unrated
83,783

Total par value
$
917,026

 
 
Amortized cost
$
688,905

Gross unrealized gains
106,922

Gross unrealized losses
(4,919
)
Fair value
$
790,908

 
 
Weighted average percentage of fair value to par value
86.25
%
Original weighted average credit support
27.72

Weighted average credit support
7.57

Weighted average collateral delinquency (1)
17.17

_______________________
 (1)
Represents loans that are 60 days or more delinquent.

Mortgage Loans

We invest in mortgages through the MPF program. The MPF program is further described under — Mortgage Loans Credit Risk and in Item 1 — Business — Business Lines — Mortgage Loan Finance.

As of December 31, 2018, our mortgage loan investment portfolio totaled $4.3 billion, an increase of $294.7 million from December 31, 2017. We expect continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities.

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Table 21 - Par Value of Mortgage Loans Held for Portfolio
 (dollars in thousands)

 
 
December 31,
 
 
2018
 
2017
 
2016
 
2015
 
2014
Mortgage loans outstanding
 
 
 
 
 
 
 
 
 
 
Conventional mortgage loans
 
 
 
 
 
 
 
 
 
 
MPF Original
 
$
1,899,446

 
$
2,105,485

 
$
2,310,350

 
$
2,431,320

 
$
2,309,566

MPF 125
 
171,550

 
195,870

 
227,098

 
275,737

 
255,169

MPF Plus
 
128,428

 
167,003

 
227,654

 
316,513

 
432,934

 MPF 35
 
1,703,131

 
1,100,115

 
470,733

 
83,845

 
—

Total conventional mortgage loans
 
3,902,555

 
3,568,473

 
3,235,835

 
3,107,415

 
2,997,669

Government mortgage loans
 
328,651

 
365,231

 
391,127

 
410,960

 
425,663

Total par value outstanding
 
$
4,231,206

 
$
3,933,704

 
$
3,626,962

 
$
3,518,375

 
$
3,423,332


Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations.

Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in Table 22.

Table 22 - State Concentrations by Outstanding Principal Balance

 
Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
 
December 31, 2018
 
December 31, 2017
 
 

 
 

Massachusetts
57
%
 
56
%
Maine
10

 
11

Connecticut
10

 
8

Wisconsin
5

 
7

New Hampshire
5

 
6

All others
13

 
12

Total
100
%
 
100
%

We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is excluded from interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis.

Table 23 - Delinquent Mortgage Loans
(dollars in thousands)

 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Total par value of government loans past due 90 days or more and still accruing interest
$
6,433

 
$
4,664

 
$
5,527

 
$
5,403

 
$
7,191

Nonaccrual loans, par value
7,960

 
13,450

 
16,918

 
22,361

 
38,658

Troubled debt restructurings (not included above)
7,199

 
6,637

 
6,846

 
7,130

 
3,045



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Although delinquent loans in our portfolio are spread throughout the U.S., delinquent loan concentrations of five percent or greater of the outstanding principal balance of our total conventional mortgage loans delinquent by more than 30 days are shown in Table 24.

Table 24 - State Concentrations of Delinquent Conventional Mortgage Loans

 
Percentage of Total Outstanding Principal Balance of Delinquent Conventional Mortgage Loans
 
December 31, 2018
 
December 31, 2017
 
 

 
 

Massachusetts
40
%
 
39
%
Connecticut
16

 
13

Maine
9

 
10

California
8

 
9

All others
27

 
29

Total
100
%
 
100
%

Table 25 - Characteristics of Our Investments in Mortgage Loans(1) 

 
 
December 31,
 
 
2018
 
2017
Loan-to-value ratio at origination
 
 
 
 
< 60.00%
 
20
%
 
22
%
60.01% to 70.00%
 
15

 
16

70.01% to 80.00%
 
19

 
19

80.01% to 90.00%
 
33

 
30

Greater than 90.00%
 
13

 
13

Total
 
100
%
 
100
%
Weighted average loan-to-value ratio
 
73
%
 
72
%
FICO score at origination
 
 
 
 
< 620
 
1
%
 
1
%
620 to < 660
 
4

 
4

660 to < 700
 
11

 
10

700 to < 740
 
18

 
17

≥ 740
 
66

 
68

Total
 
100
%
 
100
%
Weighted average FICO score
 
754

 
755

_______________________
(1)
Percentages are calculated based on unpaid principal balance at the end of each period.

Government mortgage loans may not exceed the loan-to-value limits set by the applicable federal agency. Conventional mortgage loans with loan-to-value ratios greater than 80 percent require certain amounts of primary mortgage insurance from a mortgage insurance company rated at least triple-B (or equivalent rating).

Higher-Risk Loans. Our portfolio includes certain higher-risk conventional mortgage loans. These include high loan-to-value ratio mortgage loans and subprime mortgage loans. The higher-risk loans represent a relatively small portion of our conventional mortgage loan portfolio (3.6 percent by outstanding principal balance), but a disproportionately higher portion of the conventional mortgage loan portfolio delinquencies (35.3 percent by outstanding principal balance).
 

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Table 26 - Summary of Higher-Risk Conventional Mortgage Loans
(dollars in thousands)

 
 
As of December 31, 2018
High-Risk Loan Type
 
Total Par Value
 
Percent Delinquent 30 Days
 
Percent Delinquent 60 Days
 
Percent Delinquent 90 Days or More and Nonaccruing
Subprime loans (1)
 
$
139,018

 
4.91
%
 
2.83
%
 
1.62
%
_______________________
(1)
Subprime loans are loans to borrowers with FICO® credit scores of 660 or lower.
 
Our portfolio consists solely of fixed-rate conventionally amortizing first-mortgage loans. The portfolio does not include adjustable-rate mortgage loans, pay-option adjustable-rate mortgage loans, interest-only mortgage loans, junior lien mortgage loans, or loans with initial teaser rates.

Mortgage Insurance Companies. We are exposed to credit risk from primary mortgage insurance coverage (PMI) on individual loans. As of December 31, 2018, we were the beneficiary of PMI coverage of $135.4 million on $523.2 million of conventional mortgage loans. These amounts relate to loans originated with PMI and for which current loan-to-value ratios exceed 78 percent (determined by recalculating the original loan-to-value ratio using the current unpaid principal balance).

We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time.

Deposits

We offer demand and overnight deposits, custodial mortgage accounts, and term deposits to our members. Deposit programs are intended to provide members a low-risk earning asset that satisfies liquidity requirements. Deposit balances depend on members' needs to place excess liquidity and can fluctuate significantly. Due to the relatively small size of our deposit base and the unpredictable nature of member demand for deposits, we do not rely on deposits as a core component of our funding. At December 31, 2018, and December 31, 2017, deposits totaled $474.9 million and $477.1 million, respectively.

Term deposits issued in amounts of $100,000 or greater at December 31, 2018 amounted to a par amount of $800,000, with a maturity date of July 1, 2019, and a weighted average rate of 2.34 percent. There were no term deposits at December 31, 2017.

Consolidated Obligations

See — Liquidity and Capital Resources for information regarding our COs.

Derivative Instruments
 
All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Bilateral and cleared derivatives outstanding are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $22.4 million and $34.8 million as of December 31, 2018, and December 31, 2017, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $255.8 million and $300.5 million as of December 31, 2018, and December 31, 2017, respectively.

We offset fair-value amounts recognized for derivative instruments with fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives recognized at fair value executed with the same counterparty under a master-netting arrangement as well as arising from derivatives cleared through a DCO.

We base the estimated fair values of these agreements on the cost of interest-rate-exchange agreements with similar terms or available market prices. Consequently, fair values for these instruments must be estimated using techniques such as discounted cash-flow analysis and comparison with similar instruments. Estimates developed using these methods are subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of

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discount rates that appropriately reflect market and credit risks. We formally establish hedging relationships associated with balance-sheet items and forecasted transactions to obtain desired economic results. These hedge relationships may include fair-value and cash-flow hedges, as well as economic hedges.

All commitments to invest in mortgage loans are recorded at fair value on the statement of condition as derivatives. Upon satisfaction of the commitment, the recorded fair value is then reclassified as a basis adjustment of the purchased mortgage assets. We had commitments for which we were obligated to invest in mortgage loans with par values totaling $50.8 million and $42.9 million at December 31, 2018 and 2017, respectively.

Table 27 - Hedged Item and Hedge-Accounting Treatment
(dollars in thousands)

 
 
 
 
 
 
 
December 31, 2018
 
December 31, 2017
Hedged Item
 
Derivative
 
Designation(2)
 
Notional
Amount
 
Fair
 Value
 
Notional
Amount
 
Fair
Value
Advances (1)
 
Swaps
 
Fair value
 
$
5,343,804

 
$
5,773

 
$
7,293,414

 
$
52,244

 
 
Swaps
 
Economic
 
769,800

 
(13,144
)
 
974,900

 
1,570

Total associated with advances
 
 
 
 
 
6,113,604

 
(7,371
)
 
8,268,314

 
53,814

Available-for-sale securities
 
Swaps
 
Fair value
 
611,915

 
(228,905
)
 
611,915

 
(271,182
)
Trading securities
 
Swaps
 
Economic
 
158,000

 
(487
)
 
192,000

 
(4,183
)
COs
 
Swaps
 
Fair value
 
6,024,980

 
(54,791
)
 
6,213,665

 
(45,446
)
 
 
Forward starting swaps
 
Cash Flow
 
282,000

 
(753
)
 
481,200

 
(9,807
)
Total associated with COs
 
 
 
 
 
6,306,980

 
(55,544
)
 
6,694,865

 
(55,253
)
Total
 
 
 
 
 
13,190,499

 
(292,307
)
 
15,767,094

 
(276,804
)
Mortgage delivery commitments
 
 
 
 
 
50,773

 
339

 
42,918

 
142

Total derivatives
 
 
 
 
 
$
13,241,272

 
(291,968
)
 
$
15,810,012

 
(276,662
)
Accrued interest
 
 
 
 
 
 

 
(3,752
)
 
 

 
(14,452
)
Cash collateral, including related accrued interest
 
 
 
 
 
 
 
62,323

 
 
 
25,450

Net derivatives
 
 
 
 
 
 

 
$
(233,397
)
 
 

 
$
(265,664
)
Derivative asset
 
 
 
 
 
 

 
$
22,403

 
 

 
$
34,786

Derivative liability
 
 
 
 
 
 

 
(255,800
)
 
 

 
(300,450
)
Net derivatives
 
 
 
 
 
 

 
$
(233,397
)
 
 

 
$
(265,664
)
 _______________________
(1)
As of December 31, 2018 and 2017, embedded derivatives separated from the advance contract with notional amounts of $769.8 million and $974.9 million, respectively, and fair values of $13.1 million and $(1.6) million, respectively, are not included in the table.
(2)
The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents derivative hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not designated for fair-value or cash-flow hedge accounting, but are acceptable hedging strategies under our risk-management policy.


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Table 28 - Hedging Strategies
(dollars in thousands)

 
 
 
 
 
 
Notional Amount
Hedged Item / Hedging Instrument
 
Hedging Objective
 
Hedge Designation
 
December 31, 2018
 
December 31, 2017
Advances
 
 
 
 
 
 
 
 
Pay fixed, receive floating interest-rate swap (without options)
 
Converts the advance's fixed rate to a variable rate index
 
Fair value
 
$
4,472,004

 
$
6,086,164

 
 
Economic
 
80,000

 
138,000

Pay fixed, receive floating interest-rate swap (with options)
 
Converts the advance's fixed rate to a variable rate index and offsets option risk in the advance
 
Fair value
 
791,200

 
1,191,250

 
 
Economic
 
10,500

 
61,500

Pay floating with embedded features, receive floating interest-rate swap (noncallable)
 
Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable rate to a different variable rate index and/or offsets embedded option risk in the advance
 
Fair value
 
26,600

 
16,000

Pay float with embedded features, receive float interest-rate swap (callable)
 
Reduces interest-rate sensitivity and repricing gaps by converting the advance’s variable-rate to a different variable-rate index and/or offsets embedded option risk in the advance.
 
Fair value
 
54,000

 
—

Pay floating, receive floating basis swap
 
Reduces interest-rate sensitivity and repricing gaps by converting the advance's variable-rate to a different variable-rate
 
Economic
 
679,300

 
775,400

 
 
 
 
 
 
6,113,604

 
8,268,314

 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
Pay fixed, receive floating interest-rate swap
 
Converts the investment's fixed rate to a variable rate index
 
Fair value
 
611,915

 
611,915

 
 
Economic
 
158,000

 
192,000

 
 
 
 
 
 
769,915

 
803,915

 
 
 
 
 
 
 
 
 
CO Bonds
 
 
 
 
 
 
 
 
Receive fixed, pay floating interest-rate swap (without options)
 
Converts the bond's fixed rate to a variable rate index
 
Fair value
 
2,629,980

 
3,153,665

Receive fixed, pay floating interest-rate swap (with options)
 
Converts the bond's fixed rate to a variable rate index and offsets option risk in the bond
 
Fair value
 
3,395,000

 
3,060,000

Forward-starting interest-rate swap
 
To lock in the cost of funding on anticipated issuance of debt
 
Cash flow
 
282,000

 
481,200

 
 
 
 
 
 
6,306,980

 
6,694,865

 
 
 
 
 
 
 
 
 
Stand-Alone Derivatives
 
 
 
 
 
 
 
 
Mortgage delivery commitments
 
N/A
 
Economic
 
50,773

 
42,918

Total
 
 
 
 
 
$
13,241,272

 
$
15,810,012


Tables 29 and 30 provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $11.4 billion, representing 85.9 percent of all derivatives outstanding as of December 31, 2018. Economic hedges and cash-flow hedges are not included within the two tables below.


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Table 29 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity
(dollars in thousands)

 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (4)
 
Derivatives
 
Advances(2)
 
 
 
Derivatives
 
 
Maturity
Notional
 
Fair Value(1)
 
Hedged
Amount
 
Fair-Value
Adjustment(3)
 
Advances
 
Receive
Floating
Rate
 
Pay
Fixed
Rate
 
Net Receive
Result
Due in one year or less
$
1,412,686

 
$
10,113

 
$
1,412,686

 
$
(10,321
)
 
1.59
%
 
2.61
%
 
1.39
%
 
2.81
%
Due after one year through two years
1,354,290

 
21,602

 
1,354,290

 
(21,682
)
 
1.84

 
2.58

 
1.57

 
2.85

Due after two years through three years
1,190,803

 
19,793

 
1,190,803

 
(19,852
)
 
2.30

 
2.68

 
1.89

 
3.09

Due after three years through four years
578,075

 
8,371

 
578,075

 
(8,392
)
 
1.92

 
2.60

 
1.61

 
2.91

Due after four years through five years
237,200

 
(9
)
 
237,200

 
(49
)
 
2.50

 
2.61

 
2.15

 
2.96

Thereafter
570,750

 
4,158

 
570,750

 
(4,229
)
 
2.47

 
2.71

 
1.91

 
3.27

Total
$
5,343,804

 
$
64,028

 
$
5,343,804

 
$
(64,525
)
 
1.98
%
 
2.63
%
 
1.66
%
 
2.95
%
_______________________
(1)
Not included in the fair value is $58.3 million of variation margin received for daily settled contracts.
(2)
Included in the advances hedged amount are $845.2 million of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.
(3)
The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of December 31, 2018.
 
Table 30 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity
(dollars in thousands)

 
As of December 31, 2018
 
 
 
 
 
 
 
 
 
Weighted-Average Yield (4)
 
Derivatives
 
CO Bonds (2)
 
 
 
Derivatives
 
 
Year of Maturity
Notional
 
Fair Value(1)
 
Hedged Amount
 
Fair-Value
Adjustment(3)
 
CO Bonds
 
Receive
Fixed Rate
 
Pay
Floating
 Rate
 
Net Pay
Result
Due in one year or less
$
1,476,285

 
$
(6,118
)
 
$
1,476,285

 
$
6,310

 
1.46
%
 
1.48
%
 
2.54
%
 
2.52
%
Due after one year through two years
1,377,705

 
(7,168
)
 
1,377,705

 
7,174

 
2.14

 
2.18

 
2.49

 
2.45

Due after two years through three years
1,738,770

 
(19,511
)
 
1,738,770

 
19,531

 
1.75

 
1.75

 
2.49

 
2.49

Due after three years through four years
542,220

 
(6,409
)
 
542,220

 
6,271

 
2.02

 
2.02

 
2.46

 
2.46

Due after four years through five years
275,000

 
(3,691
)
 
275,000

 
3,717

 
2.10

 
2.10

 
2.43

 
2.43

Thereafter
615,000

 
(18,023
)
 
615,000

 
17,770

 
2.50

 
2.03

 
2.58

 
3.05

Total
$
6,024,980

 
$
(60,920
)
 
$
6,024,980

 
$
60,773

 
1.88
%
 
1.85
%
 
2.51
%
 
2.54
%
_______________________
(1)
Not included in the fair value is $6.1 million of variation margin paid for daily settled contracts.
(2)
Included in the CO bonds hedged amount are $3.4 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.
(3) 
The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.
(4)
The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of December 31, 2018.

Derivative Instruments Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative contract. The amount of unsecured credit exposure to derivative counterparty default is the amount by which the replacement cost of the defaulted derivative contract exceeds the value of any collateral held by us (if the counterparty is the net obligor on the derivative contract) or is exceeded by the value of collateral pledged by us to

52
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counterparties (if we are the net obligor on the derivative contract). We accept cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives (principal-to-principal derivatives that are not centrally cleared) from counterparties with whom we are in a current positive fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. The resulting net exposure at fair value is reflected in Table 31 below. We pledge cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives to counterparties with whom we are in a current negative fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty.

From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied to securities, we pledge to counterparties cash or securities collateral whose fair value is greater than the current net negative fair-value of derivative positions outstanding with them adjusted for any applicable exposure threshold. Similarly, from time to time, due to timing differences or derivatives valuation differences, we receive from counterparties cash or securities collateral whose fair value is less than the current net positive fair-value of derivatives positions outstanding with them adjusted for any applicable exposure threshold. We pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member.

Table 31 - Credit Exposure to Derivatives Counterparties
(dollars in thousands)

 
 
As of December 31, 2018
Credit Rating (1)
 
Notional Amount
 
Net Derivatives Fair Value Before Collateral
 
Cash Collateral Pledged to Counterparty
 
Non-cash Collateral Pledged to Counterparty
 
Net Credit Exposure to Counterparties
Liability positions with credit exposure:
 
 
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
 
 
Single-A
 
$
3,339,800

 
$
(33,242
)
 
$
27,653

 
$
6,359

 
$
770

Triple-B
 
451,000

 
(5,766
)
 
—

 
6,215

 
449

Cleared derivatives
 
6,889,444

 
(2,073
)
 
23,161

 
—

 
21,088

Total derivative positions with nonmember counterparties to which we had credit exposure
 
10,680,244

 
(41,081
)
 
50,814

 
12,574

 
22,307

 
 
 
 
 
 
 
 
 
 
 
Mortgage delivery commitments (2)
 
50,773

 
339

 
—

 
—

 
339

Total
 
$
10,731,017

 
$
(40,742
)
 
$
50,814

 
$
12,574

 
$
22,646

 
 
 
 
 
 
 
 
 
 
 
Derivative positions without credit exposure: (3)
 
 
 
 
 
 
 
 
 
 
Double-A
 
$
157,000

 
 
 
 
 
 
 
 
Single-A
 
1,422,550

 
 
 
 
 
 
 
 
Triple-B
 
930,705

 
 
 
 
 
 
 
 
Total derivative positions without credit exposure
 
$
2,510,255

 

 
 
 
 
 
 
_______________________
(1)
Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.
(2)
Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.
(3)
Represents derivatives positions with counterparties for which we are in a net liability position and for which we have delivered collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions

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with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.

Uncleared derivatives. The credit risk arising from unsecured credit exposure on derivatives is mitigated by the credit quality of the counterparties and by the early termination ratings triggers contained in all master derivatives agreements. We enter into new uncleared derivatives only with nonmember institutions that have long-term senior unsecured credit ratings that are at or above single-A (or its equivalent) although risk-reducing trades may be approved for counterparties whose ratings have fallen below these ratings. We actively monitor these exposures and the credit quality of our counterparties, using stress testing of counterparty exposures and assessments of each counterparty's financial performance, capital adequacy, sovereign support, and related market signals such as credit default swap spreads. We can reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities. We do not enter into interest-rate-exchange agreements with other FHLBanks. We use master-netting agreements to reduce our credit exposure from counterparty defaults. The master agreements contain bilateral-collateral-exchange provisions that may require credit exposures beyond a defined amount to be secured by U.S. federal government or GSE securities or cash. Exposures are measured daily, and adjustments to collateral positions are made daily. These agreements may require us to deliver additional collateral to certain of our counterparties if our credit rating is downgraded by an NRSRO, which could increase our exposure to loss in the event of a default by a counterparty to which we were the net creditor at the time of any such default, as further detailed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 12 — Derivatives and Hedging Activities.

We may deposit funds with these counterparties and their affiliates for short-term money-market investments, including overnight federal funds, term federal funds, and interest-bearing deposits. We also engage in short-term secured reverse repurchase agreements with affiliates of these counterparties. All of these counterparties have affiliates that buy, sell, and distribute our COs.

Cleared derivatives. The credit risk from unsecured credit exposure on cleared swaps is principally mitigated by the DCO's structural risk protections. Our internal policies require that the DCO must have a rating of at least single-A or the equivalent. We actively monitor these exposures and the credit quality of our DCO counterparties, using stress testing of DCO counterparties exposures and assessments of the DCO's structural risk protections. We can reduce existing exposures to a DCO by unwinding any trade, by entering into an offsetting trade, or by moving trades to another DCO.

LIBOR. Our derivatives and many of our assets and liabilities are indexed to LIBOR. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate as further detailed in Item 1A — Risk Factors — Market and Liquidity Risks — Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations and in Item 1A — Risk Factors — Operational Risks — We use derivatives to manage interest-rate risk, however, we could be unable to enter into effective derivative instruments on acceptable terms.

LIQUIDITY AND CAPITAL RESOURCES
 
Our financial structure is designed to enable us to expand and contract our assets, liabilities, and capital in response to changes in membership composition and member credit needs. Our primary source of liquidity is our access to the capital markets through CO issuance, which is described in Item 1 — Business — Consolidated Obligations. Outstanding COs and the condition of the market for COs are discussed below under — Debt Financing — Consolidated Obligations. Our equity capital resources are governed by our capital plan, certain portions of which are described under — Capital below as well as by applicable legal and regulatory requirements.

Liquidity

We are required to maintain liquidity in accordance with the FHLBank Act, FHFA regulations and guidance, and policies established by our management and board of directors. We seek to be in a position to meet the credit and liquidity needs of our members and to meet all current and future financial commitments by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of our assets and liabilities.

We may not be able to predict future trends in member credit needs because they are driven by complex interactions among a number of factors, including members' asset growth or reductions, deposit growth or reductions, and the attractiveness of advances compared to other wholesale borrowing alternatives. We regularly monitor current trends and anticipate future debt issuance needs and maintain a portfolio of highly liquid assets in an effort to be prepared to fund our members' credit needs and our investment opportunities. We are able to expand our CO debt issuance in response to our members' increased credit needs

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for advances and mortgage loans. Alternatively, in response to reduced member credit needs, we may allow our COs to mature without replacement, or repurchase and retire outstanding COs, allowing our balance sheet to shrink.

Sources and Uses of Liquidity. Our sources of liquidity are proceeds from the issuance of COs and advance repayments, as well as cash and investment holdings that are primarily high-quality, short-, and intermediate-term financial instruments.

During the year ended December 31, 2018, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. During the year ended December 31, 2018, our short-term funding was generally driven by member demand and was achieved primarily through the issuance of discount notes and short-term CO bonds. Access to short-term debt markets has been reliable because investors continue to view our short-term debt as an asset of choice, which has led to consistently low funding costs compared to those of other high-quality issuers and increased utilization of debt maturing in one year or less.

We may use a portion of the short-term COs issued to fund both short- and long-term floating-rate assets. Funding longer-term floating-rate assets with shorter-term liabilities generally does not expose us to significant interest rate risk because the rates on both the floating-rate assets and liabilities reset similarly (either through rate resets or re-issuance of the obligations). However, deviations in the cost of our short-term liabilities relative to resetting assets can cause fluctuations in our net interest margin. Accordingly, we have established funding gap limits designed to limit our exposure to refinancing risk. See — Balance Sheet Funding Gap Policy for additional information. Also, we measure and monitor interest rate risk with commonly used methods and metrics, which include the calculations of market value of equity, duration of equity, duration gap, and earnings at risk. See Item 7A — Quantitative and Qualitative Disclosures About Market Risk for additional information.

Our primary uses of liquidity are advance originations and consolidated obligation payments. Other uses of liquidity are mortgage loan and investment purchases, dividend payments, and other contractual payments. We also maintain liquidity to redeem or repurchase excess capital stock, at our discretion, upon the request of a member or under our capital plan. We currently conduct daily repurchases of excess capital stock as discussed under Internal Capital Practices and Policies — Repurchases of Excess Stock.

Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under the FHLBank Act, the U.S. Treasury may purchase up to $4 billion of COs of the FHLBanks. The terms, conditions, and interest rates in such a purchase would be determined by the U.S. Treasury. This authority may be exercised at the discretion of the U.S. Treasury with the agreement of the FHFA only if alternative means cannot be effectively employed to permit the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasury during the year ended December 31, 2018.

Our contingency liquidity plans, as discussed further below, are intended to ensure that we are able to meet our obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets.

For information and discussion of our guarantees and other commitments we may have, see — Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations below, and for further information and discussion of the joint and several liability for FHLBank COs, see — Debt Financing — Consolidated Obligations below.

Internal Liquidity Sources / Liquidity Management

Liquidity Reserves for Deposits. Applicable law requires us to hold a total amount of cash, obligations of the U.S., and advances with maturities of less than five years, in an amount not less than the amount of total member deposits with us. We have complied with this requirement during the year ended December 31, 2018.


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Table 32 - Liquidity Reserves for Deposits
(dollars in thousands)

 
 
December 31,
 
 
2018
 
2017
Liquid assets(1)
 
 
 
 
Cash and due from banks
 
$
10,431

 
$
261,673

Interest-bearing deposits
 
593,199

 
246

Advances maturing within five years
 
41,916,398

 
35,835,925

Total liquid assets(1)
 
42,520,028

 
36,097,844

Total deposits
 
474,878

 
477,069

Excess liquid assets(1)
 
$
42,045,150

 
$
35,620,775

 ________________________
(1)
For purposes of the regulatory requirement, liquid assets include cash, obligations of the U.S., and advances with maturities of less than five years.

We have developed a methodology and policies by which we measure and manage the Bank’s short-term liquidity needs based on projected net cash flow and contingent obligations.

Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.

Structural Liquidity. We define structural liquidity as projected net cash flow (defined above) less assumed secondary uses of funds, for which we assume the following:

•
all maturing advances are renewed;
•
member overnight deposits are withdrawn at a rate of 50 percent per day;
•
outstanding standby letters of credit are drawn down at a rate of 50 percent spread equally over 86 days;
•
uncommitted lines of credit are drawn upon at a rate of 10 percent of the previous day's balance; and
•
MPF master commitments are funded at a rate of 10 percent of the previous day's total amount on the first day and at a rate of one percent on each day thereafter.

The above assumptions for secondary uses of funds are in excess of our ordinary experience, and therefore represent a more stressful scenario than we expect to experience. We review these assumptions periodically.

This methodology for measuring projected net cash flow and structural liquidity has been established by management to monitor our liquidity position on a daily basis, to help ensure that we meet all of our obligations as they come due and to meet our members' potential demand for liquidity from us in all cases. We may adjust the amount of liquidity maintained as market conditions change from time to time using projected net cash flow and structural liquidity measurements.

Liquidity Management Action Triggers. We maintain two liquidity management action triggers:

•
if structural liquidity is less than negative $1.0 billion on or before the fifth business day following the measurement date; and
•
if projected net cash flow falls below zero on or before the 21st day following the measurement date.

If either of these thresholds is exceeded, then management of the Bank is notified and determines whether any corrective action is necessary. We did not exceed either of these thresholds at any time during the year ended December 31, 2018.


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Table 33 - Projected Net Cash Flow and Structural Liquidity
(dollars in thousands)

 
 
As of December 31, 2018
 
 
5 Business Days
 
21 Days
Uses of funds
 
 
 
 
Interest payable
 
$
10,257

 
$
34,010

Maturing liabilities
 
2,545,718

 
10,834,500

Committed asset settlements
 
146,500

 
148,891

Capital outflow
 
88,726

 
88,726

MPF delivery commitments
 
50,773

 
50,773

Other
 
319

 
319

Gross uses of funds
 
2,842,293

 
11,157,219

 
 
 
 
 
Sources of funds
 
 
 
 
Interest receivable
 
70,832

 
115,225

Maturing or projected amortization of assets
 
14,370,897

 
21,544,036

Committed liability settlements
 
704,083

 
704,083

Cash and due from banks and interest bearing deposits
 
603,366

 
603,366

Gross sources of funds
 
15,749,178

 
22,966,710

 
 
 
 
 
Projected net cash flow
 
12,906,885

 
$
11,809,491

 
 
 
 
 
Less: Secondary uses of funds
 
 
 
 
Deposit runoff
 
396,073

 
 
Drawdown of standby letters of credit and lines of credit
 
663,989

 
 
Rollover of all maturing advances
 
7,447,252

 
 
Projected funding of MPF master commitments
 
191,013

 
 
Total secondary uses of funds
 
8,698,327

 

 
 
 
 
 
Structural liquidity
 
$
4,208,558

 


Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:

•
marketable securities with a maturity greater than one week and less than one year that can be sold;
•
self-liquidating assets with a maturity of seven days or less;
•
assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and
•
irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.

We complied with this regulatory requirement at all times during the year ended December 31, 2018. As of December 31, 2018 and 2017, we held a surplus of $17.4 billion and $13.2 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO issuance.


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Table 34 - Contingency Liquidity
(dollars in thousands)

 
 
As of December 31, 2018
 
 
5 Business Days
Cumulative uses of funds
 
 
Interest payable
 
$
10,257

Maturing liabilities
 
2,545,718

Committed asset settlements
 
146,500

Drawdown of standby letters of credit
 
181,841

Other
 
319

Gross uses of funds
 
2,884,635

 
 
 
Cumulative sources of funds
 
 
Interest receivable
 
70,832

Maturing or amortizing advances
 
7,597,253

Committed liability settlements
 
704,083

Gross sources of funds
 
8,372,168

 
 
 
Plus: sources of contingency liquidity
 
 
Marketable securities
 
1,249,156

Self-liquidating assets
 
6,750,000

Cash and due from banks and interest bearing deposits
 
603,366

Marketable securities available for repo
 
3,307,164

Total sources of contingency liquidity
 
11,909,686

 
 
 
Net contingency liquidity
 
$
17,397,219


Additional Liquidity Requirements. The FHFA requires us to maintain, in the aggregate, qualifying assets free from any lien or pledge in an amount at least equal to the amount of our participation in total COs outstanding.

In addition, certain FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios. 

•
The first scenario assumes that we cannot borrow funds from the capital markets for a period of between 10 to 20 days, with initial guidance set at 15 business days, and that during that time we do not renew any maturing, prepaid, and put or called advances.

•
The second scenario assumes that we cannot raise funds in the capital markets for a period of between three to seven days, with initial guidance set at five business days, and that during that period we will renew maturing and called advances for all members except very large, highly rated members.

We were in compliance with these additional liquidity requirements at all times during the year ended December 31, 2018. For information on new liquidity guidance issued by the FHFA, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.

Balance Sheet Funding Gap Policy. The Bank is exposed to refinancing risk due to the fact that over certain time horizons, it has more liabilities than assets maturing. To adequately fund assets the maturing liabilities must be replaced by new liabilities, which may occur at higher cost, putting spread margin at risk. In order to manage the Bank’s refinancing risk, we maintain an appropriate funding balance between financial assets and financial liabilities and maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month and one-year time horizons inclusive of projected prepayment and call activity. We measure this difference, or gap, as a

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percentage of total assets under two alternative formats. One funding gap format effectively assumes that all floating rate advances indexed to the discount note auction rate that both mature beyond the three-month or one-year time horizon and are prepayable without fees on coupon reset dates mature within the three-month or one-year time horizon; this assumption results in an adjustment that reduces the funding gap measurement. (Such advances are not subject to margin compression because the cost of the refinanced debt defines the reset rate on the advance coupon.) The other funding gap format includes no such adjustment. The Bank has instituted a limit and management action trigger framework around these metrics as follows:

Table 35 - Funding Gap Metric

Funding Gap Metric (1)
 
Limit
 
Management Action Trigger
 
Actual as of December 31, 2018
 
Actual as of December 31, 2017
3-month Funding Gap
 
 
 
 
 
 
 
 
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction
 
35%
 
25%
 
12.2
 %
 
8.7
%
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than three-month maturity
 
20%
 
10%
 
(1.4
)%
 
0.6
%
 
 
 
 
 
 
 
 
 
1-year Funding Gap
 
 
 
 
 
 
 
 
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction
 
35%
 
25%
 
13.9
 %
 
10.9
%
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than one-year maturity
 
20%
 
10%
 
0.4
 %
 
3.9
%
 _______________________
(1)
The funding gap metric is a positive value when maturing liabilities exceed maturing assets, as defined, within the given time period.

Funding Concentration Policy. In an effort to limit the liquidity risk potentially associated with a high volume of short-term debt refinancing, we have a funding concentration policy that limits the volume of discount notes outstanding as a proportion of total assets. The policy establishes a management action trigger when discount notes (excluding the amount of discount notes matched to short-term advances) exceed 40 percent of total assets. In addition, we have adopted a separate management action trigger that is triggered when total discount notes exceed 55 percent of assets. Finally, discount notes are limited to no more than 65 percent of total assets. We were in compliance with these internal policies during the year ended December 31, 2018.

External Sources of Liquidity

Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. Under the terms of that agreement, in the event we do not fund our principal and interest payments due with respect to any CO within deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. We would then be required to repay the funding FHLBanks. We have never drawn funding under this agreement.

Debt Financing — Consolidated Obligations
 
Our primary source of liquidity is through CO issuances. At December 31, 2018, and December 31, 2017, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $59.0 billion and $56.1 billion, respectively. CO bonds are generally issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that use a variety of indices for interest-rate resets. Some of the fixed-rate bonds that we have issued are callable bonds that may be redeemed at par on one or more dates prior to their maturity date. In addition, to meet our needs and the needs of certain investors in COs, fixed- and variable-rate bonds may also contain certain provisions that may result in complex coupon-payment terms and call or amortization features. When such COs (structured bonds) are issued, we enter into interest-rate-exchange agreements containing offsetting features, which effectively change the characteristics of the bond to those of a simple variable-rate bond.


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The Office of Finance has established a methodology for the allocation of the proceeds from the issuance of COs when COs cannot be issued in sufficient amounts to satisfy all FHLBank demand for funding during periods of financial distress and when its existing allocation processes are deemed insufficient. See Item 1 —Business — Consolidated Obligations for additional information on the methodology.

In general, this methodology provides that the proceeds in such circumstances will be allocated among the FHLBanks based on relative FHLBank total regulatory capital, with FHLBanks with greater total regulatory capital in absolute terms receiving greater allocations of issuance proceeds. The Office of Finance will use this method in such periods unless it determines that there is an overwhelming reason to adopt a different allocation method. As is the case during any instance of a disruption in our ability to access the capital markets, market conditions or this allocation could adversely impact our ability to finance our operations, which could adversely impact our financial condition and results of operations.

See Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 14 — Consolidated Obligations for a summary of CO bonds by contractual maturity dates and call dates as of December 31, 2018, and December 31, 2017. CO bonds outstanding for which we are primarily liable at December 31, 2018, and December 31, 2017, include issued callable bonds totaling $5.5 billion and $4.4 billion, respectively.

CO discount notes are also a significant funding source for us. CO discount notes are short-term instruments with maturities ranging from overnight to one year. We use CO discount notes primarily to fund short-term advances and investments, and longer-term advances and investments with short repricing intervals. CO discount notes comprised 56.1 percent and 49.4 percent of the outstanding COs for which we are primarily liable at December 31, 2018, and December 31, 2017, respectively, but accounted for 95.1 percent and 94.1 percent of the proceeds from the issuance of such COs during the years ended December 31, 2018 and 2017, respectively.

Table 36 - Short-Term Borrowings
(dollars in thousands)

 
 
CO Discount Notes
 
CO Bonds with Original Maturities of One Year or Less
 
 
For the Years Ended December 31,
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Outstanding par amount at end of the period
 
$
33,147,065

 
$
27,752,860

 
$
30,070,103

 
$
3,020,150

 
$
3,212,640

 
$
447,000

Weighted-average rate at the end of the period
 
2.37
%
 
1.25
%
 
0.47
%
 
2.35
%
 
1.30
%
 
0.71
%
Daily-average par amount outstanding for the period
 
$
30,078,903

 
$
26,489,602

 
$
26,979,622

 
$
3,152,989

 
$
2,126,941

 
$
3,944,741

Weighted-average rate for the period
 
1.87
%
 
0.88
%
 
0.35
%
 
1.94
%
 
1.18
%
 
0.52
%
Highest par amount outstanding at any month-end
 
$
33,501,223

 
$
30,417,341

 
$
30,495,259

 
$
3,760,990

 
$
3,212,640

 
$
6,758,300


Although we are primarily liable for our portion of COs, that is, those issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on COs issued by all of the FHLBanks. The par amounts of the FHLBanks' outstanding COs were $1.0 trillion at both December 31, 2018 and 2017, respectively. COs are backed only by the combined financial resources of the FHLBanks. We have never repaid the principal or interest on any COs on behalf of another FHLBank.

We have evaluated the financial condition of the other FHLBanks based on known regulatory actions, publicly-available financial information, and individual long-term credit rating downgrades as of each period presented. Based on this evaluation, as of December 31, 2018, and through the filing of this report, we do not believe it is likely that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

Market Conditions for Consolidated Obligations

Overall, we continued to experience continuous demand for COs among investors and our issuance costs during the period covered by this report were consistent with those of recent quarters, reflecting continued high demand for all tenors of COs

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with the strongest demand for short-term COs. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. Throughout 2018, COs continued to be issued at yields that were generally at or below equivalent-maturity LIBOR swap yields for debt maturing in less than five years, while longer-term issues bore funding costs that were typically higher than equivalent maturity LIBOR swap yields. During the period covered by this report, CO yields continued generally to move with U.S. dollar interest rate swaps and comparable U.S. Treasury yields, though minor spread fluctuations occurred between these series. We believe that the market’s reaction to recent and expected changes in FOMC monetary policies, including the decision to increase the target rate for Interest on Excess Reserves by less than the increase in the policy range for the target federal funds rate, is potentially an important factor that could shape investor demand for debt, including COs, in 2019. Moreover, potential increases in U.S. Treasury security issuance in response to the fiscal policy implications of the Tax Cut and Jobs Act of 2017 or any change or roll back of regulations governing money market investors may also have an impact on our funding costs.

Capital

Total capital at December 31, 2018, was $3.6 billion compared with $3.3 billion at year-end 2017.

Capital stock increased by $245.1 million during the year ended December 31, 2018, resulting from the issuance of $1.8 billion of capital stock to support new advances borrowings by members offset by capital stock repurchases of $1.6 billion.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at December 31, 2018, as discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 16 — Capital.

Table 37 - Capital Stock Outstanding by Institution Type
(dollars in thousands)

 
 
December 31, 2018
Commercial banks
 
$
1,021,913

Savings institutions
 
895,114

Insurance companies
 
309,606

Credit unions
 
301,990

Community development financial institutions
 
231

Total GAAP capital stock
 
2,528,854

Mandatorily redeemable capital stock
 
31,868

Total regulatory capital stock
 
$
2,560,722


Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $31.9 million and $35.9 million at December 31, 2018, and December 31, 2017, respectively. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Notes to the Financial Statements — Note 2 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock.

Capital Rule

The Capital Rule, among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An FHLBank is adequately capitalized if it has sufficient permanent and total capital to meet or exceed its risk-based and minimum capital requirements. FHLBanks that are adequately capitalized have no corrective action requirements. FHLBanks that are not adequately capitalized must submit capital restoration plans, are subject to corrective action requirements and are prohibited from paying dividends, redeeming or repurchasing excess stock, and are subject to certain asset growth restrictions. The FHFA may place critically undercapitalized FHLBanks into conservatorship or receivership.

The Director of the FHFA has discretion to add to or modify the corrective action requirements for each capital classification other than adequately capitalized if the Director of the FHFA determines that such action is necessary to ensure the safe and sound operation of the FHLBank and the FHLBank's compliance with its risk-based and minimum capital requirements.

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If we became classified into a capital classification other than adequately capitalized, we could be adversely impacted by the corrective action requirements for that capital classification.

The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated December 13, 2018, the Director of the FHFA notified us that, based on September 30, 2018 financial information, we met the definition of adequately capitalized under the Capital Rule. We have not yet received our capital classification based on our December 31, 2018 financial information.

Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.

Targeted Capital Ratio Operating Range

We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.2 percent at December 31, 2018.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must be at least equal to the sum of four percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of December 31, 2018, this internal minimum capital requirement equaled $3.1 billion, which was satisfied by our actual regulatory capital of $4.0 billion.

Reduction of Membership and Activity-Based Stock Investment Requirements

At the close of business on May 31, 2017, we reduced the activity-based stock investment requirement (ABSIR) for advances with original maturities of more than three months from 4.5 percent to 4.0 percent. Effective January 16, 2019, the MSIR was reduced to 0.20 percent of the value of certain member assets eligible to secure advances subject to a minimum balance of $10,000 and a maximum balance of $10.0 million. We reduced both our ABSIR and MSIR in an effort to gain efficiency in our capital structure, as we currently exceed internal and regulatory minimum capital requirements.

Minimum Retained Earnings Target

At December 31, 2018, we had total retained earnings of $1.4 billion compared with our minimum retained earnings target of $700.0 million. We generally view our minimum retained earnings target as a floor for retained earnings rather than as a retained earnings limit and expect to continue to grow our retained earnings modestly even though we exceed the target.

Our methodology for determining retained earnings adequacy and selection of the minimum retained earnings target incorporates an assessment of the various risks that could adversely impact retained earnings if trigger stress-scenario conditions were to occur. Principal elements are market risk and credit risk. Market risk is represented through the Bank's established management action trigger for Value at Risk (VaR) market-risk measurement, which estimates the 99th percentile worst case of potential changes in our market value of equity due to potential shifts in yield curves applicable to our assets, liabilities, and off-balance-sheet transactions. Credit risk is represented through incorporation of valuation deterioration due but not limited to actual and potential adverse ratings migrations for our assets and actual and potential defaults.

Our minimum retained earnings target could be superseded by FHFA mandates, either in the form of an order specific to us or by promulgation of new regulations requiring a level of retained earnings that is different from our current target. Moreover, we may, at any time, change our methodology or assumptions for modeling our minimum retained earnings target and will do so when prudential or other reasons warrant such a change. Either of these events could result in us increasing our minimum retained earnings target and, in turn, reducing or eliminating dividends, as necessary.

For information on limitations on dividends, including limitations when we are under our minimum retained earnings target, see Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.


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Repurchases of Excess Stock

We have the authority, but are not obliged, to repurchase excess stock, as discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock.

Table 38 - Capital Stock Requirements and Excess Capital Stock
(dollars in thousands)

 
Membership Stock
Investment
Requirement
 
Activity-Based
Stock Investment
Requirement
 
Total Stock
Investment
Requirement (1)
 
Outstanding Class B
Capital Stock (2)
 
Excess Class B
Capital Stock
December 31, 2018
$
755,723

 
$
1,716,251

 
$
2,471,996

 
$
2,560,722

 
$
88,726

December 31, 2017
705,924

 
1,502,996

 
2,208,942

 
2,319,644

 
110,702

_______________________
(1)
TSIR is rounded up to the nearest $100 on an individual member basis.
(2) 
Class B capital stock outstanding includes mandatorily redeemable capital stock.

As discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock, we currently conduct daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000.

Restricted Retained Earnings and the Joint Capital Agreement
 
Our capital plan and the Joint Capital Agreement require us to allocate a certain percentage of quarterly net income to a restricted retained earnings account, which we refer to as restricted retained earnings. The Joint Capital Agreement, the terms of which are reflected in the capital plans of the 11 FHLBanks, is a voluntary capital initiative among the FHLBanks, intended to build greater safety and soundness in the FHLBank System. Generally, the agreement requires each FHLBank to allocate a certain amount, generally not less than 20 percent of each of its quarterly net income (net of that FHLBank's obligation to its AHP) and adjustments to prior net income, to a restricted retained earnings account until the total amount in that account is equal to one percent of the daily average carrying value of that FHLBank's outstanding total COs (excluding fair-value adjustments) for the calendar quarter (total required contribution). The FHLBanks commenced this obligation with their results at September 30, 2011. The percentage of the required allocation is subject to adjustment when an FHLBank has had an adjustment to a prior calendar quarter's net income. At December 31, 2018, our total required contribution to the restricted retained earnings account was $574.3 million compared with our total contribution on that date of $310.7 million. The agreement refers to the period of required contributions to the restricted retained earnings account as the “dividend restriction period.” Additionally, the agreement provides that:
 
•
amounts held in an FHLBank's unrestricted retained earnings account may not be transferred into the restricted retained earnings account;
•
during the dividend restriction period, an FHLBank shall redeem or repurchase capital stock only at par value, and shall only conduct such redemption or repurchase if it would not result in the FHLBank's total regulatory capital falling below its aggregate paid in amount of capital stock;
•
any quarterly net losses will be netted against the FHLBank's other quarters' net income during the same calendar year so that the minimum required annual allocation into the FHLBank's restricted retained earnings account is satisfied;
•
if the FHLBank sustains a net loss for a calendar year, the net loss will be applied to reduce the FHLBank's retained earnings that are not in the FHLBank's restricted retained earnings account to zero prior to application of such net loss to reduce any balance in the FHLBank's restricted retained earnings account;
•
if the FHLBank incurs net losses for a cumulative year-to-date period resulting in a decline to the balance of its restricted retained earnings account, the FHLBank's required allocation percentage will increase from 20 percent to 50 percent of quarterly net income until its restricted retained earnings account balance is restored to an amount equal to the regular required allocation (net of the amount of the decline);
•
if the balance in the FHLBank's restricted retained earnings account exceeds 150 percent of its total required contribution to the account, the FHLBank may release such excess from the account;

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•
in the event of the liquidation of the FHLBank, or the taking of the FHLBank's retained earnings by future federal action, such event will not affect the rights of the FHLBank's Class B stockholders under the FHLBank Act in the FHLBank's retained earnings, including those held in the restricted retained earnings account;
•
the payment of dividends from amounts in the restricted retained earnings account be restricted for at least one year following the termination of the Joint Capital Agreement; and
•
certain procedural mechanisms be followed for determining when an automatic termination event has occurred.
 
The agreement will terminate upon an affirmative vote of two-thirds of the boards of directors of the then existing FHLBanks, or automatically if a change in the FHLBank Act, FHFA regulations, or other applicable law has the effect of:
 
•
creating any new or higher assessment or taxation on the net income or capital of any FHLBank;
•
requiring the FHLBanks to retain a higher level of restricted retained earnings than what is required under the agreement; or
•
establishing general restrictions on dividend payments requiring a new or higher mandatory allocation of an FHLBank's net income to any retained earnings account than the amount specified in the agreement, or prohibiting dividend payments from any portion of an FHLBank's retained earnings not held in the restricted retained earnings account.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations
 
Our significant off-balance-sheet arrangements consist of the following:
 
•
commitments that obligate us for additional advances;
 •
standby letters of credit;
 •
commitments for unused lines-of-credit advances; and
 •
unsettled COs.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 20 — Commitments and Contingencies.

Table 39 - Contractual Obligations
(dollars in thousands)

 
 
As of December 31, 2018
 
 
Payment Due By Period
Contractual Obligations
 
Total
 
Less than
one year
 
One to three
years
 
Three to
five years
 
More than
five years
Consolidated obligation bonds(1)
 
$
25,901,315

 
$
9,638,270

 
$
9,240,405

 
$
3,230,490

 
$
3,792,150

Estimated interest payments on long-term debt(2)
 
2,406,790

 
548,190

 
651,539

 
346,331

 
860,730

Capital lease obligations
 
63

 
41

 
22

 
—

 
—

Operating lease obligations
 
13,311

 
2,681

 
5,374

 
5,256

 
—

Mandatorily redeemable capital stock
 
31,868

 
31,455

 
—

 
403

 
10

Commitments to invest in mortgage loans
 
50,773

 
50,773

 
—

 
—

 
—

Pension and post-retirement contributions
 
24,493

 
7,171

 
4,604

 
4,619

 
8,099

Total contractual obligations
 
$
28,428,613

 
$
10,278,581

 
$
9,901,944

 
$
3,587,099

 
$
4,660,989

_______________________
(1)
Includes CO bonds outstanding at December 31, 2018, at par value, based on the contractual maturity date of the CO bonds. No effect for call dates on callable CO bonds has been considered in determining these amounts.
(2)
Includes estimated interest payments for CO bonds. For floating-rate CO bonds, the forward interest-rate curve of the underlying index as of December 31, 2018, has been used to estimate future interest payments. No effect for call dates on callable CO bonds has been considered in determining these amounts.

CRITICAL ACCOUNTING ESTIMATES
 

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The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.
 
We have identified three accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, and accounting for deferred premiums and discounts on prepayable assets. The Audit Committee of our board of directors has reviewed these estimates.

Accounting for Derivatives

Derivatives are required to be carried at fair value on the statement of condition. Any change in the fair value of a derivative is required to be recorded each period in current period earnings or other comprehensive income, depending on the type of hedge transaction. All of our derivatives are either 1) derivative contracts structured to offset some or all of the risk exposure inherent in our member-lending, investment, and funding activities, 2) inherent to another activity, such as forward commitments to purchase mortgage loans under the MPF program, or 3) embedded in a host financial instrument, such as an advance or an investment security. We are required to recognize unrealized losses or gains on derivative positions, regardless of whether offsetting gains or losses on the associated assets or liabilities being hedged are permitted to be recognized in a symmetrical manner. Therefore, the accounting framework imposed can introduce the potential for considerable income variability. Specifically, a mismatch can exist between the timing of income and expense recognition from assets or liabilities and the income effects of derivatives positioned to mitigate market-risk and cash-flow variability. Therefore, during periods of significant changes in interest rates and other market factors, our reported earnings may exhibit considerable variability. We generally employ hedging techniques that are effective under the hedge-accounting requirements. However, not all of our hedging relationships meet the hedge-accounting requirements. In some cases, we have elected to retain or enter into derivatives that are economically effective at reducing risk but do not meet the hedge-accounting requirements, either because the cost of the hedge was economically superior to nonderivative hedging alternatives or because no nonderivative hedging alternative was available, and available derivatives did not meet hedge accounting requirements. As required by FHFA regulation and our policy, derivatives that do not qualify as hedging instruments pursuant to GAAP may be used only if we document a nonspeculative purpose.

A hedging relationship is created from the designation of a derivative financial instrument as either hedging our exposure to changes in the fair value of a recognized asset, liability, or unrecognized firm commitment, or changes in future variable cash flows attributable to a recognized asset or liability or forecasted transaction. Fair-value hedge accounting allows for the offsetting changes in the fair value of the hedged risk in the hedged item to also be recorded in current period earnings.

The majority of our hedge relationships are treated as a long-haul fair-value hedge, where the change in the value of the hedged item attributable to changes in the benchmark interest rate must be measured separately from the derivative and effectiveness testing must be performed with results falling within established tolerances. If the hedge fails its effectiveness test, the hedge no longer qualifies for hedge accounting and the derivative is marked through current-period earnings without any offset related to the hedged item.

For derivative transactions to qualify for long-haul fair-value hedge-accounting treatment, management must assess how effective the derivatives have been, and are expected to be, in hedging changes in the estimated fair values of the hedged items attributable to the risks being hedged. Hedge-effectiveness testing is performed at the inception of the hedging relationship and on an ongoing basis. We perform testing at hedge inception based on regression analysis of the hypothetical performance of the hedge relationship using historical market data. We then perform regression testing on an ongoing basis using accumulated actual values in conjunction with hypothetical values. Specifically, each month we use a consistently applied statistical methodology that uses a sample of at least 31 historical interest-rate environments and includes an R-square test, a slope test, and an F-statistic test. These tests measure the degree of correlation of movements in estimated fair values between the derivative and the related hedged item. For the hedging relationship to be considered effective, the R-square must be greater than 0.8, the slope must be between -0.8 and -1.25, and the computed F-statistic test significance must be less than 0.05.

We use the overnight-index swap (OIS) curve for valuation of our interest-rate derivatives in which the recipient of collateral maintains the right to rehypothecate pledged collateral, while LIBOR is used as the discount rate for interest-rate derivatives in which the recipient of collateral has no right to rehypothecate pledged collateral. Additionally, we use the OIS curve as the discount rate for derivatives cleared through a DCO.


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We use the LIBOR swap curve to discount cash flows on all associated hedged assets or liabilities in fair-value hedging relationships where the hedged risk is changes in fair value attributable to changes in the designated benchmark interest rate, LIBOR. For any such hedging relationship where the valuation of the derivative transaction is based on the OIS curve, there could be an increase in hedge ineffectiveness that in turn could result in the loss of hedge accounting for certain hedge relationships. Loss of hedge accounting for those hedge relationships would lead to increased net income volatility, which could be material. However, through December 31, 2018, no hedge relationships failed our hedge effectiveness criteria as a result of using the OIS curve as the discount rate for the derivative and the LIBOR swap curve as the discount rate for the hedged item.

The fair values of the derivatives and hedged items do not have any cumulative economic effect if the derivative and the hedged item are held to maturity, or mutual optional termination at par. Since these fair values fluctuate throughout the hedge period and eventually return to par value on the maturity date, the effect of fair values is normally only a timing issue.

For derivatives and hedged items that meet the requirements described above, we do not anticipate any significant impact on our financial condition or operating performance. For derivatives where no identified hedged item qualifies for hedge accounting, changes in the market value of the derivative are reflected in earnings. As of December 31, 2018, we held derivatives that are marked to market with no offsetting qualifying hedged item including $927.8 million notional of interest-rate swaps with a fair value of $(13.6) million, and $50.8 million notional of mortgage-delivery commitments with a fair value of $339,000. The following table shows the estimated changes in the fair value of the interest-rate swaps under alternative parallel interest-rate shifts (for example the same change to interest rates on short-, intermediate-, and long-term fixed income maturities):

Table 40 - Estimated Change in Fair Value of Undesignated Derivatives
(dollars in thousands)

 
 
 
 
 
 
As of December 31, 2018
 
 
 
 
 
 
-200 basis points
 
-150 basis points
 
-100 basis points
 
-50 basis points
 
+50 basis points
 
+100 basis points
 
+150 basis points
 
+200 basis points
Change from base case
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
 
$
(50,945
)
 
$
(36,217
)
 
$
(22,217
)
 
$
(9,914
)
 
$
7,352

 
$
12,350

 
$
15,504

 
$
17,466


These derivatives economically hedge certain advances, investment securities, and CO bonds. Although these economic hedges do not qualify or were not designated for hedge accounting, they are an acceptable hedging strategy under our risk-management program. Our projections of changes in value of the derivatives have been consistent with actual experience.

Fair-Value Estimates
 
Overview. We measure certain assets and liabilities, including investment securities classified as available-for-sale or trading, as well as all derivatives and mandatorily redeemable capital stock at fair value on a recurring basis. Additionally, certain held-to-maturity securities are measured at fair value on a nonrecurring basis due to the recognition of other-than-temporary impairment. Management also estimates the fair value of some of the collateral that borrowers pledge against advance borrowings to confirm that collateral is sufficient to meet regulatory requirements and to protect against losses. The book values and fair values of our financial assets and liabilities, along with a description of the valuation techniques used to determine the fair values of these financial instruments, is disclosed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 19 — Fair Values.

Valuation of Derivatives and Hedged Items. For purposes of estimating the fair value of derivatives and items for which we are hedging the changes in fair value attributable to changes in the designated benchmark interest rate, we employ a valuation model that uses market data from the Eurodollar futures, cash LIBOR, U.S. Treasury obligations, and the U.S. dollar interest-rate-swap markets to construct discount and forward-yield curves using standard financial market techniques.

As discussed under — Accounting for Derivatives, the OIS curve is used as the discount rate for valuation of our uncleared derivatives in which the recipient of collateral maintains the right to rehypothecate pledged collateral and for all derivatives cleared through a DCO, while LIBOR continues to be the appropriate discount rate for uncleared derivatives in which the recipient of collateral has no right to rehypothecate pledged collateral.


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The valuation adjustments for our hedged items in which the designated hedged risk is the risk of changes in fair value attributable to changes in the benchmark interest rate (LIBOR-based) are calculated using the same model that calculates the fair values of the associated hedging derivatives.

Valuation of Investment Securities. As of December 31, 2018, multiple vendor prices were received for substantially all of our investment securities and the final prices for substantially all of those securities were computed by averaging those prices. We have conducted reviews of the pricing vendors to confirm and further augment our understanding of the vendors' pricing processes, methodologies, and control procedures. To the extent available, we also reviewed the vendors' independent auditors' reports regarding the internal controls over their valuation processes. Based on our review of the pricing methods 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, our additional analyses), we believe the final prices used are reasonably likely to be exit prices and further that the fair-value measurements are classified appropriately in the fair-value hierarchy.

Deferred Premium/Discount Associated with Prepayable MBS

When we purchase MBS, we often pay an amount that is different from the unpaid principal balance. The difference between the purchase price and the contractual note amount is a premium if the purchase price is higher, and a discount if the purchase price is lower. Accounting guidance permits us to amortize (or accrete) these premiums (or discounts) in a manner such that the yield recognized on the underlying asset is constant over the asset's estimated life.

We typically pay more than the unpaid principal balances when the interest rates on the purchased mortgages are greater than prevailing market rates for similar mortgages on the transaction date. The net purchase premiums paid are then amortized using the constant-effective-yield method over the expected lives of the mortgages as a reduction in their book yields (that is, interest income). Similarly, if we pay less than the unpaid principal balances due to interest rates on the purchased mortgages being lower than prevailing market rates on similar mortgages on the transaction date, the net discount is accreted in the same manner as the premiums, resulting in an increase in the mortgages' book yields. The constant-effective-yield amortization method is applied using expected cash flows that incorporate prepayment projections that are based on mathematical models that describe the likely rate of consumer refinancing activity in response to incentives created (or removed) by changes in interest rates. While changes in interest rates have the greatest effect on the extent to which mortgages may prepay, in general prepayment behavior can also be affected by factors not contingent on interest rates.

We estimate prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide estimates of cash flows, from which we determine expected asset lives. The constant-effective-yield method uses actual historical prepayments received and projected future prepayment speeds, as well as scheduled principal payments, to determine the amount of premium/discount that should be recognized so that the book yield of each MBS is constant for each month until maturity.

In general, lower prevailing interest rates are expected to result in the acceleration of premium and discount amortization and accretion, compared with the effect of higher prevailing interest rates that would tend to decelerate the amortization and accretion of premiums and discounts. Exact trends will depend on the relationship between market interest rates and coupon rates on outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization will also be impacted by differences between projected prepayments and actual experience. Prepayment projections are inherently subject to uncertainty because it is difficult to accurately predict future market conditions and the response of borrowing consumers in terms of refinancing activity to future market conditions even if the market conditions were known. However, actual prepayment speeds observed in these rate environments can be influenced by factors such as home price trends and lender credit underwriting standards.

If we determine that an other-than-temporary impairment exists, we account for the investment security as if it had been purchased on the measurement date of the other-than-temporary impairment at an amortized cost basis equal to the previous amortized cost basis reduced by the other-than-temporary impairment recognized in income. The difference between the new amortized cost basis and the cash flows expected to be collected is amortized or accreted into interest income prospectively over the remaining life of the investment security based on the amount and timing of future estimated cash flows.

Upon subsequent evaluation of a debt security where there is no additional other-than-temporary impairment, we adjust the accretable yield on a prospective basis if there is a significant increase in the security's expected cash flows. The new accretable yield is used to calculate the amount to be recognized into income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. The estimated cash flows and accretable yield are re-evaluated on a quarterly basis.

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The effect on interest income from the amortization and accretion of premiums and discounts on MBS, including MBS in both the held-to-maturity and available-for-sale portfolios and including accretion associated with a significant increase in a security's expected cash flows, for the years ended December 31, 2018, 2017, and 2016, was a net increase to income of $23.0 million, $10.9 million, and $15.5 million, respectively.
 
RECENT ACCOUNTING DEVELOPMENTS
 
See Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 3 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Significant regulatory actions and developments for the period covered by this report are summarized below.

Final Rule on FHLBank Capital Requirements. On February 20, 2019, the FHFA published a final rule, effective January 1, 2020, that adopts, with amendments, the regulations of the Federal Housing Finance Board (predecessor to the FHFA) (the Finance Board) pertaining to the capital requirements for the FHLBanks. The final rule carries over most of the prior Finance Board regulations without material change but substantively revises the credit risk component of the risk-based capital requirement, as well as the limitations on extensions of unsecured credit. The main revisions remove requirements that we calculate credit risk capital charges and unsecured credit limits based on ratings issued by an NRSRO, and instead require that we establish and use our own internal rating methodology. The rule imposes a new credit risk capital charge for cleared derivatives. The final rule also revises the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and for non-mortgage assets. The final rule also rescinds certain contingency liquidity requirements that were part of the Finance Board regulations, as these requirements are now addressed in an Advisory Bulletin on FHLBank Liquidity Guidance issued by the FHFA in 2018 (see — Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance below). We do not expect this rule to materially affect our financial condition or results of operations.

FDIC Final Rule on Reciprocal Deposits. On February 4, 2019, the FDIC published a final rule, effective March 6, 2019, related to the treatment of “reciprocal deposits” that implements Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule exempts, for certain insured depository institutions (depositories), certain reciprocal deposits (deposits acquired by a depository from a network of participating depositories that enables depositors to receive FDIC insurance coverage for the entire amount of their deposits) from being subject to FDIC restrictions on brokered deposits. Under the rule, well-capitalized and well-rated depositories are not required to treat reciprocal deposits as brokered deposits up to the lesser of twenty percent of their total liabilities or $5 billion. Reciprocal deposits held by depositories that are not well-capitalized and well-rated may also be excluded from brokered deposit treatment in certain circumstances.

We continue to evaluate the potential impact of the final rule, but currently do not expect the rule to materially affect our financial condition or results of operations. The rule could, however, enhance depositories’ liquidity by increasing the attractiveness of deposits that exceed FDIC insurance limits. This could affect the demand for certain advance products.

In late 2018, the FHFA published two final rules on indemnification payments and golden parachute arrangements:

Final Rule on Indemnification Payments. On October 4, 2018, the FHFA published a final rule, effective November 5, 2018, establishing standards for identifying when an indemnification payment by an FHLBank or the Office of Finance to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the FHFA is prohibited or permissible. The rule generally prohibits these payments, except we may pay:

•
premiums for any commercial insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the FHFA or a civil money penalty imposed by the FHFA;
•
expenses of defending an action, subject to an agreement to repay those expenses in certain circumstances; and
•
amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016 (the date the rule was proposed).


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The rule also outlines the process the board of directors must undergo prior to making a permitted payment related to expenses of defending an action. We do not expect the rule to materially impact our financial condition or results of operations.

Final Rule on Golden Parachute and Indemnification Payments. On December 20, 2018, the FHFA published a final rule, effective January 22, 2019, on golden parachute and indemnification payments (the Golden Parachute Rule) to better align the Golden Parachute Rule with areas of the FHFA’s supervisory concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards the FHFA would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLBank or the Office of Finance to an entity-affiliated party when such entity is in a troubled condition, in conservatorship or receivership, or insolvent. The final rule amendments:

•
focus the standards on payments to and agreements with executive officers, broad-based plans covering large numbers of employees (such as severance plans), and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoing; and
•
revise and clarify definitions, exemptions and procedures to implement the FHFA’s supervisory approach.

We do not expect this rule to materially impact our financial condition or results of operations.

Final Rule Amending AHP Regulations. On November 28, 2018, the FHFA published a final rule, effective December 28, 2018, that amends the operating requirements of the FHLBanks’ AHP.  The final rule retains a scoring criteria method for awarding competitive AHP subsidies, but allows us to create multiple pools of competitive funds in order to target specific affordable housing needs in our district. The final rule amendments also:

•
revise the scoring criteria to create different and new scoring priorities;
•
remove the retention agreement requirement on owner-occupied units using the subsidy solely for rehabilitation;
•
increase the maximum per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);
•
clarify the requirements for remediating AHP noncompliance;
•
prohibit our board of directors from delegating approval of AHP strategic policy decisions to a committee; and
•
further align AHP monitoring with certain federal government funding programs.

The majority of the rule’s provisions take effect January 1, 2021, while the owner-occupied retention agreement requirements take effect January 1, 2020. We do not expect this rule to materially affect our financial condition or results of operations.

FHFA Proposed Rule on Housing Goals. On November 2, 2018, the FHFA published a proposed rule that would amend the existing Federal Home Loan Bank Housing Goals regulation. The proposed amendments are intended to replace existing FHLBank housing goals with a more streamlined set of goals. While the existing housing goals are established retrospectively, the proposed rule would establish the levels of annual housing goals in advance, thereby eliminating uncertainty about housing goals from year-to-year. If adopted as proposed, the proposed amendments would:

•
eliminate the $2.5 billion acquired member assets (AMA) mortgage purchase volume threshold that triggers the application of housing goals;
•
establish a new prospective target level for the AMA mortgage purchase housing goal as follows: of total AMA mortgage loans purchased each calendar year, 20 percent should be mortgage loans issued to very low-income families, low-income families, or families in low-income areas, and of those loans, at least 75 percent should be loans to borrowers with incomes at or below 80 percent of the area median income;
•
establish a goal that 50 percent of AMA program users meet the definition of “small members” whose assets do not exceed the “community financial institution” asset cap, which under FHFA regulations is currently $1.2 billion; and
•
allow the FHLBanks to request FHFA approval of alternative target percentages for mortgage purchase housing goals and small member participation goals.

We submitted a joint comment letter with the other FHLBanks on the proposed rule on January 29, 2019. We continue to evaluate the proposed rule but do not expect this rule, if adopted as proposed, to materially affect our financial condition or results of operations.


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Office of the Comptroller of the Currency (OCC), Federal Reserve Board (FRB), FDIC, Farm Credit Administration and FHFA Final Rule on Margin and Capital Requirements for Covered Swap Entities. On October 10, 2018, the OCC, FRB, FDIC, Farm Credit Administration, and the FHFA published a final rule, effective November 9, 2018, that amended each agency’s rule on Margin and Capital Requirements for Covered Swap Entities (Swap Margin Rules) to conform the definition of “eligible master netting agreement” in such rules to the FRB’s, OCC’s and FDIC’s final qualified financial contract (QFC) rules. The final rule also clarifies that a legacy swap would not be deemed to be a covered swap under the Swap Margin Rules if it is amended to conform to the QFC rules. The QFC rules previously published by the OCC, FRB and FDIC require their respective regulated entities to amend covered QFCs to limit a regulated entity’s counterparty’s immediate termination or exercise of default rights in the event of bankruptcy or receivership of the regulated entity or its affiliate(s).

We do not expect this rule to materially affect our financial condition or results of operations.

Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance. On August 23, 2018, the FHFA issued an Advisory Bulletin on FHLBank liquidity (the “Liquidity Guidance AB”) that communicates the FHFA’s expectations with respect to the maintenance of sufficient liquidity to enable us to provide advances and letters of credit for members. The Liquidity Guidance AB rescinds the 2009 liquidity guidance previously issued by the FHFA. Contemporaneously with the issuance of the Liquidity Guidance AB, the FHFA issued a supervisory letter that identifies initial thresholds for measures of liquidity within the established ranges set forth in the Liquidity Guidance AB.

The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit. In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.

With respect to base case liquidity, the FHFA revised previous guidance that required us to assume a 5-day period without access to capital markets due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, we are required to hold positive cash flow assuming no access to capital markets and assuming renewal of all maturing advances for a period of between ten to thirty calendar days. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to standby letters of credit, the guidance states that we should maintain a liquidity reserve of between one percent and 20 percent of our outstanding standby letters of credit commitments.

With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10 to -20 percent) and one-year (-25 to -35 percent) maturity horizons. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding.

The Liquidity Guidance AB also addresses liquidity stress testing, contingency funding plans and an adjustment to our core mission achievement calculation. Portions of the Liquidity Guidance AB were implemented on December 31, 2018, with further implementation to take place on March 31, 2019 and full implementation on December 31, 2019. The Liquidity Guidance AB may require us to hold an additional amount of liquid assets to meet the new guidance. These additional liquid assets may be at yields at or below our cost of funds. Further, our cost of funding may increase if we were required to achieve the appropriate funding gap with longer-term funding. We do not expect the changes to have a material effect on our financial condition or results of operations.

Adoption of Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations by Board of Governors of the Federal Reserve System. On August 6, 2018, the Board of Governors of the Federal Reserve System published a final rule, effective October 5, 2018, establishing single-counterparty credit limits applicable to bank holding companies and foreign banking organizations with total consolidated assets of $250 billion or more, including global systemically important bank holding companies (GSIBs) in the United States. These entities are considered to be covered companies under the rule. The FHLBanks are themselves exempt from the limits and reporting requirements contained in this rule. However, credit exposure to individual FHLBanks must be monitored, and reported on as required, by any entity that is a covered company under this rule.

Under the final rule, a covered company and its subsidiaries may not have aggregate net credit exposure to an FHLBank and (in certain cases) economically interdependent entities in excess of 25 percent of the company’s tier 1 capital. Such credit exposure does not include advances from an FHLBank, but generally includes collateral pledged to an FHLBank in excess of a covered company’s outstanding advances. Also included towards a covered company’s net credit exposure is its investment in FHLBank capital stock and debt instruments, deposits with an FHLBank, FHLBank-issued letters of credit where a covered company is

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the named beneficiary, and other obligations to an FHLBank, including repurchase or reverse repurchase transactions net of collateral that create a credit exposure to an FHLBank. Intra-day exposures are exempt from the final rule.

With respect to the FHLBanks’ consolidated obligations held by a covered company, the company must monitor, and report on as required, its credit exposure for such obligations. It is not clear if the Federal Reserve will require consolidated obligations to be aggregated with other exposures to an FHLBank or the FHLBank System.
 
The final rule gives major covered companies (i.e., the GSIBs) until January 1, 2020 to comply, and all other covered companies will have until July 1, 2020 to comply. We do not expect the rule to materially affect our financial condition or results of operations.

CREDIT RATING AGENCY DEVELOPMENTS

As of February 28, 2019, Moody’s long-and short-term credit ratings for us and the 10 other FHLBanks are Aaa and P-1, with a stable outlook.

As of February 28, 2019, S&P’s long- and short-term credit ratings for us and the 10 other FHLBanks are AA+ and A-1+, with a stable outlook.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sources and Types of Market and Interest-Rate Risk

Market risk is the risk to earnings or shareholder value due to adverse movements in interest rates, market prices, or interest-rate spreads. Market risk arises in the normal course of business from our investment in mortgage assets, where risk cannot be eliminated; from the fact that assets and liabilities are priced in different markets; and from tactical decisions to, from time to time, assume some risk to generate income.
 
Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. The majority of our balance sheet is comprised of assets that can be funded individually or collectively without imposing significant residual interest-rate risk on ourselves.

However, those assets with embedded options, particularly our mortgage-related assets, including the portfolio of whole loans acquired through the MPF program, our portfolio of MBS and ABS, and our portfolio of bonds issued by HFAs, represent more complex cash-flow structures and contain more risk of prepayment and/or call options.

Further, unequal moves in the various different yield curves associated with our assets and liabilities create risks that changes in individual portfolio or instrument valuations, or changes in projected income, will not be equally offset by changes in valuations or projected income associated with individual portfolios or instruments on the opposite side of the balance sheet, even if the financial terms of the opposing financial portfolios or instruments are closely matched.

These risks cannot always be profitably managed with a strategy in which each asset is offset by a liability with a substantially identical cash-flow structure. Therefore, we generally view each portfolio as a whole and allocate funding and hedging to these portfolios based on an evaluation of the collective market and interest-rate risks posed by these portfolios. We measure the estimated impact to fair value of these portfolios as well as the potential for income to decline due to movements in interest rates, and make adjustments to the funding and hedge instruments assigned as necessary to keep the portfolios within established risk limits.

We also incur interest-rate risk in the investment of our capital stock and retained earnings in interest-earning assets. Traditionally we have sought to match our capital against liquid short-term money-market assets to maintain liquidity and to provide our members with a money-market-based return on capital that is responsive to changes in prevailing interest rates over time. While this capital investment strategy is comparatively risk-neutral in terms of our market risk, it exposes our interest income to the level and volatility of interest rates in the markets. As the FOMC sought to stimulate the U.S. economy during and after the prolonged economic recession through a low-rate accommodative policy, the net interest income realized on our investments was lower than could have been realized on alternative longer-term investments.

Types of Market and Interest-Rate Risk


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Interest-rate and market risk can be divided into several categories, including repricing risk, yield-curve risk, basis risk, and options risk. Repricing risk refers to differences in the average sensitivities of asset and liability yields attributable to differences in the average timing of maturities and/or coupon rate resets between assets and liabilities. Differences in the timing of repricing of assets and liabilities can cause spreads between assets and liabilities to either increase or decline.

Yield-curve risk reflects the sensitivity of net income to changes in the shape or slope of the yield curve that could impact the performance of assets and liabilities differently, even though average sensitivities are the same.

When assets and liabilities are affected by yield changes in different markets, basis risk can result. For example, if we invest in LIBOR-based floating-rate assets and fund those assets with short-term discount notes, potential compression in the spread between LIBOR and discount-note rates could adversely impact our net income.

We also face options risk, particularly in our portfolio of advances, mortgage loans, MBS, and HFA securities. When a borrower prepays an advance, we could suffer lower future income if the principal portion of the prepaid advance is reinvested in lower-yielding assets that continue to be funded by higher-cost debt. For this reason, we are required by regulation to assess a prepayment fee that makes us financially indifferent to the prepayment, or in the case of callable advances, to charge an interest rate that is reflective of the value of the member's option to prepay the advance without a fee. However, in the mortgage loan, MBS, and HFA-bond portfolios, borrowers or issuers often have the right to repay their obligations prior to maturity without penalty, potentially requiring us to reinvest the returned principal at lower yields. If interest rates decline, borrowers may be able to refinance existing mortgage loans at lower interest rates, resulting in the prepayment of these existing mortgages and forcing us to reinvest the proceeds in lower-yielding assets. If interest rates rise, borrowers may avoid refinancing mortgage loans for periods longer than the average term of liabilities funding the mortgage loans, causing us to have to refinance the assets at higher cost. This right of redemption is effectively a call option that we have written to the obligor. Another less prominent form of options risk includes coupon-cap risk, which may be embedded into certain floating-rate MBS and limit the amount by which asset coupon rates may increase.

Strategies to Manage Market and Interest-Rate Risk

General
 
We use various strategies and techniques in an effort to manage our market and interest-rate risk. Principal among our tools for interest-rate-risk management is the issuance of debt that can be used to match interest-rate-risk exposures of our assets. For example, we can issue a CO with a maturity of five years to fund an investment with a five-year maturity. The debt may be noncallable until maturity or callable on and/or after a certain date.

COs may be issued to fund specific assets or to manage the overall exposure of a portfolio or the balance sheet. At December 31, 2018, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $14.9 billion, compared with $15.5 billion at December 31, 2017, and fixed-rate callable debt not hedged by interest-rate swaps amounted to $2.1 billion and $1.2 billion at December 31, 2018, and December 31, 2017, respectively.

To achieve certain risk-management objectives, we also use interest-rate derivatives that alter the effective maturities, repricing frequencies, or option-related characteristics of financial instruments. These may include swaps, swaptions, caps, collars, and floors. For example, as an alternative to issuing a fixed-rate bond to fund a fixed-rate advance, we might enter into an interest-rate swap that receives a floating-rate coupon and pays a fixed-rate coupon, thereby effectively converting the fixed-rate advance to a floating-rate advance.

Because the interest-rate swaps and hedged assets and liabilities trade in different markets, they are subject to basis risk that is reflected in our VaR calculations and fair-value disclosures, but that is not reflected in hedge ineffectiveness, because these interest-rate swaps are designed to only hedge changes in fair values of the hedged items that are attributable to changes in the benchmark LIBOR interest rate.
 
Advances
 
In addition to the general strategies described above, we use contractual provisions that require borrowers to pay us prepayment fees, which make us financially indifferent if the borrower prepays such advances prior to maturity. These provisions protect against a loss of income under certain interest-rate environments.


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Prepayment-fee income can be used to offset the cost of purchasing and retiring high-cost debt to maintain our asset-liability sensitivity profile. In cases where derivatives are used to hedge prepaid advances, prepayment-fee income can be used to offset the cost of terminating the associated hedge.

Investments and Mortgage Loans
 
We hold certain long-term bonds issued by U.S. federal agencies, U.S. federal government corporations and instrumentalities, and supranational institutions as available-for-sale. To hedge the market and interest-rate risk associated with these assets, we may enter into interest-rate swaps with matching terms to those of the bonds to create synthetic floating-rate assets. At December 31, 2018, and December 31, 2017, this portfolio of hedged investments had an amortized cost of $839.4 million and $881.4 million, respectively.
 
We also manage the market and interest-rate risk in our MBS portfolio. For MBS classified as held-to-maturity, we use debt that matches the characteristics of the portfolio assets. For commercial MBS that are nonprepayable or prepayable for a fee for an initial period, we may use fixed-rate debt.

We also use interest-rate swaps to manage the fair-value sensitivity of the portion of our MBS portfolio that is classified as trading securities as an economic offset to the duration and convexity risks arising from these assets.

We manage the interest-rate and prepayment risk associated with mortgage loans through the issuance of both callable and noncallable debt to achieve cash-flow patterns and liability durations similar to those expected on the mortgage loans.

We mitigate our exposure to changes in interest rates by funding a portion of our mortgage portfolio with callable debt. When interest rates change, our option to redeem this debt offsets a large portion of the fair-value change driven by the mortgage-prepayment option. However, because this option is not fully hedged by the callable debt, the combined market value of our mortgage assets and debt will be affected by changes in interest rates.

Swapped Consolidated Obligation Debt

We may also issue bonds together with interest-rate swaps that receive a coupon rate that offsets the bond coupon rate and any optionality embedded in the bond, thereby effectively creating a floating-rate liability. We may employ this strategy to secure long-term debt that meets funding needs versus relying on short-term CO discount notes. Total CO bond debt used in conjunction with interest-rate-exchange agreements was $6.0 billion, or 23.2 percent of our total outstanding CO bonds at December 31, 2018, compared with $6.2 billion, or 21.9 percent of total outstanding CO bonds, at December 31, 2017.

Measurement of Market and Interest-Rate Risk and Related Policy Constraints

We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure VaR, duration of equity, MVE sensitivity, and the other metrics discussed below.

We use certain quantitative systems to evaluate our risk position. These systems are capable of employing various interest-rate term-structure models and valuation techniques to determine the values and sensitivities of complex or option-embedded instruments such as mortgage loans; MBS; callable bonds and swaps; and adjustable-rate instruments with embedded caps and floors, among others. These models require the following:

•
specification of the contractual and behavioral features of each instrument;
•
determination and specification of appropriate market data, such as yield curves and implied volatilities;
•
utilization of appropriate term-structure and prepayment models to reasonably describe the potential evolution of interest rates over time and the expected behavior of financial instruments in response;
•
for option-free instruments, the expected cash flows are specified in accordance with the term structure of interest rates and discounted using spot rates derived from the same term structure; and
•
for option-embedded instruments, the models use standardized option pricing methodology to determine the likelihood of embedded options being exercised or not.


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We use various measures of market and interest-rate risk, as set forth below in this section. Some measures have associated, prescriptive management action triggers or limits under our policies, as described below, but others do not.

Market Value of Equity Estimation and Market Risk Limit. MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the estimated market value of our assets and the estimated market value of our liabilities.

Market Value of Equity/Book Value of Equity Ratio. MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, these valuations may not be fully representative of future realized prices. Valuations are based on market curves and prices of individual assets, liabilities, and derivatives, and therefore embed elements of option, credit, and liquidity risk which may not be representative of future net income to be earned from the spread between asset yields and funding costs. Further, MVE does not consider future new business activities, or income or expense derived from sources other than financial assets or liabilities.

For purposes of measuring this ratio, the BVE is equal to the par value of capital stock including mandatorily redeemable capital stock, retained earnings, and accumulated other comprehensive loss. At December 31, 2018, our MVE was $3.9 billion and our BVE was $3.6 billion. At December 31, 2017, our MVE was $3.6 billion and our BVE was $3.3 billion. Our ratio of MVE to BVE was 107 percent at December 31, 2018, compared with 110 percent at December 31, 2017.

Market Value of Equity/Par Stock Ratio. We also measure the ratio of our MVE to the par value of our Class B Stock, which we refer to as our MVE to par stock ratio. We have established an MVE to par stock ratio floor of 125 percent with an associated management action trigger of 130 percent, reflecting our intent to preserve the value of our members' capital investment. As of December 31, 2018, and December 31, 2017, that ratio was 152 percent and 156 percent, respectively.

Value at Risk. VaR measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR stress scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992.

The table below presents the historical simulation VaR estimate as of December 31, 2018, and December 31, 2017, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 6-month time horizon that is measured monthly beginning with the most current month-end and going back to 1992.
 
Table 41 - Value-at-Risk
(dollars in millions)

 
 
Value-at-Risk
(Gain) Loss Exposure (1)
 
 
December 31, 2018
 
December 31, 2017
Confidence Level
 
% of
MVE (2)
 
Amount
 
% of
MVE (2)
 
Amount
50%
 
0.16
%
 
$
6.4

 
0.17
%
 
$
6.1

75%
 
1.08

 
41.9

 
1.13

 
41.1

95%
 
3.25

 
126.4

 
3.51

 
127.5

99%
 
4.81

 
187.2

 
4.69

 
170.1

_______________________
(1)
To be consistent with FHFA guidance, we have excluded VaR stress scenarios prior to 1992 because market-risk stress conditions are effectively captured in those scenarios beginning in 1992 and therefore properly present our current VaR exposure.
(2)
Loss exposure is expressed as a percentage of base MVE.

The following table outlines our VaR exposure to the 99th percentile, consistent with FHFA regulations, over 2018 and 2017.

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Table 42 - Value-at-Risk 99th Percentile
(dollars in millions)


 
 
 
2018
 
2017
Year ending December 31
 
$
187.2

 
$
170.1

Average month-end VaR for year ending December 31
 
229.3

 
159.1

Maximum month-end VaR during the year ending December 31
 
257.9

 
177.7

Minimum month-end VaR during the year ending December 31
 
187.2

 
133.0


Our risk-management policy requires that VaR not exceed $350.0 million with an associated management action trigger of $275.0 million. Should the limit be exceeded, the policy requires management to notify the board of directors' Risk Committee of such breach. We complied with our VaR limit at all times during the year ended December 31, 2018.

Duration of Equity. Another measure of risk that we use is duration of equity. Duration of equity is calculated as the estimated percentage change to MVE for a 100 basis point parallel rate shock. A positive duration of equity generally indicates an appreciation in shareholder value in times of falling rates and a depreciation in shareholder value for increasing rate environments. We have established a limit of +/- 4.0 years for duration of equity with an associated management action trigger of +/- 3.5 years based on a balanced consideration of market-value sensitivity and net interest-income sensitivity. Should the limit be exceeded, our policies require us to notify our board of directors' Risk Committee of such breach. We complied with our duration of equity limit at all times during the year ended December 31, 2018.

As of December 31, 2018, our duration of equity was -0.32 years, compared with -0.46 years at December 31, 2017.

MVE Sensitivity. We measure MVE sensitivity by using the percent change in MVE from base in an up or down 200 basis point parallel rate shock scenario and have established a management action trigger at a decline of 10 percent and a limit at a decline of 15 percent. Our policies require management to notify the board of director’s Risk Committee if the limit is breached. As noted in Table 43 below, we were in compliance with the limit at each of December 31, 2018, and December 31, 2017.

Duration Gap. We measure the duration gap of our assets and liabilities, including all related hedging transactions. Duration gap is the difference between the estimated durations (percentage change in market value for a 100 basis point parallel rate shock) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities, are matched. Higher numbers, whether positive or negative, indicate greater sensitivity in the MVE in response to changing interest rates. A positive duration gap means that our total assets have an aggregate duration, or sensitivity to interest-rate changes, greater than our liabilities, and a negative duration gap means that our total assets have an aggregate duration shorter than our liabilities. Our duration gap was -0.23 months at December 31, 2018, compared with -0.33 months at December 31, 2017.

Income Simulation and Repricing Gaps. To provide an additional perspective on market and interest-rate risks, we have an income-simulation model that projects adjusted net income over the ensuing 12-month period using a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and nonlinear changes to our funding curve and LIBOR. The income simulation metric is based on projections of adjusted net income divided by regulatory capital. Regulatory capital is capital stock (including mandatorily redeemable capital stock) plus total retained earnings. Projections of adjusted net income exclude a) projected prepayment penalties; b) loss on early extinguishment of debt; and c) changes in fair values from hedging activities. Beginning in 2017, changes in fair values of trading securities are included in the projections of adjusted net income. The simulations are solely based on simulated movements in the swap and the CO curve and do not reflect potential impacts of credit events, including, but not limited to, potential, additional other-than-temporary impairment charges. Management has put in place management action triggers whereby senior management is explicitly informed of instances where our projected base case return on regulatory capital (RORC) would fall below the average yield on three-month LIBOR over a 12-month horizon in a variety of assumed interest-rate shock scenarios. The results of this analysis for December 31, 2018, showed that in the base case our RORC was 203 basis points over three-month LIBOR, and in the worst case fell 117 basis points to 86 basis points over three-month LIBOR in the down 300 basis point scenario. For December 31, 2017, the results of this analysis showed that in the base case our RORC was 242 basis points over three-month LIBOR, and in the worst case fell 101 basis points to 141 basis points over three-month LIBOR in the up 300 basis point scenario. In both 2018 and 2017, our RORC spread to three-month LIBOR remained positive in all projected interest rate shock scenarios that were modeled and subject to management action triggers.


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Economic Capital Ratio Limit. We have established a limit of 4.0 percent for the ratio of the MVE to the market value of assets, referred to as the economic capital ratio. FHFA regulations require us to maintain a regulatory capital ratio of book value of regulatory capital to book value of total assets of no less than 4.0 percent, as discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 16 — Capital. We seek to ensure that the regulatory capital ratio will not fall below the 4.0 percent threshold at a future time by establishing the economic capital ratio limit at 4.0 percent. We also maintain a management action trigger of 4.5 percent for this ratio. The economic capital ratio serves as a proxy for benchmarking future capital adequacy by discounting our balance sheet and derivatives at current market expectations of future values. Our economic capital ratio was 6.1 percent as of December 31, 2018, compared with 6.0 percent as of December 31, 2017.

Our economic capital ratio was not below 4.0 percent at any time during the year ended December 31, 2018.

Table 43 - Market and Interest-Rate Risk Metrics
(dollars in millions)

 
 
December 31, 2018
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,628
 
$3,661
 
$3,829
 
$3,891
 
$3,869
 
$3,819
 
$3,755
Percent change in MVE from base
 
(6.8)%
 
(5.9)%
 
(1.6)%
 
—%
 
(0.6)%
 
(1.9)%
 
(3.5)%
MVE/BVE
 
100%
 
101%
 
105%
 
107%
 
106%
 
105%
 
103%
MVE/Par Stock
 
142%
 
143%
 
150%
 
152%
 
151%
 
149%
 
147%
Duration of Equity
 
- 0.61 years
 
-5.50 years
 
-3.03 years
 
-0.32 years
 
+1.05 years
 
+1.50 years
 
+1.90 years
Return on Regulatory Capital less 3-month LIBOR
 
0.86%
 
1.01%
 
1.67%
 
2.03%
 
2.13%
 
2.10%
 
2.01%
Net income percent change from base
 
(82.41)%
 
(64.03)%
 
(29.11)%
 
—%
 
23.63%
 
44.57%
 
64.22%
____________________________
(1)
In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.

 
 
December 31, 2017
 
 
Down 300(1)
 
Down 200(1)
 
Down 100(1)
 
Base
 
Up 100
 
Up 200
 
Up 300
MVE
 
$3,362
 
$3,345
 
$3,534
 
$3,628
 
$3,585
 
$3,484
 
$3,365
Percent change in MVE from base
 
(7.3)%
 
(7.8)%
 
(2.6)%
 
—%
 
(1.2)%
 
(4.0)%
 
(7.2)%
MVE/BVE
 
102%
 
101%
 
107%
 
110%
 
109%
 
106%
 
102%
MVE/Par Stock
 
145%
 
144%
 
152%
 
156%
 
155%
 
150%
 
145%
Duration of Equity
 
+0.75 years
 
-2.58 years
 
-4.67 years
 
-0.46 years
 
+2.26 years
 
+3.15 years
 
+3.76 years
Return on Regulatory Capital less 3-month LIBOR
 
1.62%
 
1.73%
 
2.17%
 
2.42%
 
2.23%
 
1.87%
 
1.41%
Net income percent change from base
 
(63.21)%
 
(59.42)%
 
(28.50)%
 
—%
 
18.56%
 
32.98%
 
44.98%
____________________________
(1)
In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to financial statements and supplementary data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplementary Data
 
 
 
 


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Management's Report on Internal Control over Financial Reporting

The management of the Federal Home Loan Bank of Boston is responsible for establishing and maintaining adequate internal control over financial reporting.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of internal control over financial reporting as of December 31, 2018, based on the framework established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that assessment, management concluded that, as of December 31, 2018, internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

Additionally, our internal control over financial reporting as of December 31, 2018, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

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pwcheadera01.gif
Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of the
Federal Home Loan Bank of Boston

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying statements of condition of the Federal Home Loan Bank of Boston (the "FHLBank") as of December 31, 2018 and 2017, and the related statements of operations, comprehensive income, capital, and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “financial statements”). We also have audited the FHLBank's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the FHLBank as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The FHLBank's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the FHLBank’s financial statements and on the FHLBank's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the FHLBank in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally

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accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

pwcsignature.gif

Boston, Massachusetts
March 22, 2019

We have served as the FHLBank's auditor since 1990.  










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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CONDITION
(dollars and shares in thousands, except par value)
 
December 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and due from banks
$
10,431

 
$
261,673

Interest-bearing deposits
593,199

 
246

Securities purchased under agreements to resell
6,499,000

 
5,349,000

Federal funds sold
1,500,000

 
3,450,000

Investment securities:
 
 
 

Trading securities
163,038

 
191,510

Available-for-sale securities - includes $3,025 and $1,414 pledged as collateral at December 31, 2018 and 2017, respectively that may be repledged
5,849,944

 
7,324,736

Held-to-maturity securities - includes $3,456 and $6,444 pledged as collateral at December 31, 2018 and 2017, respectively that may be repledged (a)
1,295,023

 
1,626,122

Total investment securities
7,308,005

 
9,142,368

Advances
43,192,222

 
37,565,967

Mortgage loans held for portfolio, net of allowance for credit losses of $500 at December 31, 2018 and 2017
4,299,402

 
4,004,737

Loans to other FHLBanks
—

 
400,000

Accrued interest receivable
112,751

 
94,100

Derivative assets, net
22,403

 
34,786

Other assets
55,904

 
59,069

Total Assets
$
63,593,317

 
$
60,361,946

LIABILITIES
 

 
 

Deposits
 
 
 
Interest-bearing
$
448,247

 
$
450,922

Non-interest-bearing
26,631

 
26,147

Total deposits
474,878

 
477,069

Consolidated obligations (COs):
 
 
 

Bonds
25,912,684

 
28,344,623

Discount notes
33,065,822

 
27,720,906

Total consolidated obligations
58,978,506

 
56,065,529

Mandatorily redeemable capital stock
31,868

 
35,923

Accrued interest payable
112,043

 
90,626

Affordable Housing Program (AHP) payable
83,965

 
81,600

Derivative liabilities, net
255,800

 
300,450

Other liabilities
48,898

 
45,619

Total liabilities
59,985,958

 
57,096,816

Commitments and contingencies (Note 20)


 


CAPITAL
 

 
 

Capital stock – Class B – putable ($100 par value), 25,289 shares and 22,837 shares issued and outstanding at December 31, 2018 and 2017, respectively
2,528,854

 
2,283,721

Retained earnings:
 
 
 
Unrestricted
1,084,342

 
1,041,033

Restricted
310,670

 
267,316

Total retained earnings
1,395,012

 
1,308,349

Accumulated other comprehensive loss
(316,507
)
 
(326,940
)
Total capital
3,607,359

 
3,265,130

Total Liabilities and Capital
$
63,593,317

 
$
60,361,946

_______________________________________
(a)   Fair values of held-to-maturity securities were $1,528,929 and $1,903,227 at December 31, 2018 and 2017, respectively.

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


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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF OPERATIONS
(dollars in thousands)
 
For the Year Ended December 31,
 
2018
 
2017
 
2016
INTEREST INCOME
 
 
 
 
 
Advances
$
867,431

 
$
515,074

 
$
340,903

Securities purchased under agreements to resell
77,718

 
27,486

 
11,474

Federal funds sold
108,144

 
58,642

 
22,562

Investment securities:
 
 
 
 
 
Trading securities
8,789

 
10,604

 
9,194

Available-for-sale securities
143,952

 
118,270

 
115,854

Held-to-maturity securities
77,892

 
79,723

 
87,729

Total investment securities
230,633

 
208,597

 
212,777

Mortgage loans held for portfolio
136,672

 
125,002

 
119,910

Other
5,455

 
2,088

 
538

Total interest income
1,426,053

 
936,889

 
708,164

INTEREST EXPENSE
 
 
 
 
 
Consolidated obligations:
 
 
 
 
 
Bonds
545,228

 
421,622

 
361,006

Discount notes
561,443

 
233,081

 
93,362

Total consolidated obligations
1,106,671

 
654,703

 
454,368

Deposits
5,311

 
3,615

 
679

Mandatorily redeemable capital stock
1,923

 
1,558

 
1,364

Other borrowings
38

 
10

 
4

Total interest expense
1,113,943

 
659,886

 
456,415

NET INTEREST INCOME
312,110

 
277,003

 
251,749

Reduction of provision for credit losses
(34
)
 
(96
)
 
(277
)
NET INTEREST INCOME AFTER REDUCTION OF PROVISION FOR CREDIT LOSSES
312,144

 
277,099

 
252,026

OTHER INCOME (LOSS)
 
 
 
 
 
Net other-than-temporary impairment losses on investment securities, credit portion
(532
)
 
(1,454
)
 
(3,310
)
Litigation settlements
12,769

 
20,761

 
39,211

Service fees
10,268

 
8,697

 
7,701

Net unrealized losses on trading securities
(4,515
)
 
(6,078
)
 
(4,410
)
Net gains (losses) on derivatives and hedging activities
2,336

 
551

 
(8,591
)
Other
500

 
435

 
(1,277
)
Total other income
20,826

 
22,912

 
29,324

OTHER EXPENSE
 
 
 
 
 
Compensation and benefits
47,681

 
46,799

 
45,440

Other operating expenses
24,243

 
24,342

 
23,008

Federal Housing Finance Agency (the FHFA)
3,582

 
3,800

 
3,643

Office of Finance
3,526

 
3,260

 
3,011

Other
12,870

 
10,300

 
13,644

Total other expense
91,902

 
88,501

 
88,746

INCOME BEFORE ASSESSMENTS
241,068

 
211,510

 
192,604

AHP
24,299

 
21,307

 
19,397

NET INCOME
$
216,769

 
$
190,203

 
$
173,207

 


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

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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)

 
 
For the Year Ended December 31,
 
 
2018
 
2017
 
2016
Net income
 
$
216,769

 
$
190,203

 
$
173,207

Other comprehensive income:
 
 
 
 
 
 
Net unrealized (losses) gains on available-for-sale securities
 
(30,627
)
 
14,478

 
909

Net noncredit portion of other-than-temporary impairment recoveries on held-to-maturity securities
 
29,064

 
34,161

 
37,406

Net unrealized gains relating to hedging activities
 
11,317

 
7,751

 
23,050

Pension and postretirement benefits
 
679

 
184

 
(2,282
)
Total other comprehensive income
 
10,433

 
56,574

 
59,083

Comprehensive income
 
$
227,202

 
$
246,777

 
$
232,290


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

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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CAPITAL
YEARS ENDED DECEMBER 31, 2018, 2017, and 2016
(dollars and shares in thousands)


 
 
 
 
 
 
 
 
 
Capital Stock Class B – Putable
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
 
 
Shares
 
Par Value
 
Unrestricted
 
Restricted
 
Total
 
 
Total
Capital
BALANCE, DECEMBER 31, 2015
23,367

 
$
2,336,662

 
$
934,214

 
$
194,634

 
$
1,128,848

 
$
(442,597
)
 
$
3,022,913

Comprehensive income
 
 
 
 
138,566

 
34,641

 
173,207

 
59,083

 
232,290

Proceeds from sale of capital stock
4,554

 
455,451

 
 
 
 
 
 
 
 
 
455,451

Repurchase of capital stock
(3,808
)
 
(380,767
)
 
 
 
 
 
 
 
 
 
(380,767
)
Shares reclassified to mandatorily redeemable capital stock
—

 
(40
)
 
 
 
 
 
 
 
 
 
(40
)
Cash dividends on capital stock
 
 
 
 
(85,069
)
 
 
 
(85,069
)
 
 
 
(85,069
)
BALANCE, DECEMBER 31, 2016
24,113

 
2,411,306

 
987,711

 
229,275

 
1,216,986

 
(383,514
)
 
3,244,778

Comprehensive income
 
 
 
 
152,162

 
38,041

 
190,203

 
56,574

 
246,777

Proceeds from sale of capital stock
10,677

 
1,067,674

 
 
 
 
 
 
 
 
 
1,067,674

Repurchase of capital stock
(11,866
)
 
(1,186,589
)
 
 
 
 
 
 
 
 
 
(1,186,589
)
Shares reclassified to mandatorily redeemable capital stock
(87
)
 
(8,670
)
 
 
 
 
 
 
 
 
 
(8,670
)
Cash dividends on capital stock
 
 
 
 
(98,840
)
 
 
 
(98,840
)
 
 
 
(98,840
)
BALANCE, DECEMBER 31, 2017
22,837

 
2,283,721

 
1,041,033

 
267,316

 
1,308,349

 
(326,940
)
 
3,265,130

Comprehensive income
 
 
 
 
173,415

 
43,354

 
216,769

 
10,433

 
227,202

Proceeds from sale of capital stock
18,009

 
1,800,880

 
 
 
 
 
 
 
 
 
1,800,880

Repurchase of capital stock
(15,554
)
 
(1,555,438
)
 
 
 
 
 
 
 
 
 
(1,555,438
)
Shares reclassified to mandatorily redeemable capital stock
(3
)
 
(309
)
 
 
 
 
 
 
 
 
 
(309
)
Cash dividends on capital stock
 
 
 
 
(130,106
)
 
 
 
(130,106
)
 
 
 
(130,106
)
BALANCE, DECEMBER 31, 2018
25,289

 
$
2,528,854

 
$
1,084,342

 
$
310,670

 
$
1,395,012

 
$
(316,507
)
 
$
3,607,359


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





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FEDERAL HOME LOAN BANK OF BOSTON
STATEMENTS OF CASH FLOWS
(dollars in thousands)


 
For the Year Ended December 31,
 
2018
 
2017
 
2016
OPERATING ACTIVITIES
 

 
 

 
 
Net income
$
216,769

 
$
190,203

 
$
173,207

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
 
 
Depreciation and amortization
(1,192
)
 
(12,892
)
 
(40,332
)
Reduction of provision for credit losses
(34
)
 
(96
)
 
(277
)
Change in net fair-value adjustments on derivatives and hedging activities
36,176

 
8,554

 
25,341

Net other-than-temporary impairment losses on investment securities, credit portion
532

 
1,454

 
3,310

Other adjustments
6,335

 
4,637

 
9,492

Net change in:
 

 
 
 
 
Market value of trading securities
4,515

 
6,078

 
4,410

Accrued interest receivable
(18,651
)
 
(9,452
)
 
(218
)
Other assets
(2,627
)
 
(3,147
)
 
(1,444
)
Accrued interest payable
21,417

 
9,804

 
(446
)
Other liabilities
7,170

 
5,883

 
(7,334
)
Total adjustments
53,641

 
10,823

 
(7,498
)
Net cash provided by operating activities
270,410

 
201,026

 
165,709

 
 
 
 
 
 
INVESTING ACTIVITIES
 

 
 

 
 
Net change in:
 

 
 

 
 
Interest-bearing deposits
(629,887
)
 
52,274

 
(16,949
)
Securities purchased under agreements to resell
(1,150,000
)
 
650,000

 
701,000

Federal funds sold
1,950,000

 
(750,000
)
 
(580,000
)
Loans to other FHLBanks
400,000

 
(400,000
)
 
—

Trading securities:
 

 
 

 
 
Proceeds
779,652

 
1,032,652

 
12,692

Purchases
(749,072
)
 
(618,051
)
 
(399,155
)
Available-for-sale securities:
 

 
 

 
 
Proceeds from long-term
1,409,776

 
1,462,091

 
1,299,593

Purchases of long-term
(12,800
)
 
(2,222,738
)
 
(1,618,180
)
Held-to-maturity securities:
 

 
 

 
 
Proceeds from long-term
385,610

 
568,279

 
589,470

Advances to members:
 

 
 

 
 
Repaid
652,931,105

 
487,707,464

 
345,626,842

Originated
(658,551,866
)
 
(486,239,305
)
 
(348,770,289
)
Mortgage loans held for portfolio:
 

 
 

 
 
Proceeds
414,690

 
472,636

 
587,203

Purchases
(719,845
)
 
(794,914
)
 
(715,274
)
Other investing activities
1,454

 
748

 
1,694

Net cash (used in) provided by investing activities
(3,541,183
)
 
921,136

 
(3,281,353
)
 
 
 
 
 
 
FINANCING ACTIVITIES
 

 
 

 
 
Net change in deposits
(2,071
)
 
(5,594
)
 
(339
)
Net payments on derivatives with a financing element
—

 
(4,101
)
 
(13,268
)
Net proceeds from issuance of consolidated obligations:
 

 
 

 
 
Discount notes
198,660,164

 
170,645,541

 
163,426,877


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Bonds
10,188,427

 
10,655,859

 
18,313,281

Payments for maturing and retiring consolidated obligations:
 

 
 

 
 
Discount notes
(193,351,448
)
 
(172,999,084
)
 
(161,858,661
)
Bonds
(12,586,510
)
 
(9,449,955
)
 
(16,466,706
)
Proceeds from issuance of capital stock
1,800,880

 
1,067,674

 
455,451

Payments for repurchase of capital stock
(1,555,438
)
 
(1,186,589
)
 
(380,767
)
Payments for redemption of mandatorily redeemable capital stock
(4,364
)
 
(5,434
)
 
(9,342
)
Cash dividends paid
(130,109
)
 
(98,837
)
 
(85,069
)
Net cash provided by (used in) financing activities
3,019,531

 
(1,380,520
)
 
3,381,457

Net (decrease) increase in cash and due from banks
(251,242
)
 
(258,358
)
 
265,813

Cash and due from banks at beginning of the year
261,673

 
520,031

 
254,218

Cash and due from banks at end of the year
$
10,431

 
$
261,673

 
$
520,031

Supplemental disclosures:
 
 
 
 
 
Interest paid
$
1,084,131

 
$
667,629

 
$
505,267

AHP payments
$
17,729

 
$
18,628

 
$
18,575

Noncash receipt of trading securities
$
6,624

 
$
—

 
$
—

Noncash transfers of mortgage loans held for portfolio to other assets
$
1,438

 
$
2,618

 
$
3,112



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


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FEDERAL HOME LOAN BANK OF BOSTON
NOTES TO FINANCIAL STATEMENTS

Note 1 — Background Information

We are a federally chartered corporation and one of 11 district Federal Home Loan Banks (the FHLBanks or the FHLBank System). The FHLBanks are government-sponsored enterprises (GSEs) that were organized under the Federal Home Loan Bank Act of 1932, as amended (FHLBank Act), to serve the public by enhancing the availability of credit for residential mortgages, targeted community development and economic growth. Each FHLBank operates in a specifically defined geographic territory, or district. We provide a readily available, competitively priced source of funds to our members and certain nonmember institutions located within the six New England states, which are Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont. Certain regulated financial institutions, including community development financial institutions (CDFIs) and insurance companies with their principal places of business in New England and engaged in residential housing finance, may apply for membership. Additionally, certain nonmember institutions (referred to as housing associates) that meet applicable legal criteria may also borrow from us. While eligible to borrow, housing associates are not eligible to become members and, therefore, are not allowed to hold capital stock. As we are a cooperative, current and former members own all of our outstanding capital stock and may receive dividends on their investment. We do not have any wholly or partially owned subsidiaries, and we do not have an equity position in any partnerships, corporations, or off-balance-sheet special-purpose entities.

All members must purchase our stock as a condition of membership and as a condition of engaging in certain business activities with us.

The FHFA, our primary regulator, is the independent federal regulator of the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac), and Federal National Mortgage Association (Fannie Mae). A purpose of the FHFA is to ensure that the FHLBanks operate in a safe and sound manner, including maintenance of adequate capital and internal controls. In addition, the FHFA is responsible for ensuring that 1) the operations and activities of each FHLBank foster liquid, efficient, competitive, and resilient national housing finance markets, 2) each FHLBank complies with the title and the rules, regulations, guidelines, and orders issued under the Housing and Economic Recovery Act (HERA) and the authorizing statutes, 3) each FHLBank carries out its statutory mission through only activities that are authorized under and consistent with HERA and the authorizing statutes, and 4) the activities of each FHLBank and the manner in which such FHLBank is operated is consistent with the public interest. Each FHLBank is a separate legal entity with its own management, employees, and board of directors.

The Office of Finance is the FHLBanks' fiscal agent and is a joint office of the FHLBanks established to facilitate the issuance and servicing of the FHLBanks' COs and to prepare the combined quarterly and annual financial reports of all the FHLBanks. As provided by the FHLBank Act, and applicable regulations, COs are backed only by the financial resources of all the FHLBanks and are our primary source of funds. Deposits, other borrowings, and the issuance of capital stock, which is principally held by our current and former members, provide other funds. We primarily use these funds to provide loans, called advances, to invest in single-family mortgage loans under the Mortgage Partnership Finance® (MPF®) program, and also to fund other investments. In addition, we offer correspondent services, such as wire-transfer, securities-safekeeping, and settlement services.

"Mortgage Partnership Finance", "MPF" and MPF Xtra are registered trademarks of the FHLBank of Chicago.

Note 2 — Summary of Significant Accounting Policies

Use of Estimates

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. The most significant of these estimates include but are not limited to, accounting for derivatives, fair-value estimates, and deferred premium/discounts associated with prepayable assets. Actual results could differ from these estimates.

Fair Value

We determine the fair-value amounts recorded on the statement of condition and in the note disclosures for the periods presented by using available market and other pertinent information, and reflect our best judgment of appropriate valuation methods. Although we use our best judgment in estimating the fair value of these financial instruments, there are inhe

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rent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See Note 19 — Fair Values for more information.

Financial Instruments Meeting Netting Requirements

We present certain financial instruments on a net basis when they are subject to a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these financial instruments, we have elected to offset our asset and liability positions, as well as cash collateral received or pledged, when we have met the netting requirements.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. See Note 12 — Derivatives and Hedging Activities for additional information regarding these agreements.

Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. At December 31, 2018 and 2017, we had $6.5 billion and $5.3 billion in securities purchased under agreements to resell. There were no offsetting amounts related to these securities at December 31, 2018 and 2017.

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

Interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold provide short-term liquidity and are carried at cost. Federal funds sold consist of short-term, unsecured loans transacted with counterparties that we consider to be of investment quality. Securities purchased under agreements to resell are treated as short-term collateralized loans that are classified as assets in the statement of condition. These securities purchased under agreements to resell are held in safekeeping in our name by third-party custodians, which we have approved. If the fair value of the underlying securities decreases below the fair value required as collateral, the counterparty has the option to provide additional securities in safekeeping in our name in an amount equal to the decrease or remit cash in such amount. If the counterparty defaults on this obligation, we will decrease the dollar value of the resale agreement accordingly. We have not sold or repledged the collateral received on securities purchased under agreements to resell. Securities purchased under agreements to resell averaged $4.0 billion during 2018 and $3.0 billion during 2017, and the maximum amount outstanding at any month-end during 2018 and 2017 was $6.5 billion and $5.3 billion, respectively.

Investment Securities

We classify investments as trading, available-for-sale, or held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.

Trading. Securities classified as trading are held for liquidity purposes and carried at fair value. We record changes in the fair value of these investments through other income as net unrealized gains (losses) on trading securities. FHFA regulations prohibit trading in or the speculative use of these instruments and limit the credit risks we have from these instruments.

Available-for-sale. We classify certain investments that are not classified as held-to-maturity or trading as available-for-sale and carry them at fair value. Changes in fair value of available-for-sale securities not being hedged by derivatives, or in an economic hedging relationship, are recorded in other comprehensive income (loss) as net unrealized gains (losses) on available-for-sale securities. For available-for-sale securities that have been hedged under fair-value hedge designations, we record the portion of the change in the fair value of the investment related to the risk being hedged in other income as net gains (losses) on derivatives and hedging activities together with the related change in the fair value of the derivative. The remainder of the change in the fair value of the investment is recorded in other comprehensive income (loss) as net unrealized gains (losses) on available-for-sale securities.

Held-to-Maturity. Certain investments for which we have both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at cost, adjusted for periodic principal repayments, amortization of premiums and accretion of discounts using the level-yield method, other-than-temporary impairment, and accretion of the noncredit portion of other-than-temporary impairment recognized in other comprehensive income (loss).



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Premiums and Discounts. We amortize premiums and accrete discounts on mortgage-backed securities (MBS) using the level-yield method over the estimated lives of the securities. This method requires a retrospective adjustment of the effective yield each time we change the estimated life, based on actual prepayments received and changes in expected prepayments, as if the new estimate had been known since the original acquisition date of the securities. We estimate prepayment speeds on each individual security using the most recent three months of historical constant prepayment rates, as available, or may subscribe to third-party data services that provide estimates of future cash flows, from which we determine expected asset lives. We amortize premiums and accrete discounts on other investments using the level-yield method to the contractual maturity of the securities.

Investment Securities – Other-than-Temporary Impairment

We evaluate our individual available-for-sale and held-to-maturity securities in an unrealized loss position for other-than-temporary impairment each quarter. An investment is considered impaired when its fair value is less than its amortized cost. We consider other-than-temporary impairment to have occurred if we:

•
have an intent to sell the investment;
•
believe it is more likely than not that we will be required to sell the investment before the recovery of its amortized cost based on available evidence; or
•
do not expect to recover the entire amortized cost of the debt security.

Recognition of Other-than-Temporary Impairment. If either of the first two conditions above is met, we recognize an other-than-temporary impairment charge in earnings equal to the entire difference between the security's amortized cost and its fair value as of the statement of condition date.

For securities in an unrealized loss position that meet neither of the first two conditions (excluding agency MBS) and for each of our private-label MBS, we perform an analysis to determine if we will recover the entire amortized cost of each of these securities. The present value of the cash flows expected to be collected is compared with the amortized cost of the debt security to determine whether a credit loss exists. If the present value of the cash flows expected to be collected is less than the amortized cost of the debt security, the security is deemed to be other-than-temporarily impaired and the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost and fair value in earnings, only the amount of the impairment representing the credit loss (that is, the credit component) is recognized in earnings, while the amount related to all other factors (that is, the noncredit component) is recognized in other comprehensive income (loss). For a security that is determined to be other-than-temporarily impaired, in the event that the present value of the cash flows expected to be collected is less than the fair value of the security, the credit loss on the security is limited to the amount of that security's unrealized losses.

In performing a detailed cash-flow analysis, we estimate the cash flows expected to be collected. If this estimate results in a present value of expected cash flows (discounted at the security's effective yield) that is less than the amortized cost basis of a security (that is, a credit loss exists), other-than-temporary impairment is considered to have occurred. For determining the present value of variable-rate and hybrid private-label residential MBS, we use the effective interest rate derived from a variable-rate index, such as one-month London Interbank Offered Rate (LIBOR), plus the contractual spread, plus or minus a fixed-spread adjustment when there is an existing discount or premium on the security. Because the implied forward yield curve of a selected variable-rate index changes over time, the effective interest rates derived from that index will also change over time and would therefore impact the present value of the subject security.

Accounting for Other-than-Temporary Impairment Recognized in Other Comprehensive Income (Loss). For subsequent accounting of other-than-temporarily impaired securities, we record an additional other-than-temporary impairment if the present value of cash flows expected to be collected is less than the amortized cost of the security. The total amount of this additional other-than-temporary impairment (both credit and non-credit, if any) is determined as the difference between the security's amortized cost less the amount of other-than-temporary impairment recognized in other comprehensive income (loss) prior to the determination of this additional other-than-temporary impairment and its fair value. Any additional credit loss is limited to that security's unrealized losses, or the difference between the security's amortized cost and its fair value as of the statement of condition date. This additional credit loss, up to the amount in other comprehensive income (loss) related to the security, is reclassified out of other comprehensive income (loss) and recognized in earnings. Any credit loss in excess of the amount reclassified out of other comprehensive income (loss) is also recognized in earnings.

Interest Income Recognition. Upon subsequent evaluation of a debt security when there is no additional other-than-temporary impairment, we adjust the accretable yield on a prospective basis if there is a significant increase in the security's expected

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future cash flows. This adjusted yield is used to calculate the amount to be recognized into income over the remaining life of the security so as to match the amount and timing of future cash flows expected to be collected. Subsequent changes in estimated cash flows that are deemed significant will change the accretable yield on a prospective basis. For debt securities classified as held-to-maturity, the other-than-temporary impairment recognized in other comprehensive income (loss) is accreted to the carrying value of each security on a prospective basis, based on the amount and timing of future estimated cash flows (with no effect on earnings unless the security is subsequently sold or there are additional decreases in cash flows expected to be collected). The estimated cash flows and accretable yield are re-evaluated each quarter.

Advances

We report advances at amortized cost. Advances carried at amortized cost are reported net of premiums/discounts and any hedging adjustments, as discussed in Note 9 — Advances. We generally record our advances at par. However, we may record premiums or discounts on advances in the following cases:

•
Advances may be acquired from another FHLBank when one of our members acquires a member of another FHLBank. In these cases, we may purchase the advances from the other FHLBank at a price that results in a fair market yield for the acquired advance.
•
In the event that a hedge of an advance is discontinued, the cumulative hedging adjustment is recorded as a premium or discount and amortized over the remaining life of the advance.
•
When the prepayment of an advance is followed by disbursement of a new advance and the transactions effectively represent a modification of the previous advance, the prepayment fee received is deferred, recorded as a discount to the modified advance, and accreted over the life of the new advance.
•
When an advance is modified under our advance restructuring program and our analysis of the restructuring concludes that the transaction is an extinguishment of the prior loan rather than a modification, the deferred prepayment fee is recognized into income immediately, recorded as premium on the new advance, and amortized over the life of the new advance.
•
When we make an AHP advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and our related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP advance.
•
Advances issued under our Jobs for New England (JNE) and Helping to House New England (HHNE) programs have an interest rate at a significant discount to market rates. Due to the below market interest rate, we record a discount on the advance and an interest rate subsidy expense at the time that we transact the advance. The subsidy expense is recorded in other expense in the statement of operations.

We amortize the premiums and accrete the discounts on advances to interest income using the level-yield method. We record interest on advances to interest income as earned.

Prepayment Fees. We charge borrowers a prepayment fee when they prepay certain advances before the original maturity. We record prepayment fees net of hedging fair-value adjustments included in the carrying value of the advance as advances interest income on the statement of operations.

Advance Modifications. In cases in which we fund a new advance concurrently with or within a short period of time of the prepayment of an existing advance by the same member, we evaluate whether the new advance meets the accounting criteria to qualify as a modification of the existing advance or whether it constitutes a new advance. We compare the present value of cash flows on the new advance with the present value of cash flows remaining on the existing advance. If there is at least a 10 percent difference in the present value of cash flows or if we conclude the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the advance's original contractual terms, the advance is accounted for as a new advance. In all other instances, the new advance is accounted for as a modification.

If a new advance qualifies as a modification of the existing advance, the net prepayment fee on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized to interest income over the life of the modified advance using the level-yield method. This amortization is recorded in advance-interest income. If the modified advance is hedged, changes in fair value are recorded after the amortization of the basis adjustment. This amortization results in offsetting amounts being recorded in net interest income and net gains (losses) on derivatives and hedging activities in other income.

For prepaid advances that were hedged and met the hedge-accounting requirements, we terminate the hedging relationship upon prepayment and record the prepayment fee net of the hedging fair-value adjustment in the basis of the advance as advance-interest income. If we fund a new advance to a member concurrent with or within a short period of time after the

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prepayment of a previous advance to that member, we evaluate whether the new advance qualifies as a modification of the original hedged advance. If the new advance qualifies as a modification of the original hedged advance, the hedging fair-value adjustment and the prepayment fee are included in the carrying amount of the modified advance and are amortized in interest income over the life of the modified advance using the level-yield method. If the modified advance is also hedged and the hedge meets the hedging criteria, the modified advance is marked to fair value after the modification, and subsequent fair-value changes are recorded in other income as net gains (losses) on derivatives and hedging activities.

If a new advance does not qualify as a modification of an existing advance, prepayment of the existing advance is treated as an advance termination and any prepayment fee, net of hedging adjustments, is recorded to advance-interest income in the statement of operations.

Commitment Fees

We record commitment fees for standby letters of credit to members as deferred fee income when received, and amortize these fees on a straight-line basis to service-fees income in other income over the term of the standby letter of credit. Based upon past experience, we believe the likelihood of standby letters of credit being drawn upon is remote.

Mortgage Loans Held for Portfolio

We participate in the MPF program through which we invest in conventional, residential, fixed-rate mortgage loans (conventional mortgage loans) and government-insured or -guaranteed residential fixed-rate mortgage loans (government mortgage loans) that are purchased from participating financial institutions (see Note 10 — Mortgage Loans Held for Portfolio). We classify our investments in mortgage loans for which we have the intent and ability to hold for the foreseeable future or until maturity or payoff as held for portfolio. As of December 31, 2018, all our investments in mortgage loans are held for portfolio. Accordingly, these investments are reported at their principal amount outstanding net of unamortized premiums, discounts, unrealized gains and losses from investments initially classified as mortgage loan commitments, direct write-downs, and the allowance for credit losses on mortgage loans.

Premiums and Discounts. We compute the amortization of mortgage-loan-origination fees (premiums and discounts) as interest income using the level-yield method over the contractual term to maturity of each individual loan, which results in income recognition in a manner that is effectively proportionate to the actual repayment behavior of the underlying assets and reflects the contractual terms of the assets without regard to changes in estimated prepayments based on assumptions about future borrower behavior.

Credit-Enhancement Fees. For conventional mortgage loans, participating financial institutions retain a portion of the credit risk on the loans in which we invest by providing credit-enhancement protection either through a direct liability to pay credit losses up to a specified amount or through a contractual obligation to provide supplemental mortgage insurance. Participating financial institutions are paid a credit-enhancement fee for assuming credit risk and in some instances all or a portion of the credit-enhancement fee may be performance-based. Credit-enhancement fees are paid monthly and are determined based on the remaining unpaid principal balance of the pertinent MPF loans. The required credit-enhancement amount varies depending on the MPF product. Credit-enhancement fees are recorded as an offset to mortgage-loan-interest income. To the extent that losses in the current month exceed performance-based credit-enhancement fees accrued, the remaining losses may be recovered from future performance-based credit-enhancement fees payable to the participating financial institution.

Other Fees. We record other nonorigination fees in connection with our MPF program activities in other income. Such fees include delivery-commitment-extension fees, pair-off fees, price-adjustment fees, and counterparty fees in connection with MPF products under which we facilitate third party investment in loans (non-investment MPF products) such as with
the MPF Xtra® product. Delivery-commitment-extension fees are charged when a participating financial institution requests to extend the period of the delivery commitment beyond the original stated expiration. Pair-off fees represent a make-whole provision; they are received when the amount funded under a delivery commitment is less than a certain threshold (under-delivery) of the delivery-commitment amount. Price-adjustment fees are received when the amount funded is greater than a certain threshold (over-delivery) of the delivery-commitment amount. To the extent that pair-off fees relate to under-deliveries of loans, they are recorded in service fee income. Fees related to over-deliveries represent purchase-price adjustments to the related loans acquired and are recorded as part of the carrying value of the loan. The FHLBank of Chicago pays us a counterparty fee for the costs and expenses of marketing activities for loans originated for sale under non-investment MPF products.

Mortgage-Loan Participations. We may purchase and sell participations in MPF loans from other FHLBanks from time to time. References to our investments in mortgage loans throughout this report include any participation interests we own.

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Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date and the amount of loss can be reasonably estimated. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. We have established an allowance methodology for each of our portfolio segments. See Note 11 – Allowance for Credit Losses for additional information.

Nonaccrual Loans. We place conventional mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due. When a conventional mortgage loan is placed on nonaccrual status, accrued but uncollected interest is reversed against interest income in the current period. We generally record cash payments received on nonaccrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless we consider the collection of the remaining principal amount due to be doubtful. If we consider the collection of the remaining principal amount to be doubtful, cash payments received are applied first solely to 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 recording interest income. A loan on nonaccrual status may be restored to accrual status when the collection of the contractual principal and interest is less than 90 days past due. We do not place government mortgage loans on nonaccrual status when the collection of the contractual principal or interest is 90 days or more past due because of the U.S. government guarantee of the loan and the contractual obligations of each related servicer, as more fully discussed in Note 11 – Allowance for Credit Losses.

Collateral-dependent Loans. An impaired loan is considered collateral-dependent if repayment is expected to be provided
solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. A loan that
is considered collateral-dependent is measured for impairment based on the fair value of the underlying property less estimated selling costs, with any shortfall recognized as an allowance for loan loss or charged-off. Interest income on impaired loans is recognized in the same manner as non-accrual loans.

Charge-Off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. We evaluate whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. We charge off the portion of outstanding conventional mortgage loan balances in excess of fair value of the underlying property, less cost to sell and adjusted for any available credit enhancements for loans that are 180 or more days past due, when the borrower has filed for bankruptcy protection and the loan is at least 30 days past due, or when there is evidence of fraud.

Troubled Debt Restructurings

We consider a troubled debt restructuring of a financing receivable to have occurred when we grant a concession to a borrower that we would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties. We place conventional mortgage loans that are deemed to be troubled debt restructurings as a result of our modification program on nonaccrual when payments are 60 days or more past due.

Real Estate Owned

Real-estate-owned property (REO) includes assets that have been received in satisfaction of debt or as a result of actual foreclosures. REO is recorded as other assets in the statement of condition and is carried at the lower of cost or fair value less estimated selling costs. At December 31, 2018 and 2017, we had $818,000 and $1.8 million, respectively, in assets classified as REO. Fair value is derived from third-party valuations of the property. If the fair value of the REO less estimated selling costs is less than the recorded investment in the MPF loan at the date of transfer, we recognize a charge-off to the allowance for credit losses. Subsequent realized gains and realized or unrealized losses are included in other income (loss) in the statement of operations.

Derivatives


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All derivatives are recognized on the statement of condition at fair value and are reported as either derivative assets or derivative liabilities, net of cash collateral, and accrued interest received from or pledged to clearing members and/or counterparties. We offset fair-value amounts recognized for derivatives and fair-value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) arising from derivatives recognized at fair value executed with the same clearing member and/or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Derivative assets and derivative liabilities reported on the statement of condition also include net accrued interest. Cash flows associated with derivatives are reflected as cash flows from operating activities in the statement of cash flows unless the derivative meets the criteria to be a financing derivative.

Each derivative is designated as one of the following:

•
a qualifying hedge of the change in fair value of a recognized asset or liability or an unrecognized firm commitment (a fair value hedge);
•
a qualifying hedge of a forecasted transaction (a cash-flow hedge); or
•
a nonqualifying hedge of an asset or liability (an economic hedge) for asset-liability-management purposes.

We utilize two derivatives clearing organizations (DCOs), for all cleared derivative transactions, Chicago Mercantile Exchange, Inc. (CME Inc.) and LCH Limited (LCH Ltd.). Based upon certain amendments, effective January 3, 2017, made by CME Inc. to its rulebook, we began to characterize variation margin payments related to CME Inc. contracts as daily settlement payments, rather than collateral. However, throughout 2017, we continued to characterize our variation margin related to LCH Ltd. contracts as cash collateral. We began to characterize variation margin payments related to LCH Ltd. contracts as daily settlement payments, rather than cash collateral, based upon a change effective January 16, 2018, to LCH Ltd.'s rulebook. At both DCOs, initial margin has been and continues to be considered cash collateral.

Accounting for Fair-Value and Cash-Flow Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they qualify for fair-value or cash-flow hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk are recorded either in earnings in the case of fair-value hedges or other comprehensive income (loss) in the case of cash-flow hedges. For cash flow hedges, we measure effectiveness using the hypothetical derivative method, which compares the cumulative change in fair value of the actual derivative designated as the hedging instrument to the cumulative change in fair value of a hypothetical derivative having terms that identically match the critical terms of the hedged forecasted transaction.

Our approaches to hedge accounting are:

•
long-haul hedge accounting, which generally requires us to formally assess (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of hedged items or forecasted transaction attributable to the hedged risk and whether those derivatives may be expected to remain highly effective in future periods; and
•
short-cut hedge accounting, which can be used for transactions for which the assumption can be made that the change in fair value of a hedged item, due to changes in the benchmark rate, exactly offsets the change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the interest-rate swap is considered to be highly effective at achieving offsetting changes in fair values or cash flows of the hedged asset or liability. Beginning in November 2014, to streamline certain operational processes, we discontinued the use of short-cut hedge accounting for new hedge relationships entered into after that date; short-cut hedge relationships entered into prior to that date will continue as short-cut hedge relationships until they mature or are terminated.

Derivatives that are used in fair-value hedges are typically executed at the same time as the hedged items, and we designate the hedged item in a qualifying hedge relationship as of the trade date. We then record the changes in fair value of the derivative and the hedged item beginning on the trade date.

•
Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk (including changes that reflect losses or gains on firm commitments), are recorded in other income (loss) as net gains (losses) on derivatives and hedging activities.

•
Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge, to the extent that the hedge is highly effective, are recorded in other comprehensive income (loss), a component of capital, until earnings are affected by the variability of the cash flows of the hedged transaction.

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•
For both fair-value and cash-flow hedges, any hedge ineffectiveness (which represents the amount by which the changes in the fair value of the derivative differ from the change in the fair value of the hedged item or the variability in the cash flows of the forecasted transaction attributable to the hedged risk) is recorded in other income (loss) as net gains (losses) on derivatives and hedging activities.

Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or nonspecific assets, liabilities, or firm commitments that does not qualify or was not designated for fair-value or cash-flow hedge accounting, but is an acceptable hedging strategy under our risk-management policy. These economic hedging strategies also comply with FHFA regulatory requirements prohibiting speculative derivative transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in income but not offset by corresponding changes in the fair value of the economically hedged assets, liabilities, or firm commitments. As a result, we recognize only the net interest and the change in fair value of these derivatives in other income (loss) as net gains (losses) on derivatives and hedging activities with no offsetting fair-value adjustments for the economically hedged assets, liabilities, or firm commitments.

Accrued Interest Receivable and Payable. The differential between accrual of interest receivable and payable on derivatives designated as a fair-value hedge or as a cash-flow hedge is recognized through adjustments to the interest income or interest expense of the designated hedged investment securities, advances, COs, or other financial instruments. The differential between accrual of interest receivable and payable on economic hedges is recognized in other income (loss), along with changes in fair value of these derivatives, as net gains (losses) on derivatives and hedging activities.

Discontinuance of Hedge Accounting. We may discontinue hedge accounting prospectively when:

•
we determine that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item attributable to the hedged risk (including hedged items such as firm commitments or forecasted transactions);
•
the derivative and/or the hedged item expires or is sold, terminated, or exercised;
•
it is no longer probable that the forecasted transaction will occur in the originally expected period or within the following two months;
•
a hedged firm commitment no longer meets the definition of a firm commitment; or
•
we determine that designating the derivative as a hedging instrument is no longer appropriate.

If hedge accounting is discontinued because we determine that the derivative no longer qualifies as an effective fair-value hedge of an existing hedged item, we either terminate the derivative or continue to carry the derivative on the statement of condition at its fair value and cease to adjust the hedged asset or liability for changes in fair value. We will then begin to amortize the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using the level-yield method.

If hedge accounting is discontinued because we determine that the derivative no longer qualifies as an effective cash-flow hedge of an existing hedged item, we will continue to carry the derivative on the statement of condition at its fair value and amortize the cumulative other comprehensive loss adjustment to earnings when earnings are affected by the existing hedged item.

If it is no longer probable that a forecasted transaction will occur by the end of the originally expected period or within two months thereafter, we immediately recognize in earnings the gain or loss that was in accumulated other comprehensive loss.

If hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, we will continue to carry the derivative on the statement of condition at its fair value, removing from the statement of condition any asset or liability that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

Embedded Derivatives. We may issue debt, make advances, or purchase financial instruments in which a derivative is embedded. Upon execution of these transactions, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the advance, debt, or other financial instrument (the host contract) and whether a separate, nonembedded instrument with the same terms as the embedded instrument would meet the definition of a derivative. When we determine that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is sepa

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rated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument. If the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current earnings (for example, an investment security classified as trading, as well as hybrid financial instruments) or if we cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract, the entire contract is carried on the statement of condition at fair value and no portion of the contract is designated as a hedging instrument. At December 31, 2018, and 2017, we had certain advances with embedded features that met the requirement to be separated from the host contract and designated the embedded features as stand-alone derivatives. The value of the embedded derivatives is included in total advances on the statement of condition. See Note 9 — Advances for the fair value of these embedded derivatives.

Premises, Software, and Equipment

We record premises, software, and equipment at cost less accumulated depreciation and amortization and compute depreciation on a straight-line basis over estimated useful lives ranging from three years to 10 years. We amortize leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. We capitalize improvements and major renewals but expense ordinary maintenance and repairs when incurred. We include gains and losses on disposal of premises, software, and equipment in other income (loss) on the statement of operations. The cost of purchased software and certain costs incurred in developing computer software for internal use are capitalized and amortized over future periods.

Consolidated Obligations

We record COs at amortized cost.

Discounts and Premiums. We accrete discounts and amortize premiums on COs to interest expense using the level-yield method over the contractual term to maturity of the CO.

Concessions on COs. We pay concessions to dealers in connection with the issuance of certain COs. The Office of Finance prorates the amounts paid to dealers based upon the percentage of debt issued that we assumed. We record concessions paid on COs as a direct reduction from their carrying amounts, consistent with the presentation of discounts on COs. These dealer concessions are amortized using the level-yield method over the contractual term to maturity of the COs. The amortization of those concessions is included in CO interest expense on the statement of operations.

Mandatorily Redeemable Capital Stock

We reclassify stock subject to redemption from equity to a liability after a member exercises a written redemption request, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or other involuntary termination from membership, since the shares meet the definition of a mandatorily redeemable financial instrument upon such instances. Member shares meeting this definition are reclassified to a liability at fair value. Dividends declared on mandatorily redeemable capital stock are accrued at the expected dividend rate for Class B stock and reflected as interest expense on the statement of operations. The repayment of these mandatorily redeemable financial instruments is reflected as cash outflows in the financing activities section of the statement of cash flows once settled.

We do not take into consideration our members' right to cancel a redemption request in determining when shares of capital stock should be classified as a liability because such cancellation would be subject to a cancellation fee equal to two percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.

Restricted Retained Earnings

The joint capital enhancement agreement, as amended (the Joint Capital Agreement) requires each FHLBank to contribute 20 percent of its quarterly net income to a separate restricted retained earnings account at that FHLBank until that account balance equals at least one percent of that FHLBank's average balance of outstanding COs (excluding fair-value adjustments) for the previous quarter. Restricted retained earnings are not available to pay dividends, and we present them separate from other retained earnings on the statement of condition.

Litigation Settlements


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Litigation settlement gains, net of related legal expenses, are recorded in other income (loss). A litigation settlement gain is considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, a litigation settlement gain is considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the statement of operations. The related legal expenses are contingent-based fees and are only incurred and recorded upon a litigation settlement gain.

FHFA Expenses

We fund a portion of the costs of operating the FHFA. The portion of the FHFA's expenses and working capital fund paid by the FHLBanks is allocated among the FHLBanks based on the ratio of each FHLBank's minimum required regulatory capital to the aggregate minimum required regulatory capital of every FHLBank. We must pay an amount equal to one-half of our annual assessment twice each year.

Office of Finance Expenses

Each FHLBank's proportionate share of Office of Finance operating and capital expenditures has been calculated using a formula based upon the following components: (1) two-thirds based upon each FHLBank's share of total COs outstanding and (2) one-third divided equally among the FHLBanks.

Assessments

Affordable Housing Program. The FHLBank Act requires us to establish and fund an AHP based on positive annual net earnings, providing grants to members to assist in the purchase, construction, or rehabilitation of housing for very low- to moderate-income households. We charge the required funding for the AHP to earnings and establish a liability, except when annual net earnings are zero or negative, in which case there is no requirement to fund an AHP. We also issue AHP advances at interest rates below the customary interest rate for nonsubsidized advances. A discount on the AHP advance and charge against the AHP liability is recorded for the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP advance rate and our related cost of funds for comparable maturity funding. The discount on AHP advances is accreted to interest income on advances using the level-yield method over the life of the advance. See Note 15 — Affordable Housing Program for additional information.

Cash Flows

In the statement of cash flows, we consider noninterest bearing cash and due from banks as cash and cash equivalents. Federal funds sold and interest-bearing deposits are not treated as cash equivalents for purposes of the statement of cash flows, but are instead treated as short-term investments and are reflected in the investing activities section of the statement of cash flows.

Related-Party Activities

We define related parties as members who owned 10 percent or more of the voting interests of our outstanding capital stock at any time during the year. See Note 21 — Transactions with Shareholders for additional information.

Segment Reporting

We report on an enterprise-wide basis. The enterprise-wide method of evaluating our financial information reflects the manner in which the chief operating decision-maker manages the business.

Reclassification

Certain amounts in the 2017 and 2016 financial statements have been reclassified to conform to the financial statement presentation for the year ended December 31, 2018.

Note 3 — Recently Issued and Adopted Accounting Guidance

Effective January 1, 2018


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Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On March 10, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that employers disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This guidance resulted in the reclassification of $1.4 million and $1.6 million, respectively, of non-service cost components of net benefit cost from compensation and benefits expense to other non-interest expense in the statements of operations for the years ended December 31, 2017 and 2016.

Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance requires, among other things, that we:

•
Present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when we elect to measure the liability at fair value in accordance with the fair value option for financial instruments.
•
Present separately financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statement of condition or the accompanying notes to the financial statements.
•
Discontinue the disclosure of the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statement of condition.

This guidance did not have any effect on our financial condition, results of operations, or cash flows. In accordance with the updated guidance, we have made insignificant revisions to Note 19 — Fair Values to specify the measurement category for each form of financial asset (that is, securities or loans and receivables).

Effective January 1, 2019

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. On October 25, 2018, the FASB issued amended guidance to permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. This guidance became effective for us on January 1, 2019. Upon adoption, SOFR became an eligible benchmark interest rate which we may elect to apply to future hedge relationships.

Targeted Improvements to Accounting for Hedging Activities. On August 28, 2017, the FASB issued amended guidance to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:

•
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception;
•
Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged;
•
Consideration of only how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk;
•
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate;
•
For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, an entity can designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method) into a hedging relationship;
•
An entity can perform subsequent assessments of hedge effectiveness qualitatively in instances where initial quantitative testing is required; and

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•
For financial instruments eligible to be designated as a hedged item under the last-of-layer method, a one-time reclassification of prepayable financial instruments from held-to-maturity to available-for-sale at the date of adoption is permitted.

This guidance became effective for us on January 1, 2019. For all cash flow hedges existing on the date of adoption, this guidance will be applied through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the year of adoption. The amended presentation and disclosure guidance is required only prospectively. We have evaluated this guidance and it is not expected to affect our application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul effectiveness testing method for our short-cut hedge strategies. Upon adoption, this guidance will prospectively affect our presentation of fair value hedge relationships on the statement of operations and will require certain new disclosures. We will continue to assess the new strategies and opportunities enabled by this guidance to expand our risk management strategies. The adoption of this guidance did not have a material effect on our financial condition, results of operations, or cash flows.

Leases. On February 25, 2016, the FASB issued guidance that requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee of operating or finance leases to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. The guidance became effective for us on January 1, 2019. Upon adoption of the new guidance, we recognized right-of-use assets and lease liabilities for our operating leases of approximately $11.9 million and $12.5 million, respectively, on the statement of condition.

Becoming effective January 1, 2020

Financial Instruments - Credit Losses. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events (including historical experience), current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected over the contractual term of the financial asset(s). The guidance also requires, among other things, that we:

•
Reflect in the statement of operations the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
•
Determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price.
•
Record credit losses relating to available-for-sale debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.
•
Further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination.

This guidance is effective for us for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018; however, we do not intend to adopt the new guidance early. This guidance is required to be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We are currently evaluating the effect this guidance may have on our financial condition, results of operations and cash flows. A preliminary assessment of the anticipated impacts on our financial condition for certain asset classes is the following:

•
No allowance for credit losses will be required for advances, U.S. government or agency securities, U.S. government-owned corporations, U.S. government-guaranteed securities and securities issued by government sponsored enterprises on the basis of the zero-loss expectations;

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•
We do not expect to recognize an allowance for credit losses for short-term investments (including federal funds sold and interest-bearing deposits), securities purchased under agreements to resell, securities issued by supranational institutions, or state or local housing-finance agency obligations; and
•
We do not expect a significant change in methodology for modeling credit losses for private-label MBS.

Although we are still evaluating the expected impact on our financial condition for mortgage loans held for portfolio, we expect the adoption of the guidance will result in an increase in the allowance for credit losses given the requirement to assess losses for the entire estimated life of the financial asset.

The overall effect on our financial condition, results of operations, and cash flows will depend upon the composition of our financial assets held at the date of adoption as well as the economic conditions and forecasts at that time.

Note 4 — Cash and Due from Banks

Cash and due from banks includes cash on hand, cash items in the process of collection, compensating balances, and amounts due from correspondent banks and the Federal Reserve Bank of Boston.

Compensating Balances. We maintain collected cash balances with a commercial bank in return for certain services. The related agreement contains no legal restrictions on the withdrawal of funds. The average collected cash balance was $16.3 million and $45.5 million for the years ended December 31, 2018 and 2017, respectively.

Note 5 — Trading Securities
 
Table 5.1 - Trading Securities by Major Security Type
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
Corporate bonds
$
6,102

 
$
—

 
 
 
 
MBS
 

 
 
U.S. government-guaranteed – single-family
5,344

 
6,807

GSEs – single-family
148

 
346

GSEs – multifamily
151,444

 
184,357

 
156,936

 
191,510

Total
$
163,038

 
$
191,510



Net unrealized losses on trading securities for the years ended December 31, 2018, 2017 and 2016, amounted to $4.5 million, $6.1 million and $4.4 million, respectively.

We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.

Note 6 — Available-for-Sale Securities


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Table 6.1 - Available-for-Sale Securities by Major Security Type
(dollars in thousands)

 
December 31, 2018
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
State or local housing-finance-agency obligations (HFA securities)
$
55,500

 
$
—

 
$
(5,899
)
 
$
49,601

Supranational institutions
419,222

 
—

 
(14,067
)
 
405,155

U.S. government-owned corporations
297,729

 
—

 
(24,560
)
 
273,169

GSEs
122,423

 
—

 
(6,796
)
 
115,627

 
894,874

 
—

 
(51,322
)
 
843,552

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
79,075

 
20

 
(3,437
)
 
75,658

U.S. government guaranteed – multifamily
368,103

 
—

 
(6,969
)
 
361,134

GSEs – single-family
3,649,964

 
681

 
(88,486
)
 
3,562,159

GSEs – multifamily
1,010,886

 
168

 
(3,613
)
 
1,007,441

 
5,108,028

 
869

 
(102,505
)
 
5,006,392

Total
$
6,002,902

 
$
869

 
$
(153,827
)
 
$
5,849,944

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.
 
 
December 31, 2017
 
 
 
Amounts Recorded in Accumulated Other Comprehensive Loss
 
 
 
Amortized
Cost (1)
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
 Value
HFA securities
$
42,700

 
$
—

 
$
(5,017
)
 
$
37,683

Supranational institutions
438,667

 
—

 
(20,382
)
 
418,285

U.S. government-owned corporations
313,985

 
—

 
(21,908
)
 
292,077

GSEs
128,744

 
—

 
(7,401
)
 
121,343

 
924,096

 
—

 
(54,708
)
 
869,388

MBS
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
98,720

 
55

 
(2,998
)
 
95,777

U.S. government guaranteed – multifamily
447,975

 
—

 
(4,602
)
 
443,373

GSEs – single-family
4,625,333

 
1,194

 
(63,535
)
 
4,562,992

GSEs – multifamily
1,350,943

 
2,263

 
—

 
1,353,206

 
6,522,971

 
3,512

 
(71,135
)
 
6,455,348

Total
$
7,447,067

 
$
3,512

 
$
(125,843
)
 
$
7,324,736

_______________________
(1)
Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.


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Table 6.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position
(dollars in thousands)

 
December 31, 2018
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
11,118

 
$
(1,682
)
 
$
38,483

 
$
(4,217
)
 
$
49,601

 
$
(5,899
)
Supranational institutions
—

 
—

 
405,155

 
(14,067
)
 
405,155

 
(14,067
)
U.S. government-owned corporations
—

 
—

 
273,169

 
(24,560
)
 
273,169

 
(24,560
)
GSEs
—

 
—

 
115,627

 
(6,796
)
 
115,627

 
(6,796
)
 
11,118

 
(1,682
)
 
832,434

 
(49,640
)
 
843,552

 
(51,322
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
—

 
—

 
57,679

 
(3,437
)
 
57,679

 
(3,437
)
U.S. government guaranteed – multifamily
—

 
—

 
361,134

 
(6,969
)
 
361,134

 
(6,969
)
GSEs – single-family
53,122

 
(388
)
 
3,417,076

 
(88,098
)
 
3,470,198

 
(88,486
)
GSEs – multifamily
902,850

 
(3,613
)
 
—

 
—

 
902,850

 
(3,613
)
 
955,972

 
(4,001
)
 
3,835,889

 
(98,504
)
 
4,791,861

 
(102,505
)
Total temporarily impaired
$
967,090

 
$
(5,683
)
 
$
4,668,323


$
(148,144
)

$
5,635,413


$
(153,827
)

 
December 31, 2017
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
 
Fair
 Value
 
Unrealized
 Losses
HFA securities
$
29,345

 
$
(4,005
)
 
$
8,338

 
$
(1,012
)
 
$
37,683

 
$
(5,017
)
Supranational institutions
—

 
—

 
418,285

 
(20,382
)
 
418,285

 
(20,382
)
U.S. government-owned corporations
—

 
—

 
292,077

 
(21,908
)
 
292,077

 
(21,908
)
GSEs
—

 
—

 
121,343

 
(7,401
)
 
121,343

 
(7,401
)
 
29,345

 
(4,005
)
 
840,043

 
(50,703
)
 
869,388

 
(54,708
)
MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
—

 
—

 
70,877

 
(2,998
)
 
70,877

 
(2,998
)
U.S. government guaranteed – multifamily
64,219

 
(571
)
 
379,154

 
(4,031
)
 
443,373

 
(4,602
)
GSEs – single-family
1,853,323

 
(12,661
)
 
2,540,006

 
(50,874
)
 
4,393,329

 
(63,535
)
 
1,917,542

 
(13,232
)
 
2,990,037

 
(57,903
)
 
4,907,579

 
(71,135
)
Total temporarily impaired
$
1,946,887

 
$
(17,237
)
 
$
3,830,080

 
$
(108,606
)
 
$
5,776,967

 
$
(125,843
)



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Table 6.3 - Available-for-Sale Securities by Contractual Maturity
(dollars in thousands)
 
December 31, 2018
 
December 31, 2017
Year of Maturity
Amortized
Cost
 
Fair
 Value
 
Amortized
Cost
 
Fair
 Value
Due in one year or less
$
—

 
$
—

 
$
—

 
$
—

Due after one year through five years
55,500

 
49,601

 
42,700

 
37,683

Due after five years through 10 years
465,248

 
450,102

 
438,667

 
418,285

Due after 10 years
374,126

 
343,849

 
442,729

 
413,420

 
894,874

 
843,552

 
924,096

 
869,388

MBS (1)
5,108,028

 
5,006,392

 
6,522,971

 
6,455,348

Total
$
6,002,902

 
$
5,849,944

 
$
7,447,067

 
$
7,324,736

_______________________
(1)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.

Note 7 — Held-to-Maturity Securities

Table 7.1 - Held-to-Maturity Securities by Major Security Type
(dollars in thousands)

 
December 31, 2018
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
208

 
$
—

 
$
208

 
$
—

 
$
—

 
$
208

HFA securities
104,465

 
—

 
104,465

 
4

 
(4,612
)
 
99,857

 
104,673

 
—

 
104,673

 
4

 
(4,612
)
 
100,065

MBS
 

 
 

 
 

 
 

 
 

 
 

U.S. government guaranteed – single-family
8,173

 
—

 
8,173

 
158

 
—

 
8,331

GSEs – single-family
412,639

 
—

 
412,639

 
6,861

 
(1,389
)
 
418,111

GSEs – multifamily
209,786

 
—

 
209,786

 
1,728

 
—

 
211,514

Private-label – residential
682,124

 
(129,135
)
 
552,989

 
234,063

 
(2,671
)
 
784,381

Asset-backed securities (ABS) backed by home equity loans
6,781

 
(18
)
 
6,763

 
20

 
(256
)
 
6,527

 
1,319,503

 
(129,153
)
 
1,190,350

 
242,830

 
(4,316
)
 
1,428,864

Total
$
1,424,176

 
$
(129,153
)
 
$
1,295,023

 
$
242,834

 
$
(8,928
)
 
$
1,528,929



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December 31, 2017
 
Amortized Cost
 
Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss
 
Carrying Value
 
Gross Unrecognized Holding Gains
 
Gross Unrecognized Holding Losses
 
Fair Value
U.S. agency obligations
$
1,042

 
$
—

 
$
1,042

 
$
10

 
$
—

 
$
1,052

HFA securities
146,410

 
—

 
146,410

 
26

 
(14,372
)
 
132,064

 
147,452

 
—

 
147,452

 
36

 
(14,372
)
 
133,116

MBS
 
 
 
 
 
 
 
 
 
 
 
U.S. government guaranteed – single-family
10,097

 
—

 
10,097

 
190

 
—

 
10,287

U.S. government guaranteed – multifamily
280

 
—

 
280

 
—

 
—

 
280

GSEs – single-family
568,948

 
—

 
568,948

 
10,410

 
(310
)
 
579,048

GSEs – multifamily
214,641

 
—

 
214,641

 
6,451

 
—

 
221,092

Private-label – residential
835,070

 
(158,194
)
 
676,876

 
278,217

 
(3,195
)
 
951,898

ABS backed by home equity loans
7,851

 
(23
)
 
7,828

 
27

 
(349
)
 
7,506

 
1,636,887

 
(158,217
)
 
1,478,670

 
295,295

 
(3,854
)
 
1,770,111

Total
$
1,784,339

 
$
(158,217
)
 
$
1,626,122

 
$
295,331

 
$
(18,226
)
 
$
1,903,227



Table 7.2 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position
(dollars in thousands)

 
December 31, 2018
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
6,196

 
$
(9
)
 
$
92,822

 
$
(4,603
)
 
$
99,018

 
$
(4,612
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family
69,377

 
(580
)
 
52,237

 
(809
)
 
121,614

 
(1,389
)
Private-label – residential
24,921

 
(326
)
 
109,296

 
(4,336
)
 
134,217

 
(4,662
)
ABS backed by home equity loans
759

 
(5
)
 
5,641

 
(251
)
 
6,400

 
(256
)
 
95,057

 
(911
)
 
167,174

 
(5,396
)
 
262,231

 
(6,307
)
Total
$
101,253

 
$
(920
)
 
$
259,996

 
$
(9,999
)
 
$
361,249

 
$
(10,919
)


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December 31, 2017
 
Continuous Unrealized Loss Less than 12 Months
 
Continuous Unrealized Loss 12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
 Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
HFA securities
$
—

 
$
—

 
$
121,203

 
$
(14,372
)
 
$
121,203

 
$
(14,372
)
 
 
 
 
 
 
 
 
 
 
 
 
MBS
 
 
 
 
 
 
 
 
 

 
 

GSEs – single-family
44,759

 
(52
)
 
28,771

 
(258
)
 
73,530

 
(310
)
Private-label – residential
—

 
—

 
158,963

 
(5,558
)
 
158,963

 
(5,558
)
ABS backed by home equity loans
—

 
—

 
7,371

 
(350
)
 
7,371

 
(350
)
 
44,759

 
(52
)
 
195,105

 
(6,166
)
 
239,864

 
(6,218
)
Total
$
44,759

 
$
(52
)
 
$
316,308

 
$
(20,538
)
 
$
361,067

 
$
(20,590
)

Table 7.3 - Held-to-Maturity Securities by Contractual Maturity
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
Year of Maturity
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
 
Amortized
Cost
 
Carrying
Value (1)
 
Fair
Value
Due in one year or less
$
1,043

 
$
1,043

 
$
1,047

 
$
264

 
$
264

 
$
267

Due after one year through five years
6,205

 
6,205

 
6,196

 
11,613

 
11,613

 
11,645

Due after five years through 10 years
16,865

 
16,865

 
16,639

 
18,245

 
18,245

 
18,226

Due after 10 years
80,560

 
80,560

 
76,183

 
117,330

 
117,330

 
102,978

 
104,673

 
104,673

 
100,065

 
147,452

 
147,452

 
133,116

MBS (2)
1,319,503

 
1,190,350

 
1,428,864

 
1,636,887

 
1,478,670

 
1,770,111

Total
$
1,424,176

 
$
1,295,023

 
$
1,528,929

 
$
1,784,339

 
$
1,626,122

 
$
1,903,227

_______________________
(1)
Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss.
(2)
MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.

Note 8 — Other-Than-Temporary Impairment

We evaluate our individual available-for-sale and held-to-maturity securities for other-than-temporary impairment each quarter.

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at December 31, 2018. At December 31, 2018, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security.

Held-to-Maturity Securities

HFA Securities and Agency MBS. We have reviewed our investments in HFA securities and agency MBS and have determined that all unrealized losses are temporary. We do not intend to sell the investments nor is it more likely than not that we will be

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required to sell the investments before recovery of the amortized cost basis, and we do not consider these investments to be other-than-temporarily impaired at December 31, 2018.

Private-Label Residential MBS and ABS Backed by Home Equity Loans. To ensure consistency in determination of the other-than-temporary impairment for private-label residential MBS and certain home equity loan investments (including home equity ABS) among all FHLBanks, the FHLBanks use an FHLBank System governance committee (the OTTI Governance Committee) and a formal process to ensure consistency in key other-than-temporary impairment modeling assumptions used for purposes of their cash-flow analyses for the majority of these securities. We use the FHLBanks' uniform framework and approved assumptions for purposes of our other-than-temporary impairment cash-flow analyses of our private-label residential MBS and certain home equity loan investments. For certain private-label residential MBS and home equity loan investments where underlying collateral data is not available, we have used alternative procedures to assess these securities for other-than-temporary impairment. We are responsible for making our own determination of impairment and the reasonableness of assumptions, inputs, and methodologies used and for performing the required present value calculations using appropriate historical cost bases and yields.

Our evaluation includes estimating the projected cash flows that we are likely to collect based on an assessment of available information, including the structure of the applicable security and certain assumptions to determine whether we will recover the entire amortized cost basis of the security, such as:

•
the remaining payment terms for the security;
•
prepayment speeds;
•
default rates;
•
loss severity on the collateral supporting each security based on underlying loan-level borrower and loan characteristics;
•
expected housing price changes, with projections ranging from a decrease of 7.0 percent to an increase of 14.0 percent over the 12-month period beginning October 1, 2018. For the vast majority of markets, the projected short-term housing price changes range from an increase of 3.0 percent to an increase of 7.0 percent. Thereafter, we have projected a unique long-term forecast for each relevant geographic area based on an internally developed framework derived from historical data; and
•
interest-rate assumptions.

To assess whether the entire amortized cost basis of private-label residential MBS will be recovered, cash-flow analyses for each of our private-label residential MBS were performed.

For those securities for which a credit loss was recognized during the year ended December 31, 2018, Table 8.1 presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted average of Alt-A other-than-temporarily impaired private-label residential MBS.

Table 8.1 - Significant Inputs and Current Credit Enhancement for Securities with a Credit Loss in 2018
(dollars in thousands)

 
 
 
 
Weighted Average of Significant Inputs
 
Weighted Average Current
Credit Enhancement
Private-label MBS by Classification
 
Par Value
 
Projected
Prepayment Rates
 
Projected
Default Rates
 
Projected
Loss Severities
 
Alt-A - Private-label residential MBS (1)
 
$
27,702

 
10.9
%
 
26.4
%
 
32.7
%
 
8.1
%
_______________________
(1)
Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.


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Table 8.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security
(dollars in thousands)

 
December 31, 2018
Other-Than-Temporarily Impaired Investment (1)
Par
Value
 
Amortized
Cost
 
Carrying
Value
 
Fair
Value
Private-label residential MBS – Prime
$
24,498

 
$
20,890

 
$
16,452

 
$
22,712

Private-label residential MBS – Alt-A
798,625

 
574,138

 
449,440

 
677,180

ABS backed by home equity loans – Subprime
154

 
144

 
127

 
146

Total other-than-temporarily impaired securities
$
823,277

 
$
595,172

 
$
466,019

 
$
700,038


_______________________
(1)
Securities are classified based on their classifications at the time of issuance.We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.

Table 8.3 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings
(dollars in thousands)

 
For the Year Ended December 31,
 
2018
 
2017
 
2016
Balance at beginning of year
$
452,523

 
$
490,404

 
$
533,888

Additions:
 
 
 
 
 
Credit losses for which other-than-temporary impairment was not previously recognized
—

 
—

 
15

Additional credit losses for which an other-than-temporary impairment charge was previously recognized
532

 
1,454

 
3,295

Reductions:
 
 
 
 
 
Securities matured during the year
—

 
(5,600
)
 
(8,778
)
Portion of increase in cash flows expected to be collected over the remaining life of the security that are recognized in the current period as interest income(1)
(31,020
)
 
(33,735
)
 
(38,016
)
Balance at end of year
$
422,035

 
$
452,523

 
$
490,404

_______________________
(1)
For the year ended December 31, 2018, the amount excludes an additional $1.4 million for bonds previously paid off.

Note 9 — Advances

General Terms. We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics, and optionality. Advances have maturities ranging from one day to 30 years or even longer with the approval of our credit committee. At both December 31, 2018 and 2017, we had advances outstanding with interest rates ranging from zero percent to 7.72 percent.


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Table 9.1 - Advances Outstanding by Year of Contractual Maturity
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
 
Amount
 
Weighted
Average
Rate
 
Amount
 
Weighted
Average
Rate
Overdrawn demand-deposit accounts
$
12,332

 
2.88
%
 
$
5,698

 
1.70
%
Due in one year or less
24,029,592

 
2.48

 
21,501,397

 
1.56

Due after one year through two years
11,413,640

 
2.55

 
7,462,785

 
1.65

Due after two years through three years
2,832,290

 
2.47

 
2,709,951

 
1.85

Due after three years through four years
1,648,076

 
2.37

 
2,084,105

 
2.03

Due after four years through five years
1,980,468

 
2.24

 
2,071,989

 
1.56

Thereafter
1,351,987

 
2.99

 
1,811,241

 
2.23

Total par value
43,268,385

 
2.50
%
 
37,647,166

 
1.66
%
Premiums
13,347

 
 

 
17,931

 
 

Discounts
(38,036
)
 
 

 
(32,757
)
 
 

Fair value of bifurcated derivatives (1)
13,051

 
 
 
(1,591
)
 
 
Hedging adjustments
(64,525
)
 
 

 
(64,782
)
 
 

Total
$
43,192,222

 
 

 
$
37,565,967

 
 


_________________________
(1)
At December 31, 2018 and 2017, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives.

We offer advances to members and eligible nonmembers that provide the borrower the right, based upon predetermined option exercise dates, to repay the advance prior to maturity without incurring prepayment or termination fees (callable advances). We also offer certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees. Other advances may only be prepaid by paying a fee (prepayment fee) that makes us financially indifferent to the prepayment of the advance.

Table 9.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date (1) 
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
Overdrawn demand-deposit accounts
$
12,332

 
$
5,698

Due in one year or less
32,748,467

 
25,842,572

Due after one year through two years
3,913,640

 
3,722,785

Due after two years through three years
2,672,290

 
2,709,951

Due after three years through four years
1,261,176

 
1,924,105

Due after four years through five years
1,362,468

 
1,684,789

Thereafter
1,298,012

 
1,757,266

Total par value
$
43,268,385

 
$
37,647,166

_______________________
(1)
Also includes certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

We offer putable advances that provide us with the right to require repayment prior to maturity of the advance (and thereby extinguish the advance) on predetermined exercise dates (put dates). Generally, we would exercise the put options when interest rates increase relative to contractual rates.


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Table 9.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date
(dollars in thousands)

Year of Contractual Maturity or Next Put Date, Par Value
December 31, 2018
 
December 31, 2017
Overdrawn demand-deposit accounts
$
12,332

 
$
5,698

Due in one year or less
25,199,892

 
22,828,547

Due after one year through two years
11,652,840

 
7,921,035

Due after two years through three years
2,834,790

 
2,686,951

Due after three years through four years
1,367,576

 
1,984,705

Due after four years through five years
1,152,468

 
1,216,989

Thereafter
1,048,487

 
1,003,241

Total par value
$
43,268,385

 
$
37,647,166



Table 9.4 - Advances by Current Interest Rate Terms
(dollars in thousands)

Par value of advances
December 31, 2018
 
December 31, 2017
Fixed-rate
 
 
 
Due in one year or less
$
23,822,091

 
$
20,674,897

Due after one year
9,748,187

 
10,983,396

Total fixed-rate
33,570,278

 
31,658,293

 
 
 
 
Variable-rate
 
 
 
Due in one year or less
219,832

 
832,198

Due after one year
9,478,275

 
5,156,675

Total variable-rate
9,698,107

 
5,988,873

Total par value
$
43,268,385

 
$
37,647,166



Credit-Risk Exposure and Security Terms. Our potential credit risk from advances is principally concentrated in commercial banks, insurance companies, savings institutions, and credit unions. At December 31, 2018 and 2017, we had $16.4 billion and $12.1 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to six borrowers at both December 31, 2018 and 2017, representing 37.9 percent and 32.3 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 11 — Allowance for Credit Losses.

Prepayment Fees. We record prepayment fees received from borrowers on certain prepaid advances net of any associated basis adjustments related to hedging activities on those advances and net of deferred prepayment fees on advance prepayments considered to be loan modifications. Additionally, for certain advances products, the prepayment-fee provisions of the advance agreement could result in either a payment from the borrower or to the borrower when such an advance is prepaid, based upon market conditions at the time of prepayment (referred to as a symmetrical prepayment fee). Advances with a symmetrical prepayment fee provision are hedged with derivatives containing offsetting terms, so that we are financially indifferent to the borrower's decision to prepay such advances. The net amount of prepayment fees is reflected as interest income in the statement of operations.

We also offer an advance restructuring program under which the prepayment fee on prepaid advances may be satisfied by the borrower's agreement to pay an interest rate on a new advance sufficient to amortize the prepayment fee by the maturity date of the new advance, rather than paying the fee in immediately available funds to us. If we conclude an advance restructuring is an extinguishment of the prior loan rather than a modification, the deferred prepayment fee is recognized into income immediately.


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Table 9.5 - Advances Prepayment Fees
(dollars in thousands)

 
 
For the Year Ended December 31,
 
 
2018
 
2017
 
2016
Prepayment fees received from borrowers
 
$
409

 
$
1,568

 
$
11,078

Hedging fair-value adjustments on prepaid advances
 
264

 
(218
)
 
(3,664
)
Net premiums associated with prepaid advances
 
(159
)
 
(137
)
 
(2,238
)
Deferred recognition of prepayment fees received from borrowers on advance prepayments deemed to be loan modifications
 
(298
)
 
(315
)
 
(3,100
)
Prepayment fees recognized in income on advance restructurings deemed to be extinguishments
 
—

 
—

 
1,677

Advance prepayment fees recognized in income, net
 
$
216

 
$
898

 
$
3,753



Note 10 — Mortgage Loans Held for Portfolio

We invest in mortgage loans through the MPF program. These mortgage loans are either guaranteed or insured by federal agencies, as is the case with government mortgage loans, or are credit-enhanced, directly or indirectly, by the related entity that sold the loan (a participating financial institution), as is the case with conventional mortgage loans. All such investments are held for portfolio. The mortgage loans are typically originated and credit-enhanced by the related participating financial institution. The majority of these loans are serviced by the originating institution or an affiliate thereof. However, a portion of these loans are sold servicing-released by the participating financial institution and serviced by a third-party servicer.

Table 10.1 - Mortgage Loans Held for Portfolio
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
Real estate
 

 
 

Fixed-rate 15-year single-family mortgages
$
392,128

 
$
466,952

Fixed-rate 20- and 30-year single-family mortgages
3,839,078

 
3,466,752

Premiums
67,671

 
70,074

Discounts
(1,800
)
 
(1,541
)
Deferred derivative gains, net
2,825

 
3,000

Total mortgage loans held for portfolio
4,299,902

 
4,005,237

Less: allowance for credit losses
(500
)
 
(500
)
Total mortgage loans, net of allowance for credit losses
$
4,299,402

 
$
4,004,737



Table 10.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type
(dollars in thousands)


 
December 31, 2018
 
December 31, 2017
Conventional mortgage loans
$
3,902,555

 
$
3,568,473

Government mortgage loans
328,651

 
365,231

Total par value
$
4,231,206

 
$
3,933,704



See Note 11 — Allowance for Credit Losses for information related to our credit risk from our investments in mortgage loans and allowance for credit losses based on these investments.

Note 11 — Allowance for Credit Losses


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An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

Portfolio Segments. We have established an allowance methodology for each of our portfolio segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. We have developed and documented a systematic methodology for determining an allowance for credit losses for our:

•
secured member credit products, such as our advances and letters of credit;
•
investments in government mortgage loans held for portfolio;
•
investments in conventional mortgage loans held for portfolio;
•
investments via term securities purchased under agreements to resell; and
•
investments via term federal funds sold.

Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent that is needed to understand the exposure to credit risk arising from these financing receivables. We determined that no further disaggregation of portfolio segments identified above is needed as we assessed and measured the credit risk arising from these financing receivables at the portfolio segment level.

Secured Member Credit Products

We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower's financial condition, and collateral and lending policies that are intended to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, we lend to eligible borrowers in accordance with the FHLBank Act, FHFA regulations, and other applicable laws. We are required to obtain sufficient collateral to secure our credit products. The estimated value of the collateral pledged to secure each borrower's credit products is calculated by applying collateral discounts, or haircuts, to the market value or unpaid principal balance of the collateral, as applicable. We accept certain investment securities, residential mortgage loans, deposits, and other assets as collateral. We require all borrowers that pledge securities collateral to place physical possession of such securities collateral with our safekeeping agent, the borrower's approved designated agent, or the borrower's securities corporation, subject to a control agreement giving us appropriate control over such collateral. In addition, community financial institutions are eligible to use expanded statutory collateral provisions for small-business and agriculture loans. Members also pledge their Bank capital stock as collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition, performance, borrowing capacity, and our overall credit exposure to the borrower. We can call for additional or substitute collateral to further safeguard our security interest. We believe our policies appropriately manage our credit risks arising from our credit products.

We either allow the borrower to retain possession of loan collateral pledged to us while agreeing to hold such collateral for our benefit or require the borrower to specifically assign or place physical possession of such loan collateral with us or a third-party custodian that we approve.

We are provided an additional safeguard for our security interests by Section 10(e) of the FHLBank Act, which generally affords any security interest granted by a borrower to the Bank priority over the claims and rights of any other party. The exceptions to this prioritization are limited to claims that would be entitled to priority under otherwise applicable law and are held by bona fide purchasers for value or by secured parties with higher priority perfected security interests. The priority granted to our security interests under Section 10(e) of the FHLBank Act may not apply when lending to insurance company members. This is due to the anti-preemption provision contained in the McCarran-Ferguson Act, which provides that federal law does not preempt state insurance law unless the federal law expressly regulates the business of insurance. Thus, if state law conflicts with Section 10(e) of the FHLBank Act, the protection afforded by this provision may not be available to us. However, we perfect our security interests in the collateral pledged by our members, including insurance company members, by filing Uniform Commercial Code (UCC)-1 financing statements, taking possession or control of such collateral, or taking other appropriate steps.

Using a risk-based approach and taking into consideration each borrower's financial strength, we consider the types and level of collateral to be the primary indicator of credit quality on our credit products. At December 31, 2018, and 2017, we had rights to collateral, on a borrower-by-borrower basis, with an estimated value in excess of our outstanding extensions of credit.


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We continue to evaluate and make changes to our collateral guidelines based on market conditions. At December 31, 2018, and 2017, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the years ended December 31, 2018, and 2017.

Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at December 31, 2018 and 2017. At December 31, 2018 and 2017, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 20 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

Government Mortgage Loans Held for Portfolio

We invest in government mortgage loans secured by one- to four-family residential properties. Government mortgage loans are mortgage loans insured or guaranteed by the Federal Housing Administration (the FHA), the U.S. Department of Veterans Affairs (the VA), the Rural Housing Service of the U.S. Department of Agriculture (RHS), or by the U.S. Department of 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 insurance or guaranty with respect to defaulted government-guaranteed mortgage loans. Any losses incurred on these loans that are not recovered from the insurer or guarantor are absorbed by the related servicer. Therefore, we only have credit risk for these loans if the servicer fails to pay for losses not covered by insurance or guarantees. Due to government guarantees or insurance on our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of December 31, 2018 and 2017. Additionally, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

Conventional Mortgage Loans Held for Portfolio

Our methodology for determining our loan loss reserve consists of estimating loan loss severity using a third-party model incorporating delinquency to default transition performance of the loans, relevant market conditions affecting the performance of the loans, and portfolio level credit protection, particularly credit enhancements, as discussed below under — Credit Enhancements. Our inputs to the third-party model consist of loan-related characteristics, such as credit scores, occupancy statuses, loan-to-value ratios, property types, and locations. We update our view of the loan transition performance and market conditions quarterly and periodically adjust our methodology to reflect the changes in the loans’ performances and the market.

Individually Evaluated Mortgage Loans. Certain conventional mortgage loans, primarily impaired mortgage loans that are considered collateral-dependent, may be specifically identified for purposes of calculating the allowance for credit losses. 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 and there is no credit enhancement from a participating financial institution to offset losses under the master commitment. The estimated credit losses on impaired collateral-dependent loans may be separately determined because sufficient information exists to make a reasonable estimate of the inherent loss on these loans on an individual loan basis. Loans that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property less estimated selling costs. The incurred loss of an individually evaluated mortgage loan is equal to the difference between the carrying value of the loan and the estimated fair value of the collateral, less estimated selling costs, and may include expected proceeds from primary mortgage insurance and other applicable credit enhancements. Additionally, for our investments in loans modified under our temporary loan modification plan, on the effective date of a loan modification we measure the present value of expected future cash flows discounted at the loan's effective interest rate and reduce the carrying value of the loan accordingly.

Collectively Evaluated Mortgage Loans. We evaluate the credit risk of our investments in conventional mortgage loans for impairment on a collective basis that considers loan-pool-specific attribute data, at the master commitment pool level (including historical delinquency migration), applies estimated loss severities, and incorporates available credit enhancements to establish our best estimate of probable incurred losses at the reporting date. Migration analysis is a methodology for estimating the rate of default experienced on pools of similar loans based on our historical experience. We apply migration analysis to conventional loans that are currently not past due, loans that are 30 to 59 days past due, 60 to 89 days past due, and 90 to 179 days past due. We then estimate the dollar amount of loans in these categories that we believe are likely to migrate to a realized loss position and apply a loss severity factor to estimate losses that would be incurred at the statement of condition

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date. The losses are then reduced by the probable cash flows resulting from available credit enhancement. Credit enhancement cash flows that are projected and assessed as not probable of receipt are not considered in reducing estimated losses.

Estimating a Margin of Imprecision. We also assess a factor for the margin of imprecision to the estimation of credit losses for the homogeneous population. The margin of imprecision is a factor in the allowance for credit losses that recognizes the imprecise nature of the measurement process and is included as part of the mortgage loan allowance for credit loss. This amount represents a subjective management judgment based on facts and circumstances that exist as of the reporting date that is unallocated to any specific measurable economic or credit event and is intended to cover other inherent losses that may not be captured in our methodology. The actual loss that may occur on homogeneous populations of mortgage loans may differ from the estimated loss.

Credit Quality Indicators. Key credit quality indicators for mortgage loans include past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. Table 11.1 sets forth certain key credit quality indicators for our investments in mortgage loans at December 31, 2018 and 2017 (dollars in thousands):

Table 11.1 - Recorded Investment in Delinquent Mortgage Loans
(dollars in thousands)

 
December 31, 2018
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
23,045

 
$
10,884

 
$
33,929

Past due 60-89 days delinquent
7,019

 
3,344

 
10,363

Past due 90 days or more delinquent
7,384

 
6,670

 
14,054

Total past due
37,448

 
20,898

 
58,346

Total current loans
3,947,096

 
316,285

 
4,263,381

Total mortgage loans
$
3,984,544

 
$
337,183

 
$
4,321,727

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
3,467

 
$
2,086

 
$
5,553

Serious delinquency rate (2)
0.20
%
 
1.98
%
 
0.34
%
Past due 90 days or more still accruing interest
$
—

 
$
6,670

 
$
6,670

Loans on nonaccrual status (3)
$
7,975

 
$
—

 
$
7,975

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.


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December 31, 2017
 
 Recorded Investment in Conventional Mortgage Loans
 
 Recorded Investment in Government Mortgage Loans
 
Total
Past due 30-59 days delinquent
$
28,622

 
$
13,862

 
$
42,484

Past due 60-89 days delinquent
6,617

 
4,142

 
10,759

Past due 90 days or more delinquent
13,310

 
4,831

 
18,141

Total past due
48,549

 
22,835

 
71,384

Total current loans
3,601,952

 
352,249

 
3,954,201

Total mortgage loans
$
3,650,501

 
$
375,084

 
$
4,025,585

Other delinquency statistics
 
 
 
 
 
In process of foreclosure, included above (1)
$
6,389

 
$
1,306

 
$
7,695

Serious delinquency rate (2)
0.38
%
 
1.29
%
 
0.46
%
Past due 90 days or more still accruing interest
$
—

 
$
4,831

 
$
4,831

Loans on nonaccrual status (3)
$
13,598

 
$
—

 
$
13,598

_______________________
(1)
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.
(2)
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.
(3)
Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

Credit Enhancements. Our allowance for credit losses factors in the credit enhancements associated with conventional mortgage loans under the MPF program. These credit enhancements apply after the homeowner's equity is exhausted and can include primary and/or supplemental mortgage insurance or other kinds of credit enhancement. The credit risk analysis of our conventional loans is performed at the individual master commitment level to determine the credit enhancements available to recover losses on loans under each individual master commitment. The credit-enhancement amounts estimated to protect us against credit losses are determined through the use of a model. Any incurred losses that would be recovered from the credit enhancements are not reserved as part of our allowance for loan losses. In such cases, a receivable is generally established to reflect the expected recovery from credit-enhancement arrangements.

The FHFA final rule on acquired member assets (AMA) went into effect on January 18, 2017, allowing each FHLBank to utilize its own model to determine the credit enhancement for AMA loan assets and pool loans in lieu of a nationally recognized statistical ratings organization (NRSRO) ratings model. Upon effectiveness of the final AMA rule, we determined that assets delivered to us must be credit enhanced at our determined “AMA investment grade” of a double-A rated MBS. In March 2017, we determined that assets delivered to us must be credit enhanced at our revised determination of “AMA investment grade” of a single-A-minus rated MBS. This revision had no impact on the allowance for credit losses. We share the risk of credit losses on our investments in mortgage loans with the related participating financial institution by structuring potential losses on these investments into layers with respect to each master commitment. We analyze the risk characteristics of our mortgage loans using a third-party model to determine the credit enhancement amount at the time of purchase. This credit-enhancement amount is broken into a first-loss account and a credit-enhancement obligation of each participating financial institution, which may be calculated based on the risk analysis to equal the difference between the amounts needed for the master commitment to have a rating equivalent to a single-A-minus rated MBS and our initial first-loss account exposure.

The first-loss account represents the first layer or portion of credit losses that we absorb with respect to our investments in mortgage loans after considering the borrower's equity and primary mortgage insurance. The participating financial institution is required to cover the next layer of losses up to an agreed-upon credit-enhancement obligation amount, which may consist of a direct liability of the participating financial institution to pay credit losses up to a specified amount, a contractual obligation of a participating financial institution to provide supplemental mortgage insurance, or a combination of both. We absorb any remaining unallocated losses.

The aggregate amount of the first-loss account is documented and tracked but is neither recorded nor reported as an allowance for loan losses in our financial statements. As credit and special hazard losses are realized that are not covered by the

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liquidation value of the real property or primary mortgage insurance, they are first charged to us, with a corresponding reduction of the first-loss account for that master commitment up to the amount in the first-loss account at that time. Over time, the first-loss account may cover the expected credit losses on a master commitment, although losses that are greater than expected or that occur early in the life of a master commitment could exceed the amount in the first-loss account. In that case, the excess losses would be charged to the participating financial institution's credit-enhancement amount, then to us after the participating financial institution's credit-enhancement amount has been exhausted.

For loans in which we buy or sell participations from or to other FHLBanks that participate in the MPF program (MPF Banks), the amount of the first-loss account remaining to absorb losses for loans that we own is partly dependent on the percentage of our participation in such loans. Assuming losses occur on a proportional basis between loans that we own and loans owned by other MPF Banks, at December 31, 2018 and 2017, the amount of first-loss account remaining for losses allocable to us was $25.3 million and $22.2 million, respectively.

Participating financial institutions are paid a credit-enhancement fee for assuming credit risk and in some instances all or a portion of the credit-enhancement fee may be performance based. For certain MPF products, our losses incurred under the first-loss account can be mitigated by withholding future performance-based credit-enhancement fees that would otherwise be payable to the participating financial institutions. We record credit-enhancement fees paid to participating financial institutions as a reduction to mortgage-loan-interest income.

Withheld performance-based credit-enhancement fees can mitigate losses from our investments in mortgage loans and therefore we consider our expectations for each master commitment for such withheld fees in determining the allowance for loan losses. More specifically, we determine the amount of credit-enhancement fees available to mitigate losses as follows: accrued credit-enhancement fees to be paid to participating financial institutions; plus projected credit-enhancement fees to be paid to the participating financial institutions using the weighted average life of the loans within each relevant master commitment; minus any losses incurred or expected to be incurred.

Allowance for Credit Losses on Mortgage Loans. Table 11.2 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the years ended December 31, 2018, 2017, and 2016, as well as the recorded investment in mortgage loans by impairment methodology at December 31, 2018, 2017, and 2016. The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.

Table 11.2 - Allowance for Credit Losses on Conventional Mortgage Loans
(dollars in thousands)

 
2018
 
2017
 
2016
Allowance for credit losses
 
 
 
 
 
Balance, beginning of year
$
500

 
$
650

 
$
1,025

Recoveries (charge-offs)
34

 
(54
)
 
(98
)
Reduction of provision for credit losses
(34
)
 
(96
)
 
(277
)
Balance, end of year
$
500

 
$
500

 
$
650

Ending balance, individually evaluated for impairment
$
—

 
$
—

 
$
—

Ending balance, collectively evaluated for impairment
$
500

 
$
500

 
$
650

Recorded investment, end of year (1)
 
 
 
 
 
Individually evaluated for impairment
$
15,402

 
$
17,668

 
$
22,945

Collectively evaluated for impairment
$
3,969,142

 
$
3,632,833

 
$
3,288,370

_________________________
(1)
These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio.

Troubled Debt Restructurings. We consider a troubled debt restructuring of a financing receivable to have occurred when we grant a concession to a borrower that we would not otherwise consider for economic or legal reasons related to the borrower's financial difficulties. We have granted a concession when we do not expect to collect all amounts due to us under the original contract as a result of the restructuring.


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A mortgage loan considered to be a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. When a loan first becomes a troubled debt restructuring, we compare the carrying value of the loan at the time of modification with the present value of the revised cash flows discounted at the original effective yield on the loan. Credit loss is measured by estimating the loss severity rate incurred as of the reporting date as well as the economic loss attributable to delaying the original contractual principal and interest due dates, if applicable. At December 31, 2018 and 2017, the recorded investment of mortgage loans classified as troubled debt restructurings were $8.5 million and $8.4 million, respectively.

Federal Funds Sold and Securities Purchased Under Agreements to Resell.

Term federal funds sold and term securities purchased under agreements to resell are all short term (less than three months), and they are generally transacted with counterparties that we consider to be of investment quality. We invest in federal funds sold on an unsecured basis and we evaluate these investments for purposes of an allowance for credit losses only if the investment is not paid when due. All investments in federal funds sold as of December 31, 2018 and 2017, were repaid according to their contractual terms. Securities purchased under agreements to resell are considered collateralized financing arrangements and effectively represent short-term loans. The terms of these loans are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must provide additional securities as collateral in an amount equal to the decrease or remit cash in such amount. If we determine that an agreement to resell is impaired, the difference between the fair value of the collateral and the amortized cost of the agreement is charged to earnings. Based upon the collateral held as security, we determined that no allowance for credit losses was needed for the securities purchased under agreements to resell at December 31, 2018 and 2017.

Note 12 — Derivatives and Hedging Activities

Nature of Business Activity

We are exposed to interest-rate risk primarily from the effects of interest-rate changes on interest-earning assets and interest-bearing liabilities that finance these assets. The goal of our interest-rate risk-management strategy is to manage interest-rate risk within appropriate limits. As part of our effort to mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest-rate changes we will accept. In addition, we monitor the risk to our interest income, net interest margin, and average maturity of interest-earning assets and interest-bearing liabilities.

Consistent with FHFA regulations, we enter into derivatives to manage the interest-rate-risk exposures inherent in otherwise unhedged assets and liabilities and achieve our risk-management objectives. FHFA regulation prohibits us from the speculative use of these derivative instruments. The use of derivatives is an integral part of our financial and risk management strategy. We may enter into derivatives that do not necessarily qualify for hedge accounting.

We reevaluate our hedging strategies from time to time and may change the hedging techniques we use or may adopt new strategies. The most common ways in which we use derivatives are to:

•
effectively change the coupon repricing characteristics of assets and liabilities from fixed-rate to floating-rate;
•
hedge the mark-to-market sensitivity of existing assets or liabilities;
•
offset or neutralize embedded options in assets and liabilities; and
•
hedge the potential yield variability of anticipated asset or liability transactions.

Application of Derivatives

We formally document at inception all relationships between derivatives designated as hedging instruments and hedged items, as well as our risk-management objectives and strategies for undertaking various hedge transactions and our method of assessing hedge effectiveness. This process includes linking all derivatives that are designated as fair-value or cash-flow hedges to specific assets or liabilities on the statement of condition, firm commitments, or forecasted transactions.

We may use derivatives to adjust the effective maturity, repricing frequency, or option characteristics of our financial instruments, including our advances products, investments, and COs to achieve risk-management objectives. Derivative instruments are designated by us as:

•
a qualifying fair-value hedge of a non-derivative financial instrument or a cash-flow hedge of a forecasted transaction; and

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•
a non-qualifying economic hedge in general asset-liability management where derivatives serve a documented risk-mitigation purpose but do not qualify for hedge accounting. These hedges are primarily used to manage certain mismatches between the coupon features of our assets and liabilities.

We transact all of our derivatives with counterparties who are major banks or, in a few instances, with their affiliates with unconditional guarantees provided by the respective major banks. Some of these derivative counterparties and their affiliates buy, sell, and distribute COs, and may be affiliates of members of the Bank. Derivative transactions may be either over-the-counter with a counterparty (uncleared derivatives) or cleared through a futures commission merchant (clearing member) with a DCO as the counterparty (cleared derivatives).

Once a derivative transaction has been accepted for clearing by a DCO, the executing counterparty is replaced with the DCO. We are not a derivatives dealer and do not trade derivatives for short-term profit.

Types of Derivatives

We primarily use the following derivatives instruments to reduce funding costs and/or to manage our interest-rate risks.

•
Interest-Rate Swaps. An interest-rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest-rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional amount at a predetermined fixed rate for a given period of time to the counterparty. In return for this promise, this party receives cash flows equivalent to the interest on the same notional amount at a variable-rate index for the same period of time from the counterparty. The variable-rate index we utilize in most of our derivative transactions is LIBOR.
•
Optional Termination Interest-Rate Swaps. In an optional termination interest-rate swap, one counterparty has the right, but not the obligation, to terminate the interest-rate swap prior to its stated maturity date. We use optional termination interest-rate swaps to hedge callable CO bonds and putable advances. In most cases, we own an option to terminate the hedged item, that is, redeem a callable bond or demand repayment of a putable advance on specified dates, and the counterparty to the optional termination interest-rate swap owns the option to terminate the interest-rate swap on those same dates.
•
Forward-Start Interest-Rate Swaps. A forward-start interest-rate swap is an interest-rate swap (as described above) with a deferred effective date. We designate forward-start interest-rate swaps as cash-flow hedges of expected debt issuances.
•
Swaptions. A swaption is an option on an interest-rate swap that gives the buyer the right to enter into a specified interest-rate swap at a certain time in the future. When used as a hedge, a swaption can protect us if we are planning to lend or borrow funds in the future against future interest-rate changes. We may enter into both payer swaptions and receiver swaptions. A payer swaption is the option to make pre-determined fixed interest payments at a later date and a receiver swaption is the option to receive pre-determined fixed interest payments at a later date.
•
Interest-Rate Cap and Floor Agreements. In an interest-rate cap agreement, a cash flow is generated if the price or rate of an underlying variable rises above a certain threshold or cap price. In an interest-rate floor agreement, a cash flow is generated if the price or rate of an underlying variable falls below a certain threshold or floor price. These agreements are intended to serve as protection against the interest rate on a variable-rate asset or liability falling below or rising above a certain level.

Types of Assets and Liabilities Hedged

Investments. We use derivatives to manage the interest-rate and prepayment risk associated with certain investment securities that are classified either as available-for-sale or as trading securities.

For available-for-sale securities to which a qualifying fair-value hedge relationship has been designated, we record the portion of the change in fair value related to the risk being hedged in other income as net gains (losses) on derivatives and hedging activities together with the related change in fair value of the derivative, and the remainder of the change in fair value is recorded in other comprehensive loss as net unrealized (losses) gains on available-for-sale securities.

We may also manage the risk arising from changing market prices or cash flows of investment securities classified as trading by entering into economic hedges that offset the changes in fair value or cash flows of the securities. These economic hedges are not specifically designated as hedges of individual assets, but rather are collectively managed to provide an offset to the changes in the fair values of the assets. The market-value changes of trading securities are included in net unrealized losses on trading securities in the statement of operations, while the changes in fair value of the associated derivatives are included in other income as net gains (losses) on derivatives and hedging activities.

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Advances. We offer a wide range of fixed- and variable-rate advance products with different maturities, interest rates, payment characteristics and optionality. We may use interest-rate swaps to manage the repricing and/or options characteristics of advances to more closely match the characteristics of our funding liabilities. Typically, we hedge the fair value of fixed-rate advances with interest-rate swaps where we pay a fixed-rate coupon and receive a variable-rate coupon, effectively converting the advance to a floating-rate advance. We also hedge the fair value of certain floating-rate advances that contain either an interest-rate cap or floor, or both a cap and a floor with a derivative containing an offsetting cap and/or floor.

With each issuance of a putable advance, we effectively purchase from the borrower an embedded put option that enables us to terminate a fixed-rate advance on predetermined put dates, and offer, subject to certain conditions, replacement funding at then-current advances rates. We may hedge a putable advance by entering into a derivative that is cancelable by the derivative counterparty, where we pay a fixed-rate coupon and receive a variable-rate coupon. This type of hedge is treated as a fair-value hedge. The swap counterparty would normally exercise its option to cancel the derivative at par on any defined exercise date if interest rates had risen, and at that time, we could, at our option, require immediate repayment of the advance.

Additionally, the borrower's ability to prepay an advance can create interest-rate risk. When a borrower prepays an advance, we could suffer lower future income if the principal portion of the prepaid advance were invested in lower-yielding assets that continue to be funded by higher-cost debt. To protect against this risk, we generally charge a prepayment fee that makes us financially indifferent to a borrower's decision to prepay an advance. If the advance is hedged with a derivative instrument, the prepayment fee will generally offset the cost of terminating the designated hedge. When we offer advances (other than short-term advances) that a borrower may prepay without a prepayment fee, we usually finance such advances with callable debt with an interest-rate swap cancellable by us.

COs. We may enter into derivatives to hedge (or partially hedge, depending on the risk strategy) the interest-rate risk associated with our specific debt issuances, including using derivatives to change the effective interest-rate sensitivity of debt to better match the characteristics of funded assets. We endeavor to manage the risk arising from changing market prices and volatility of a CO by matching the cash inflow on the derivative with the cash outflow on the CO.

As an example of such a hedging strategy, when fixed-rate COs are issued, we may simultaneously enter into a matching derivative in which we receive a fixed-interest cash flows designed to mirror in timing and amount the interest cash outflows we pay on the CO. At the same time, we may pay variable cash flows that closely match the interest payments we receive on short-term or variable-rate assets. In some cases, the hedged CO may have a nonstatic coupon that is subject to fair-value risk and that is matched by the receivable coupon on the hedging interest-rate swap. These transactions are treated as fair-value hedges.

In a typical cash-flow hedge of anticipated CO issuance, we may enter into interest-rate swaps for the anticipated issuance of fixed-rate CO bonds to lock in a spread between an earning asset and the cost of funding. The interest-rate swap is terminated upon issuance of the fixed-rate CO bond. Changes in fair value of the hedging derivative, to the extent that the hedge is effective, will be recorded in accumulated other comprehensive loss and reclassified into earnings in the period or periods during which the cash flows of the fixed-rate CO bond affects earnings (beginning upon issuance and continuing over the life of the CO bond).

Firm Commitments. Mortgage loan purchase commitments are considered derivatives. We may hedge these commitments by selling MBS TBA or other derivatives for forward settlement. These hedges do not qualify for hedge accounting treatment. The mortgage loan purchase commitment and the TBA used in the economic hedging strategy are treated as an economic hedge and are marked-to-market through earnings. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan. The basis adjustments on the resulting performing loans are then amortized into net interest income over the life of the loans.

We may also hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap. In this case, the interest-rate swap functions as the hedging instrument for both the firm commitment and the subsequent advance and is treated as a fair value hedge. The fair-value change associated with the firm commitment is recorded as a basis adjustment of the advance at the time the commitment is terminated and the advance is issued. The basis adjustment is then amortized into interest income over the life of the advance.

Financial Statement Impact and Additional Financial Information. The notional amount of derivatives is a factor in determining periodic interest payments or cash flows received and paid. However, the notional amount of derivatives reflects our involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor our overall exposure to credit and market risk; the overall risk is much smaller. The risks of derivatives can be measured

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meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged, and any offsets between the derivatives and the items being hedged.

Table 12.1 - Fair Value of Derivative Instruments
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
 
Notional
Amount of
Derivatives
 
Derivative
Assets
 
Derivative
Liabilities
Derivatives designated as hedging instruments
 

 
 

 
 

 
 
 
 
 
 
Interest-rate swaps
$
11,980,699

 
$
12,811

 
$
(296,324
)
 
$
14,118,994

 
$
52,557

 
$
(332,830
)
Forward-start interest-rate swaps
282,000

 
—

 
(753
)
 
481,200

 
—

 
(9,807
)
Total derivatives designated as hedging instruments
12,262,699

 
12,811

 
(297,077
)
 
14,600,194

 
52,557

 
(342,637
)
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
 
 
 
 
 
Interest-rate swaps
927,800

 
682

 
(12,475
)
 
1,166,900

 
3,512

 
(4,688
)
Mortgage-delivery commitments (1)
50,773

 
339

 
—

 
42,918

 
169

 
(27
)
Total derivatives not designated as hedging instruments
978,573

 
1,021

 
(12,475
)
 
1,209,818

 
3,681

 
(4,715
)
Total notional amount of derivatives
$
13,241,272

 
 

 
 

 
$
15,810,012

 
 

 
 

Total derivatives before netting and collateral adjustments
 

 
13,832

 
(309,552
)
 
 
 
56,238

 
(347,352
)
Netting adjustments and cash collateral, including related accrued interest (2)
 

 
8,571

 
53,752

 
 
 
(21,452
)
 
46,902

Derivative assets and derivative liabilities
 

 
$
22,403

 
$
(255,800
)
 
 
 
$
34,786

 
$
(300,450
)
_______________________
(1)
Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.
(2)
Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $62.8 million and $25.8 million at December 31, 2018, and 2017, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $471,000 and $350,000 at December 31, 2018 and 2017.


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Table 12.2 - Net Gains and Losses on Derivatives and Hedging Activities
(dollars in thousands)

 
 
For the Year Ended December 31,
 
 
2018
 
2017
 
2016
Derivatives designated as hedging instruments
 
 
 
 
 
 
Interest-rate swaps
 
$
2,027

 
$
(2,308
)
 
$
(6,998
)
Forward-start interest-rate swaps
 
227

 
280

 
29

Total net gains (losses) related to derivatives designated as hedging instruments
 
2,254

 
(2,028
)
 
(6,969
)
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Economic hedges:
 
 
 
 
 
 
Interest-rate swaps
 
682

 
434

 
(1,352
)
Mortgage-delivery commitments
 
421

 
1,768

 
(270
)
Total net gains (losses) related to derivatives not designated as hedging instruments
 
1,103

 
2,202

 
(1,622
)
 
 
 
 
 
 
 
Price alignment amount(1)
 
(1,021
)
 
377

 
—

 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities
 
$
2,336

 
$
551

 
$
(8,591
)

_______________________
(1)
Represents the amount for derivatives for which variation margin is characterized as a daily settlement amount.

Table 12.3 - Effect of Fair Value Hedge Relationships
(dollars in thousands)

 
For the Year Ended December 31, 2018
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
447

 
$
257

 
$
704

 
$
51,522

Investments
43,771

 
(42,022
)
 
1,749

 
(26,040
)
COs – bonds
(5,680
)
 
5,254

 
(426
)
 
(27,895
)
Total
$
38,538

 
$
(36,511
)
 
$
2,027

 
$
(2,413
)
 
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2017
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
52,054

 
$
(52,633
)
 
$
(579
)
 
$
(24,663
)
Investments
20,748

 
(19,011
)
 
1,737

 
(32,053
)
COs – bonds
4,610

 
(8,076
)
 
(3,466
)
 
6,694

 Total
$
77,412

 
$
(79,720
)
 
$
(2,308
)
 
$
(50,022
)



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For the Year Ended December 31, 2016
 
Gain/(Loss) on
Derivative
 
Gain/(Loss) on
Hedged Item
 
Net Fair-Value
Hedge
Ineffectiveness
 
Effect of
Derivatives on
Net Interest
Income (1)
Hedged Item:
 

 
 

 
 

 
 

Advances
$
114,139

 
$
(112,547
)
 
$
1,592

 
$
(96,079
)
Investments
25,784

 
(23,965
)
 
1,819

 
(35,203
)
COs – bonds
(65,653
)
 
55,244

 
(10,409
)
 
27,182

Total
$
74,270

 
$
(81,268
)
 
$
(6,998
)
 
$
(104,100
)
______________
(1)
The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

Table 12.4 - Effect of Cash Flow Hedge Relationships
(dollars in thousands)

Derivatives and Hedged Items in Cash Flow Hedging Relationships
 
Gain (Losses) Recognized in Other Comprehensive Loss on Derivatives
(Effective Portion)
 
Location of Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Losses Reclassified
from Accumulated Other Comprehensive Loss into Net Income
(Effective Portion)
 
Gains Recognized in Net Losses on Derivatives and Hedging Activities
(Ineffective Portion)
Forward-start Interest-rate swaps - CO bonds
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2018
 
$
7,907

 
Interest expense
 
$
(3,171
)
 
$
227

For the Year Ended December 31, 2017
 
(2,838
)
 
Interest expense
 
(10,575
)
 
280

For the Year Ended December 31, 2016
 
(732
)
 
Interest expense
 
(23,767
)
 
29



For the years ended December 31, 2018, 2017, and 2016, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of December 31, 2018, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is three years.

As of December 31, 2018, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $4.6 million.

Managing Credit Risk on Derivatives. We are subject to credit risk on our hedging activities due to the risk of nonperformance by nonmember counterparties (including DCOs and their clearing members acting as agent to the DCOs as well as uncleared counterparties) to the derivative agreements. We manage credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in our policies, U.S. Commodity Futures Trading Commission (the CFTC) regulations, and FHFA regulations.

Uncleared Derivatives. All counterparties must execute master-netting agreements prior to entering into any uncleared derivative with us. Our master-netting agreements for uncleared derivatives contain bilateral-collateral exchange agreements that require that credit exposure beyond a defined threshold amount (which may be zero) be secured by readily marketable, U.S. Treasury, U.S. Government-guaranteed, or GSE securities, or cash. The level of these collateral threshold amounts (when applicable) varies according to the counterparty's Standard & Poor's Rating Service (S&P) or Moody's Investors Services (Moody's) long-term credit ratings. Credit exposures are then measured daily and adjustments to collateral positions are made in accordance with the terms of the master-netting agreements. These master-netting agreements also contain bilateral ratings-tied termination events permitting us to terminate all outstanding derivatives transactions with a counterparty in the event of a specified rating downgrade by Moody's or S&P. Based on credit analyses and collateral requirements, we do not anticipate any credit losses on our derivative agreements.

We execute uncleared derivatives with nonmember counterparties with long-term ratings of single-A (or equivalent) or better by the major NRSROs at the time of the transaction, although risk-reducing trades may be permitted for counterparties whose

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ratings have fallen below these ratings. Some of these counterparties or their affiliates buy, sell, and distribute COs. See Note 14 — Consolidated Obligations for additional information.

Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's or S&P to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net liability position, unless the collateral delivery threshold is set to zero. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at December 31, 2018, was $294.6 million for which we had delivered collateral with a post-haircut value of $271.4 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting arrangements. Table 12.5 sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at December 31, 2018.

Table 12.5 - Post Haircut Value of Incremental Collateral to be Delivered as of December 31, 2018
(dollars in thousands)

Ratings Downgrade (1)
 
 
From
 
To
 
Incremental Collateral
AA+
 
AA or AA-
 
$
622

AA-
 
A+, A or A-
 
15,000

A-
 
below A-
 
13,578

_______________________
(1)
Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used.

Cleared Derivatives. For cleared derivatives, the DCO is our counterparty. The DCO notifies the clearing member of the required initial and variation margin and our agent (clearing member) in turn notifies us. We utilize two DCOs, for all cleared derivative transactions, CME Inc. and LCH Ltd. Based upon certain amendments, effective January 3, 2017, made by CME Inc. to its rulebook,we began to characterize variation margin payments related to CME Inc. contracts as daily settlement payments, rather than collateral. However, throughout 2017, we continued to characterize our variation margin related to LCH Ltd. contracts as cash collateral. On January 16, 2018, based on a change to LCH Ltd.'s rulebook, we began to characterize variation margin payments related to LCH Ltd. contracts as daily settlement payments, rather than cash collateral. At both DCOs, initial margin has been, and continues to be, considered cash collateral. We post initial margin and exchange variation margin through a clearing member who acts as our agent to the DCO and who guarantees our performance to the DCO, subject to the terms of relevant agreements. These arrangements expose us to credit risk in the event that one of our clearing members or one of the DCOs fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because the DCO, which is fully secured at all times through margin received from its clearing members, is substituted for the credit risk exposure of individual counterparties in uncleared derivatives, and collateral is posted at least once daily for changes in the fair value of cleared derivatives through a clearing member.

For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are CFTC-registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at December 31, 2018.

Offsetting of Certain Derivatives. We present derivatives, any related cash collateral received or pledged, and associated accrued interest, on a net basis by counterparty.

We have analyzed the rights, rules, and regulations governing our cleared derivatives and determined that those rights, rules, and regulations should result in a net claim through each of our clearing members with the related DCO upon an event of default including a bankruptcy, insolvency or similar proceeding involving the DCO or one of our clearing members, or both.

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For this purpose, net claim generally means a single net amount reflecting the aggregation of all amounts indirectly owed by us to the relevant DCO and indirectly payable to us from the relevant DCO.

Table 12.6 presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master netting arrangements or similar agreements as of December 31, 2018 and 2017, and the fair value of derivatives that are not subject to such netting. Derivatives subject to netting include any related cash collateral received from or pledged to counterparties.

Table 12.6 - Netting of Derivative Assets and Derivative Liabilities
(dollars in thousands)

 
December 31, 2018
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
Non-cash Collateral (Received) or Pledged Not Offset(2)
 
 
 
Gross Recognized Amount
Gross Amounts of Netting Adjustments (1)
 
Mortgage Delivery Commitments
 
Total Derivative Assets and Total Derivative Liabilities
 
Can Be Sold or Repledged
Cannot Be Sold or Repledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
12,861

$
(11,885
)
 
$
339

 
$
1,315

 
$
(396
)
$
—

 
$
919

Cleared
631

20,457

 
 
 
21,088

 
—

—

 
21,088

Total
 
 
 
 
 
$
22,403

 
 
 
 
$
22,007

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
(306,848
)
$
51,048

 
$
—

 
$
(255,800
)
 
$
6,104

$
237,054

 
$
(12,642
)
Cleared
(2,704
)
2,704

 
 
 
—

 
—

—

 
—

Total
 
 
 
 
 
$
(255,800
)
 
 
 
 
$
(12,642
)
_______________________
(1)
Includes gross amounts of netting adjustments and cash collateral.
(2)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2018, we had additional net credit exposure of $639,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

 
December 31, 2017
 
Derivative Instruments Meeting Netting Requirements
 
 
 
 
 
Non-cash Collateral (Received) or Pledged Not Offset(2)
 
 
 
Gross Recognized Amount
Gross Amounts of Netting Adjustments (1)
 
Mortgage Delivery Commitments
 
Total Derivative Assets and Total Derivative Liabilities
 
Can Be Sold or Repledged
Cannot Be Sold or Repledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
15,587

$
(13,481
)
 
$
169

 
$
2,275

 
$
—

$
—

 
$
2,275

Cleared
40,482

(7,971
)
 
 
 
32,511

 
—

—

 
32,511

Total
 
 
 
 
 
$
34,786

 
 
 
 
$
34,786

 
 
 
 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
 
 
 
 
 
 
 
 
 
 
Uncleared
$
(335,289
)
$
34,866

 
$
(27
)
 
$
(300,450
)
 
$
7,627

$
280,486

 
$
(12,337
)
Cleared
(12,036
)
12,036

 
 
 
—

 
—

—

 
—

Total
 
 
 
 
 
$
(300,450
)
 
 
 
 
$
(12,337
)
_______________________
(1)
Includes gross amounts of netting adjustments and cash collateral.

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(2)
Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2017, we had additional net credit exposure of $502,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 13 — Deposits

We offer demand, overnight and term deposits for members and qualifying nonmembers. Members that service mortgage loans may deposit funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans, which we classify as "other" in the following table.

Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The average interest rate paid on average deposits during 2018 and 2017 was 1.07 percent and 0.76 percent, respectively.

Table 13.1 - Deposits
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
Interest-bearing
 

 
 
Demand and overnight
$
444,486

 
$
447,700

Term
800

 
—

Other
2,961

 
3,222

Noninterest-bearing
 

 
 

Other
26,631

 
26,147

Total deposits
$
474,878

 
$
477,069



Note 14 — Consolidated Obligations

COs consist of CO bonds and CO discount notes. CO bonds may be issued to raise short-, intermediate-, and long-term funds and are not subject to any statutory or regulatory limits on maturity. CO discount notes are issued to raise short-term funds and have original maturities of up to one year. These notes sell at less than their face amount and are redeemed at par value when they mature.

Although we are primarily liable for the portion of COs issued for which we received issuance proceeds, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all COs. The FHFA, at its discretion, may require any FHLBank to make principal or interest payments due on any CO whether or not the CO represents a primary liability of such FHLBank. Although an FHLBank has never paid the principal or interest payments due on a CO on behalf of another FHLBank, if that event should occur, FHFA regulations provide that the paying FHLBank is entitled to reimbursement from the noncomplying FHLBank for any payments made on its behalf and other associated costs, including interest to be determined by the FHFA. If, however, the FHFA determines that the noncomplying FHLBank is unable to satisfy its repayment obligations, the FHFA may allocate the outstanding liabilities of the noncomplying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all COs outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner. See Note 20 – Commitments and Contingencies for additional information regarding the FHLBanks' joint and several liability.

The par values of the FHLBanks' outstanding COs, including COs on which other FHLBanks are primarily liable, were approximately $1.0 trillion at both December 31, 2018 and 2017, respectively. Regulations require each FHLBank to maintain unpledged qualifying assets equal to outstanding COs for which it is primarily liable. Such qualifying assets include cash; secured advances; obligations of or fully guaranteed by the U.S.; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBank is located. Any assets subject to a lien or pledge for the benefit of holders of any issues of COs are treated as if they were free from lien or pledge for purposes of compliance with these regulations.

CO Bonds.


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Table 14.1 - CO Bonds Outstanding by Contractual Maturity
(dollars in thousands)

 
December 31, 2018
 
December 31, 2017
Year of Contractual Maturity
Amount
 
Weighted
Average
Rate (1)
 
Amount
 
Weighted
Average
Rate (1)
Due in one year or less
$
9,638,270

 
2.01
%
 
$
12,186,510

 
1.35
%
Due after one year through two years
5,375,845

 
2.24

 
5,288,470

 
1.63

Due after two years through three years
3,864,560

 
2.17

 
3,128,240

 
1.81

Due after three years through four years
1,891,975

 
2.20

 
2,759,460

 
1.74

Due after four years through five years
1,338,515

 
2.39

 
1,572,775

 
2.00

Thereafter
3,792,150

 
3.25

 
3,389,695

 
2.76

Total par value
25,901,315

 
2.30
%
 
28,325,150

 
1.70
%
Premiums
88,434

 
 

 
90,836

 
 

Discounts
(16,133
)
 
 

 
(15,685
)
 
 

Hedging adjustments
(60,932
)
 
 

 
(55,678
)
 
 

 
$
25,912,684

 
 

 
$
28,344,623

 
 

_______________________
(1)
The CO bonds' weighted-average rate excludes concession fees.

CO bonds outstanding were issued with either fixed-rate coupon-payment terms or variable-rate coupon-payment terms that may use a variety of indices for interest-rate resets, such as LIBOR and SOFR. To meet the expected specific needs of certain investors in CO bonds, both fixed-rate CO bonds and variable-rate CO bonds may contain features which may result in complex coupon-payment terms and call options. When these CO bonds are issued, we may enter into derivatives containing features that offset the terms and embedded options, if any, of the CO bonds.

Table 14.2 - CO Bonds Outstanding by Call Feature
(dollars in thousands)

Par Value of CO bonds
December 31, 2018
 
December 31, 2017
Noncallable and nonputable
$
20,419,315

 
$
23,931,150

Callable
5,482,000

 
4,394,000

Total par value
$
25,901,315

 
$
28,325,150



Table 14.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date
(dollars in thousands)

Year of Contractual Maturity or Next Call Date
 
December 31, 2018
 
December 31, 2017
Due in one year or less
 
$
13,435,270

 
$
15,309,510

Due after one year through two years
 
5,602,845

 
5,580,470

Due after two years through three years
 
2,802,560

 
3,020,240

Due after three years through four years
 
1,366,975

 
1,542,460

Due after four years through five years
 
1,156,515

 
1,107,775

Thereafter
 
1,537,150

 
1,764,695

Total par value
 
$
25,901,315

 
$
28,325,150



CO bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have the following interest-rate payment terms:


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Step-Up bonds pay interest at increasing fixed rates for specified intervals over the life of the CO bond and can be called at our option on the step-up dates.

Table 14.4 - CO Bonds by Interest Rate-Payment Type
(dollars in thousands)

Par Value of CO bonds
December 31, 2018
 
December 31, 2017
Fixed-rate
$
21,216,315

 
$
21,416,150

Simple variable-rate
2,853,000

 
5,432,000

Step-up
1,832,000

 
1,477,000

Total par value
$
25,901,315

 
$
28,325,150



CO Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows:
Table 14.5 - CO Discount Notes Outstanding
(dollars in thousands)

 
Book Value
 
Par Value
 
Weighted Average
Rate (1)
December 31, 2018
$
33,065,822

 
$
33,147,065

 
2.37
%
December 31, 2017
$
27,720,906

 
$
27,752,860

 
1.25
%
_______________________
(1)
The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 15 — Affordable Housing Program

The FHLBank Act requires each FHLBank to establish and maintain an AHP to provide subsidies in the form of direct grants and below-market interest-rate advances (AHP advances). These funds are intended to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Each FHLBank is required to contribute to its
AHP the greater of 10 percent of its previous year's net income before interest expense associated with mandatorily redeemable capital stock and the assessment for AHP (AHP earnings), or the prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million for each year. We accrue this expense monthly based on our AHP earnings, and the accruals are accumulated into our AHP payable account. We reduce our AHP payable account as we disburse the funds either in the form of direct grants to member institutions or as a discount on below-market-rate AHP advances.

If we experience a net loss during a quarter, but still have AHP earnings for the year, our obligation to the AHP would be calculated based on our AHP earnings for that calendar year. In annual periods where our AHP earnings are zero or less, our AHP assessment is zero since our required annual contribution is limited to our annual AHP earnings. If the result of the aggregate 10 percent calculation described above is less than $100 million for all the FHLBanks, then each FHLBank would be required to contribute such prorated sums as may be required to ensure that the aggregate contributions by the FHLBanks equals $100 million. The proration would be made on the basis of the income of the FHLBanks for the year, except that the required annual AHP contribution for an FHLBank cannot exceed its AHP earnings for the year pursuant to an FHFA regulation. Each FHLBank's required annual AHP contribution is limited to its annual net earnings. Our AHP expense for 2018, 2017, and 2016 was $24.3 million, $21.3 million, and $19.4 million, respectively.

There was no shortfall, as described above, in 2018, 2017, or 2016. If an FHLBank is experiencing financial instability and finds that its required AHP contributions are contributing to the financial instability, the FHLBank may apply to the FHFA for a temporary suspension of its contributions. We did not make such an application in 2018, 2017, or 2016.


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Table 15.1 - AHP Liability
(dollars in thousands)

 
2018
 
2017
Balance at beginning of year
$
81,600

 
$
81,627

AHP expense for the period
24,299

 
21,307

AHP direct grant disbursements
(17,729
)
 
(18,628
)
AHP subsidy for AHP advance disbursements
(4,360
)
 
(2,782
)
Return of previously disbursed grants and subsidies
155

 
76

Balance at end of year
$
83,965

 
$
81,600



Note 16 — Capital

We are subject to capital requirements under our capital plan, the FHLBank Act, and FHFA regulations:
 
1.
Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.
 
2.
Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of any general loss allowance if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses. We have never issued Class A stock.
 
3.
Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.
 
The FHFA has authority to require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

Table 16.1 - Regulatory Capital Requirements
(dollars in thousands)

Risk-Based Capital Requirements
December 31,
2018
 
December 31,
2017
 
 
 
 
Permanent capital
 

 
 

Class B capital stock
$
2,528,854

 
$
2,283,721

Mandatorily redeemable capital stock
31,868

 
35,923

Retained earnings
1,395,012

 
1,308,349

Total permanent capital
$
3,955,734

 
$
3,627,993

Risk-based capital requirement
 

 
 

Credit-risk capital
$
289,080

 
$
328,557

Market-risk capital
187,183

 
170,102

Operations-risk capital
142,879

 
149,598

Total risk-based capital requirement
$
619,142

 
$
648,257

Permanent capital in excess of risk-based capital requirement
$
3,336,592

 
$
2,979,736


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December 31, 2018
 
December 31, 2017
 
 
Required
 
Actual
 
Required
 
Actual
Capital Ratio
 
 
 
 
 
 
 
 
Risk-based capital
 
$
619,142

 
$
3,955,734

 
$
648,257

 
$
3,627,993

Total regulatory capital
 
$
2,543,733

 
$
3,955,734

 
$
2,414,478

 
$
3,627,993

Total capital-to-asset ratio
 
4.0
%
 
6.2
%
 
4.0
%
 
6.0
%
 
 
 
 
 
 
 
 
 
Leverage Ratio
 
 
 
 
 
 
 
 
Leverage capital
 
$
3,179,666

 
$
5,933,601

 
$
3,018,097

 
$
5,441,990

Leverage capital-to-assets ratio
 
5.0
%
 
9.3
%
 
5.0
%
 
9.0
%


We are a cooperative whose members own most of our capital stock. Former members (including certain nonmembers that own our capital stock as a result of merger or acquisition, relocation, or involuntary termination of membership) own the remaining capital stock to support business transactions still carried on our statement of condition. Shares of capital stock cannot be purchased or sold except between us and our members at $100 per share par value. We have only issued Class B stock and each member is required to purchase Class B stock equal to the sum of 0.35 percent of certain member assets eligible to secure advances under the FHLBank Act (the membership stock investment requirement), and 3.00 percent for overnight advances, 4.00 percent for all other advances, and 0.25 percent for outstanding letters of credit (collectively, the activity-based stock-investment requirement).

Members may redeem Class B stock after no sooner than five years' notice provided in accordance with our capital plan (the redemption-notice period). The effective date of termination of membership for any member that voluntarily withdraws from membership is the end of the redemption-notice period, at which time any stock that is held as a condition of membership shall be divested, subject to any other applicable restrictions at that time. At that time, any stock held pursuant to activity-based stock investment requirements shall remain outstanding until such requirements are eliminated by disposition of the related business activity. Any member that withdraws from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that is held as a condition of membership. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.

The redemption-notice period can also be triggered by the involuntary termination of membership of a member by our board of directors or by the FHFA, the merger or acquisition of a member into a nonmember institution, or the relocation of a member to a principal location outside our district. At the end of the redemption-notice period, if the former member's activity-based stock investment requirement is greater than zero, we may require the associated remaining obligations to us to be satisfied in full prior to allowing the member to redeem the remaining shares.

Because our Class B stock is subject to redemption in certain instances, we can experience a reduction in our capital, particularly due to membership terminations due to merger and acquisition activity. However, there are several mitigants to this risk, including, but not limited to, the following:

•
the activity-based stock-investment requirement allows us to retain stock beyond the redemption-notice period if the associated member-related activity is still outstanding, until the obligations are paid in full;
•
the redemption notice period allows for a significant period in which we can restructure our balance sheet to accommodate a reduction in capital;
•
our board of directors may modify the membership stock-investment requirement (MSIR) or the activity-based stock-investment requirement (ABSIR), or both, to address expected shortfalls in capitalization due to membership termination;
•
our board of directors or the FHFA may suspend redemptions in the event that such redemptions would cause us not to meet our minimum regulatory capital requirements; and
•
the growth in our retained earnings, which are included in our equity capital, helps offset the risk that our capital could be reduced by redemptions.

Our board of directors may declare and pay dividends in either cash or capital stock, subject to limitations in applicable law and our capital plan.


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Restricted Retained Earnings. At December 31, 2018, our total contribution requirement totaled $574.3 million. As of December 31, 2018 and 2017, restricted retained earnings totaled $310.7 million and $267.3 million, respectively. These restricted retained earnings are not available to pay dividends.

Mandatorily Redeemable Capital Stock. We will reclassify capital stock subject to redemption from equity to liability once a member exercises a written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from membership. Dividends related to capital stock classified as a liability are accrued at the expected dividend rate and reported as interest expense in the statement of operations. If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock would no longer be classified as interest expense.

Redemption of capital stock is subject to the redemption-notice period and our satisfaction of applicable minimum capital requirements. For the years ended December 31, 2018, 2017, and 2016, dividends on mandatorily redeemable capital stock of $1.9 million, $1.6 million, and $1.4 million, respectively, were recorded as interest expense.

Table 16.2 - Mandatorily Redeemable Capital Stock
(dollars in thousands)

 
 
2018
 
2017
 
2016
Balance at beginning of year
 
$
35,923

 
$
32,687

 
$
41,989

Capital stock subject to mandatory redemption reclassified from capital
 
309

 
8,670

 
40

Redemption/repurchase of mandatorily redeemable capital stock
 
(4,364
)
 
(5,434
)
 
(9,342
)
Balance at end of year
 
$
31,868

 
$
35,923

 
$
32,687



The number of stockholders holding mandatorily redeemable capital stock was ten, nine, and nine at December 31, 2018, 2017, and 2016, respectively.

Consistent with our capital plan, we are not required to redeem membership stock until the expiration of the redemption-notice period. Furthermore, we are not required to redeem activity-based stock until the later of the expiration of the redemption-notice period or the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity-based asset no longer outstanding, we may repurchase such shares, in our sole discretion, subject to the statutory and regulatory restrictions on excess capital-stock redemption. The year of redemption in the following table represents the end of the redemption-notice period. However, as discussed above, if activity to which the capital stock relates remains outstanding beyond the redemption-notice period, the activity-based stock associated with this activity will remain outstanding until the activity no longer remains outstanding.

Table 16.3 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period
(dollars in thousands)

 
 
December 31, 2018
 
December 31, 2017
Past redemption date (1)
 
$
4,076

 
$
420

Due in one year or less
 
27,379

 
4,018

Due after one year through two years
 
—

 
27,379

Due after two years through three years
 
—

 
54

Due after three years through four years
 
363

 
—

Due after four years through five years
 
40

 
4,022

Thereafter (2)
 
10

 
30

Total
 
$
31,868

 
$
35,923

_______________________
(1)
Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption-notice period but the member-related activity (for example, advances) remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.

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(2)
Amount represents reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for membership. Captive insurance company members that were admitted as members prior to September 12, 2014, will have their memberships terminated no later than February 19, 2021.

A member may cancel or revoke its written notice of redemption or its notice of withdrawal from membership prior to the end of the redemption-notice period. Our capital plan provides that we will charge the member a cancellation fee in the amount of 2.0 percent of the par amount of the shares of Class B stock that is the subject of the redemption notice. We will assess a redemption-cancellation fee unless the board of directors decides that it has a bona fide business purpose for waiving the imposition of the fee, and such a waiver is consistent with the FHLBank Act.

Excess Capital Stock. Our capital plan provides us with the discretion to repurchase capital stock from a member at par value if that stock is not required by the member to meet its total stock investment requirement (excess capital stock) subject to all applicable limitations. In conducting any repurchases, we repurchase any shares that are the subject of an outstanding redemption notice from the member from whom we are repurchasing prior to repurchasing any other shares that are in excess of the member's total stock-investment requirement (TSIR). On June 1, 2017, we began daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 25 percent of the shareholder's total stock investment requirement, subject to a minimum repurchase of $100,000. On August 11, 2017, we began repurchasing excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000. In addition to these daily repurchases, shareholders may request that we voluntarily repurchase excess stock shares at any time. We may also allow the member to sell the excess capital stock at par value to another one of our members.

At December 31, 2018 and 2017, members and nonmembers with capital stock outstanding held excess capital stock totaling $88.7 million and $110.7 million, respectively, representing approximately 3.5 percent and 4.8 percent, respectively, of total capital stock outstanding. FHFA rules limit our ability to create member excess capital stock under certain circumstances. We may not pay dividends in the form of capital stock or issue new excess capital stock to members if our excess capital stock exceeds one percent of our total assets or if the issuance of excess capital stock would cause our excess capital stock to exceed one percent of our total assets. At December 31, 2018, we had excess capital stock outstanding totaling 0.1 percent of our total assets. For the year ended December 31, 2018, we complied with the FHFA's excess capital stock rule.

Capital Classification Determination. We are subject to the FHFA's regulation on FHLBank capital classification and critical capital levels (the Capital Rule). The Capital Rule, among other things, defines criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. We satisfied these requirements at December 31, 2018. However, pursuant to the Capital Rule, the FHFA has discretion to reclassify an FHLBank and modify or add to corrective action requirements for a particular capital classification. If we become classified into a capital classification other than adequately capitalized, we will be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock. By letter dated December 13, 2018, the Director of the FHFA notified us that, based on September 30, 2018 financial information, we met the definition of adequately capitalized under the Capital Rule. We have not yet received our capital classification based on our December 31, 2018 financial information.

Note 17 — Accumulated Other Comprehensive Loss

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Table 17.1 - Accumulated Other Comprehensive Loss
(dollars in thousands)
 
 
Net Unrealized Loss on Available-for-sale Securities
 
Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities
 
Net Unrealized Loss Relating to Hedging Activities
 
Pension and Postretirement Benefits
 
Total
Balance, December 31, 2015
 
$
(137,718
)
 
$
(229,785
)
 
$
(71,237
)
 
$
(3,857
)
 
$
(442,597
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
909

 
—

 
(732
)
 
—

 
177

Noncredit other-than-temporary impairment losses
 
—

 
(1,142
)
 
—

 
—

 
(1,142
)
Accretion of noncredit loss
 
—

 
36,070

 
—

 
—

 
36,070

Net actuarial loss
 
—

 
—

 
—

 
(3,242
)
 
(3,242
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
2,478

 
—

 
—

 
2,478

Amortization - hedging activities (2)
 
—

 
—

 
23,782

 
—

 
23,782

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
960

 
960

Other comprehensive income (loss)
 
909

 
37,406

 
23,050

 
(2,282
)
 
59,083

Balance, December 31, 2016
 
(136,809
)
 
(192,379
)
 
(48,187
)
 
(6,139
)
 
(383,514
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses)
 
14,478

 
—

 
(2,838
)
 
—

 
11,640

Accretion of noncredit loss
 
—

 
32,815

 
—

 
—

 
32,815

Net actuarial loss
 
—

 
—

 
—

 
(586
)
 
(586
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
1,346

 
—

 
—

 
1,346

Amortization - hedging activities (4)
 
—

 
—

 
10,589

 
—

 
10,589

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
770

 
770

Other comprehensive income
 
14,478

 
34,161

 
7,751

 
184

 
56,574

Balance, December 31, 2017
 
(122,331
)
 
(158,218
)
 
(40,436
)
 
(5,955
)
 
(326,940
)
Other comprehensive income (loss) before reclassifications:
 
 
 
 
 
 
 
 
 
 
Net unrealized (losses) gains
 
(30,627
)
 
—

 
7,907

 
—

 
(22,720
)
Accretion of noncredit loss
 
—

 
28,834

 
—

 
—

 
28,834

Net actuarial loss
 
—

 
—

 
—

 
(670
)
 
(670
)
Reclassifications from other comprehensive income to net income
 
 
 
 
 
 
 
 
 
 
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)
 
—

 
230

 
—

 
—

 
230

Amortization - hedging activities (5)
 
—

 
—

 
3,410

 
—

 
3,410

Amortization - pension and postretirement benefits (3)
 
—

 
—

 
—

 
1,349

 
1,349

Other comprehensive (loss) income
 
(30,627
)
 
29,064

 
11,317

 
679

 
10,433

Balance, December 31, 2018
 
$
(152,958
)
 
$
(129,154
)
 
$
(29,119
)
 
$
(5,276
)
 
$
(316,507
)
_______________________

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(1)
Recorded in net other-than-temporary impairment losses in investment securities, credit portion in the statement of operations.
(2)
Amortization of hedging activities includes $23.8 million recorded in CO bond interest expense and $14,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.
(3)
Recorded in other operating expenses in the statement of operations.
(4)
Amortization of hedging activities includes $10.6 million recorded in CO bond interest expense and $14,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.
(5)
Amortization of hedging activities includes $3.2 million recorded in CO bond interest expense and $239,000 recorded in net gains (losses) on derivatives and hedging activities in the statement of operations.

Note 18 — Employee Retirement Plans

Qualified Defined Benefit Multiemployer Plan. We participate in the Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory defined-benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Internal Revenue Code. Accordingly, certain multiemployer plan disclosures are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by a participating employer may be used to provide benefits to employees of other participating employers since assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The plan covers substantially all of our employees. For the years ended December 31, 2018, 2017 and 2016, in addition to our required contribution, we made voluntary contributions of $6.0 million, $6.2 million and $5.0 million, respectively, to the Pentegra Defined Benefit Plan. We were not required to nor did we pay a funding improvement surcharge to the plan for the years ended December 31, 2018, 2017, and 2016.

The Pentegra Defined Benefit Plan operates on a fiscal year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. We do not have any collective bargaining agreements in place.

The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. Accordingly, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.

The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the plan year ended June 30, 2017. For the Pentegra Defined Benefit Plan plan years ended June 30, 2017 and 2016, our contributions did not represent more than five percent of the total contributions to the Pentegra Defined Benefit Plan.

Table 18.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status
(dollars in thousands)

 
For the Year Ended December 31,
 
2018
 
2017
 
2016
Net pension cost
$
6,472

 
$
6,727

 
$
5,526

Pentegra Defined Benefit Plan funded status as of July 1(1)
109.9
%
(2) 
111.8
%
(3) 
104.7
%
Our funded status as of July 1(1)
123.1
%
 
122.9
%
 
108.6
%

______________________
(1)
The funded status is calculated in accordance with a provision contained in the Highway and Transportation Funding Act of 2014 (HATFA), which was signed into law on August 8, 2014, and which modifies the interest rates that had been set by the Moving Ahead for Progress in the 21st Century Act (MAP-21). MAP-21, signed into law in 2012, changed the calculation of the discount rate used in measuring the pension plan liability. MAP-21 allows plan sponsors to measure the pension plan liability using a 25-year average of interest rates plus or minus a corridor. Prior to MAP-21, the discount ra

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te used in measuring the pension plan liability was based on the 24-month average of interest rates. HATFA amended MAP-21 by extending the time period and reducing the rate at which the 25-year corridors widen. Over time, the pension funding stabilization effect of MAP-21 will decline because the 24-month smoothed segment rates and the amended 25-year corridors are likely to converge.
(2)
The funded status as of July 1, 2018, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2018, through March 15, 2019. Contributions made on or before March 15, 2019, and designated for the plan year ended June 30, 2018, will be included in the final valuation as of July 1, 2018. The final funded status as of July 1, 2018, will not be available until the Form 5500 for the plan year July 1, 2018, through June 30, 2019 is filed. This Form 5500 is due to be filed no later than April 2020.
(3)
The funded status as of July 1, 2017, is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2017, through March 15, 2018. Contributions made on or before March 15, 2018, and designated for the plan year ended June 30, 2017, will be included in the final valuation as of July 1, 2017. The final funded status as of July 1, 2017, will not be available until the Form 5500 for the plan year July 1, 2017, through June 30, 2018 is filed. This Form 5500 is due to be filed no later than April 2019.

Qualified Defined Contribution Plan. We also participate in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified defined contribution plan. The plan covers substantially all of our employees. We contribute a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. Our matching contributions are charged to compensation and benefits expense and are not considered to be material.

Nonqualified Defined Contribution Plan. We also maintain the Thrift Benefit Equalization Plan, a nonqualified, unfunded deferred compensation plan covering certain of our senior officers and directors. The plan's liability consists of the accumulated compensation deferrals and the accumulated earnings on these deferrals. Our obligation from this plan was $9.7 million and $9.5 million at December 31, 2018 and 2017, respectively, which is recorded in other liabilities on the statement of condition. We maintain a rabbi trust, which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations. Our matching contributions are charged to compensation and benefits expense and are not considered to be material.

Nonqualified Supplemental Defined Benefit Retirement Plan. We also maintain a nonqualified, single-employer unfunded defined-benefit plan covering certain senior officers, for which our obligation is detailed below. We maintain a rabbi trust which is recorded in other assets on the statement of condition, intended to satisfy future benefit obligations.

Postretirement Benefits. We sponsor a fully insured postretirement benefit program that includes life insurance benefits for eligible retirees. We provide life insurance to all employees who retire on or after age 55 after completing six years of service. No contributions are required from the retirees. There are no funded plan assets that have been designated to provide postretirement benefits.


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Table 18.2 - Pension and Postretirement Benefit Obligation, Fair Value of Plan Assets, and Funded Status
(dollars in thousands)

 
Nonqualified Supplemental Defined Benefit Retirement Plan
 
Postretirement Benefits 
 
December 31, 2018
 
December 31, 2017
 
December 31, 2018
 
December 31, 2017
Change in benefit obligation (1)
 

 
 

 
 

 
 

Benefit obligation at beginning of year
$
19,366

 
$
17,132

 
$
1,056

 
$
878

Service cost
1,490

 
1,179

 
45

 
38

Interest cost
654

 
600

 
37

 
36

Actuarial loss
831

 
459

 
(161
)
 
127

Benefits paid
(5
)
 
(4
)
 
(22
)
 
(23
)
Plan amendments
—

 
—

 
—

 
—

Settlements
(15
)
 
—

 
—

 
—

Benefit obligation at end of year
22,321

 
19,366

 
955

 
1,056

 
 
 
 
 
 
 
 
Change in plan assets
 

 
 

 
 

 
 

Fair value of plan assets at beginning of year
—

 
—

 
—

 
—

Employer contribution
20

 
4

 
22

 
23

Benefits paid
(5
)
 
(4
)
 
(22
)
 
(23
)
Settlements
(15
)
 
—

 
—

 
—

Fair value of plan assets at end of year
—

 
—

 
—

 
—

Funded status at end of year
$
(22,321
)
 
$
(19,366
)
 
$
(955
)
 
$
(1,056
)
______________________
(1)
Represents the projected benefit obligation for the nonqualified supplemental defined benefit retirement plan and the accumulated postretirement benefit obligation for postretirement benefits.

Amounts recognized in other liabilities on the statement of condition for our nonqualified supplemental defined benefit retirement plan and postretirement benefits at December 31, 2018 and 2017, were $23.3 million and $20.4 million, respectively.

Table 18.3 - Pension and Postretirement Benefits Recognized in Accumulated Other Comprehensive Loss
(dollars in thousands)

 
 
Nonqualified Supplemental Defined Benefit Retirement Plan
 
Postretirement
Benefits
 
 
December 31, 2018
 
December 31, 2017
 
December 31, 2018
 
December 31, 2017
Net actuarial loss
 
$
4,920

 
$
5,337

 
$
123

 
$
299

Prior service cost
 
234

 
319

 
—

 
—

Total
 
$
5,154

 
$
5,656

 
$
123

 
$
299



The accumulated benefit obligation for the nonqualified supplemental defined benefit retirement plan was $18.3 million and $15.4 million at December 31, 2018 and 2017, respectively.


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Table 18.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
(dollars in thousands)

 
 
Nonqualified Supplemental Defined Benefit Retirement Plan
 
Postretirement Benefits
 
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
 
$
1,490

 
$
1,179

 
$
1,053

 
$
45

 
$
38

 
$
34

Interest cost
 
654

 
600

 
655

 
37

 
36

 
34

Amortization of prior service cost
 
86

 
86

 
86

 
—

 
—

 
—

Amortization of net actuarial loss
 
1,248

 
676

 
870

 
15

 
8

 
4

Net periodic benefit cost
 
3,478

 
2,541

 
2,664

 
97

 
82

 
72

 
 
 
 
 
 
 
 
 
 
 
 
 
Other Changes in Benefit Obligations Recognized in Accumulated Other Comprehensive Loss
 
 
 
 
 
 
 
 
 
 
 
 
Amortization of prior service cost
 
(86
)
 
(86
)
 
(86
)
 
—

 
—

 
—

Amortization of net actuarial loss
 
(1,248
)
 
(676
)
 
(870
)
 
(15
)
 
(8
)
 
(4
)
Prior service cost
 
—

 
—

 
492

 
—

 
—

 
—

Net actuarial loss (gain)
 
831

 
459

 
2,682

 
(161
)
 
127

 
68

Total amount recognized in other comprehensive income
 
(503
)
 
(303
)
 
2,218

 
(176
)
 
119

 
64

Total amount recognized in net periodic benefit cost and other comprehensive income
 
$
2,975

 
$
2,238

 
$
4,882

 
$
(79
)
 
$
201

 
$
136



The estimated net actuarial loss and prior service cost that will be amortized from accumulated other comprehensive loss into net periodic benefit cost during 2019 is $640,000 for our nonqualified supplemental defined benefit retirement plan and $2,000 for our postretirement benefits.

Table 18.5 - Pension and Postretirement Benefit Plan Key Assumptions

 
 
Nonqualified Supplemental Defined Benefit Retirement Plan
 
Postretirement
Benefits
 
 
2018
 
2017
 
2018
 
2017
Benefit obligation
 
 
 
 
 
 
 
 
Discount rate
 
3.81
%
 
3.09
%
 
4.25
%
 
3.64
%
Salary increases
 
5.50
%
 
5.50
%
 
—

 
—

 
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
 
 
 
 
 
 
 
Discount rate
 
3.09
%
 
3.98
%
 
3.64
%
 
4.22
%
Salary increases
 
5.50
%
 
5.50
%
 
—

 
—



The discount rate for the nonqualified supplemental defined benefit retirement plan was determined by using a discounted cash-flow analysis using the FTSE Pension Discount Curve as of December 31, 2018.

Our nonqualified supplemental defined benefit retirement plan and postretirement benefits are not funded; therefore, no contributions will be made in 2019 other than the payment of benefits.


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Table 18.6 - Estimated Future Benefit Payments
(dollars in thousands)

 
 
Estimated Future Payments
 
 
Nonqualified Supplemental Defined Benefit
Retirement Plan
 
Postretirement
Benefits
2019
 
$
6,615

 
$
18

2020
 
1,917

 
20

2021
 
2,383

 
16

2022
 
2,200

 
18

2023
 
2,382

 
19

2024-2028
 
7,961

 
138



Note 19 — Fair Values

Fair-Value Methodologies and Techniques

We have determined the fair-value amounts above using available market and other pertinent information and our best judgment of appropriate valuation methods. Fair value is the price in an orderly transaction between market participants to sell an asset or transfer a liability in the principal (or advantageous) market for the asset or liability at the measurement date (an exit price). Although we use our best judgment in estimating the fair value of these financial instruments, there are inherent limitations in any estimation technique or valuation methodology. For example, because an active secondary market does not exist for a portion of our financial instruments, in certain cases, fair values are not subject to precise quantification or verification and may change as economic and market factors and evaluation of those factors change. Therefore, these fair values are not necessarily indicative of the amounts that would be realized in current market transactions, although they do reflect our judgment of how a market participant would estimate the fair values. Additionally, these values do not represent
an estimate of the overall market value of the Bank as a going concern, which would take into account, among other things, future business opportunities and the net profitability of assets and liabilities.
 
Fair-Value Hierarchy.

GAAP establishes a fair-value hierarchy and requires an entity to maximize the use of significant observable inputs and minimize the use of significant unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair-value measurement is determined. This overall level is an indication of market observability of the fair-value measurement for the asset or liability. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.

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

Level 1
Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.

Level 2
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified or 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; (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, volatilities, and prepayment speeds); and (4) inputs that are derived principally from or corroborated by observable market data (e.g., implied spreads).

Level 3
Unobservable inputs for the asset or liability.

We review the fair-value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications would be reported as transfers in/out as of the

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beginning of the quarter in which the changes occur. There were no such transfers during the years ended December 31, 2018 and 2017.

Table 19.1 presents the carrying value, fair value, and fair value hierarchy of our financial assets and liabilities at December 31, 2018 and 2017. We record trading securities, available-for-sale securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain private-label MBS, certain mortgage loans, and certain other assets on a non-recurring basis. We record all other financial assets and liabilities at amortized cost. Refer to Table 19.2 for further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis.

Table 19.1 - Fair Value Summary
(dollars in thousands)

 
December 31, 2018
 
Carrying
Value
 
Total Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral(2)
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
10,431

 
$
10,431

 
$
10,431

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
593,199

 
593,199

 
593,199

 
—

 
—

 
—

Securities purchased under agreements to resell
6,499,000

 
6,499,078

 
—

 
6,499,078

 
—

 
—

Federal funds sold
1,500,000

 
1,500,002

 
—

 
1,500,002

 
—

 
—

Trading securities(1)
163,038

 
163,038

 
—

 
163,038

 
—

 
—

Available-for-sale securities(1)
5,849,944

 
5,849,944

 
—

 
5,800,343

 
49,601

 
—

Held-to-maturity securities
1,295,023

 
1,528,929

 
—

 
638,164

 
890,765

 
—

Advances
43,192,222

 
43,167,700

 
—

 
43,167,700

 
—

 
—

Mortgage loans, net
4,299,402

 
4,238,087

 
—

 
4,217,487

 
20,600

 
—

Accrued interest receivable
112,751

 
112,751

 
—

 
112,751

 
—

 
—

Derivative assets(1)
22,403

 
22,403

 
—

 
13,832

 
—

 
8,571

Other assets (1)
25,059

 
25,059

 
9,988

 
15,071

 
—

 
—

Liabilities:


 
 

 
 
 
 
 
 
 
 
Deposits
(474,878
)
 
(474,848
)
 
—

 
(474,848
)
 
—

 
—

COs:


 
 
 
 
 
 
 
 
 
 
Bonds
(25,912,684
)
 
(25,843,163
)
 
—

 
(25,843,163
)
 
—

 
—

Discount notes
(33,065,822
)
 
(33,062,585
)
 
—

 
(33,062,585
)
 
—

 
—

Mandatorily redeemable capital stock
(31,868
)
 
(31,868
)
 
(31,868
)
 
—

 
—

 
—

Accrued interest payable
(112,043
)
 
(112,043
)
 
—

 
(112,043
)
 
—

 
—

Derivative liabilities(1)
(255,800
)
 
(255,800
)
 
—

 
(309,552
)
 
—

 
53,752

Other:


 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(4,164
)
 
—

 
(4,164
)
 
—

 
—

Standby letters of credit
(1,257
)
 
(1,257
)
 
—

 
(1,257
)
 
—

 
—

_______________________
(1)
Carried at fair value and measured on a recurring basis.
(2)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.


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December 31, 2017
 
Carrying
Value
 
Total Fair
Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral(2)
Financial instruments
 

 
 

 
 
 
 
 
 
 
 
Assets:
 

 
 

 
 
 
 
 
 
 
 
Cash and due from banks
$
261,673

 
$
261,673

 
$
261,673

 
$
—

 
$
—

 
$
—

Interest-bearing deposits
246

 
246

 
246

 
—

 
—

 
—

Securities purchased under agreements to resell
5,349,000

 
5,348,898

 
—

 
5,348,898

 
—

 
—

Federal funds sold
3,450,000

 
3,449,981

 
—

 
3,449,981

 
—

 
—

Trading securities(1)
191,510

 
191,510

 
—

 
191,510

 
—

 
—

Available-for-sale securities(1)
7,324,736

 
7,324,736

 
—

 
7,287,053

 
37,683

 
—

Held-to-maturity securities
1,626,122

 
1,903,227

 
—

 
811,759

 
1,091,468

 
—

Advances
37,565,967

 
37,591,048

 
—

 
37,591,048

 
—

 
—

Mortgage loans, net
4,004,737

 
4,035,928

 
—

 
4,013,704

 
22,224

 
—

Loans to other FHLBanks
400,000

 
399,997

 
—

 
399,997

 
—

 
—

Accrued interest receivable
94,100

 
94,100

 
—

 
94,100

 
—

 
—

Derivative assets(1)
34,786

 
34,786

 
—

 
56,238

 
—

 
(21,452
)
Other assets(1)
22,351

 
22,351

 
9,726

 
12,625

 
—

 
—

Liabilities:
 

 
 

 
 
 
 
 
 
 
 
Deposits
(477,069
)
 
(477,060
)
 
—

 
(477,060
)
 
—

 
—

COs:
 
 
 
 
 
 
 
 
 
 
 
Bonds
(28,344,623
)
 
(28,353,945
)
 
—

 
(28,353,945
)
 
—

 
—

Discount notes
(27,720,906
)
 
(27,719,598
)
 
—

 
(27,719,598
)
 
—

 
—

Mandatorily redeemable capital stock
(35,923
)
 
(35,923
)
 
(35,923
)
 
—

 
—

 
—

Accrued interest payable
(90,626
)
 
(90,626
)
 
—

 
(90,626
)
 
—

 
—

Derivative liabilities(1)
(300,450
)
 
(300,450
)
 
—

 
(347,352
)
 
—

 
46,902

Other:
 
 
 
 
 
 
 
 
 
 
 
Commitments to extend credit for advances
—

 
(3,817
)
 
—

 
(3,817
)
 
—

 
—

Standby letters of credit
(1,100
)
 
(1,100
)
 
—

 
(1,100
)
 
—

 
—


_______________________
(1)
Carried at fair value and measured on a recurring basis.
(2)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

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. The fair
values and level within the fair value hierarchy of these assets and liabilities are reported in Table 19.2.

Investment Securities. We determine the fair values of our investment securities, other than HFA floating-rate securities, based on prices obtained for each of these securities that we request from multiple designated third-party pricing vendors. The fair value of each such security is the average of such vendor prices that are within a cluster pricing tolerance range. A cluster is defined as a group of available vendor prices for a given security that is within a defined price tolerance range of the median vendor price depending on the security type. An outlier is any vendor price that is outside of the defined cluster and is evaluated for reasonableness. The use of the average of available vendor prices within a cluster and the evaluation of reasonableness of outlier prices does not discard available information. In addition, the fair values produced by this method are reviewed for reasonableness.

We request prices on each of our securities subject to this fair-value method from multiple third-party vendors, when available. These pricing vendors use methods that generally employ, but are not limited to, benchmark yields, recent trades,

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dealer estimates, valuation models, benchmarking of like securities, sector groupings, and/or matrix pricing. We then establish 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.

Vendor prices that are outside of a defined cluster are identified as outliers and are subject to additional review including, but not limited to, comparison to prices provided by an additional third-party valuation vendor, prices for similar securities, and/or nonbinding dealer estimates, or the use of internal model prices, which we believe reflect the facts and circumstances that a market participant would consider. We also perform this analysis in those limited instances where no third-party vendor price or only one third-party vendor price is available to determine fair value. If the analysis indicates that an outlier (or outliers) is (are) not representative of fair value and that the average of the vendor prices within the tolerance threshold of the median price is the best estimate, then we use the average of the vendor prices within the tolerance threshold of the median price as the final price. If, on the other hand, we determine that an outlier (or some other price identified in the analysis) is a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price. In all cases, the final price is used to determine the fair value of the security.

As of December 31, 2018, multiple vendor prices were received for substantially all of our investment securities and the final prices for substantially all of those securities were computed by averaging the prices received. The relative proximity of the prices received supports our conclusion that the final computed prices are reasonable estimates of fair value. Based on the current low level of market activity for private-label residential MBS, the nonrecurring fair-value measurements for such securities as of December 31, 2018 and 2017, fell within Level 3 of the fair-value hierarchy. Our fixed-rate HFA securities fall within Level 3 of the fair-value hierarchy due to the current lack of market activities for these bonds.

Investment Securities – HFA Floating Rate Securities. The fair value is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for securities with similar terms. Our floating rate HFA securities fall within Level 3 of the fair-value hierarchy due to the current lack of market activity for these bonds.

Mortgage Loans. The fair value of impaired conventional mortgage loans is based on the lower of the carrying value of the loans or fair value of the collateral less estimated costs to sell. The fair value of impaired government mortgage loans is equal to the unpaid principal balance.
REO. Fair value is derived from third-party valuations of the property, which fall within Level 3 of the fair-value hierarchy.
Derivative Assets/Liabilities - Interest-Rate-Exchange Agreements. We base the fair values of interest-rate-exchange agreements on available market prices of derivatives having similar terms, including accrued interest receivable and payable. The fair-value methodology uses standard valuation techniques for derivatives such as discounted cash-flow analysis and comparisons with similar instruments.

The fair values of all interest-rate-exchange agreements are netted by clearing member and/or by counterparty, including cash collateral received from or delivered to the counterparty. If these netted amounts are positive, they are classified as an asset, and if negative, they are classified as a liability. We generally use a midmarket pricing convention based on the bid-ask spread as a practical expedient for fair-value measurements. Because these estimates are made at a specific point in time, they are susceptible to material near-term changes. We have evaluated the potential for the fair value of the instruments to be affected by counterparty risk and our own credit risk and have determined that no adjustments were significant to the overall fair-value measurements.

The discounted cash-flow model uses market-observable inputs (inputs that are actively quoted and can be validated to external sources), including the following:
•
Discount rate assumption. At December 31, 2018 and 2017, we used either the overnight-index swap (OIS) curve or the LIBOR swap curve depending on the terms of the International Swaps and Derivatives Association (ISDA) agreement we have with each derivative counterparty.
•
Forward interest-rate assumption. LIBOR swap curve.
•
Volatility assumption. Market-based expectations of future interest-rate volatility implied from current market prices for similar options.

Derivative Assets/Liabilities – Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are recorded as derivatives in the statement of condition. The fair values of such commitments are based on the end-of-day delivery

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commitment prices provided by the FHLBank of Chicago and a spread, derived from MBS TBA delivery commitment prices with adjustment for the contractual features of the MPF program, such as servicing and credit-enhancement features.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methodologies 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. Since these estimates are made as of a specific point in time, they are susceptible to material near-term changes.

Fair Value Measured on a Recurring and Nonrecurring Basis.


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Table 19.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring and Nonrecurring Basis
(dollars in thousands)

 
December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
Corporate bonds
$
—

 
$
6,102

 
$
—

 
$
—

 
$
6,102

U.S. government-guaranteed – single-family MBS
—

 
5,344

 
—

 
—

 
5,344

GSEs – single-family MBS
—

 
148

 
—

 
—

 
148

GSEs – multifamily MBS
—

 
151,444

 
—

 
—

 
151,444

Total trading securities
—

 
163,038

 
—

 
—

 
163,038

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

State or local HFA securities
—

 
—

 
49,601

 
—

 
49,601

Supranational institutions
—

 
405,155

 
—

 
—

 
405,155

U.S. government-owned corporations
—

 
273,169

 
—

 
—

 
273,169

GSEs
—

 
115,627

 
—

 
—

 
115,627

U.S. government guaranteed – single-family MBS
—

 
75,658

 
—

 
—

 
75,658

U.S. government guaranteed – multifamily MBS
—

 
361,134

 
—

 
—

 
361,134

GSEs – single-family MBS
—

 
3,562,159

 
—

 
—

 
3,562,159

GSEs – multifamily
—

 
1,007,441

 
—

 
—

 
1,007,441

Total available-for-sale securities
—

 
5,800,343

 
49,601

 
—

 
5,849,944

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
13,493

 
—

 
8,571

 
22,064

Mortgage delivery commitments
—

 
339

 
—

 
—

 
339

Total derivative assets
—

 
13,832

 
—

 
8,571

 
22,403

Other assets
9,988

 
15,071

 
—

 
—

 
25,059

Total assets carried at fair value on a recurring basis
$
9,988

 
$
5,992,284

 
$
49,601

 
$
8,571

 
$
6,060,444

Carried at fair value on a nonrecurring basis(2)
 
 
 
 
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
1,668

 
$
—

 
$
1,668

Mortgage loans held for portfolio
—

 
—

 
1,144

 
—

 
1,144

REO
—

 
—

 
361

 
—

 
361

Total assets carried at fair value on a nonrecurring basis
—

 
—

 
3,173

 
—

 
3,173

Liabilities:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(309,552
)
 
$
—

 
$
53,752

 
$
(255,800
)
Total liabilities carried at fair value on a recurring basis
$
—

 
$
(309,552
)
 
$
—

 
$
53,752

 
$
(255,800
)
_______________________
(1)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.
(2)
We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security). The fair values presented are as of the date the fair value adjustment was recorded.


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December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Netting
Adjustments and Cash Collateral  (1)
 
Total
Assets:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Trading securities:
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed – single-family MBS
$
—

 
$
6,807

 
$
—

 
$
—

 
$
6,807

GSEs – single-family MBS
—

 
346

 
—

 
—

 
346

GSEs – multifamily MBS
—

 
184,357

 
—

 
—

 
184,357

Total trading securities
—

 
191,510

 
—

 
—

 
191,510

Available-for-sale securities:
 

 
 

 
 

 
 

 
 

State or local HFA securities
—

 
—

 
37,683

 
—

 
37,683

Supranational institutions
—

 
418,285

 
—

 
—

 
418,285

U.S. government-owned corporations
—

 
292,077

 
—

 
—

 
292,077

GSEs
—

 
121,343

 
—

 
—

 
121,343

U.S. government guaranteed – single-family MBS
—

 
95,777

 
—

 
—

 
95,777

U.S. government guaranteed – multifamily MBS
—

 
443,373

 
—

 
—

 
443,373

GSEs – single-family MBS
—

 
4,562,992

 
—

 
—

 
4,562,992

GSEs – multifamily MBS
—

 
1,353,206

 
—

 
—

 
1,353,206

Total available-for-sale securities
—

 
7,287,053

 
37,683

 
—

 
7,324,736

Derivative assets:
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
—

 
56,069

 
—

 
(21,452
)
 
34,617

Mortgage delivery commitments
—

 
169

 
—

 
—

 
169

Total derivative assets
—

 
56,238

 
—

 
(21,452
)
 
34,786

Other assets
9,726

 
12,625

 
—

 
—

 
22,351

Total assets carried at fair value on a recurring basis
$
9,726

 
$
7,547,426

 
$
37,683

 
$
(21,452
)
 
$
7,573,383

Carried at fair value on a nonrecurring basis(2)
 
 
 
 
 
 
 
 
 
Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
Private-label residential MBS
$
—

 
$
—

 
$
1,970

 
$
—

 
$
1,970

Mortgage loans held for portfolio
—

 
—

 
4,608

 
—

 
4,608

REO
—

 
—

 
784

 
—

 
784

Total assets carried at fair value on a nonrecurring basis
$
—

 
$
—

 
$
7,362

 
$
—

 
$
7,362

Liabilities:
 

 
 

 
 

 
 

 
 

Carried at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
 

 
 

 
 

 
 

Interest-rate-exchange agreements
$
—

 
$
(347,325
)
 
$
—

 
$
46,902

 
$
(300,423
)
Mortgage delivery commitments
—

 
(27
)
 
—

 
—

 
(27
)
Total liabilities carried at fair value on a recurring basis
$
—

 
$
(347,352
)
 
$
—

 
$
46,902

 
$
(300,450
)
_______________________
(1)
These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.
(2)
We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and REO at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security). The fair values presented are as of the date the fair value adjustment was recorded.

Table 19.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis
using significant unobservable inputs (Level 3) during the years ended December 31, 2018, 2017, and 2016.


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Table 19.3 - Roll Forward of Level 3 Available-for-Sale Securities
(dollars in thousands)

 
 
For the Year Ended December 31,
 
 
2018
 
2017
 
2016
Balance at beginning of year
 
$
37,683

 
$
8,146

 
$
—

Purchases
 
12,800

 
33,350

 
9,350

Unrealized losses included in other comprehensive income
 
(882
)
 
(3,813
)
 
(1,204
)
Balance at end of year
 
$
49,601

 
$
37,683

 
$
8,146



Note 20 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this evaluation, as of December 31, 2018, and through the filing of this report, we do not believe it is likely that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by the FHLBank Act, as implemented by FHFA regulations, and is not the result of an arms-length transaction among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at December 31, 2018 and 2017. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $972.6 billion and $978.2 billion at December 31, 2018 and 2017, respectively. See Note 14 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

Table 20.1 - Off-Balance Sheet Commitments
(dollars in thousands)

 
 
December 31, 2018
 
December 31, 2017
 
 
Expire within one year
 
Expire after one year
 
Total
 
Expire within one year
 
Expire after one year
 
Total
Standby letters of credit outstanding (1)
 
$
6,028,851

 
$
226,438

 
$
6,255,289

 
$
5,034,725

 
$
223,167

 
$
5,257,892

Commitments for unused lines of credit - advances (2)
 
1,177,377

 
—

 
1,177,377

 
1,216,592

 
—

 
1,216,592

Commitments to make additional advances
 
159,401

 
59,894

 
219,295

 
18,851

 
63,488

 
82,339

Commitments to invest in mortgage loans
 
50,773

 
—

 
50,773

 
42,918

 
—

 
42,918

Unsettled CO bonds, at par
 
105,400

 
—

 
105,400

 
52,550

 
—

 
52,550

Unsettled CO discount notes, at par
 
600,000

 
—

 
600,000

 
—

 
—

 
—

__________________________
(1)
The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At December 31, 2018 and 2017, these amounts totaled $32.6 million and $1.4 million, respectively. A

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lso excluded are commitments to issue standby letters of credit that expire after one year totaling $675,000 and $543,000 at December 31, 2018 and 2017, respectively.
(2)
Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.

Standby Letters of Credit. We issue standby letters of credit on behalf of our members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed for members for a fee. If we are required to make payment for a beneficiary's draw, our strategy is to take prompt action to recover the funds paid to the third-party beneficiary, including converting the payment amount into a collateralized advance to the primary obligor, withdrawing the payment amount from the primary obligor's demand deposit account with us, or selling collateral pledged by the primary obligor in a commercially reasonable manner to offset the payment amount. Historically, standby letters of credit usually expire without being drawn upon. The original terms of these standby letters of credit have original expiration periods of up to 20 years, currently expiring no later than 2027. Currently, we offer new standby letters of credit with expiration periods of up to 10 years. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $1.3 million and $1.1 million at December 31, 2018 and 2017, respectively.

We monitor the creditworthiness of our members and housing associates that have standby letter of credit agreements outstanding based on our evaluations of the financial condition of the member or housing associate. We review available financial data, which can include regulatory call reports filed by depository institution members, regulatory financial statements filed with the appropriate state insurance department by insurance company members, audited financial statements of housing associates, SEC filings, and rating-agency reports to ensure that potentially troubled members are identified as soon as possible. In addition, we have access to most members' regulatory examination reports. We analyze this information on a regular basis.
Standby letters of credit are fully collateralized at the time of issuance. Based on our credit analyses and collateral requirements, we have not deemed it necessary to record any additional liability on these commitments.
Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.

Pledged Collateral. We have pledged securities, as collateral, related to derivatives. See Note 12 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.

Lease Commitments. We charged to operating expense net rental costs of approximately $3.0 million, $2.9 million, and $2.9 million for the years ended December 31, 2018, 2017, and 2016, respectively.

Table 20.2 - Future Minimum Lease Payments
(dollars in thousands)

 
 
Equipment
 
Premises
 
 
Capital Leases
 
Operating Leases
2019
 
$
41

 
$
2,681

2020
 
22

 
2,685

2021
 
—

 
2,689

2022
 
—

 
2,693

2023
 
—

 
2,563

Total minimum lease payments
 
$
63

 
$
13,311



Lease agreements for our premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. We do not expect any such increases to have a material effect on us.


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Legal Proceedings. We are subject to various legal proceedings arising in the normal course of business from time to time. We 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. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition, results of operations, or cash flows.

Other commitments and contingencies are discussed in Note 9 — Advances, Note 12 — Derivatives and Hedging Activities, Note 14 — Consolidated Obligations, Note 15 — Affordable Housing Program, Note 16 — Capital, and Note 18 — Employee Retirement Plans.

Note 21 — Transactions with Shareholders

We are a cooperative whose members own our capital stock and may receive dividends on their investment in our capital stock. In addition, certain former members and nonmembers that still have outstanding transactions with us are also required to maintain their investment in our capital stock until the transactions mature or are paid off. All advances are issued to members or housing associates, and mortgage loans held for portfolio are generally acquired from our members or housing associates. We also maintain demand-deposit accounts for members and housing associates primarily to facilitate settlement activities that are directly related to advances, mortgage-loan purchases, and other transactions between us and the member or housing associate. In instances where the member has an officer or director who serves as a director of the Bank, those transactions are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as transactions with all other members.

Related Parties. We define related parties as members who owned 10 percent or more of the voting interests of our capital stock outstanding at any time during the year. Under the FHLBank Act and FHFA regulations, each member directorship is designated to one of the six states in our district. Each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, which is December 31, of the year prior to each election, subject to the limitation that no member may cast more votes than the average number of shares of our stock that is required to be held by all members located in such member's state. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. A nonmember stockholder is not entitled to cast votes for the election of directors unless it was a member as of the record date. At December 31, 2018 and 2017, no shareholder owned more than 10 percent of the total voting interests due to statutory limits on members' voting rights, therefore, we did not have any related parties.

Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding at any time during the year.
Table 21.1 - Shareholder Concentrations, Balance Sheet
(dollars in thousands)

 
Capital Stock
Outstanding
 
Percent
of Total Capital Stock
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
339,003

 
13.2
%
 
$
7,656,146

 
17.7
%
 
$
5,005

 
8.3
%
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Citizens Bank, N.A.
$
227,287

 
9.8
%
 
$
4,858,592

 
12.9
%
 
$
2,558

 
6.0
%


We held sufficient collateral to support the advances to the above institution such that we do not expect to incur any credit losses on these advances.


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Table 21.2 - Shareholder Concentrations, Income Statement
(dollars in thousands)

 
 
For the Year Ended December 31,
Citizens Bank, N.A.
 
2018
 
2017
 
2016
Interest income on advances
 
$
134,753

 
$
63,568

 
$
34,276

Fees on letters of credit
 
4,415

 
3,368

 
3,059



We received prepayment fees of $298,000 and $368,000 from Citizens Bank, N.A. and the corresponding principal amount prepaid to us was $3.2 million and $2.0 million during 2018 and 2016, respectively. During 2017, we did not receive any prepayment fees from Citizens Bank, N.A.

Transactions with Directors' Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors. In accordance with FHFA regulations, transactions with directors' institutions are conducted on the same terms as those with any other member.

Table 21.3 - Transactions with Directors' Institutions
(dollars in thousands)

 
Capital Stock
Outstanding
 
Percent
of Total Capital Stock
 
Par
Value of
Advances
 
Percent of Total Par Value
of Advances
 
Total Accrued
Interest
Receivable
 
Percent of Total
Accrued Interest
Receivable on
Advances
As of December 31, 2018
$
113,337

 
4.4
%
 
$
2,147,602

 
5.0
%
 
$
3,576

 
6.0
%
As of December 31, 2017
114,498

 
4.9

 
2,133,374

 
5.7

 
2,466

 
5.8



Note 22 — Transactions with Other FHLBanks

We may occasionally enter into transactions with other FHLBanks. These transactions are summarized below.

Overnight Funds. We may borrow or lend unsecured overnight funds from or to other FHLBanks. All such transactions are at current market rates. Interest income and interest expense related to these transactions with other FHLBanks are included within other interest income and interest expense from other borrowings in the statement of operations. We had a loan outstanding to another FHLBank for $400.0 million as of December 31, 2017. Interest income on loans to other FHLBanks was $21,000, $43,000 and $3,000 for the years ended December 31, 2018, 2017, and 2016, respectively. Interest expense for loans from other FHLBanks was $36,000, $6,000, and $1,000 for the years ended December 31, 2018, 2017, and 2016, respectively.

MPF Mortgage Loans. We pay a transaction-services fee and a membership fee to the FHLBank of Chicago for our participation in the MPF program. The transaction-services fee is assessed monthly, and is based upon the amount of mortgage loans which we invested in after January 1, 2004, and which remain outstanding on our statement of condition. For the years ended December 31, 2018, 2017, and 2016, we recorded $2.5 million, $2.2 million, and $2.0 million, respectively in MPF transaction-services fee expense to the FHLBank of Chicago which has been recorded in the statement of operations as other expense. The membership fee is paid quarterly and has been recorded in the statement of operations as an operating expense. The membership fee paid was $600,000 for the years ended December 31, 2018, 2017 and 2016.

Note 23 — Subsequent Events

On February 14, 2019, the board of directors declared a cash dividend at an annualized rate of 6.17 percent based on capital stock balances outstanding during the fourth quarter of 2018. The dividend, including dividends classified as interest on mandatorily redeemable capital stock, amounted to $37.8 million and was paid on March 4, 2019.




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Supplementary Financial Data

Supplementary financial data for the years ended December 31, 2018 and 2017, are included in the following tables. The following unaudited results of operations include, in the opinion of management, all adjustments necessary for a fair statement of the results of operations for each quarterly period presented below.
 2018 Quarterly Results of Operations – Unaudited
 (dollars in thousands)
 
 
2018 – Quarter Ended
 
 
December 31
 
September 30
 
June 30
 
March 31
Total interest income
 
$
401,212

 
$
368,818

 
$
350,090

 
$
305,933

Total interest expense
 
325,231

 
291,358

 
271,332

 
226,022

Net interest income before provision for credit losses
 
75,981

 
77,460

 
78,758

 
79,911

(Reduction of) provision for credit losses
 
(40
)
 
—

 
(3
)
 
9

Net interest income after (reduction of) provision for credit losses
 
76,021

 
77,460

 
78,761

 
79,902

Net impairment losses on investment securities recognized in income
 
(125
)
 
(71
)
 
(257
)
 
(79
)
Litigation settlements
 
—

 
12,769

 
—

 
—

Other income
 
2,328

 
2,410

 
1,978

 
1,873

Non-interest expense
 
29,604

 
20,658

 
21,172

 
20,468

Income before assessments
 
48,620

 
71,910

 
59,310

 
61,228

AHP assessments
 
4,912

 
7,238

 
5,978

 
6,171

Net income
 
$
43,708

 
$
64,672

 
$
53,332

 
$
55,057


2017 Quarterly Results of Operations – Unaudited
 (dollars in thousands)
 
 
2017 – Quarter Ended
 
 
December 31
 
September 30
 
June 30
 
March 31
Total interest income
 
$
266,747

 
$
246,824

 
$
224,227

 
$
199,091

Total interest expense
 
187,177

 
175,715

 
160,407

 
136,587

Net interest income before provision for credit losses
 
79,570

 
71,109

 
63,820

 
62,504

Provision for (reduction of) credit losses
 
52

 
28

 
(125
)
 
(51
)
Net interest income after provision for (reduction of) credit losses
 
79,518

 
71,081

 
63,945

 
62,555

Net impairment losses on investment securities recognized in income
 
(36
)
 
(432
)
 
(568
)
 
(418
)
Litigation settlements
 
20,761

 
—

 
—

 
—

Other income
 
1,130

 
1,028

 
1,020

 
427

Non-interest expense
 
25,958

 
20,972

 
20,597

 
20,974

Income before assessments
 
75,415

 
50,705

 
43,800

 
41,590

AHP assessments
 
7,587

 
5,110

 
4,418

 
4,192

Net income
 
$
67,828

 
$
45,595

 
$
39,382

 
$
37,398


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures


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Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal year covered by this report.

Management's Report on Internal Control over Financial Reporting

Management's report on internal control over financial reporting as of December 31, 2018, is included in Item 8 — Financial Statements and Supplementary Data — Management's Report on Internal Control over Financial Reporting.

The Bank's independent registered public accounting firm, PricewaterhouseCoopers LLP, has also issued a report regarding the effectiveness of the Bank's internal control over financial reporting as of December 31, 2018, which is included in Item 8 — Financial Statements and Supplementary Data — Report of Independent Registered Public Accounting Firm — PricewaterhouseCoopers LLP.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. OTHER INFORMATION

PricewaterhouseCoopers LLP (PwC) serves as the independent registered public accounting firm for the Bank. Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement team, personnel in the chain of command, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.

PwC has advised the Bank by letter dated February 22, 2019, that PwC covered persons had borrowing relationships with a Bank member (referred to below as the “Lender”) which owned more than ten percent of the Bank’s capital stock based on PwC’s assessment conducted using shareholder information as of each quarterly period ended in 2018. Under the Loan Rule, these borrowing relationships could call into question PwC’s independence with respect to the Bank. The Bank is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the Bank.

PwC advised the Audit Committee of the Bank that it believes that based on its analysis, PwC remains objective and impartial despite matters that may ultimately be determined to be inconsistent with the criteria set out in the rules and regulations of the SEC related to the Loan Rule, and therefore believe that it can continue to serve as the Bank’s independent registered public accounting firm. PwC also advised the Audit Committee that it believes that in light of its analysis, a reasonable investor possessing all the facts regarding the lending relationships described above and PwC audit relationships would conclude that PwC is able to exhibit the requisite objectivity and impartiality to report on the financial statements of the Bank as the independent registered public accounting firm. PwC has advised the Audit Committee their views and conclusions are based in part on the following considerations:


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•
the covered persons do not play an active role in the conduct of the audit;
•
the lead audit partner has no reason to believe that the Lender has made any attempt to influence the conduct of the Bank’s audit or the objectivity and impartiality of any member of PwC’s audit engagement team; and
•
PwC professionals are required to disclose any relationships that may raise issues about objectivity, confidentiality, independence, conflicts of interest or favoritism.

In addition, PwC identified no aspects of the lending relationships involving the covered persons that would impact PwC’s objectivity and impartiality.

The Audit Committee of the Bank assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the Bank, the limited voting rights of the Bank’s members and the composition of the board of directors. In addition to the above listed considerations, the Audit Committee considered the following:

•
as of December 31, 2018, and as of the date of the filing of this Form 10-K, no officer or director of the Lender served on the board of directors of the Bank;
•
the Lender will be eligible to vote only in the at-large independent directorship election for 2019; and
•
the Lender is subject to the same terms and conditions for conducting business with the Bank as any other member.

Based on the Audit Committee’s evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.

If in the future, however, PwC is ultimately determined under the Loan Rule not to be independent with respect to the Bank, or permanent relief regarding this matter is not granted by the SEC, the Bank may need to take other actions and incur other costs in order for the Bank’s previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q to be deemed compliant with applicable securities laws. Such actions may include, among other things, obtaining a new audit and review of our historical financial statements by another independent registered public accounting firm. Any of the foregoing could have an adverse impact on the Bank.

For a discussion of the voting rights of our members, please see Item 10 — Directors, Executive Officers and Corporate Governance — Annual Director Elections.



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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our board of directors is constituted of a combination of member directors (each of whom must be a director or officer of a member) nominated and elected by our members on a state-by-state basis and independent directors nominated by our board and elected by a plurality of all our members. Our board of directors is currently constituted of nine member directors and eight independent directors. Two of the independent directors are designated as public interest directors.

An FHFA regulation (the Election Regulation) regarding FHLBank board of director elections and director eligibility gives the Director of the FHFA the annual responsibility to determine the size of each FHLBank's board of directors. Further, for each FHLBank, the Election Regulation requires the Director of the FHFA to allocate:

•
the directorships between member directorships and independent directorships, subject to the requirement that a majority, but no more than 60 percent, of the directorships be member directorships; and
•
the member directorships among the states in each FHLBank's district based on the number of shares of FHLBank stock required to be held by members in each state, subject to any state statutory minimum. For us, the only state statutory minimum is for Massachusetts, which is three member directorships.

If, during a director's term of office, the Director of the FHFA eliminates the directorship to which he or she has been elected or, for member directorships, redesignates such directorship to another state, the director's term will end as of December 31 of the year in which the Director of the FHFA takes such action.

Based on the requirements of the Election Regulation, the Director of the FHFA allocated our member directorships among the six New England states that comprise our district for each of 2018 and 2019 as follows:

Table 44 - Member Directorships by State

 
 
Member Directorships
Connecticut
 
2
Maine
 
1
Massachusetts
 
3
New Hampshire
 
1
Rhode Island
 
1
Vermont
 
1
Total
 
9

Our annual election was completed in the fourth quarter of 2018 and involved elections for one Vermont member directorship, one New Hampshire member directorship, and two independent directorship. See — Annual Director Elections below for additional information on the election.

Director Requirements

Board of director elections are conducted in accordance with applicable law, including the Election Regulation, and our governance documents. Accordingly:

•
each director is required to be a U.S. citizen;
•
no director may be a member of our management;
•
each director is elected for a four-year term (unless the Director of the FHFA designates a shorter term for staggering of the expiration dates of the terms); and
•
no director can be elected to more than three consecutive full terms.


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Additional requirements are applicable to member directors, independent directors, and nominees for each as set forth in the following two sections. Apart from such additional requirements, however, FHLBanks are not permitted to establish additional eligibility criteria for directorships.

The Election Regulation provides for members to elect directors by ballot, rather than by voting at a meeting. As a result, we do not solicit proxies, and members are not permitted to solicit or use proxies to cast their votes in the election. A member may not split its votes among multiple nominees for a single directorship. There are no family relationships between any current director (or any of the nominees from the most recent election), any executive officer, and any proposed executive officer. No director or executive officer has an involvement in any legal proceeding required to be disclosed pursuant to Item 401(f) of Regulation S-K.

Member Director and Member Director Nominee Requirements and Nominations

Candidates for member directorships in a particular state are nominated by members in that state. Each member that is required to hold stock as of the record date, which is December 31 of the year prior to each election (the record date), may nominate and vote for representatives from members in its respective state for open member directorships. FHLBank boards of directors are not permitted to nominate or elect member directors, although they may elect a director to fill a vacant member directorship. Further, the Election Regulation provides that no director, officer, employee, attorney, or agent, other than in a personal capacity, may support the nomination or election of a particular individual for a member directorship. In addition to the requirements applicable to all directors, each member director and each nominee for member directorships must be an officer or director of a member that is in compliance with the minimum capital requirements established by its regulator.

Because of the foregoing requirements for member director nominations and elections, we do not know what factors our members considered in nominating candidates for member directorships or in voting to elect our member directors.

Independent Director and Independent Director Nominee Requirements and Nominations

Candidates for independent directorships are nominated by our board of directors. In addition to the requirements applicable to all directors, each independent director is required to be a bona fide resident of our district, and no independent director may serve as an officer, employee, or director of any of our members or other recipient of advances from us and may not be an officer of any FHLBank. At least two of the independent directors must be public interest directors. Public interest directors, as defined by FHFA regulations, are independent directors who have at least four years of experience representing consumer or community interests in banking services, credit needs, housing, or consumer financial protection. Pursuant to FHFA regulations, each independent director must either satisfy the requirements to be a public interest director or have knowledge or experience in one or more of the following areas: auditing and accounting, derivatives, financial management, organizational management, project development, risk-management practices, and the law.

Our members are permitted to (and we ask them to) identify candidates to be considered for inclusion on the nominee slate for independent directorship, but to be considered for nomination, an individual must submit an application to us. We are required to submit information about nominees for independent directorships to the FHFA for review prior to announcing such nominations. In addition, our board of directors is required by FHFA regulations to consult with the Advisory Council (a council that reviews and advises on our AHP program) in establishing the independent director nominee slate. Before nominating any individual for an independent directorship, other than for a public interest directorship, our board of directors must determine that the nominee's knowledge or experience is commensurate with that needed to oversee a financial institution with a size and complexity that is comparable to ours. Our bylaws and the charter for our governance committee, which has responsibility for recommending candidates for nomination for independent directorships to the board, include skills, experience, and diversity among the factors that the committee and the board of directors may take into consideration when nominating candidates for independent directorships. In addition, at the commencement of elections for both independent and member directors, we include a statement in the relevant publicity that our board seeks to promote diversity in its composition and encourages nominations from eligible diverse candidates. The Election Regulation permits our directors, officers, attorneys, employees, agents, and Advisory Council to support the candidacy of the board of director nominees for independent directorships.

In determining whom to nominate for independent directorships, the board of directors selected:

•
Joan Carty in 2018, to serve as a public interest director, based on her experience serving as president and chief executive officer of Housing Development Fund, a Stamford, Connecticut-based CDFI that finances multifamily housing, lends

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directly to low- and moderate-income households for first-time purchases, and provides homeownership counseling, homebuyer education, and foreclosure-intervention counseling;
•
Patrick E. Clancy in 2018, to serve as a public interest director, based on his experience as a developer of affordable housing, particularly through his previous role as president and chief executive officer of The Community Builders, a Boston, Massachusetts-based nonprofit corporation that has developed more than 25,000 affordable housing units over the past 40 years;
•
Cornelius K. Hurley in 2017, based on his legal and banking experience, having served as general counsel of a large regional bank, as director of the Center for Finance, Law and Policy at Boston University School of Law, and as Professor of the Practice of Banking Law at Boston University;
•
Andrew J. Calamare in 2016, based on his significant experience in business; organizational management; legal, bank regulatory, and insurance company matters; as well as involvement in multiple boards of directors that represent consumer or community interests;
•
Antoinette C. Lazarus in 2016, based on her significant experience in compliance, regulatory matters and accounting; valuable understanding of the fund management and insurance industries; and involvement in multiple boards of directors of charitable organizations;
•
Jay F. Malcynsky in 2016, based on his significant experience in law, government-relations and political consulting as well as his involvement in multiple boards of directors of charitable organizations;
•
Eric Chatman in 2015, based on his affordable housing experience, particularly through his role as president and executive officer of the Connecticut Housing Finance Authority; his prior FHLBank experience as treasurer of the FHLBank of Des Moines; his private banking experience; and his significant capital markets experience; and
•
Emil J. Ragones in 2015, based on his experience as a former partner at Ernst & Young specializing in information technology audit and controls and related experience in implementing business strategies for financial systems, incorporating or improving information technology and financial controls, addressing regulatory examination findings surrounding information technology and financial controls, and reviewing governance matters applicable to information technology.

Further, with the exception of director Antoinette C. Lazarus, all of the independent directors have been independent directors of the Bank prior to their most recent nominations, and our board of directors considered their experience gained from serving on our board in selecting them for their most recent nominations.

Additional information on the backgrounds of our directors, including these independent directors, is available under — Information Regarding Current Directors.

Annual Director Elections

For the election of both member and independent directors, each member eligible to vote is entitled to cast by ballot one vote for each share of stock that it was required to hold as of the record date, subject to the limitation that no member may cast more votes than the average number of shares of our stock that are required to be held by all members located in such member's state. Eligible members are permitted to vote all their eligible shares for one candidate for each open member directorship in the state in which the member is located and for each open independent directorship. For independent directors, unless the board of directors nominates more persons than there are independent directorships to be filled in an election, the candidates must receive at least 20 percent of the number of votes eligible to be cast in the election in order to be elected. If no nominee receives at least 20 percent of the eligible votes, the Election Regulation requires us to identify additional nominees and conduct additional elections until the directorship is filled.

As contemplated by the Election Regulation, no in-person meeting of the members was held in connection with the election. Information about the results of the election was reported to the members via email and on current reports on Form 8-K filed with the SEC on September 7, 2018 and October 19, 2018, as supplemented by a Form 8-K/A filed with the SEC on December 17, 2018.

Information Regarding Current Directors

The term for each director position is four years unless a shorter term is assigned to a director position by the FHFA to implement staggering of the expiration dates of the terms. None of our directors serves as an executive officer of the Bank.

Member Directors


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The member directors currently serving on the board of directors provided the information set forth below regarding their principal occupation, business experience, and other matters.

Donna L. Boulanger, age 65, has served as president, chief executive officer and trustee of North Brookfield Savings Bank, located in North Brookfield, Massachusetts, since February 2008. Ms. Boulanger also currently serves on the boards of directors of the Massachusetts Bankers Association, the Massachusetts Bankers Association Charitable Foundation, and the Depositors Insurance Fund, a Bank member. Ms. Boulanger began serving as a director of the Bank on January 1, 2014, and her current term will conclude on December 31, 2021.

Stephen G. Crowe (vice chair), age 68, has served as the community engagement officer of MountainOne Bank, located in North Adams, Massachusetts, since April 2016. Mr. Crowe served as a director of MountainOne Bank and a trustee of MountainOne Financial, its holding company, from 2002 to April 2016, and as president and chief executive officer of MountainOne Bank from 2002 to 2012. Mr. Crowe also served as president and chief executive officer of Williamstown Savings Bank from 1994 to 2009 and of Hoosac Bank from 2002 to 2009. Mr. Crowe is also a former director of The Savings Bank Life Insurance Company of Massachusetts, a Bank member. He was a Massachusetts certified public accountant from 1976 to June 2016. Mr. Crowe served as a treasurer of the American Bankers Association in 2011 and 2012. Mr. Crowe's service as a director of the Bank began on January 1, 2012, and his current term will conclude on December 31, 2019.

Martin J. Geitz, age 62, has served as president and chief executive officer of The Simsbury Bank & Trust Company, located in Simsbury, Connecticut, since October 2004, and its holding company, SBT Bancorp, Inc., since its formation in 2005. Mr. Geitz is also a member of the board of directors of The Simsbury Bank & Trust Company and SBT Bancorp, Inc. Mr. Geitz began serving as a director of the Bank on January 1, 2014, and his current term will conclude on December 31, 2021.

John W. McGeorge, age 74, has served as chairman of the board of Needham Bank, of Needham, Massachusetts, since April 2006. Mr. McGeorge also served as chief executive officer of Needham Bank from April 2006 until May 2015, and as president of Needham Bank from April 2006 through April 2012. Mr. McGeorge began serving as a director of the Bank on January 1, 2014, and his current term will conclude on December 31, 2021.

Gregory R. Shook, age 68, has served as president, chief executive officer and a director of Essex Savings Bank, located in Essex, Connecticut, since July 22, 1999. Mr. Shook also serves on the board of directors of Essex Financial Services, Inc. a subsidiary of Essex Savings Bank. Additionally, Mr. Shook served from 2011 to 2013 on the initial Federal Reserve Bank of Boston, First District, Community Depository Institutions Advisory Council. Mr. Shook began serving as a director of the Bank on January 1, 2015, and his current term will conclude on December 31, 2020.

John F. Treanor, age 71, has served as a director of The Washington Trust Company, located in Westerly, Rhode Island, since 2001. Mr. Treanor also served as president and chief operating officer at The Washington Trust Company for 10 years prior to his retirement in October 2009. Prior positions included executive vice president, chief financial officer, and chief operating officer of Springfield Institution for Savings in Springfield, Massachusetts (1994 to 1999); executive vice president, treasurer, and chief financial officer of Sterling Bancshares Corporation in Waltham, Massachusetts (1991 to 1994); and various senior management positions at Shawmut National Corporation in Boston, Massachusetts and Hartford, Connecticut (1969-1991). Mr. Treanor has served as a director of the Bank since January 1, 2011, and his current term will conclude on December 31, 2020.

Michael R. Tuttle, age 64, has served as chief credit officer of Opportunities Credit Union, located in Winooski, Vermont, since February 2019. He served as a voting director of Opportunities Credit Union from May 2017 until February 2019, and served there as an ex-officio director, functioning solely as a nonvoting observer, beginning in December 2016. Until the acquisition in May 2017 by Community Bank System, Inc. of Merchants Bancshares, Inc., parent company of Merchants Bank (the Merchants Acquisition), Mr. Tuttle had served as a director of Merchants Bank since 2006 and as a director of Merchants Bancshares, Inc., located in South Burlington, Vermont, since 2007. Mr. Tuttle is also the former president and chief executive officer of each of Merchants Bancshares Inc. (from 2007 through 2015) and Merchants Bank (from 2006 through 2014). He has served on the board of the Vermont Economic Development Authority since October 2016. Mr. Tuttle began serving as a director of the Bank on January 1, 2015, and his current term will conclude on December 31, 2022.

John C. Witherspoon, age 62, has served as president and chief executive officer of Skowhegan Savings Bank in Skowhegan, Maine, since November 2007. Prior positions included serving as chief executive officer of the Finance Authority of Maine between 2004 and 2007, and as president and chief executive officer of United Kingfield Bank and its predecessor, Kingfield Savings Bank, from 1984 until 2004. Mr. Witherspoon began serving as a director of the Bank on January 1, 2016, and his current term will conclude on December 31, 2019.


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Richard E. Wyman, Jr., age 63, is president of Meredith Village Savings Bank (MVSB), Meredith, New Hampshire, a position he has held since January 1, 2016. Since 2013 he has also served as executive vice president (and from 2013 to January 1, 2016 served as chief financial officer) of New Hampshire Mutual Bancorp, the holding company that was formed in 2013 from the affiliation of MVSB and Merrimack County Savings Bank, a Bank member. New Hampshire Mutual Bancorp is also the holding company for Savings Bank of Walpole, a Bank member. Mr. Wyman joined MVSB in August 2001 as chief financial officer, and was promoted to executive vice president and chief financial officer of MVSB in 2009, prior to assuming the role of president. Prior to joining MVSB, Mr. Wyman held senior leadership roles for several Maine-based banks, ranging from local community mutual banks to a publicly traded multi-bank holding company. Mr. Wyman began serving as a director of the Bank on January 1, 2019, and his current term will conclude on December 31, 2022.

Independent Directors

The independent directors currently serving on the board provided the following information about their principal occupation, business experience, and other matters.

Andrew J. Calamare (chair), age 63, has served as president and chief executive officer of The Co-operative Central Bank, located in Boston, Massachusetts, since March 2015, and served as executive vice president of The Co-operative Central Bank from January 2011 to March 2015. Prior to that position, Mr. Calamare served as president and chief executive officer of the Life Insurance Association of Massachusetts since 2000. Previously, Mr. Calamare served as of counsel with the law firm Quinn and Morris, as special counsel to the Rhode Island General Assembly, and as Commissioner of Banks for the Commonwealth of Massachusetts. Mr. Calamare has served as a director of the Bank since March 30, 2007, and his current term will conclude on December 31, 2020.

Joan Carty, age 67, has served as president and chief executive officer of Housing Development Fund in Stamford, Connecticut, since 1994. She previously served as executive director of Bridgeport Neighborhood Fund, of Bridgeport, Connecticut; Neighborhood Preservation Program, of Stamford, Connecticut; and Neighborhood Housing Services, of Brooklyn, New York. Ms. Carty has served as a director of the Bank since January 1, 2008, and her current term will conclude on December 31, 2022.

Eric Chatman, age 58, has served as chief financial officer of Housing Partnership Network, a network of affordable housing and community development nonprofits, since July 2017. Mr. Chatman founded and was president of The Chatman Group, LLC, a consulting and advisory firm focused on affordable housing and financial advisory services for non-profits, housing finance authorities, and financial institutions from June 2015 to July 2017. Mr. Chatman served as president and executive director of the Connecticut Housing Finance Authority from May 2012 until March 2015 and, in that capacity, was responsible for the policy development, strategic planning and execution of the Connecticut Housing Finance Authority affordable housing finance mission. Prior to serving in that role, Mr. Chatman served as deputy director and chief financial officer of the Iowa Finance Authority from 2008 to 2012. Mr. Chatman has also held various corporate finance, treasury, and capital markets roles, both domestic and international, including treasurer of the Federal Home Loan Bank of Des Moines and division manager, treasury department, at the African Development Bank. Mr. Chatman has served as a director of the Bank since June 16, 2014, and his current term will conclude on December 31, 2019.

Patrick E. Clancy, age 72, served from 1977 through 2011 as president and chief executive officer of The Community Builders, a Boston-based nonprofit corporation that has developed or redeveloped approximately 25,000 units of affordable and mixed-income housing. He continues to engage in the field as an independent consultant and developer as principal of The Clancy Company. Mr. Clancy has served as director of the Bank since March 30, 2007, and his current term will conclude on December 31, 2022.

Cornelius K. Hurley, age 73, has served as executive director of the Online Lending Policy Institute, Inc. since February 2017. He has also served as Professor of the Practice of Banking Law at Boston University since 2005, and was director of the Boston University Center for Finance, Law & Policy from 2005 to June 2017. Prof. Hurley also serves as a director of Computershare Trust Company, N.A., located in Canton, Massachusetts, a wholly owned subsidiary of Computershare, Ltd. Previous roles include serving as managing director of The Secura Group (1990 to 1997); as general counsel and director of human resources of Shawmut National Corporation and its predecessor companies (1981 to 1990); and as assistant general counsel to the Board of Governors of the Federal Reserve System. Prof. Hurley was appointed as a director of the Bank on March 30, 2007, for a term that expired on December 31, 2008. Prof. Hurley was reappointed as a director of the Bank on April 16, 2009, to fill an open vacancy on the board, and has served on the board of directors continuously since that date. His current term will conclude on December 31, 2021.


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Antoinette C. Lazarus, age 55, has served as chief compliance and risk officer and as privacy and anti-money laundering officers for Landmark Partners, a Simsbury, Connecticut-based registered investment adviser since 2006. Since November 2018, Ms. Lazarus has also served as the vice president of the board of directors for the Hartford Community Loan Fund, a community development financial institution based in Hartford, Connecticut. Prior to her work at Landmark Partners, Ms. Lazarus served from 2004 to 2006 as vice president of compliance for Prudential Financial, Inc., a Hartford, Connecticut-based financial products and services company and from 2001 to 2004 as director of fund accounting for CIGNA Retirement and Investment Services, a Hartford-based retirement services business that was acquired in 2004 by Prudential Financial, Inc. From 1988 to 2001 Ms. Lazarus served in multiple fund accounting, reporting and valuation roles at Aetna Financial Services, a financial services company based in Hartford that was acquired by ING in 2000. Ms. Lazarus has served as a director of the Bank since January 1, 2017, and her current term will conclude on December 31, 2020.

Jay F. Malcynsky, age 65, has served as president and managing partner of Gaffney, Bennett and Associates, Inc., a Connecticut-based corporation specializing in government relations and political consulting, since 1984. Mr. Malcynsky is also a practicing lawyer in Connecticut and Washington, D.C., specializing in administrative law and regulatory compliance. Mr. Malcynsky previously served as a director of the Bank from 2002 to 2004. Mr. Malcynsky was reappointed as a director on March 30, 2007, and his current term will conclude on December 31, 2020.

Emil J. Ragones, age 72, is an adjunct professor at the Boston College Carroll School of Management in the Masters of Science in Accounting Program, a position he has held since January 2013. He served as executive in residence at Accounting Management Solutions, Inc., located in Waltham, Massachusetts, from 2008 through April 2015, providing accounting and financial management advisory services. Mr. Ragones previously worked at Ernst & Young for 39 years, including 24 years of service as an audit partner. In addition to performing financial statement audits, Mr. Ragones specialized in providing information technology auditing, as well as advisory and consulting services to clients in a variety of industries, including financial services. Prior to his retirement from Ernst & Young in 2007, Mr. Ragones spent seven years in the firm's National Professional Practice office for assurance and advisory business services, focusing on reviewing and reporting on financial and information technology controls and Sarbanes-Oxley Act Section 404 compliance and reporting. Mr. Ragones has served as a director of the Bank since September 24, 2010, and his current term will conclude on December 31, 2019.

Audit Committee Financial Expert

Our board of directors has a standing Audit Committee that satisfies the "Audit Committee" definition under Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Our board of directors' Audit Committee Charter is available in full on our website at the following location: http://www.fhlbboston.com/downloads/aboutus/Audit_Committee_Charter.pdf.

The board has determined that Director Chatman is the "audit committee financial expert" within the meaning of the SEC rules. Mr. Chatman is not an auditor or accountant for us, does not perform fieldwork, and is not a Bank employee. In accordance with the SEC's safe harbor relating to Audit Committee financial experts, a person designated or identified as an Audit Committee financial expert will not be deemed an "expert" for purposes of federal securities laws. In addition, such a designation or identification does not impose on any such person any duties, obligations, or liabilities that are greater than those imposed on such persons as a member of the Audit Committee and board of directors in the absence of such designation or identification and does not affect the duties, obligations, or liabilities of any other member of the Audit Committee or board of directors. See Item 13 — Certain Relationships and Related Transactions, and Director Independence for additional information regarding Mr. Chatman’s independence.

Report of the Audit Committee

The Audit Committee assists the board in fulfilling its oversight responsibilities for (1) the integrity of our financial reporting, (2) the establishment of an adequate administrative, operating, and internal accounting control system, (3) our compliance with legal and regulatory requirements, (4) the independent registered public accounting firm's independence, qualifications, and performance, (5) the independence and performance of our internal audit function, and (6) our compliance with internal policies and procedures. The Audit Committee has adopted, and annually reviews, a charter outlining the practices it follows.

Management is responsible for the Bank's internal controls and the financial reporting process. PwC, our independent registered public accounting firm, is responsible for performing an independent audit of the financial statements and the effectiveness of internal control over financial reporting in accordance with auditing standards promulgated by the Public Company Accounting Oversight Board (PCAOB). Our internal auditors are responsible for preparing an annual audit plan and conducting internal audits under the direction of the Chief Audit Officer, who is accountable to the Audit Committee. The Audit Committee acts in an oversight role with the responsibility to monitor and oversee these processes.


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The Bank is one of eleven FHLBanks that, together with the Office of Finance, comprise the FHLBank System. The Office of Finance has responsibility for the issuance of COs on behalf of the FHLBanks and for compiling a combined financial report of the FHLBanks. Accordingly, the FHLBank System has determined that it is beneficial to have a single independent registered public accounting firm responsible for the audit of the FHLBank System and each FHLBank. The FHLBanks and Office of Finance cooperate in selecting and evaluating the independent registered public accounting firm, but the responsibility for appointing the independent registered public accounting firm for each FHLBank remains solely with the audit committee of each individual FHLBank and the Office of Finance.

PwC has been the independent auditor for the Bank and the FHLBank System since 1990. The Bank’s Audit Committee engages in rigorous evaluations each year before appointing an independent registered public accounting firm. In connection with the appointment of the Bank’s independent registered public accounting firm, the Audit Committee’s evaluation included consultation with the audit committees of the other FHLBanks and the Office of Finance. Specific considerations included:

•
an analysis of the risks and benefits of re-engaging the independent auditor versus engaging a different firm, including consideration of:
◦
PwC audit partner and audit team rotation,
◦
PwC’s tenure as the Bank’s and the FHLBank System’s independent auditor,
◦
PwC’s depth of understanding of our business, operations, and accounting policies and practices, and
◦
disruption and risks associated with changing the Bank’s auditor;
•
PwC’s historical and recent performance on the Bank’s audit, including the results of an internal survey of PwC’s service and quality;
•
an analysis of PwC’s known legal risks and significant proceedings;
•
external data relating to audit quality and performance, including recent PCAOB reports on PwC and its peer firms; and
•
the appropriateness of PwC’s fees, on both an absolute basis and as compared to its peer firms.

Audit Fees represent fees for professional services provided in connection with the audit of the Bank’s annual financial statements and internal control over financial reporting and reviews of the Bank’s quarterly financial statements, regulatory filings, consents and other SEC matters.

The Audit Committee has reviewed and approved the fees paid to the independent registered public accounting firm for audit, audit related and other services. The Audit Committee has determined that PwC does not provide any non-audit services that would impair PwC’s independence.

In accordance with SEC rules, audit partners are subject to rotation requirements to limit the number of consecutive years an individual partner may provide service to the Bank. For lead and concurring audit partners, the maximum number of consecutive years of service in that capacity is five years. The process for selection of the Bank’s lead audit partner pursuant to this rotation policy involves a meeting between the Chair of the Audit Committee and the candidate for the role, as well as discussion by the full Audit Committee and with management.

Based on its reviews discussed above, the Audit Committee recommended to the Board of Directors the reappointment of PwC as the Bank's independent registered public accounting firm for 2019.

The Audit Committee discussed with our internal auditors and PwC the overall scope and plans for their respective audits. The Audit Committee meets with the internal auditors and PwC, with and without management present, to discuss the results of their audits, their evaluations of the Bank's internal controls, and the overall quality of the Bank's financial reporting.

The Audit Committee has reviewed and discussed the audited financial statements with management, including a discussion of the quality, not just the acceptability, of the accounting principles used, the reasonableness of significant accounting judgments and estimates, and the clarity of disclosures in the financial statements. In addressing the quality of management's accounting judgments, members of the Audit Committee asked for representations and reviewed certifications prepared by the chief executive officer and chief financial officer that the audited financial statements present, in all material respects, the financial condition and results of operations, and have expressed to both management and PwC their general preference for conservative policies when a range of accounting options is available. In meeting with PwC, the Audit Committee asked them to address and discuss their responses to several questions that the Audit Committee believes are particularly relevant to its oversight. These questions include:

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•
Based on PwC's experience, and their knowledge of the Bank, do the financial statements present fairly, with clarity and completeness, the Bank's financial position and performance for the reporting period in accordance with GAAP and SEC disclosure requirements?
•
Based on PwC's experience, and their knowledge of the Bank, has the Bank implemented internal controls and internal audit procedures that are appropriate for the Bank?

The Audit Committee believes that by focusing its discussions with PwC, it promotes a meaningful discussion that provides a basis for its oversight judgments.

The Audit Committee has discussed with PwC the matters required to be discussed by PCAOB Auditing Standard 1301, Communications with Audit Committees. The Audit Committee has received from PwC the written disclosures and the letter required by PCAOB Rule 3526, Communication with Audit Committees Concerning Independence, and the Audit Committee has discussed with PwC their independence.

In reliance on these reviews and discussions, and the report of the independent registered public accounting firm, the Audit Committee has recommended to the board of directors, and the board of directors has approved, that the audited financial statements be included in the Bank's annual report on Form 10-K for the year ended December 31, 2018, for filing with the SEC.

As of the date of filing this annual report on Form 10-K, the members of the Audit Committee are:

Emil J. Ragones, chair
Stephen G. Crowe, vice chair
Eric Chatman
Antoinette C. Lazarus
Jay F. Malcynsky
John F. Treanor
Richard E. Wyman
Andrew Calamare, ex officio

Executive Officers

The following table sets forth the names, titles, and ages of our executive officers:
Table 45 - Executive Officers

Name (1)
Title
Age
Edward A. Hjerpe III
President and Chief Executive Officer
60
Timothy J. Barrett
Executive Vice President and Treasurer
60
George H. Collins
Executive Vice President and Chief Risk Officer
59
M. Susan Elliott
Executive Vice President and Chief Business Officer
64
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer
57
Carol Hempfling Pratt
Executive Vice President, General Counsel, and Corporate Secretary
60
Brian G. Donahue
Senior Vice President, Controller and Chief Accounting Officer
52
Barry F. Gale
Senior Vice President and Chief Human Resources Officer
59
Sean R. McRae
Senior Vice President and Chief Information Officer
54
_________________________
(1)
Each of the executive officers listed serves on our Management Committee, with the exception of Mr. Donahue.

Edward A. Hjerpe III has served as president and chief executive officer since July 2009. Mr. Hjerpe joined us from Strata Bank and Service Bancorp, Inc., where he was interim chief executive officer from September 2008 until joining us. Mr. Hjerpe was a financial, strategy, and management consultant from August 2007 to September 2008. He was both president and chief operating officer of the Massachusetts/Rhode Island Region of Webster Bank and senior vice president of Webster Financial Corporation from May 2004 to June 2007. Prior to those roles, Mr. Hjerpe served as executive vice president, chief operating officer, and chief financial officer at FIRSTFED AMERICA BANCORP, Inc. from July 1997 to May 2004. Mr. Hjerpe also

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worked with us from 1988 to 1997, first as vice president and director of financial analysis and economic research, and ultimately as executive vice president and chief financial officer. Mr. Hjerpe has been involved in numerous community, civic, industry, and nonprofit organizations over the course of his career. He currently serves as a member of the board of directors of the Office of Finance, as a member of the FHLBank Presidents Conference, and as a member of the board of directors of the Pentegra Defined Benefit Plan for Financial Institutions. He is also a former member and past chair of the board of Dental Services of Massachusetts, as well as a former member and past chair of the board of trustees of St. Anselm College in Manchester, New Hampshire. Mr. Hjerpe earned a B.A. in business and economics from St. Anselm College, and an M.A. and Ph.D. in economics from the University of Notre Dame.

Timothy J. Barrett has served as executive vice president and treasurer since January 2019, and previously as senior vice president and treasurer since November 2010. Prior to employment with us, Mr. Barrett served as assistant treasurer at FMR LLC, the parent company of Fidelity Investments from September 2008 to October 2010; as treasurer and chief investment officer at Fidelity Personal Bank & Trust from August 2007 to September 2008; as managing director, global treasury at Investors Bank & Trust from September 2004 to July 2007; in various senior roles in treasury at FleetBoston Financial (including merged entities) from 1985 to 2004; and as an investment manager for Citibank, NA from 1981 to 1985. Mr. Barrett received his B.A. from St. Anselm College and his M.B.A. from Rensselaer Polytechnic Institute.

George H. Collins has served as executive vice president and chief risk officer since January 2015 and is also our chief compliance officer. Mr. Collins previously served as senior vice president and chief risk officer, a position he held since November 2006. Prior to assuming that position, Mr. Collins served as first vice president, director of market risk management from 2005 to 2006. Mr. Collins joined us in July 2000 as vice president and assistant treasurer. He holds a B.S. in applied mathematics and economics from the State University of New York at Stony Brook.

M. Susan Elliott has served as executive vice president and chief business officer since October 2009. Prior to assuming that position, Ms. Elliott served as executive vice president of member services since January 1994. She previously served as senior vice president and director of marketing from August 1992 to January 1994. She joined us in 1981. She holds a B.S. from the University of New Hampshire and an M.B.A. from Babson College.

Frank Nitkiewicz has served as executive vice president and chief financial officer since January 2006. Prior to assuming that position, Mr. Nitkiewicz served as senior vice president, chief financial officer, and treasurer from August 1999 until December 31, 2005, and senior vice president and treasurer from October 1997 to August 1999. Mr. Nitkiewicz joined us in 1991. He holds a B.S. and a B.A. from the University of Maryland and an M.B.A. from the Kellogg Graduate School of Management at Northwestern University.

Carol Hempfling Pratt has served as executive vice president, general counsel and corporate secretary since January 2019, and previously as senior vice president, general counsel and corporate secretary since June 2010. She also serves as our ethics officer. Prior to employment with us, Ms. Pratt spent over 25 years specializing in corporate and banking law at the Boston law firm of Foley Hoag LLP, where she was a partner from 1992 to 2010. Ms. Pratt holds a B.A. and a J.D. from Northwestern University.

Brian G. Donahue has served as senior vice president, controller, and chief accounting officer since January 2013, and previously as first vice president, controller and chief accounting officer since February 2010. Prior to assuming that position, Mr. Donahue served as first vice president and controller since 2007, vice president and controller from 2004 to 2007, assistant vice president and assistant controller from 2001 to 2004, and in progressively responsible positions from 1992 to 1999, when he served as assistant controller. Mr. Donahue worked for two years as assistant vice president and division controller for State Street Bank and Trust Company, from 1999 to 2001. Prior to joining us in 1992, Mr. Donahue was an associate with Price Waterhouse. Mr. Donahue earned his B.B.A. from James Madison University and his M.B.A. from Boston University, and is a certified public accountant.

Barry F. Gale has served as senior vice president, chief human resources officer and director of the Bank’s office of minority and women inclusion since January 2019, and previously as senior vice president, executive director of human resources and director of the Bank’s office of minority and women inclusion since April 2013. Prior to employment with us, Mr. Gale served as senior director of human resources at Thomson Reuters, where he spent 16 years in progressively senior roles. Prior to that position, Mr. Gale served in human resources roles at Citizens Financial Group and The Colonial Group. Mr. Gale holds a B.S. in business management from The University of Massachusetts, Boston.

Sean R. McRae has served as senior vice president and chief information officer since April 2014. Prior to employment with us, Mr. McRae worked for Thomson Reuters for 19 years in a variety of technology leadership roles, the most recent of which was serving as chief technology officer of their global emerging markets business. Prior to Thomson Reuters, Mr. McRae

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served as software engineer, application architect, network engineer, business analyst, and project manager at John Hancock in Boston. Mr. McRae holds a B.S. in Computer Science from Bridgewater State College.

Code of Ethics and Business Conduct

We have adopted a Code of Ethics and Business Conduct that sets forth the guiding principles and rules of behavior by which we operate and conduct our daily business with our customers, vendors, shareholders, and with our employees. The Code of Ethics and Business Conduct applies to all directors and employees, including the chief executive officer, chief financial officer, and chief accounting officer, and all other professionals serving in a finance, accounting, treasury, or investor-relations role. The purpose of the Code of Ethics and Business Conduct is to avoid conflicts of interest and to promote honest and ethical conduct and compliance with the law, particularly as related to the maintenance of our financial books and records and the preparation of our financial statements. The Code of Ethics and Business Conduct can be found on our website (http://www.fhlbboston.com/downloads/aboutus/code_of_ethics.pdf). All future amendments to, or waivers from, the Code of Ethics and Business Conduct will be posted on our website. The information contained within or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC.

ITEM 11. EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Executive Summary

We attract, reward, and retain senior managers, including our president, chief financial officer, and other most highly compensated executive officers (the named executive officers) by offering a total rewards package that includes base salary, cash incentive opportunities, qualified and nonqualified retirement plans, and certain perquisites.

For the year ended December 31, 2018, the named executive officers were:
Edward A. Hjerpe III
 
President and Chief Executive Officer;
Frank Nitkiewicz
 
Executive Vice President and Chief Financial Officer;
M. Susan Elliott
 
Executive Vice President and Chief Business Officer;
George H. Collins
 
Executive Vice President and Chief Risk Officer;
Carol Hempfling Pratt
 
Executive Vice President, General Counsel and Corporate Secretary; and
Timothy J. Barrett
 
Executive Vice President and Treasurer.

Compensation program objectives are set forth in our Total Rewards Philosophy, which was used in determining the total rewards packages for the named executive officers for 2018. Total rewards packages, including base salary, cash incentive opportunities, and retirement plans, were set based on each named executive officer's performance, tenure, experience, and complexity of position and to be competitive in the labor market for senior managers in which we compete. Overall, the named executive officers were awarded increases in base salary based on our Total Rewards Philosophy (defined below) reflecting performance and market conditions, effective January 1, 2019. Additionally, we adopted an executive incentive plan (an EIP) on February 7, 2018 (the 2018 EIP). Cash incentives awarded under EIPs in 2018 were generally determined based on the criteria set forth in the 2018 EIP and the 2016 EIP.

Compensation Committee

Pursuant to a charter approved by the board of directors, the Human Resources and Compensation Committee (the Compensation Committee) assists the board of directors in developing and maintaining human resources and compensation policies that support our business objectives. The Compensation Committee develops and recommends the compensation philosophy for the board of directors' review and approval. The Compensation Committee reviews and recommends to the board of directors, for its approval, human resources policies and plans applicable to the compensation philosophy, such as compensation, benefits, and incentive plans in which the named executive officers may participate.

Compensation Committee Interlocks and Insider Participation


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No member of the Compensation Committee has at any time been an officer or employee with us. None of our executive officers has served or is serving on our board of directors or the compensation committee of any entity whose executive officers served on the Compensation Committee or our board of directors.

Compensation Committee Report

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K. Based on the Compensation Committee's review and discussion, they recommended to the board of directors that the Compensation Discussion and Analysis be included in the annual report on the Form 10-K for the year ending December 31, 2018.

The members of the Compensation Committee are:

John W. McGeorge, Chair
Michael R. Tuttle, Vice Chair
Joan Carty
Martin J. Geitz
Antoinette C. Lazarus
Gregory R. Shook
Andrew J. Calamare (ex officio).

Shareholder Advisory Vote on Executive Compensation

We are governed and directors are elected as described under Item 10 — Directors, Executive Officers and Corporate Governance. As such, we do not engage in a proxy process and have not otherwise engaged in any activity that would require a consent solicitation of our members. Accordingly, there is no shareholder advisory vote on executive compensation in determining our compensation policies and decisions.

Objectives of our Compensation Program and What it is Designed to Reward

We are committed to providing a compensation package that enables us to attract, retain, motivate, and reward highly skilled executive officers, including the named executive officers, who contribute significantly to the achievement of our mission, goals, and objectives. The FHFA reviews FHLBank compensation of the named executive officers, as described under — FHFA Oversight of Executive Compensation.

In 2014, the Compensation Committee retained McLagan Partners (McLagan), a compensation consulting firm specializing in the financial services industry, to assist with a comprehensive total rewards study. A major outcome of the study was the adoption of an updated "Total Rewards Philosophy," the principles of which have been the basis for determining total compensation for the named executive officers since that time.

The Total Rewards Philosophy defines compensation goals, competitive market and peer groups, components and comparability of the total rewards package, performance evaluation and compensation, and responsibility for administration and oversight of compensation and benefits programs. The Compensation Committee and board of directors are responsible for periodically reviewing the Total Rewards Philosophy to ensure consistency with our overall business objectives, the competitive market, and our financial condition.

The Total Rewards Philosophy provides for a total compensation and benefits package for employees, including the named executive officers, that:

•
is tailored to our unique cooperative structure;
•
is reasonable, comparable, and competitive in the marketplace in which we compete and therefore enables us to attract, retain, motivate, and reward talent;
•
is aligned with prudent risk-management practices;
•
directly links individual total rewards opportunities to our mission and annual and long-term business and financial strategies while also considering business unit/team, and individual performance; and
•
capitalizes on the perceived value of compensation and benefits to employees while optimizing the efficiency of employee-related expenses.


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Risk and Bank Compensation Practices and Policies

Our chief risk officer reviews the design of our compensation plans and policies, including the 2018 EIP, to ensure these plans do not promote or reward imprudent risk taking. Additionally, the 2018 EIP includes long-term incentive opportunities based on the average core return on capital stock over the three-year period starting January 1, 2018, and ending December 31, 2020, and targeted regulatory results at December 31, 2020, with associated deferred payouts of 50 percent of the 2018 EIP's awards, which are intended to align management's interests with risk-management objectives.

Further, as described under — Executive Incentive Plan — Additional Conditions on Long-Term Awards, the long-term incentive opportunities are subject to reduction or elimination in certain cases including in the case of certain material revisions to our financial results or to data used to determine the 2018 short-term awards, which are intended to further reduce the risk of imprudent risk-taking.

Further, our chief risk officer and our chief human resources officer jointly engage in periodic reviews of our compensation practices and policies in an effort to ensure that such practices or policies do not result in risks that are reasonably likely to have a material adverse effect. They report on the results of these reviews to the Compensation Committee at least annually. In developing that report, compensation policies and practices are reviewed first on a stand-alone basis, then in combination with enterprise-wide risk-management controls that constrain risk-taking, and finally in conjunction with procedural risk controls at the business department level that are intended to further mitigate risk-taking activities. In January 2019, the Compensation Committee concluded that none of the compensation policies or plans in effect are reasonably likely to have a material adverse effect on the Bank based on the report and related discussions.

Compensation plans and policies for staff engaged in risk-management and compliance functions are designed to manage any conflicts of interest and promote independence in risk management in a manner independent of the financial performance of the business areas these personnel monitor. For example, as discussed under — Executive Incentive Plan — Incentive Goals, Mr. Collins's goals, as chief risk officer, differ somewhat and have different weightings under the 2018 EIP from the goals of the other named executive officers. These differences are intended to align his incentives with appropriately managing our risk profile. Likewise, all participants in the 2018 EIP working in our enterprise risk-management (ERM) department have somewhat different goals and weightings from their peers in other departments. Additionally, the review of the chief risk officer includes input by the board of directors’ Risk Committee.

In addition to our internal processes, the FHFA has oversight authority over our executive compensation. In the exercise of this authority, the FHFA has issued certain compensation principles, one of which is that executive compensation should be consistent with sound risk management and preservation of the par value of FHLBank stock. Also, the FHFA reviews all executive compensation, including the 2018 EIP, relative to these principles and such other factors as the FHFA determines to be appropriate, prior to their effectiveness. For additional information on this oversight, see — FHFA Oversight of Executive Compensation.

Overview of the Labor Market for Senior Managers

The labor market in which we compete for senior managers, including the named executive officers, is across a broad group of organizations representing different industries. In particular, we experience a greater frequency of competition for talent with financial services firms, including commercial banks, other FHLBanks, other GSEs, such as Fannie Mae and Freddie Mac, and other financial institutions, including those in the private sector. We also recognize that a “one-size-fits-all” approach to compensation may need to be adjusted at times to attract employees who may have critical skills (e.g., technology staff) and to attract and retain the most qualified and highly sought-after staff. The local financial services labor market is dominated by asset-management firms that are considered labor market competitors even though they are not business competitors. As a result, we may, at times, have to expand recruiting efforts to a regional or national basis to recruit named executive officers and other senior executives with the specialized skills needed to manage the complex risks of a wholesale lending and mortgage loan investment operation. For these reasons, we must be positioned to offer comparable compensation packages to attract, retain, motivate, and reward top talent. When setting compensation levels, we also consider the cost of living in the Boston area.

Our competitive peer groups for our named executive officers include:

•
The other FHLBanks, particularly for determining mix of pay within the total rewards package due to the FHLBank System’s unique cooperative structure.

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•
The commercial banks, GSEs and diversified financial firm peers as the primary peer group for competitive positioning for total rewards for all levels of our positions that require financial services experience. For executive officers, we may consider peers that are smaller in assets or adjust the level of a matched position versus larger asset peers to establish reasonable market benchmarks.

Both peer groups are considered in setting the total rewards package. However, no specific target among the peer groups is selected for named executive officer compensation. Rather, the data is used generally to ensure the total rewards packages remain competitive as determined by the Compensation Committee relative to those peer groups.

The first competitive peer group consists of the other FHLBanks that serve as the primary peer group for determining the proportionate mix of pay and benefits. While all of the FHLBanks share the same mission, they may differ in their relative mix of products and services and location among urban and smaller-city locations, both of which impact labor-market competition and compensation by individual FHLBank. However, due to the FHLBank System's unique cooperative structure, all FHLBanks generally must rely on a similarly structured total rewards package for the named executive officers, including base salary, cash incentives, and benefits, since none can offer equity-based compensation opportunities such as those offered at their non-FHLBank competitors. In 2018, we participated in, and used the results of, the annual McLagan FHLBank System survey of key positions to determine whether the total rewards packages for the named executive officers, as well as the proportionate mix of pay and benefits, are competitive for each matched position as discussed below in more detail.

The second primary peer group, commercial banks, serves as a relevant comparator group for competitive positioning of the total rewards package for those positions requiring financial services experience, including the named executive officers. The commercial bank peer group focuses on large and mid-sized commercial banks and financial services firms but excludes large global investment banks. Both the Bank and commercial banks engage in wholesale lending and share similarities in several functional areas, particularly middle-office and support areas. The commercial bank peer group consists mostly of banks with multiple product lines/offerings and significant assets. The most significant difference between us and the commercial bank peer group is that we are focused on wholesale banking activities while the peer group generally engages in both wholesale and retail activities. The market analysis focuses on the wholesale activities and excludes retail-focused positions.

We worked with McLagan to match several of the positions held by the named executive officers to comparable positions in the commercial banks peer group of McLagan's proprietary 2018 FHLB Custom Survey. Named executive officer positions were matched to those survey positions that represented realistic job opportunities based on scope, similarity of positions, experience, complexity, and responsibilities. Realistic job opportunities included positions for which the named executive officers would be qualified at the external firms as well as positions at the firm that we would consider when recruiting for experienced executives.

The following is a list of survey participants that were included by McLagan in the 2018 FHLB Custom Survey, including the commercial banks peer group, the Federal Home Loan Banks, and proxy data from smaller public peers with assets between $10 billion and $20 billion. Not all participants reported positions that matched the data set for the named executive officers.

Table 46 - List of Survey Participants

AIB National Australia Bank
Federal Home Loan Bank of Cincinnati
MUFG Securities
Ally Financial Inc.
Federal Home Loan Bank of Dallas
Natixis
Australia & New Zealand Banking Group
Federal Home Loan Bank of Des Moines
New York Community Bank
Banc of California Inc
Federal Home Loan Bank of Indianapolis
Nord/LB
Banco Bilbao Vizcaya Argentaria
Federal Home Loan Bank of New York
Nordea Bank
Banco Itau Unibanco
Federal Home Loan Bank of Pittsburgh
Norinchukin Bank, New York Branch
BancorpSouth Bank
Federal Home Loan Bank of San Francisco
Northern Trust Corporation
Bank Hapoalim
Federal Home Loan Bank of Topeka
Old National Bancorp
Bank of America Merrill Lynch
Federal Reserve Bank of Atlanta
People's United Bank, National Assoc.
Bank of Hawaii Corp.
Federal Reserve Bank of Boston
PNC Bank
Bank of New York Mellon
Federal Reserve Bank of Cleveland
Popular Community Bank
Bank of Nova Scotia
Federal Reserve Bank of Kansas City
PricewaterhouseCoopers
Bank of the West
Federal Reserve Bank of Minneapolis
Putnam Investments
Bayerische Landesbank
Federal Reserve Bank of New York
Rabobank

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Table 46 - List of Survey Participants

BBVA Compass
Federal Reserve Bank of Richmond
Regions Financial Corporation
Berkshire Hills Bancorp Inc.
Federal Reserve Bank of San Francisco
Royal Bank of Canada
BMO Financial Group
Federal Reserve Bank of St Louis
Royal Bank of Scotland Group
BNP Paribas
Fidelity Investments
Santander Bank, N.A.
BOK Financial Corporation
Fifth Third Bank
Signature Bank - NY
Branch Banking & Trust Co.
First Citizens Bank
Simmons First National Corp.
Brown Brothers Harriman
First Interstate BancSystem
Societe Generale
Capital One
First Midwest Bancorp Inc.
South State Corporation
Cathay General Bancorp
First Republic Bank
Standard Chartered Bank
Charles Schwab & Co.
First Tennessee Bank/ First Horizon
State Street Corporation
Chemical Financial Corp.
FNB Omaha
Sterling National Bank
China Construction Bank
Freddie Mac
Sumitomo Mitsui Banking Corporation
CIBC World Markets
GE Capital
Sumitomo Mitsui Trust Bank
CIT Group
GMO
SunTrust Banks
Citigroup
Great Western Bancorp
SVB Financial Group
Citizens Financial Group
Hancock Bank
Synchrony Financial
City National Bank
Hilltop Holdings Inc.
Synovus
Columbia Banking System Inc.
Home BancShares Inc.
TD Ameritrade
Comerica
Hope Bancorp, Inc.
TD Securities
Commerzbank
HSBC
Texas Capital Bank
Commonwealth Bank of Australia
Huntington Bancshares, Inc.
The PrivateBank
Community Bank System Inc.
ICBC Financial Services
TIAA
Credit Agricole CIB
ING
Trustmark Corp.
Credit Industriel et Commercial - N.Y.
International Bancshares Corp.
U.S. Bancorp
Cullen Frost Bankers, Inc.
Intesa Sanpaolo
UMB Financial Corporation
DBS Bank
Investors Bancorp, Inc.
UniCredit Bank AG
Depository Trust & Clearing Corporation
JP Morgan Chase
United Bankshares Inc.
DZ Bank
KBC Bank
United Community Banks Inc.
East West Bancorp
KeyCorp
Valley National Bank
Eaton Vance Investment Managers
Landesbank Baden-Wuerttemberg
Washington Federal Inc.
Ernst & Young
Lloyds Banking Group
Webster Bank
Fannie Mae
M&T Bank Corporation
Wellington Management Company
FCB Financial Holdings Inc.
Macquarie Bank
Wells Fargo Bank
Federal Home Loan Bank of Atlanta
MB Financial Bank
Westpac Banking Corporation
Federal Home Loan Bank of Boston
MFS Investment Management
Zions Bancorporation
Federal Home Loan Bank of Chicago
MUFG Bank, Ltd.
 

Data from international banks contained results from their U.S. operations only.

Elements of our Compensation Plan and Why Each Element is Selected

We compensate the named executive officers principally based on their performance, skills, experience, the criticality of the role, and tenure through a package that consists of a mix of base salary, annual and deferred cash-incentive opportunities, qualified and nonqualified retirement plans, and various other health and welfare benefits, that is, total rewards. From time to time, we will also award special cash bonuses outside of an EIP to compensate a named executive officer based on unusual or exemplary circumstances. Each compensation element is discussed in greater detail below. Due to our cooperative structure, we cannot offer equity-based compensation programs, so we may offer higher base salaries, in addition to cash-incentive opportunities, and certain retirement benefits to keep our compensation packages competitive relative to the market and to replace some of the value of compensation that competitors might offer through equity-based compensation programs. The named executive officers may also be provided with certain additional perquisites. Although we do not engage in

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benchmarking, the Total Rewards Philosophy provides that our total rewards package, including that for named executive officers, should be comparable with the total rewards package for matched positions in the two primary peer groups, as discussed under — Overview of the Labor Market for Senior Managers above. Historically, the Compensation Committee has set total rewards packages for each of the named executive officers so that their total rewards package of base salary, cash incentives, and retirement plans would be comparable with the total rewards packages at the commercial bank peer group, including base salary and short- and long-term incentives, and so that their total cash compensation, that is, base salary plus cash incentives, would be competitive with total cash compensation of the named executive officer's peers at other FHLBanks. The Compensation Committee has also considered total cash compensation at the other FHLBanks as the comparator since it includes base salaries and cash incentives, but does not consider the value of retirement plans since they are generally of similar value across the FHLBank System. The Compensation Committee has been informed by the same data in setting current total rewards packages.

How we Determine the Amount for Each Element of our Compensation Plan

The board of directors sets annual goals and objectives for the chief executive officer. In 2018, these goals and objectives were developed to align with our strategic business plan. At the end of the year, the chief executive officer provides the Compensation Committee with a self-assessment of his corporate and individual achievements. Based on the Compensation Committee's evaluation of his performance and review of competitive market data for the defined peer groups, the Compensation Committee determines and recommends an appropriate total compensation and benefits package to the board of directors for approval. In the case of other named executive officers, the chief executive officer reviews individual performance and submits market data and recommendations to the Compensation Committee regarding appropriate compensation, although the board of director’s Risk Committee provides input on the evaluation of the chief risk officer. The Compensation Committee reviews these recommendations and submits its recommendations to the full board of directors. The board of directors reviews the recommendations and approves the compensation it considers appropriate, giving consideration to the Total Rewards Philosophy.

The Compensation Committee does not set specific, predetermined targets for the allocation of total rewards between base salary, cash incentives, and benefits, including retirement and other health and welfare plans and perquisites. Rather, the Compensation Committee considers the value and mix of the total rewards package offered to each named executive officer compared with the total rewards package for positions of comparable scope, responsibility, and complexity of position at the two defined peer groups, the incumbent's performance, experience and tenure, and internal equity.

Base Salary

Base salary adjustments for all named executive officers are considered at least annually as part of the year-end annual performance review process and more often if considered necessary by the Compensation Committee during the year, such as in recognition of a promotion or to ensure internal equity.

After review and nonobjection by the FHFA, the board of directors awarded the named executive officers an increase in base salary on January 9, 2019, with retroactive application to January 1, 2019. In determining the amount of the increases, the Compensation Committee considered market data from the McLagan 2018 FHLB Custom Survey, discussed under — Overview of the Labor Market for Senior Managers above. Additionally, the Compensation Committee considered the recommendations of Mr. Hjerpe for the other named executive officers based on individual performance, tenure, experience, and complexity of the named executive officer's position and internal equity. Mr. Hjerpe recommended, and the board of directors awarded at the recommendation of the Compensation Committee, increases in base salary for each of the named executive officers. The percentage increases in base salary were generally consistent with merit and adjustment increases granted to staff. In determining Ms. Pratt’s and Mr. Barrett’s increases in base salary, Mr. Hjerpe and the board of directors considered their leadership and strong performances, which led to the promotion of each from senior vice president to executive vice president.

The following table sets forth the base salary increases:


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Table 47 - Named Executive Officer Salaries

Name and Principal Position
 
Pre-Adjustment Annual Base Salary
 
Post-Adjustment Annual Base Salary
 
Percent Increase
Edward A. Hjerpe III
 
$859,430
 
$889,510
 
3.50%
President and Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
Frank Nitkiewicz
 
$393,280
 
$405,880
 
3.20%
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
M. Susan Elliott
 
$393,080
 
$405,680
 
3.21%
Executive Vice President and Chief Business Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
George H. Collins
 
$361,070
 
$371,070
 
2.77%
Executive Vice President and Chief Risk Officer
 
 
 
 
 
 
 
 
 
 
 
 
 
Carol Hempfling Pratt
 
$346,400
 
$377,600
 
9.01%
Executive Vice President, General Counsel and Corporate Secretary
 
 
 
 
 
 
 
 
 
 
 
 
 
Timothy J. Barrett
 
$346,400
 
$377,600
 
9.01%
Executive Vice President and Treasurer
 
 
 
 
 
 

Executive Incentive Plan

General Overview of EIPs

EIPs are cash incentive plans which are reviewed by the Compensation Committee and may be adopted by the board of directors on an annual basis. EIPs are not necessarily adopted every year. Generally, EIPs are used to promote achievement of strategic objectives by aligning cash incentive opportunities for corporate officers or other members of management or highly compensated employees, including the named executive officers, with our short- and long-term financial performance and strategic direction. These incentive opportunities are also designed to facilitate retention and commitment of key officers. EIPs generally include specific goals, such as goals based on profitability, business growth, regulatory examination results and remediation, and operational goals for each of the corporate officers or other members of management or highly compensated employees, including the named executive officers.

The Compensation Committee reviews each component of the EIP's plan design, including eligible participants, goals, goal weighting, achievement levels, and payout opportunities. The Compensation Committee administers the EIP and has full power and binding authority to construe, interpret, administer and adjust the EIP during or at the end of the plan year for extraordinary circumstances. Extraordinary circumstances may include changes in, among other things, business strategy, termination or commencement of business lines, significant growth or consolidation of the membership base, impact of severe economic fluctuations, or significant regulatory or other changes impacting us or the FHLBank System. The Committee may not make adjustments for extraordinary circumstances that include changes to goals, weights, or levels of achievement without resubmission to the FHFA.

Purpose of the 2018 EIP

The 2018 EIP is intended to:
•
reflect a reasonable assessment of our financial situation and prospects while rewarding achievement of our financial plan and strategic objectives in our strategic business plan;
•
reinforce and reward our commitment to conservative, prudent, sound risk-management practices and preservation of the par value of our capital stock;
•
tie a significant percentage of incentive awards to our long-term financial condition and performance; and

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•
recognize the importance of individual performance through metrics linked to our strategic goals and/or objectives of the participant’s principal functions and independent of the areas that they monitor.

2018 EIP Plan Design

The design of the 2018 EIP was guided by principles intended to:

•
promote achievement of our financial plan and strategic objectives in our strategic business plan;
•
provide a total rewards package that is competitive with other financial institutions in the labor markets in which we compete; and
•
facilitate the retention and commitment of our corporate officers.

Incentive Goals

The 2018 EIP's short-term financial and nonfinancial goals were derived from, or are consistent with, our strategic business plan and objectives and were generally weighted based on desired business outcomes. The goal achievement levels have generally been set so that the target achievement level is consistent with projections in our strategic business plan. For certain nonfinancial EIP goals for which there is no direct reference in the strategic business plan, the goals and goal achievement levels are established consistent with our strategic objectives and the impact of achievement of the objectives. The 2018 EIP does not contain individual performance award opportunities for the named executive officers. To mitigate unnecessary or excessive risk-taking, the 2018 EIP contains measures for overall performance that are achieved through Bankwide collaboration of activity but cannot be individually attained or altered by participants in the 2018 EIP. Additionally, the 2018 EIP includes long-term incentive opportunities based on the average core return on capital stock over the three-year period starting January 1, 2018, and ending December 31, 2020, and targeted regulatory results at December 31, 2020, which are intended to align management's interests with our long-term financial performance and condition. Further, Mr. Collins's goals, as chief risk officer, differ somewhat and have different weightings from the goals and weightings of the other named executive officers, and are intended both to align his incentives with appropriately managing our risk profile and to be independent of the financial performance of the individual business areas that ERM monitors. As described in greater detail under — Determination of Awards under the 2018 EIP, the Compensation Committee and the board of directors maintained authority over all awards under the 2018 EIP, however, the 2018 EIP prohibits award payouts to participants that do not receive a performance rating of “meets expectations” or better.

Short-Term Incentive Goals and Actual Achievement

The 2018 EIP includes the following short-term incentive goals for the named executive officers:

•
Pre-assessment core return on capital stock (the core return goal): Pre-assessment core return on capital stock (as such term is defined in the 2018 EIP and referred to in this report as core return on capital stock) is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, expenses of the HHNE and JNE initiatives, interest expense on mandatorily redeemable capital stock, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to hedges, other-than-temporary-impairment credit losses on private-label MBS, gains from the accretion of prior other-than-temporary-impairment credit losses due to improvements in projected private-label MBS performance, private-label MBS litigation settlement income, and unbudgeted voluntary pension contributions. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described above, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of the year. We complied with these limits for 12 months. These limits are described under Item 7A — Quantitative and Qualitative Disclosures about Market Risk - Measurement of Market and Interest-Rate Risk and Related Policy Constraints.
•
HHNE Initiative (HHNE initiative): This goal is measured by the launch to each of the six New England housing finance agencies and disbursement of the allocated subsidy in our HHNE initiative.
•
JNE initiative (JNE initiative): This goal is measured by the launch of two disbursement periods, disbursement of the subsidy in our JNE initiative, and by the introduction of the JNE program to members that did not apply and take down a JNE advance in 2016 or 2017.
•
Operational Efficiency (the operational efficiency goal): This goal is measured by whether and to what degree our core operating expenses, which are defined as our normal expenses associated with enabling the Bank to conduct business

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operations, and which exclude significant discretionary expenses approved by our board in an amount not to exceed judgment or settlement income associated with our ongoing private-label MBS litigation, stay within and do not exceed the operating expense budget approved by our board. Core operating expenses are measured as a percentage of the annual operating expense budget for 2018.

The 2018 EIP includes the following short-term incentive goals for the named executive officers, except for Mr. Collins:

•
New business and mission goal (the new business goal): This goal is measured by the total amount of advances with maturities of greater than or equal to one year in term (and not pre-payable without fee) originated during 2018 to depository institution members, including advances restructurings that result in extension of the advance in maturity of one year or longer, but excluding certain AHP, CDA, NEF, JNE and HHNE advances and advances to insurance company members.
•
Insurance advances disbursements (the insurance advances goal): This goal is measured by the amount of new advances originated in 2018 (any type and maturity of advance) to insurance company members.
•
Insurance membership (the insurance membership goal): This goal is measured by the number of insurance companies approved for membership by the president and chief executive officer in 2018.

As chief risk officer, Mr. Collins's short-term incentive goals differ somewhat and have different weightings from the goals and weightings of the other named executive officers. These differences are intended to align Mr. Collins’s incentives with appropriately managing our risk profile and are intended to be independent of the financial performance of the individual business areas that ERM monitors. Under the 2018 EIP, Mr. Collins's short-term incentive goals include the core return goal, HHNE initiative, JNE initiative, and the operational efficiency goal but exclude the new business goal, insurance advances goal, and insurance membership goal. Mr. Collins's short-term goals also include:

•
Bankwide ERM initiatives (the ERM goals): These goals are described and measured as set forth in Table 49. Mr. Collins's achievement of these goals was evaluated by Mr. Hjerpe in his capacity as Mr. Collins's manager.
•
Remediation of 2017 Report of Examination Findings (the remediation goal): This goal is measured by the clearance rate of recommendations and matters requiring attention identified during our 2017 FHFA examination.

Table 48 sets forth the named executive officers' short-term goals and the related weight for all goals and the levels of achievement, and the actual achievement for each of those goals, other than ERM goals which are set forth in Table 49 for the year ended December 31, 2018.


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Table 48 - Short-Term Goals

 
 
Weighting
 
 
 
 
 
 
 
 
Goal
 
Named Executive Officers other than Chief Risk Officer
Chief Risk Officer
 
Threshold
 
Target
 
Excess
 
Actual
Achievement
Core Return
 
25%
20%
 
7.13 percent (1)
 
7.90 percent (1)
 
9.43 percent (1)
 
Between target and excess
New Business
 
20%
NA
 
$3.0 billion
 
$4.0 billion
 
$5.0 billion
 
$4.4 billion
Insurance Advances
 
15%
NA
 
$2.5 billion
 
$3.5 billion
 
$4.5 billion
 
$6.35 billion
Insurance Membership
 
10%
NA
 
3 new members
 
5 new members
 
7 new members
 
7 new members
HHNE Initiative
 
10%
10%
 
N/A
 
Launch and disburse 80% of subsidy by December 31, 2018
 
Disburse 100% of subsidy by December 31, 2018
 
Excess
JNE Initiative
 
10%
10%
 
N/A
 
Launch and disburse first disbursement of $3.0 million by June 30, 2018 and launch second disbursement period ($2.0 million) by 7/1/18; plus add 8 new users
 
Disburse $5.0 million in subsidy by December 1, 2018; plus add 15 new users
 
Between target and excess
Operational Efficiency
 
10%
10%
 
2018 core operating expenses do not exceed the 2018 operating expense budget approved by the board of directors
 
2018 core operating expenses do not exceed 97% of the 2018 operating expense budget approved by the board of directors
 
2018 core operating expenses do not exceed 93% of the 2018 operating expense budget approved by the board of directors
 
Between threshold and target
Remediation
 
NA
15%
 
Clear all matters requiring board attention and 85% of recommendations
 
Clear all matters requiring board attention and all recommendations
 
Target criteria plus receive an upgrade in the 2018 regulatory examination
 
Threshold(2)
ERM
 
NA
35%
 
See Table 49
 
See Table 49
 
See Table 49
 
See Table 49
___________________________
(1)
These performance levels were adjusted from the amounts originally established in the 2018 EIP. The 2018 EIP provides that the originally established performance levels were to be adjusted up or down by 1.2 basis points for every basis point by which the average daily federal funds rate deviated from the 1.66 percent assumed in our strategic business plan. In 2018, the average daily federal funds rate deviation was 20 basis points, resulting in a 24 basis point increase to each of the performance levels.
(2)
Following a review of the criteria for this goal, which are listed in this table, and a discussion of achievement, payment was approved for all ERM employees at the threshold level for this goal. The payment was recommended by the president and chief executive officer and approved by the Compensation Committee to recognize ERM remediation outcomes. The Bank received nonobjection from the FHFA on the plan to pay at the threshold level.

The following table 49 sets forth the ERM Goals, weightings and the actual achievement for the year ended December 31, 2018.


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Table 49 - ERM Goals and Actual Achievement

Goals
 
Threshold
 
Target
 
Excess
 
Actual Achievement
Contribute to the Bank activities for 2018 via active participation with key constituents co-led by ERM and business unit management. This goal was weighted 40 percent.
 
Satisfactorily meet 75 percent of ongoing initiatives.
 
Threshold criteria plus 100 percent of key initiatives.
 
Satisfactorily meet 100 percent of ongoing and key initiatives.
 
Between target and excess
Evaluate and assess the state of the Bank’s ERM department by conducting a maturity assessment and presenting the report to executive management and the Risk Committee of the board of directors. This goal was weighted 20 percent.
 
Achieve by September 30, 2018.
 
Achieve by July 31, 2018.
 
Achieve by June 30, 2018.
 
Excess
Conduct a review of the Bank’s risk limit structure including both market value and earnings at risk-based exposures. Present final report to Risk Committee of the board of directors. This goal was weighted 40 percent.
 
Achieve by December 2018.
 
Achieve by October 2018.
 
Achieve by September 2018.
 
Excess

Long-Term Incentive Goals

In addition, the 2018 EIP includes two long-term incentive goals. The first, weighted at 67 percent of the total long-term opportunity, is based on our average core return on capital stock over the three-year period starting January 1, 2018, and ending December 31, 2020. The 2018 EIP provides that the performance levels for this goal will be adjusted up or down by 1.2 basis points for every basis point by which the average daily federal funds rate deviates from the 1.86 percent that we have forecast.

For information on how core return on capital stock is determined, see — Short-Term Incentive Goals and Actual Achievement.

Table 50 - Average Core Return on Capital Stock

Long-Term Goal
 
Average Core Return on Capital Stock from January 1, 2018 to December 31, 2020
Threshold
 
5.94%
Target
 
7.43%
Excess
 
8.92%

The second long-term incentive goal will be measured by the achievement of certain targeted regulatory goals by December 31, 2020. This goal is weighted at 33 percent of the total long-term opportunity.

Incentive Opportunities under the 2018 EIP

Incentive opportunities under the 2018 EIP are based on each named executive officer's base salary at December 31, 2018 (referred to as 2018 incentive salaries).

Table 51 sets forth the combined short and long-term incentive opportunities under the 2018 EIP, in each case expressed as percentages of the named executive officers' 2018 incentive salaries:

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Table 51 - Combined Short- and Long-Term Incentive Opportunity

 
Combined Short- and Long-Term Incentive Opportunity(1)
 
Threshold
 
Target
 
Excess
President
50.00%
 
75.00%
 
100.00%
All Other Named Executive Officers
30.00%
 
50.00%
 
70.00%
 ___________________________
(1)
The combined short- and long-term incentive paid under the 2018 EIP will not exceed 100 percent of the average of the named executive officer’s base salary for 2018, 2019 and 2020.

At the conclusion of 2018, individual awards were calculated based on actual goal achievement as of December 31, 2018. Participants were eligible to receive 50 percent of such award in a cash payment in March 2019, following non-objection by the FHFA and approval of the board of directors. Table 52 below sets forth the incentive opportunities for the short-term incentive opportunity that were payable in March 2019, in each case expressed as percentages of the named executive officers' 2018 incentive salaries:

Table 52 - Short-Term Incentive Opportunity


 
Short -Term Incentive Opportunity
 
Threshold
 
Target
 
Excess
President
25.00%
 
37.50%
 
50.00%
All Other Named Executive Officers
15.00%
 
25.00%
 
35.00%
 
The remaining 50 percent of the combined award, calculated at the end of 2018, then becomes the target long-term incentive opportunity, with threshold and excess incentive opportunities tied to threshold and excess levels of achievement of the long-term goals, as set forth in Table 53 below.

Table 53 - Long-Term Incentive Opportunity

 
Long-Term Incentive Opportunity
 
Threshold
 
Target
 
Excess
All Named Executive Officers
50% of the remaining 50% of the combined short- and long-term incentive opportunity
 
100% of the remaining 50% of the combined short- and long-term incentive opportunity
 
150% of the remaining 50% of the combined short- and long-term incentive opportunity
 
Determination of Awards under the 2018 EIP

Awards for the short-term goals, other than the ERM goals under the 2018 EIP, were based on actual goal achievement determined objectively at the conclusion of the year. Results for each goal were measured and the award for each goal was then calculated independently based on the following formula:

Award for Each Goal
=
Goal Weight (Table 48)
X
Incentive Opportunity for Level of Achievement
(Table 51)
X
2018
Incentive Salary

If the result for the goal were less than the threshold level of achievement (Table 48), the award for that goal would have been zero absent an act of discretion. For goals achieved above the excess level of achievement (Table 48), there were no incremental payouts for achievements above excess per plan design. The remaining annual goals were achieved at a level between the threshold and excess levels of achievement. In administering the EIP, as with prior EIPs, the Compensation

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Committee determined that participants would receive an interpolated award for having exceeded threshold or target levels. In such instance, the award for each goal would be calculated according to the following formula:
 
Award for Each Goal
=
Goal Weight (Table 48)
X
Incentive Opportunity
(Table 51) Interpolated for Actual Level of Achievement
X
2018
Incentive Salary
 
Our staff calculated the named executive officers' awards under the 2018 EIP's short-term goals, in accordance with actual year-end results and the foregoing formulas. Mr. Hjerpe reviewed the results for Mr. Collins under the ERM goals, and made award recommendations to the Compensation Committee for the Compensation Committee's consideration. The Compensation Committee discussed and adopted Mr. Hjerpe’s recommendations and the staff calculations.

Based on those calculations and recommendations, the combined incentive awards were calculated, by goal, as follows:

Table 54 - 2018 Combined Short-and Long-Term Awards as Calculated by Goal

Participant
Core Return
New Business
Insurance Advances
Insurance Member-ship
HHNE
JNE
Remediation
Operational Efficiency
ERM
Total Combined Award
Mr. Hjerpe
$
194,144

$
146,103

$
128,915

$
85,943

$
85,943

$
76,735

N/A

$
54,430

N/A

$
772,213

Mr. Nitkiewicz
61,241

45,620

41,294

27,530

27,530

24,159

N/A

15,993

N/A

243,367

Ms. Elliott
61,210

45,597

41,273

27,516

27,516

24,146

N/A

15,985

N/A

243,243

Mr. Collins
44,980

N/A

N/A

N/A

25,275

22,180

$
16,248

14,684

$
86,777

210,144

Ms. Pratt
53,941

40,182

36,372

24,248

24,248

21,279

N/A

14,087

N/A

214,357

Mr. Barrett
53,941

40,182

36,372

24,248

24,248

21,279

N/A

14,087

N/A

214,357


The named executive officers were eligible to receive 50 percent of the combined award illustrated above in a cash payment in March 2019, following non-objection by the FHFA and approval of the board of directors. The column “short-term award” in Table 55 below sets forth the short-term incentive award paid to the named executive officers in March 2019 and the remaining 50 percent which then becomes the target level of achievement for the long-term incentive opportunity.

Table 55 - 2018 Combined Short-and Long-Term Awards, Short-Term Awards and Long-Term Incentive Opportunity at Target Level of Achievement

Participant
 
Combined Short and Long Term Award
 
Short-Term Award
 
Long-Term Opportunity at Target
Mr. Hjerpe
 
$
772,213

 
$
386,107

 
$
386,106

Mr. Nitkiewicz
 
243,367

 
121,684

 
121,683

Ms. Elliott
 
243,243

 
121,622

 
121,621

Mr. Collins
 
210,144

 
105,072

 
105,072

Ms. Pratt
 
214,357

 
107,179

 
107,178

Mr. Barrett
 
214,357

 
107,179

 
107,178


Final awards under the 2018 EIP's long-term incentive opportunities cannot be determined until after December 31, 2020, since they are based on average core return on capital stock over the three-year period starting January 1, 2018, and ending December 31, 2020, and targeted regulatory results as of December 31, 2020. Based on the Bank's levels of achievement as of December 31, 2018, the named executive officers are eligible for long-term incentive opportunities, payable in March 2021, as follows:


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Table 56 - Long-Term Incentive Opportunity at Threshold, Target, and Excess

 
 
Long-Term Incentive Opportunity at Threshold, Target, and Excess
Participant
 
Threshold
 
 Target
 
Excess
Mr. Hjerpe
 
$
193,053

 
$
386,106

 
$
579,159

Mr. Nitkiewicz
 
60,842

 
121,683

 
182,525

Ms. Elliott
 
60,811

 
121,621

 
182,432

Mr. Collins
 
52,536

 
105,072

 
157,608

Ms. Pratt
 
53,589

 
107,178

 
160,767

Mr. Barrett
 
53,589

 
107,178

 
160,767


Additional Conditions on Long-Term Awards

Long-term awards are subject to the following additional conditions:

•
Participants must be employed by us on the payment date in March 2021 to receive the long-term award, although participants that terminate employment by reason of death or disability or who are eligible to retire prior to that date may receive payment of the award in certain instances, as detailed in the 2018 EIP.
•
Subject to the discretion of the board of directors, the calculated long-term award may be reduced or eliminated (but not to a number that is less than zero) for some or all participants, as applicable, if, during calendar years 2019 and/or 2020, any of the following occurs such that if it had occurred prior to the year-end 2018 calculations, it would have negatively impacted the goal results and reduced the associated payout calculation:
◦
operational errors or omissions result in material revisions to our 2018 financial results, information submitted to the FHFA, or data used to determine the combined award at year-end 2018;
◦
significant information to the SEC, Office of Finance, and/or FHFA is submitted materially beyond any deadline or applicable grace period, other than late submissions that are caused by acts of God or other events beyond the reasonable control of the participants; or
◦
we fail to make sufficient progress, as determined by the FHFA, in the timely remediation of examination and other supervisory findings relevant to the goal results or payout calculation.
•
The actual payment of the long-term award is subject to the final approval of the board of directors and review and non-objection by the FHFA (to the extent required by the FHFA).

Retirement and Deferred Compensation Plans

We offer participation in qualified and nonqualified retirement plans to the named executive officers as key elements of our total rewards package. The benefits received under these plans are intended to enhance the competitiveness of our total compensation and benefits relative to the market by complementing the named executive officers' base salary and cash incentive opportunities. We maintain four retirement plans in which the named executive officers participate, including:

•
Pentegra Defined Benefit Plan for Financial Institutions (the Pentegra Defined Benefit Plan), a funded, tax-qualified, noncontributory plan that provides retirement benefits for all eligible employees;
•
Pension Benefit Equalization Plan (the Pension BEP), a nonqualified, unfunded defined benefit plan covering certain senior officers, as defined in the plan, which includes the named executive officers and other personnel as determined by the board of directors;
•
Pentegra Defined Contribution Plan for Financial Institutions (the Pentegra Defined Contribution Plan), a 401(k) plan, under which we match employee contributions for all eligible employees; and
•
Thrift Benefit Equalization Plan (the Thrift BEP), a nonqualified, unfunded defined contribution plan with a deferred compensation feature, which is available to the named executive officers, directors, and such other personnel as determined by the board of directors.

The Compensation Committee believes that the Thrift BEP, together with the Pension BEP, provide retirement benefits that are necessary for our total rewards package to remain competitive, particularly compared with labor market competitors that may offer equity-based compensation. Additional information regarding these plans can be found with the Pension Benefits and Nonqualified Deferred Compensation tables below.


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All benefits payable under the Pension BEP and Thrift BEP are paid solely out of our general assets, or from assets set aside in rabbi trusts subject to the claims of our creditors in the event of our insolvency.

Perquisites

Perquisites for the named executive officers may include supplemental life insurance (Mr. Nitkiewicz and Ms. Elliott only), travel memberships and subscriptions, spouse travel during business, parking, or a 100 percent mass transportation subsidy. Mr. Hjerpe is also eligible for the personal use of an automobile. The Compensation Committee believes that the perquisites offered to the named executive officers are reasonable and necessary for the total compensation package to remain competitive in recruiting and retaining them.

Potential Payments upon Termination or Change in Control

Change-in-Control Agreement with Mr. Hjerpe

We have a change-in-control agreement with Mr. Hjerpe. The board of directors had determined that having the change in control agreement in place would be an effective recruitment and retention tool since the events under which we provide payment to Mr. Hjerpe would provide a measure of protection to Mr. Hjerpe in the instance of our relocation in excess of 50 miles or his termination of employment or material diminution in duties or base compensation resulting from merger, consolidation, reorganization, sale of all or substantially all of our assets, or our liquidation or dissolution. The change-in-control agreement is discussed below under Post-termination Payments.

Employment Status and Severance Policy

Pursuant to the FHLBank Act, our employees, including the named executive officers as of December 31, 2018, are "at will" employees. Each may resign his or her employment at any time, and we may terminate his or her employment at any time for any reason or no reason, with or without cause, and with or without notice. Under our severance policy, all regular full- and part-time employees who work at least 1,000 hours per year whose employment is terminated involuntarily for reasons other than "cause," (as determined by us at our sole discretion), are provided with severance packages reflecting their status in the organization and tenure. Severance packages for employees leaving by mutual agreement or terminated for cause is at our sole discretion, provided that such severance shall not exceed that paid to employees terminated involuntarily for reasons other than cause. The severance policy does not constitute a contractual relationship between the Bank and the named executive officers, and we reserve the right to modify, revoke, suspend, terminate, or change the severance policy at any time without notice.

To receive benefits under the severance policy, individuals must agree to execute our standard release of claims agreement. In addition and at our sole discretion, we may provide outplacement and/or such other services as may assist in ensuring a smooth career transition. Payments under the severance policy are discussed below under Post-termination Payments.

Executive Change in Control Severance Plan

In 2018, the Board adopted an Executive Change in Control Severance Plan (Executive Severance Plan). The purpose of the Executive Severance Plan is to provide stability to the Bank in the event of a change in control and to facilitate hiring and retention of senior management by providing them with certain protections and benefits in the event of a qualifying termination following a change in control of the Bank. Outside of a change in control period (as defined in the Executive Severance Plan), we have the right to revise, modify or terminate the plan in whole or in part at any time without the consent of any participant. During a change in control period (or such longer period until all payments and benefits, if any, which become due under the plan have been paid), however, any revision, modification, or termination that would impact benefits to a participant would require the consent of that participant. The Executive Severance Plan is discussed below under Post-termination Payments.

FHFA Oversight of Executive Compensation

The FHFA provides certain oversight of FHLBank executive officer compensation. Section 1113 of HERA requires that the Director of the FHFA prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. In connection with this responsibility, the FHFA has issued final rules on executive compensation and golden parachute payments, which provide for oversight of such compensation and payments. In addition to those rules, the FHFA has issued an advisory bulletin on principles for FHLBank executive compensation together with certain protocols for the review of proposed FHLBank compensation actions. We await express non-objection from the FHFA to any proposed award of compensation to our named

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executive officers prior to making any such award. The FHFA could issue additional rules, advisory bulletins, and/or review protocols that could further impact named executive officer compensation.

Compensation Tables

The following table sets forth all compensation received from the Bank for the years ended December 31, 2018, 2017, and 2016, by our named executive officers.

Table 57 - Summary Compensation for 2018, 2017 and 2016

Name and Principal Position
 
Year
 
Salary(1)
 
Bonus(2)
 
Non-equity
Incentive Plan
Compensation Short-Term(3)
 
Non-equity
Incentive Plan
Compensation Long-Term(4)
 
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings(5)
 
All Other
Compensation(6)
 
Total
Edward A. Hjerpe III
 
2018

 
$
859,430

 
$
—

 
$
386,107

 
$
473,323

(7) 
$
498,000

 
$
118,999

 
$
2,335,859

President and
 
2017

 
781,300

 
—

 
370,415

 
386,685

(8) 
981,000

 
106,684

 
2,626,084

Chief Executive Officer
 
2016

 
756,700

 
—

 
364,162

 
289,987

 
692,000

 
103,149

 
2,205,998

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Frank Nitkiewicz
 
2018

 
393,280

 
—

 
121,684

 
164,658

 
244,000

 
46,779

 
970,401

Executive Vice President
 
2017

 
380,880

 
—

 
122,307

 
170,888

 
1,022,000

 
41,424

 
1,737,499

and Chief Financial Officer
 
2016

 
369,280

 
1,495

 
123,340

 
102,329

 
691,000

 
40,551

 
1,327,995

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
M. Susan Elliott
 
2018

 
393,080

 
—

 
121,622

 
167,288

 
422,000

 
53,012

 
1,157,002

Executive Vice President
 
2017

 
380,680

 
—

 
127,127

 
175,075

 
979,000

 
46,414

 
1,708,296

and Chief Business Officer
 
2016

 
369,280

 
2,961

 
125,310

 
103,371

 
788,000

 
44,704

 
1,433,626

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
George H. Collins
 
2018

 
361,070

 
 
 
105,072

 
125,940

 
236,000

 
36,086

 
864,168

Executive Vice President
 
2017

 
350,070

 
1,450

 
101,844

 
138,578

 
708,000

 
31,108

 
1,331,050

and Chief Risk Officer
 
2016

 
339,570

 
—

 
94,337

 
74,106

 
516,000

 
32,040

 
1,056,053

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Carol Hempfling Pratt
 
2018

 
346,400

 
—

 
107,179

 
142,958

 
218,000

 
35,990

 
850,527

Executive Vice President
 
2017

 
334,700

 
—

 
110,210

 
143,220

 
288,000

 
31,588

 
907,718

General Counsel and Corporate Secretary
 
2016

 
324,500

 
—

 
107,085

 
84,691

 
216,000

 
31,073

 
763,349

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Timothy J. Barrett
 
2018

 
346,400

 
—

 
107,179

 
142,958

 
198,000

 
31,253

 
825,790

Executive Vice President
 
2017

 
334,700

 
—

 
107,198

 
138,690

 
270,000

 
27,707

 
878,295

and Treasurer
 
2016

 
324,500

 
—

 
107,085

 
84,691

 
205,000

 
27,413

 
748,689

_______________________
(1)
Amounts shown are not reduced to reflect the named executive officers' elections, if any, to defer receipt of salary into the Pentegra Defined Contribution Plan or the Thrift BEP.
(2)
In 2017 Mr. Collins received an additional bonus of $1,450 as a cash award for 20 years of service. In 2016 Mr. Nitkiewicz received an additional bonus of $1,495 as a cash award for 25 years of service, and Ms. Elliott received an additional bonus of $2,961 as a cash award for 35 years of service. The amount of these service awards is the same as would have been paid to any employee who completed the same number of years of service in 2017 and 2016.
(3)
Represents amounts paid under the 2018 EIP during 2019 in respect of service performed in 2018, under the 2017 EIP during 2018 in respect of service performed in 2017, and under the 2016 EIP during 2017 in respect of service performed in 2016.

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(4)
Represents amounts earned under the 2016 EIP for satisfying at the excess level of achievement at December 31, 2018, a long-term goal based on our pre-assessment core return on capital stock (as such term is defined in the 2016 EIP and referred to in this report as the 2016 EIP core return on capital stock), which is explained further below in this footnote; amounts earned under the 2015 EIP for satisfying at the excess level of achievement at December 31, 2017, a long-term goal based on our pre-assessment, pre-other-than-temporary-impairment core return on capital stock (as such term is defined in the 2015 EIP and referred to in this report as the 2015 EIP core return on capital stock), which is explained further below in this footnote; and amounts earned under the 2014 EIP for satisfying at the achievement level between target and excess long-term goals based on our retained earnings (as adjusted as explained in this footnote) at December 31, 2016.
Retained earnings were adjusted for payouts under the 2014 EIP from the amounts determined in accordance with GAAP to net out the impacts of prepayment fee income, private-label MBS litigation settlement income, and debt retirement expense. With the approval of the board of directors, retained earnings was additionally adjusted from this formula for the payouts under the 2014 EIP to exclude from net income unbudgeted voluntary pension contributions and the expense associated with JNE and HHNE, programs which were not contemplated at the time the 2014 EIP was established. The difference between GAAP retained earnings and this measure of adjusted retained earnings is that GAAP retained earnings does not provide for the adjustments described above.
The 2015 EIP core return on capital stock is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to hedges, other-than-temporary-impairment credit losses on private-label MBS, gains from the accretion of prior other-than-temporary-impairment credit losses due to improvements in projected private-label MBS performance, and private-label MBS litigation settlement income. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the exclusions described in the immediately prior sentence, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. With the approval of the board of directors, the 2015 EIP core return on capital stock was adjusted from the formula set out in the 2015 EIP to exclude from net income unbudgeted voluntary pension contributions and also to exclude the expense associated with JNE and HHNE, programs which were not contemplated at the time the 2015 EIP was established. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described under Short-Term Incentive Goals and Actual Achievement, and the 2015 EIP core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of each year. We complied with these limits. These limits are described under Item 7A —Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints.
The 2016 EIP core return on capital stock is a measure of return on capital stock that excludes or adjusts the timing of recognition of the impact of AHP expenses, expenses of the HHNE and JNE initiatives, gains (losses) on debt retirement, net prepayment fees, net unrealized gains (or losses) attributable to hedges, other-than-temporary-impairment credit losses on private-label MBS, gains from the accretion of prior other-than-temporary-impairment credit losses due to improvements in projected private-label MBS performance, and private-label MBS litigation settlement income. In addition, with the approval of the board of directors, we also adjusted the calculation of core return on capital stock by including unbudgeted voluntary pension contributions to the extent funded by current period litigation income. The difference between GAAP return on capital stock and this measure of return on capital stock is that GAAP return on capital stock does not provide for the adjustments described above, and core return on capital stock includes shares classified as mandatorily redeemable capital stock. Achievement of this goal was subject to compliance with our VaR and duration of equity limits for at least 10 of the 12 months of the year. We complied with these limits. These limits are described under Item 7A — Quantitative and Qualitative Disclosures about Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints. The amounts paid under the 2016, 2015 and 2014 EIPs also reflect a payout based on the results of the regulatory goal of those plans.
(5)
The amounts shown reflect the actuarial increase/decrease in the present value of the named executive officer's benefits under all pension plans established by us determined using interest-rate and mortality-rate assumptions consistent with those used in our financial statements. No amount of above market earnings on nonqualified deferred compensation is reported because above market rates are not possible under the Thrift BEP, the only such plan that we offer.
(6)
See Table 58 - Other Compensation for amounts, which include our match on employee contributions to the Thrift BEP and the Pentegra Defined Contribution Plan, insurance premiums paid by us with respect to supplemental life insurance, and perquisites.
(7)
The amount Mr. Hjerpe earned under the 2016 EIP at December 31, 2018, based on the formula in the plan, was $486,156. This amount was reduced to $473,323, however, to cap the combined short- and long-term incentive paid under the plan to no greater than 100 percent of Mr. Hjerpe’s salary for 2018. The board of directors exercised discretion to raise the cap

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from the provision in the plan capping the combined short- and long-term incentive paid under the plan to no greater than 100 percent of the average of the participant’s salary for 2016, 2017, and 2018. The Bank received nonobjection from the FHFA on the revision of the cap.
(8)
The amount Mr. Hjerpe earned under the 2015 EIP at December 31, 2017, based on the formula in the plan, was $513,230. This amount was reduced to $386,685, however, to comply with a provision capping combined short- and long-term incentive paid under the plan to no greater than 100 percent of the average of the participant’s salary for 2015, 2016, and 2017.

Table 58 -  Other Compensation

Name
 
Year
 
Contributions
to Defined
Contribution
Plans(1)
 
Insurance
Premiums
 
Perquisites(2)
 
Total
Edward A. Hjerpe III
 
2018
 
$
96,992

 
$
—

 
$
22,007

 
$
118,999

 
 
2017
 
86,127

 
—

 
20,557

 
106,684

 
 
2016
 
85,882

 
—

 
17,267

 
103,149

 
 
 
 
 
 
 
 
 
 
 
Frank Nitkiewicz
 
2018
 
41,189

 
5,590

 
—

 
46,779

 
 
2017
 
36,393

 
5,031

 
—

 
41,424

 
 
2016
 
36,090

 
4,461

 
—

 
40,551

 
 
 
 
 
 
 
 
 
 
 
M. Susan Elliott
 
2018
 
41,717

 
11,295

 
—

 
53,012

 
 
2017
 
36,562

 
9,852

 
—

 
46,414

 
 
2016
 
36,068

 
8,636

 
—

 
44,704

 
 
 
 
 
 
 
 
 
 
 
George H. Collins
 
2018
 
36,086

 
—

 
—

 
36,086

 
 
2017
 
31,108

 
—

 
—

 
31,108

 
 
2016
 
32,040

 
—

 
—

 
32,040

 
 
 
 
 
 
 
 
 
 
 
Carol Hempfling Pratt
 
2018
 
35,990

 
—

 
—

 
35,990

 
 
2017
 
31,588

 
—

 
—

 
31,588

 
 
2016
 
31,073

 
—

 
—

 
31,073

 
 
 
 
 
 
 
 
 
 
 
Timothy J. Barrett
 
2018
 
31,253

 
—

 
—

 
31,253

 
 
2017
 
27,707

 
—

 
—

 
27,707

 
 
2016
 
27,413

 
—

 
—

 
27,413

_______________________
(1)
Amounts include our contributions to the Pentegra Defined Contribution Plan, as well as contributions to the Thrift BEP. Contributions to the Thrift BEP are also shown in the Nonqualified Deferred Compensation Table below.
The Pentegra Defined Contribution Plan, a 401(k) plan, excludes hourly, flex staff, and short-term employees from participation, but includes all other employees. Employees may elect to defer one percent to 50 percent of their plan salary, as defined in the plan document. We make contributions based on the amount the employee contributes, up to the first three percent of plan salary, multiplied by the following factors:
•
100 percent during the second and third years of employment.
•
150 percent during the fourth and fifth years of employment.
•
200 percent following completion of five or more years of employment.

Participant deferrals are limited on an annual basis by Internal Revenue Code (IRC) rules. For 2018, the maximum elective deferral amount was $18,500 (or $24,500 per year for participants who attain or exceed age 50 in 2018), and the maximum

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matching contribution under the terms of the Pentegra Defined Contribution Plan was $16,500 (three percent multiplied by two multiplied by the $275,000 IRC compensation limit).
A description of the Thrift BEP follows the Nonqualified Deferred Compensation Table.
(2)
Amount for Mr. Hjerpe includes the following perquisites: personal use of a Bank-owned vehicle, parking, reimbursement for mass transportation, spousal travel expenses, and travel memberships and subscriptions.

The following table shows the potential payouts for our non-equity incentive plan awards under the 2018 EIP, for our named executive officers:


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Table 59 - Grants of Plan-Based Awards for Fiscal Year 2018

 
 
Estimated Possible Payouts Under Non-equity Incentive Plan Awards (1)
Short-Term Component:
 
Threshold
 
Target
 
Excess
     Mr. Hjerpe
 
$
214,858

 
$
322,286

 
$
429,715

     Mr. Nitkiewicz
 
58,992

 
98,320

 
137,648

     Ms. Elliott
 
58,962

 
98,270

 
137,578

     Mr. Collins
 
54,161

 
90,268

 
126,375

Ms. Pratt
 
51,960

 
86,600

 
121,240

     Mr. Barrett
 
51,960

 
86,600

 
121,240

 
 
 
 
 
 
 
Long-Term Component:
 
 
 
 
 
 
     Mr. Hjerpe
 
 
 
 
 
 
     If short-term component results in:
 
 Threshold
 
 Target
 
 Excess
     Threshold
 
$
107,429

 
$
214,858

 
$
322,286

     Target
 
161,143

 
322,286

 
483,429

     Excess
 
214,858

 
429,715

 
644,573

 
 
 
 
 
 
 
     Mr. Nitkiewicz
 
 
 
 
 
 
     If short-term component results in:
 
 Threshold
 
 Target
 
 Excess
     Threshold
 
$
29,496

 
$
58,992

 
$
88,488

     Target
 
49,160

 
98,320

 
147,480

     Excess
 
68,824

 
137,648

 
206,472

 
 
 
 
 
 
 
Ms. Elliott
 
 
 
 
 
 
     If short-term component results in:
 
 Threshold
 
 Target
 
 Excess
     Threshold
 
$
29,481

 
$
58,962

 
$
88,443

     Target
 
49,135

 
98,270

 
147,405

     Excess
 
68,789

 
137,578

 
206,367

 
 
 
 
 
 
 
     Mr. Collins
 
 
 
 
 
 
     If short-term component results in:
 
 Threshold
 
 Target
 
 Excess
     Threshold
 
$
27,080

 
$
54,161

 
$
81,241

     Target
 
45,134

 
90,268

 
135,401

     Excess
 
63,187

 
126,375

 
189,562

 
 
 
 
 
 
 
     Mr. Barrett and Ms. Pratt
 
 
 
 
 
 
     If short-term component results in:
 
 Threshold
 
 Target
 
 Excess
     Threshold
 
$
25,980

 
$
51,960

 
$
77,940

     Target
 
43,300

 
86,600

 
129,900

     Excess
 
60,620

 
121,240

 
181,860

______________________
(1)
Amounts represent potential awards under the 2018 EIP; actual amounts awarded are reflected in Table 57 - Summary Compensation. See Executive Incentive Plans above for further discussion of performance goals and plan payouts.

Retirement Plans


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Table 60 - Pension Benefits

Name
 
Plan Name
 
No. of Years of Credited Service(1)
 
 
Present Value of Accumulated Benefit(2)
 
Payments During Year Ended December 31, 2018
Edward A. Hjerpe III
 
Pentegra Defined Benefit Plan
 
26.67

(3) 
 
$
1,759,000

 
$
—

 
 
Pension BEP
 
9.50

 
 
2,535,000

 
—

Frank Nitkiewicz
 
Pentegra Defined Benefit Plan
 
26.83

 
 
1,701,000

 
—

 
 
Pension BEP
 
27.83

 
 
3,340,000

 
—

M. Susan Elliott
 
Pentegra Defined Benefit Plan
 
36.58

 
 
2,792,000

 
—

 
 
Pension BEP
 
37.08

 
 
4,431,000

 
—

George H. Collins
 
Pentegra Defined Benefit Plan
 
20.83

(4) 
 
1,392,000

 
—

 
 
Pension BEP
 
21.33

(5) 
 
2,151,000

 
—

Carol Hempfling Pratt
 
Pentegra Defined Benefit Plan
 
7.50

 
 
462,000

 
—

 
 
Pension BEP
 
8.50

 
 
621,000

 
—

Timothy J. Barrett
 
Pentegra Defined Benefit Plan
 
7.17

 
 
425,000

 
—

 
 
Pension BEP
 
8.17

 
 
560,000

 
—

_______________________
(1)
Equals number of years of credited service as of December 31, 2018.
(2)
See Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 18 — Employee Retirement Plans for a description of valuation methods and assumptions.
(3)
Number of years of credited service for the Pentegra Defined Benefit Plan includes 19.59 years of service at the Bank and 7.08 years of service at FIRSTFED AMERICA BANCORP, Inc., which entities are both participants in the Pentegra Defined Benefit Plan.
(4)
Number of years of credited service for the Pentegra Defined Benefit Plan includes 2.33 years of service at the FHLBank of Pittsburgh.
(5)
Number of years of credited service for the Pension BEP includes recognition of 2.83 years of service at the FHLBank of Pittsburgh.

We participate in the Pentegra Defined Benefit Plan to provide retirement benefits for eligible employees, including the named executive officers. Employees become eligible to participate in the Pentegra Defined Benefit Plan the first day of the month following satisfaction of our waiting period, which is one year of service with us. The Pentegra Defined Benefit Plan excludes hourly paid employees, flex staff, and short-term employees from participation. Participants are 20 percent vested in their retirement benefit after the completion of two years of employment and vest at an additional 20 percent per year thereafter until they are fully vested after the completion of six years of employment. Participants who have reached age 65 are automatically 100 percent vested, regardless of completed years of employment. All of the named executive officers are participants in the Pentegra Defined Benefit Plan and are 100 percent vested in their benefits pursuant to the plan's provisions.

Benefits under the Pentegra Defined Benefit Plan are based on the participant's years of service and earnings, defined as base salary excluding the participant's voluntary contribution to the Thrift BEP, subject to the applicable IRC limits on annual earnings ($275,000 for 2018). In general, participants' benefits are calculated as 2.00 percent multiplied by the participant's years of benefit service multiplied by the high three-year average salary. Annual benefits provided under the plan are subject to IRC limits, which vary by age and benefit option selected. The regular form of benefit is a straight life annuity with a 12 times initial death benefit feature. Lump sum and other additional payout options are also available. Participants are eligible for a lump sum option beginning at age 45. Benefits are payable in the event of retirement, death, disability, or termination of employment if vested. Normal retirement is age 65, but a participant may elect early retirement as early as age 45. However, if a participant elects early retirement, the normal retirement benefit is reduced by an early retirement factor based on the participant's age when beginning early retirement. If the sum of the participant's age and vesting service at the time of termination of employment is at least 70, that is, the "Rule of 70," the benefit is reduced by an early retirement factor of one and a half percent per year for each year that payments commence before age 65. If age and vesting service do not equal at least 70, the benefit is reduced by a higher early retirement factor.

The amount of pension benefits payable from the Pension BEP to a named executive officer is the amount that would be payable to the executive under the Pentegra Defined Benefit Plan:


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•
ignoring the limits on benefit levels imposed by the IRC (including the limit on annual compensation discussed above);
•
including in the definition of salary any amounts deferred by a participant under the Thrift BEP in the year deferred and any incentive compensation in the year paid;
•
recognizing the participant's full tenure with us or any other employer participating in the Pentegra Defined Benefit Plan from initial date of employment to the date of membership in the Pentegra Defined Benefit Plan, for each named executive officer who was a participant before January 1, 2009, and for all other participants, recognizing only the participant's years of service with us from initial date of employment with us, but disregarding prior service of participants who were re-employed by us and received a full distribution of the Pension BEP benefit at the time of termination;
•
applying an increased benefit accrual rate of 2.375 percent of the participant's highest three-year average salary, multiplied by the participant's total benefit service, for those whose most recent date of hire by the Bank is prior to January 9, 2006, and who have continuously been an “Executive Officer” (as such term is defined by the plan) since January 1, 2008, and, for all other participants, applying the same accrual rate and average salary as the participant is eligible to receive under the Pentegra Defined Benefit Plan; and
•
reducing the result by the participant's actual accrued benefit from the Pentegra Defined Benefit Plan.

Total benefits payable under both the Pentegra Defined Benefit Plan and the Pension BEP are subject to an overall maximum annual benefit amount not to exceed a specified percentage of high three-year average salary as applicable as follows: Mr. Hjerpe, 80 percent as president; and Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, Ms. Pratt, and Mr. Barrett, 70 percent as executive vice presidents. Our only named executive officer that has reached the maximum annual benefit amount is Ms. Elliott. All benefits payable under the Pension BEP are paid solely from either our general assets or from assets held in a rabbi trust subject to the claims of our creditors in the event of the Bank's insolvency. The Pension BEP requires that we contribute at least annually to any rabbi trust so established an amount to fund participant benefits on a plan termination basis and anticipated administrative, trust and investment advisory expenses that may be paid by the trust over the next 12 months. Retirement benefits from the Pentegra Defined Benefit Plan and the Pension BEP are not subject to any offset provision for Social Security benefits.

Nonqualified Deferred Compensation
 
Table 61 - Nonqualified Deferred Compensation

Name
 
Executive
Contributions in Year Ended
December 31,
2018(1)
 
Our
Contributions
in Year Ended
December 31, 2018(2)
 
Aggregate Earnings
in Year Ended
December 31, 2018
 
Aggregate
Withdrawals/
Distributions
 
Aggregate Balance
at December 31,
2018
Edward A. Hjerpe III
 
$
48,496

 
$
80,492

 
$
(48,192
)
 
$
—

 
$
983,096

Frank Nitkiewicz
 
20,594

 
24,688

 
(32,164
)
 
—

 
416,962

M. Susan Elliott
 
82,241

 
25,217

 
(69,687
)
 
—

 
773,075

George H. Collins
 
10,823

 
19,586

 
(14,971
)
 
—

 
115,497

Carol Hempfling Pratt
 
59,983

 
19,489

 
(39,156
)
 
—

 
560,499

Timothy J. Barrett
 
7,377

 
14,753

 
(6,847
)
 
—

 
143,056

_______________________
(1)
Amounts are also reported as salary in Table 57 - Summary Compensation.
(2)
Amounts are also reported as contributions to defined contribution plans in Table 58 - Other Compensation.

Thrift BEP participants may elect to defer receipt of up to 100 percent of base salary and/or incentive compensation into the Thrift BEP. We match participant contributions based on the amount the employee contributes, typically, up to the first three percent of compensation beginning with the initial date of membership in the Thrift BEP, and then according to the same schedule as the Pentegra Defined Contribution Plan after the first year of service. However, the Compensation Committee has the flexibility to modify our matching contribution rate in an offer letter, employment agreement, or other writing approved by the Compensation Committee so long as our maximum matching contribution rate does not exceed the maximum matching contribution rate available to any participant under the Pentegra Defined Contribution Plan (the Contribution Limit). Our matching contribution is immediately vested at 100 percent, as in the Pentegra Defined Contribution Plan. Participants may defer their contributions into one or more investment funds as elected by the participant. Participants may elect to receive distributions in a lump sum or in semi-annual installments over a period that does not exceed 11 years. Participants may

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withdraw contributions under the plan's hardship provisions and may also begin to receive distributions while still employed through scheduled distribution accounts.

The Thrift BEP provides participants an opportunity to defer taxation on income and to make up for benefits that would have been provided under the Pentegra Defined Contribution Plan except for IRC limitations on annual contributions under 401(k) plans. It also provides participants with an opportunity for incentive compensation to be deferred and matched. The Compensation Committee and board of directors approve participation in the Thrift BEP. All of the named executive officers are current participants. All benefits payable under the Thrift BEP are paid solely from our general assets or from assets held in a rabbi trust subject to the claims of our creditors in the event of our insolvency. The Thrift BEP requires us to contribute at least quarterly to any rabbi trust established for the Thrift BEP an amount to fund participant benefits on a plan termination basis. A rabbi trust was established for the Thrift BEP effective January 1, 2010.

Post-termination Payments

The following is a discussion of the policies and arrangements to which a named executive officer becomes subject upon certain termination events, with or without a change in control of the Bank. During 2018, all named executive officers were covered by the Bank’s severance policy and, beginning on November 7, 2018, the Federal Home Loan Bank of Boston Executive Change in Control Severance Plan (Executive Severance Plan). In addition, Mr. Hjerpe is covered by a change in control agreement. The severance policy, Executive Severance Plan and Mr. Hjerpe’s change in control agreement are also discussed above in “Potential Payments upon Termination or Change in Control.” The Bank’s Executive Incentive Plans provide for payment to executives who are employed on the payment date and, subject to recommendation by our president and chief executive officer and review and approval by the Compensation Committee and the FHFA, whose employment has terminated prior to the payment date for death, disability or retirement. The terms cause, change in control, good reason, disability, retirement, and qualifying termination are defined in the respective policy, plan or agreement, as applicable.

Severance Policy

As chief executive officer, Mr. Hjerpe is eligible for 12 months of base pay under the severance policy. As executive officers, Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, Ms. Pratt, and Mr. Barrett are eligible for a minimum of six months and a maximum of 12 months of base pay under the severance policy, depending on their tenure of employment. Severance payable to the executives in connection with a change in control is discussed in the Executive Severance Plan section below. All severance packages under the severance policy for executive officers, including the named executive officers, must have the approval of the chief executive officer and the Compensation Committee, and may also require the approval of the FHFA, prior to making any award under the severance policy.

Under our severance policy (and for Mr. Hjerpe, under his change in control agreement) and based on status in the organization and tenure for Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott and Mr. Collins, the payment amount is equal to 12 months' base salary, and for Ms. Pratt and Mr. Barrett, the payment amount is equal to approximately eight months' base salary, all based on annual salary in effect on December 31, 2018.

Change in Control Agreement with Mr. Hjerpe

Under the terms of the change of control agreement with Mr. Hjerpe, in the event that, within a specified period following the Bank’s entry into a definitive reorganization agreement (i.e. relating to a merger or consolidation where the Bank is not the survivor, a sale or transfer of substantially all of the Bank’s assets, or a liquidation or dissolution of the Bank), either:

•
Mr. Hjerpe terminates his employment with us for a good reason (in connection with a reorganization) that is not remedied within certain cure periods by us; or
•
We (or our successor in the event of a reorganization) terminate Mr. Hjerpe's employment without cause,

we have agreed to pay Mr. Hjerpe an amount equal to his annualized base salary at the time of such termination to be paid in equal installments over the following 12 months. As a condition to payment, Mr. Hjerpe must agree to execute our standard release of claims agreement. Any payments to Mr. Hjerpe under the change-in-control agreement are in lieu of any severance payments that would otherwise be payable to him, and may also require the approval of the FHFA.

Executive Severance Plan


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In 2018, the Board adopted the Executive Severance Plan that provides certain payments and benefits in the event of a qualifying termination following a change in control. The Executive Severance Plan applies to employees or officers who are designated by the Bank’s board of directors as participants and who execute a participation agreement in which the participants agree to certain protective covenants including a non-solicitation agreement. The Bank’s board designated Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, Ms. Pratt, and Mr. Barrett, in addition to certain other executive officers, as participants in the Executive Severance Plan and these officers all have executed participation agreements. If a participant is eligible for severance benefits under the Executive Severance Plan and also for similar benefits under any other Bank plan, program, arrangement or agreement, the severance benefits under the Executive Severance Plan will be reduced on a dollar for dollar basis for the severance benefits available under such other plan, program, arrangement or agreement.

Under the terms of the Executive Severance Plan, if there is a qualifying termination during the period beginning on the earliest of 180 days prior to the date a definitive agreement or order for a change in control has been entered into, or the effective date of a change in control as prescribed by the FHFA, and ending 24 months following the effective date of the change in control, the participant becomes entitled to certain severance payments and benefits. The Executive Severance Plan defines a qualifying termination as a termination of the participant’s employment with the Bank, (i) by the Bank, other than for cause; or (ii) by the participant, for good reason but does not include a termination resulting from the participant’s death, disability or retirement.

The severance payments and benefits to which the participant would be entitled include:

•
Mr. Hjerpe would receive a cash payment equal to 2.99 times the sum of (i) the greater of his annual base salary determined at the time of the qualifying termination or 180 days prior to the change in control, and (ii) his target long and short-term incentive awards for the year in which the qualifying termination of employment occurs.
•
The other named executive officers would receive a cash payment equal to 2.00 times the sum of (i) the greater of their annual base salary determined at the time of the qualifying termination or 180 days prior to the change in control, and (ii) their target long and short-term incentive awards for the year in which the qualifying termination of employment occurs.
•
The named executive officers would receive a lump sum cash payment equal to the amount that would have been payable pursuant to their annual incentive compensation award for the year in which the date of a qualifying termination occurs based on actual Bank performance, prorated based on the number of days the participant was employed that year.
•
Participants would receive a lump sum cash payment for outplacement assistance in the amount of $25,000 for Mr. Hjerpe and $15,000 for the other named executive officers.
•
Mr. Hjerpe would receive a lump sum cash payment equivalent to the Bank’s cost to maintain his health insurance coverage for 24 months, and the other named executive officers would each receive a lump sum cash payment equivalent to the Bank’s cost to maintain their health insurance coverage for 18 months.

The payments described above are payable in a lump sum within 60 days following the participant’s employment termination date, except the prorated incentive compensation award, which is payable at the time such incentive compensation awards are paid to other senior executives, but no later than March 15 of the year following the executive’s qualifying termination. Any amounts that constitute non-qualified deferred compensation subject to Section 409A of the U.S. Internal Revenue Code are payable on the 75th day after the participant’s qualifying termination.

All payments and benefits are conditioned upon the executive having delivered an irrevocable general release of claims against the Bank before payment occurs. In addition, all payments and benefits remain subject to the Bank’s compliance with any applicable statutory and regulatory requirements relating to the payment of amounts under the Executive Severance Plan.

If the aggregate amount of pay and benefits payable to an executive under the Executive Severance Plan would constitute a “parachute payment” subject to excise tax under Section 4999 of the U.S. Internal Revenue Code, their aggregate pay and benefits will be reduced to the extent necessary to avoid being subject to the excise tax imposed by Section 4999, unless payment of the unreduced benefit would provide the participant with a higher net after-tax benefit after payment of such excise tax.

Executive Incentive Plan

Under the 2016, 2017 and 2018 Executive Incentive Plans, the named executive officers must be employed by the Bank on the payment date of an incentive award in order to be paid such award. Subject to recommendation of our president and chief executive officer, approval of the Compensation Committee, and review of the FHFA, if required, if a named executive officer’s employment had terminated in 2018 for death or disability or after becoming retirement-eligible, such officer may be paid: (i) a pro-rata portion of the 2018 short-term award if they completed six months of service during 2018, (ii) a 2016 and

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2017 long-term award, and (iii) a 2018 long-term award (assuming their employment terminated upon close of business on December 31, 2018), with such awards to be paid at the same time they would have been paid if the executive’s employment had not terminated. To be retirement-eligible, a named executive officer must be either eligible for normal retirement or satisfy the Rule of 70 (counting only service earned with the Federal Home Loan Bank system) under the Pentegra Defined Benefit Plan.

Potential Payments Upon Termination

The table below shows amounts triggered upon the termination events identified below for the named executive officers assuming a termination of employment and, as applicable, a change in control as of the close of business on December 31, 2018 and does not include amounts that are not payable or otherwise forfeited upon a for cause termination or certain non-retirement terminations. In these circumstances, other than legally required amounts such as accrued salary, no additional amounts would be payable and rights to incentive or deferred compensation would be forfeited. The amounts listed below also do not include payments from the Thrift BEP or the Pension BEP. Amounts payable from the Pension BEP may be found in the Pension Benefits Table. Account balances for the Thrift BEP may be found in the Nonqualified Deferred Compensation Table.


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Table 62 - Cash Payments on Termination

 
 Severance
 
Incentive Compensation(4)(5)
 
All Other Compensation(6)
 
Total Post
Termination
Payment & Benefit Value
Edward A. Hjerpe III
 
 
 
 
 
 
 
Bank initiated (not for cause) termination of employee without a change in control(1)
$
859,430

 
$
1,823,376

 
$
—

 
$
2,682,806

Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(2)(3)
3,569,979

 
1,823,376

 
64,831

 
5,458,186

Retirement
—

 
1,823,376

 
—

 
1,823,376

Death and Disability
—

 
1,823,376

 
—

 
1,823,376

Frank Nitkiewicz
 
 
 
 
 
 
 
Bank initiated (not for cause) termination of employee without a change in control(1)
393,280

 
597,568

 
—

 
990,848

Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3)
1,179,840

 
597,568

 
44,329

 
1,821,737

Retirement
—

 
597,568

 
—

 
597,568

Death and Disability
—

 
597,568

 
—

 
597,568

M. Susan Elliott
 
 
 
 
 
 
 
Bank initiated (not for cause) termination of employee without a change in control(1)
393,080

 
606,495

 
—

 
999,575

Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3)
1,179,240

 
606,495

 
15,908

 
1,801,643

Retirement
—

 
606,495

 
—

 
606,495

Death and Disability
—

 
606,495

 
—

 
606,495

George H. Collins
 
 
 
 
 
 
 
Bank initiated (not for cause) termination of employee without a change in control(1)
361,070

 
494,725

 
—

 
855,795

Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3)
1,083,210

 
494,725

 
51,407

 
1,629,342

Retirement
—

 
494,725

 
—

 
494,725

Death and Disability
—

 
494,725

 
—

 
494,725

Carol Hempfling Pratt
 
 
 
 
 
 
 
Bank initiated (not for cause) termination of employee without a change in control(1)
239,815

 
—

 
—

 
239,815

Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3)
1,039,200

 
107,179

 
46,720

 
1,193,099

Retirement
—

 
—

 
—

 
—

Death and Disability
—

 
527,578

 
—

 
527,578

Timothy J. Barrett
 
 
 
 
 
 
 
Bank initiated (not for cause) termination of employee without a change in control(1)
231,022

 
—

 
—

 
231,022

Bank initiated (not for cause) termination of employee or good reason termination by employee due to change in control(3)
1,039,200

 
107,179

 
44,330

 
1,190,709

Retirement
—

 
—

 
—

 
—

Death and Disability
—

 
523,557

 
—

 
523,557

_______________________
(1)
Under our severance policy and based on status in the organization and tenure for Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott and Mr. Collins, the “Severance” amount payable is equal to 12 months' base salary, and for Ms. Pratt and Mr. Barrett the

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amount payable is equal to approximately eight months' base salary, all based on annual salary in effect on December 31, 2018.
(2)
The aggregate amount due to Mr. Hjerpe under his change in control agreement and the Executive Severance Plan, assuming a December 31, 2018, termination would have been subject to the change in control excise tax under Section 4999 of the Code. Therefore, the amount actually payable to Mr. Hjerpe would have been limited to the 280G safe harbor level, as doing so would result in a higher after-tax payment. The amounts shown in the “Severance” column have been reduced accordingly. No tax gross-up payments apply. If all payments are determined not to be parachute payments under Section 280G of the Internal Revenue Code, the total amount of severance paid to Mr. Hjerpe would be $4,496,967 rather than $3,569,979.
(3)
“Severance” payments for involuntary termination without cause due to a change in control or for a resignation for good reason due to a change in control that are made under our Executive Severance Plan are in lieu of, not in addition to, the severance benefit payments under our severance policy or, for Mr. Hjerpe, his change-in-control agreement. Amounts shown for “Severance” payable under the Executive Severance Plan are a multiple, 2.99 for Mr. Hjerpe and 2.00 for the other named executive officers, of the total of (i) base salary in effect on December 31, 2018 and (ii) target long and short-term incentive awards under our 2018 Executive Incentive Plan. Mr. Nitkiewicz, Ms. Elliott, Mr. Collins, Ms. Pratt and Mr. Barrett would not have been subject to the change in control excise tax under Section 4999 of the Internal Revenue Code. In no event would tax gross-up payments apply.
(4)
Because Mr. Hjerpe, Mr. Nitkiewicz, Ms. Elliott and Mr. Collins were retirement-eligible as of December 31, 2018, amounts shown for incentive compensation payable to them under each of the termination scenarios in the table includes such officers’ actual 2018 annual short-term incentive compensation award as well as their long-term incentive compensation awards under the 2016, 2017 and 2018 Executive Incentive Plans. All of such short- and long-term awards are also included in the row entitled “Death and Disability” for Ms. Pratt and Mr. Barrett. However, because Ms. Pratt and Mr. Barrett were not retirement-eligible as of December 31, 2018, they would not have been entitled to any incentive compensation upon retirement, or upon a Bank-initiated (not for cause) termination without a change in control. Upon a Bank-initiated (not for cause) termination or good reason termination by employee due to change in control, they would have been entitled to incentive compensation only equal to their actual 2018 annual short-term incentive compensation award, and not any long-term award under the 2016, 2017 or 2018 Executive Incentive Plans.
(5)
Long-term incentive awards under the 2016 Executive Incentive Plan are the actual awards that were paid in March 2019. Long-term incentive awards under the 2017 and 2018 Executive Incentive Plans, which will be payable in March 2020 and March 2021, respectively, are based on currently estimated performance as of December 31, 2018 for the core return on capital stock goal, and a current estimate by the Bank’s chief risk officer for the regulatory goal.
(6)
“All Other Compensation” includes the following amounts payable under the Executive Severance Plan: (i) a payment to each officer equivalent to what it would have cost the Bank to maintain such officer’s health insurance coverage for a number of months, 24 months for Mr. Hjerpe and 18 months for the other named executive officers, and (ii) a payment for outplacement services of $25,000 for Mr. Hjerpe and $15,000 for the other named executive officers.

Pay Ratio

For the year ended December 31, 2018, the ratio of the annual total compensation of our median employee (the Median Employee, identified in the manner described below) to the annual total compensation of our chief executive officer is 15:1. To determine this ratio, total compensation of the Median Employee for 2018 was calculated in the same manner as total compensation of our chief executive officer for 2018 as presented in Table 57 — Summary Compensation. In both cases, compensation includes, among other things, amounts attributable to the change in pension value and the employer match on employee contributions to the Pentegra Defined Contribution Plan (401(k) match), which amounts vary among employees based upon their tenure at the Bank and, for the 401(k) match, based upon the employee’s contributions. For 2018, the total annual compensation of the Median Employee was $156,768, and the total annual compensation of the chief executive officer, as reported in Table 57 — Summary Compensation Table, was $2,335,859.
 
The Bank is using the same Median Employee in its pay ratio calculation in this report that it identified in the pay ratio calculation in our 2017 Annual Report on Form 10-K because there have been no changes to our employee population or employee compensation arrangements that we believe would result in a significant change of our pay distribution to our employee population and significantly affect the pay ratio disclosure. We identified the Median Employee by computing for each of the full-time and part-time employees who were employed by the Bank on October 1, 2017, excluding the chief executive officer, the sum of (i) the 2017 salary of each employee as of October 1, 2017 and (ii) the 2016 incentive compensation paid to that employee in March 2017, and ranking the sums for all such employees (a list of 201 employees as of October 1, 2017) from lowest to highest. The Bank identified the Median Employee using this compensation measure, which was applied consistently to all our employees included in the calculation.

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Director Compensation

In 2018 and 2017, we paid members of the board of directors fees for each board and committee meeting that they attend and a quarterly retainer fee. FHFA regulations permit the payment of reasonable director compensation, and such compensation is subject to the FHFA's oversight. We are a cooperative and our capital stock may only be held by current and former members, so we do not provide compensation to our directors in the form of stock or stock options. The 2019 Director Compensation Policy provides payments for attendance at board and committee meetings and retainers paid in arrears at the end of each quarter. The policy provides for maximums on total director compensation and potential reduction based on attendance and performance.

The amounts to be paid or paid to the members of the board of directors for attendance at board and committee meetings and for quarterly retainers for the years ended December 31, 2019, 2018, and 2017, along with the annual maximum compensation amounts are detailed in the following table:

Table 63 - Director Compensation

 
 
2019
 
2018
 
2017
Fee per board meeting:
 
 
 
 
 
 
    Chair of the board
 
$
11,500

 
$
11,500

 
$
11,000

    Vice chair of the board and committee chairs
 
9,500

 
9,500

 
9,000

    All other board members
 
8,500

 
8,500

 
8,000

Fee per committee meeting
 
2,500

 
2,500

 
2,250

Fee per telephonic conference call
 
1,500

 
1,500

 
1,500

 
 
 
 
 
 
 
Quarterly Retainer Fees
 
 
 
 
 
 
    Chair of the board
 
10,250

 
10,250

 
10,000

    Vice chair of the board and committee chairs
 
9,000

 
9,000

 
8,750

    All other board members
 
7,750

 
7,750

 
7,500

 
 
 
 
 
 
 
Annual maximum compensation amounts:
 
 
 
 
 
 
    Chair of the board
 
132,500

 
132,500

 
125,000

    Vice chair of the board and committee chairs
 
112,500

 
112,500

 
105,000

    All other board members
 
102,500

 
102,500

 
95,000


The Bank will also pay or reimburse directors for expenses related to the directors’ attendance at board meetings.

The aggregate amounts earned or paid to individual members of the board of directors for attendance at board and committee meetings during 2018 are detailed in the following table:


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Table 64 - 2018 Director Compensation

 
Fees Earned or
Paid in Cash
Andrew J. Calamare, Chair
$
132,500

Stephen G. Crowe, Vice Chair
112,500

Donna L. Boulanger
102,500

Joan Carty
112,500

Eric Chatman
102,500

Patrick E. Clancy
102,500

Martin J. Geitz
112,500

Cornelius K. Hurley
112,500

Antoinette Lazarus
102,500

Jay F. Malcynsky
112,500

John W. McGeorge
112,500

Emil J. Ragones
112,500

Gregory R. Shook
102,500

Stephen R. Theroux
102,500

John F. Treanor
112,500

Michael R. Tuttle
102,500

John C. Witherspoon
102,500

 
$
1,852,500


Directors may elect to defer the receipt of meeting fees (including all compensation payable under the Director Compensation Policy) pursuant to the Thrift BEP, although there is no Bank-matching contribution for such deferred fees. For additional information on the Thrift BEP, see — Retirement and Deferred Compensation Plans above. FHFA regulations permit the payment or reimbursement of reasonable expenses incurred by directors in performing their duties, and in accordance with those regulations, we have adopted a policy governing such payment and reimbursement of expenses. Such paid and reimbursed board of director expenses aggregated to $181,000 for the year ended December 31, 2018.

Reduction in Compensation Based on Attendance and Performance

The board may vote to reduce or eliminate a director’s final quarterly retainer payment if (i) the director has not attended at least 75 percent of all regular and special meetings of the Board and the committees on which the director served during the year, or (ii) the board determines the director has consistently demonstrated a lack of engagement and participation in meetings attended. In 2018, Director Jay F. Malcynsky was one of only two directors who served on four committees (compared to two or three committees for each of the other directors), and his heavy load of committee meetings resulted in a drop in his attendance in 2018 to 71 percent of all the regular and special meetings of the Board and the committees on which he served. The Board considered that Mr. Malcynsky had actually attended more meetings (22) than five other directors who had lighter committee responsibilities. The Board also considered that if only Mr. Malcynsky’s standing committees (as opposed to the ad hoc committee) were included in the calculation, his attendance would have exceeded 75 percent. The Board determined that, under the circumstances, it would not be appropriate to reduce Mr. Malcynsky’s retainer payment.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

We are a cooperative, our members or former members own all of our outstanding capital stock, and our directors are elected by and a majority are from our membership. Each member is eligible to vote for the open member directorships in the state in which its principal place of business is located and for each open independent directorship. See Item 10 — Directors, Executive Officers and Corporate Governance for additional information on the election of our directors. Membership is voluntary, and members must give notice of their intent to withdraw from membership. Members that withdraw from membership may not be readmitted to membership for five years.


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We do not offer any compensation plan under which our equity securities are authorized for issuance. Members, former members, and successors to former members, including affiliated institutions under common control of a single holding company, holding five percent or more of our outstanding capital stock as of February 28, 2019, are noted in Table 65.

Table 65 - Stockholders Holding Five Percent or More of Outstanding Capital Stock
(dollars in thousands)

 
 
Capital
Stock
 
Percent of Total
Capital Stock
Citizens Bank, N.A.
 
$
242,175

 
12.21
%
One Citizens Plaza
 
 
 
 
Providence, RI 02903
 
 
 
 

Additionally, due to the fact that a majority of our board of directors is elected from our membership, these member directors serve as officers or directors of members that own our capital stock. Table 66 provides capital stock outstanding as of February 28, 2019 to members whose officers or directors serve as our directors.

Table 66 - Capital Stock Outstanding to Members whose Officers or Directors serve on our Board of Directors
(dollars in thousands)

 
 
Capital
Stock
 
Percent of Total
Capital Stock
The Washington Trust Company
 
$
47,427

 
2.39
%
23 Broad Street
 
 
 
 
Westerly, RI 02891
 
 
 
 
 
 
 
 
 
Needham Bank
 
17,155

 
0.87

1063 Great Plain Avenue
 
 
 
 
Needham, MA 02492
 
 
 
 
 
 
 
 
 
Meredith Village Savings Bank
 
5,047

 
0.25

24 State Route 25
 
 
 
 
Meredith, NH 03253
 
 
 
 
 
 
 
 
 
MountainOne Bank
 
4,789

 
0.24

93 Main Street
 
 
 
 
North Adams, MA 01247
 
 
 
 
 
 
 
 
 
Merrimack County Savings Bank
 
4,017

 
0.20

89 North Main Street
 
 
 
 
Concord, NH 03301
 
 
 
 
 
 
 
 
 
North Brookfield Savings Bank
 
1,784

 
0.09

35 Summer Street
 
 
 
 
North Brookfield, MA 01535
 
 
 
 
 
 
 
 
 
Skowhegan Savings Bank
 
765

 
0.04

13 Elm Street
 
 
 
 
Skowhegan, ME 04976
 
 
 
 
 
 
 
 
 
Depositors Insurance Fund
 
690

 
0.03


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Table 66 - Capital Stock Outstanding to Members whose Officers or Directors serve on our Board of Directors
(dollars in thousands)

One Linscott Road
 
 
 
 
Woburn, MA 01801
 
 
 
 
 
 
 
 
 
The Simsbury Bank & Trust Company
 
575

 
0.03

981 Hopmeadow Street
 
 
 
 
Simsbury, CT 06070
 
 
 
 
 
 
 
 
 
Essex Savings Bank
 
550

 
0.03

35 Plains Road
 
 
 
 
Essex, CT 06426
 
 
 
 
 
 
 
 
 
Savings Bank of Walpole
 
513

 
0.03

68 Ames Plaza Lane
 
 
 
 
Walpole, NH 03608
 
 
 
 
 
 
 
 
 
Opportunities Credit Union
 
214

 
0.01

25 Winooski Falls Way
 
 
 
 
Winooski, VT 05404
 
 
 
 
Total stock ownership by members whose officers or directors serve as directors of the Bank
 
$
83,526

 
4.21
%

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Related Persons

We have a cooperative ownership structure. As such, capital stock ownership in the Bank is a prerequisite to transacting any member business with us. Our members and certain former members or their successors own all of our stock, the majority of our directors are elected by and from the membership, and we conduct our advances and mortgage loan business almost exclusively with members. Grants under the AHP and AHP advances are also made in partnership or in connection with our members. Therefore, in the normal course of business, we extend credit and offer services and AHP benefits to members whose officers and directors may serve as our directors, as well as to entities that hold five percent or more of our capital stock. It is our policy that extensions of credit, all other Bank products and services, and AHP benefits are offered on terms and conditions that are no more favorable to such members than the terms and conditions of comparable transactions with other members.

In addition, we may purchase short-term investments, federal funds, and MBS from, and enter into interest-rate-exchange agreements with, members or their affiliates whose officers or directors serve as directors of the Bank, as well as from members or their affiliates who hold five percent or more of our capital stock. All such purchase transactions are effected at the then-current market rate and all MBS are purchased through securities brokers or dealers, also at the then-current market rate.

For the year ended December 31, 2018, the review and approval of transactions with related persons was governed by our Conflict of Interest Policy for Bank Directors (the Conflict Policy), our Code of Ethics and Business Conduct and our Related Persons Transaction Policy, each of which are in writing. Under the Conflict Policy, each director is required to disclose to the board of directors all actual or potential conflicts of interest, including any personal financial interest that he or she has, as well as such interests of any immediate family member or business associate of the director known to the director, in any matter to be considered by the board of directors or in which another person does, or proposes to do, business with the Bank. Following such disclosure, the board is empowered to determine whether an actual conflict exists. In the event the board determines the existence of a conflict with respect to any matter, the affected director is required to be recused from all further considerations relating to that matter. The Conflict Policy is administered by the Governance Committee of the board of directors.

The Code of Ethics and Business Conduct requires that all directors and executive officers (as well as all other employees) avoid conflicts of interest, or the appearance of conflicts of interest. In particular, subject to limited exceptions for interests arising through ownership of mutual funds and certain financial interests acquired prior to employment by the Bank, no

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employee may have a financial interest in or financial relationship with any of our members that is not transacted in the ordinary course of the member's business or, in the case of an extension of credit, involves more than the normal risk of repayment or of loss to the member. Employees are required to disclose annually all financial interests and non-ordinary-course financial relationships with members. These disclosures are reviewed by our ethics officer, who is principally responsible for enforcing the Code of Ethics and Business Conduct on a day-to-day basis. The ethics officer is charged with attempting to resolve any apparent conflict involving an employee other than our president and chief executive officer and, if an apparent conflict has not been resolved within 60 days, to report it to our president and chief executive officer for resolution. The ethics officer is charged with reporting any apparent conflict involving a director or our president and chief executive officer to the Governance Committee of the board of directors for resolution. Our ethics officer is Carol Hempfling Pratt, executive vice president, general counsel and corporate secretary of the Bank.

The Related Persons Transaction Policy provides for the board of director’s Governance Committee’s review of certain transactions not in the ordinary course of our business that would be with related persons to determine whether such transactions would be in the best interests, or not be inconsistent with the best interests, of the Bank and our members.

Director Independence

General

The board of directors is required to evaluate and report on the independence of the directors of the Bank under two distinct director independence standards. First, FHFA regulations establish independence criteria for directors who serve as members of the board of directors' Audit Committee. Second, SEC rules require that our board of directors apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of our directors. Rule 10A-3 promulgated under the Exchange Act sets forth additional independence criteria of directors serving on the Audit Committee.

As of the date of this report, our board of directors is constituted of nine member directors and eight independent directors, as discussed in Item 10 — Directors, Executive Officers and Corporate Governance. None of our directors is an "inside" director. That is, none of our directors is a Bank employee or officer. Further, our directors are prohibited from personally owning stock or stock options in the Bank, as our stock may only be held by our members, former members, or their successors in interest. Each of the member directors, however, is an officer, director, or trustee of an institution that is a member of the Bank that is encouraged to engage in transactions with us on a regular basis, and some of the independent directors also engage in transactions either directly or indirectly with us from time to time in the ordinary course of the Bank's business.

FHFA Regulations Regarding Independence

The FHFA regulations on director independence standards prohibit an individual from serving as a member of the board of directors' Audit Committee if he or she has one or more disqualifying relationships with us or our management that would interfere with the exercise of that individual's independent judgment. Disqualifying relationships considered by the board are: employment with the Bank at any time during the last five years; acceptance of compensation from us other than for service as a director; being a consultant, advisor, promoter, underwriter, or legal counsel for the Bank at any time within the last five years; and being an immediate family member of an individual who is or who has been within the past five years, a Bank executive officer. The board assesses the independence of each director who serves on the Audit Committee under the FHFA's regulations on these independence standards. As of March 22, 2019, all of our directors serving on the board of directors' Audit Committee were independent under these criteria.

SEC Rule Regarding Independence

SEC rules require our board of directors to adopt a standard of independence to evaluate the independence of its directors. Pursuant thereto, the board adopted the independence standards of the New York Stock Exchange (the NYSE) to determine which of its directors are independent, which members of its Audit Committee are not independent, and whether the board of directors' Audit Committee financial expert is independent.

After applying the NYSE independence standards, the board determined that, as of March 22, 2019, all of our independent (that is, nonmember) directors are independent, including Directors Calamare, Carty, Chatman, Clancy, Hurley, Lazarus, Malcynsky, and Ragones. Based upon the fact that each member director is an officer or director of an institution that is a member of the Bank (and thus is an equity holder in the Bank), that each such institution routinely engages in transactions with us, and that such transactions occur frequently and are encouraged, the board of directors has determined that for the present time it would conclude that none of the member directors meets the independence criteria under the NYSE independence standards.


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It is possible that under a strict reading of the NYSE objective criteria for independence (particularly the criterion regarding the amount of business conducted with us by the director's institution), a member director could meet the independence standard on a particular day. However, because the amount of business conducted by a member director's institution may change frequently, and because we generally desire to increase the amount of business we conduct with each member, the directors deemed it inappropriate to draw distinctions among the member directors based upon the amount of business conducted with us by any director's institution at a specific time.

The board of directors has a standing Audit Committee and a standing Compensation Committee. For the reasons noted above, the board of directors determined that none of the current member directors on these committees, including Directors Crowe, Geitz, McGeorge, Shook, Treanor, Tuttle, and Wyman, are independent under the NYSE standards for these committees. The board determined that all of the independent directors on these committees, including Directors Calamare (ex-officio), Carty, Chatman, Lazarus, Malcynsky and Ragones, are independent under the NYSE independence standards for these committees. The board of directors also determined that Director Chatman is the "Audit Committee financial expert" within the meaning of the SEC rules, and further determined that as of March 22, 2019, is independent under NYSE standards. As stated above, the board of directors determined that each director on the Audit Committee is independent under the FHFA's regulations applicable to the board of director's Audit Committee. In addition, the board of directors also assessed the independence of the members of its Audit Committee under Rule 10A-3. In order to be considered independent under Rule 10A-3, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board or any other Board Committee (i) accept any consulting, advisory, or other compensation from us or (ii) be an affiliated person of the Bank. As of March 22, 2019, all members of our Audit Committee were independent under these criteria.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The following table sets forth the aggregate fees billed by PwC for professional services rendered in connection with the audit of our financial statements for 2018 and 2017, as well as the fees billed by PwC for audit-related and other services rendered by PwC to us during 2018 and 2017.

Table 67 - Principal Accounting Fees and Services
(dollars in thousands)

 
 
Year Ended December 31,
 
 
2018
 
2017
Audit fees(1)
 
$
891

 
$
858

Audit-related fees(2)
 
95

 
68

All other fees
 
3

 
2

Tax fees
 
—

 
—

Total
 
$
989

 
$
928

_______________________
(1)
Audit fees consist of fees incurred in connection with the audit of our financial statements, including audit of internal control over financial reporting, review of quarterly or annual management's discussion and analysis, and review of financial information filed with the SEC.
(2)
Audit-related fees consist of fees related to accounting research and consultations, operations reviews of new products and supporting processes, and fees related to participation in and presentations at conferences.

The Audit Committee selects our independent registered public accounting firm and preapproves all audit services to be provided by it to us. The Audit Committee also reviews and preapproves all audit-related and nonaudit-related services rendered by the independent registered public accounting firm in accordance with the Audit Committee's charter. In its review of these services and related fees and terms, the Audit Committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

a) Financial Statements

Our financial statements are set forth under Item 8 — Financial Statements and Supplementary Data of this report on Form 10-K.

b) Financial Statement Schedule

None.

c) Exhibits
Number
Exhibit Description
Reference
3.1
Restated Organization Certificate of the Federal Home Loan Bank of Boston
3.2
By-laws of the Federal Home Loan Bank of Boston
4
Amended and Restated Capital Plan of the Federal Home Loan Bank of Boston
10.1
The Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective January 1, 2009, as amended on April 15, 2009 *
10.1.1
First Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective September 1, 2009 *
10.1.2
Second Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective December 21, 2012 *
10.1.3
Third Amendment to the Federal Home Loan Bank of Boston Pension Benefit Equalization Plan effective June 30, 2014 *
10.2.1
The Federal Home Loan Bank of Boston Thrift Benefit Equalization Plan (as amended and restated effective January 1, 2017) *
10.3.1
The Federal Home Loan Bank of Boston 2016 Executive Incentive Plan *
10.3.2
The Federal Home Loan Bank of Boston 2017 Executive Incentive Plan * +
10.3.3
The Federal Home Loan Bank of Boston 2018 Executive Incentive Plan * +
10.3.4
The Federal Home Loan Bank of Boston 2019 Executive Incentive Plan * ∞
10.4
MPF Consolidated Interbank Agreement dated as of July 22, 2016
10.5
Executive Change in Control Severance Plan, effective November 7, 2018 *
10.6
Lease between the Federal Home Loan Bank of Boston and BP Prucenter Acquisition LLC
10.7
Mortgage Partnership Finance Services Agreement dated August 15, 2007 between the Federal Home Loan Bank of Boston and the Federal Home Loan Bank of Chicago

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10.8
Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, effective as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks
10.8.1
Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, effective as of January 1, 2017, by and among the Office of Finance and each of the Federal Home Loan Banks
10.9.1
The Federal Home Loan Bank of Boston 2018 Director Compensation Policy *
10.9.2
The Federal Home Loan Bank of Boston 2019 Director Compensation Policy *
10.10
Offer Letter for Edward A. Hjerpe III, dated May 18, 2009 *
10.10.1
Amendment to Offer Letter for Edward A. Hjerpe III, dated July 3, 2009 *
10.11
 
Change in Control Agreement between the Federal Home Loan Bank of Boston and Edward A. Hjerpe III, dated as of May 18, 2009 *
10.12
 
Joint Capital Enhancement Agreement, among the Federal Home Loan Banks as amended August 5, 2011
10.13
 
Severance Policy, as adopted March 23, 2012 and as amended as of October 19, 2018 *
10.14
 
The Federal Home Loan Bank of Boston Split-Dollar Insurance Termination Agreement between Frank Nitkiewicz and the Federal Home Loan Bank of Boston dated May 24, 2005 *
10.15
 
The Federal Home Loan Bank of Boston Split-Dollar Insurance Termination Agreement between M. Susan Elliott and the Federal Home Loan Bank of Boston dated May 24, 2005 *
31.1
 
Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
 
XBRL Instance Document
The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document
Filed within this Form 10-K
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
Filed within this Form 10-K
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
Filed within this Form 10-K

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101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
Filed within this Form 10-K
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
Filed within this Form 10-K

* Management contract or compensatory plan.
+ Confidential treatment has been granted as to portions of this exhibit.
∞ Confidential treatment has been requested as to portions of this exhibit.

ITEM 16. FORM 10-K SUMMARY

Not applicable


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date
 
FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
March 22, 2019
 
By:
/s/
Edward A. Hjerpe III
 
 
 
 
 
Edward A. Hjerpe III
President and Chief Executive Officer
March 22, 2019
 
By:
/s/
Frank Nitkiewicz
 
 
 
 
 
Frank Nitkiewicz
Executive Vice President and Chief Financial Officer
March 22, 2019
 
By:
/s/
Brian G. Donahue
 
 
 
 
 
Brian G. Donahue
Senior Vice President, Controller and Chief Accounting Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

March 22, 2019
 
By:
/s/
Donna L. Boulanger
 
 
 
 
Donna L. Boulanger
Director
March 22, 2019
 
By:
/s/
Andrew J. Calamare
 
 
 
 
Andrew J. Calamare
Director
March 22, 2019
 
By:
/s/
Joan Carty
 
 
 
 
Joan Carty
Director
March 22, 2019
 
By:
/s/
Eric Chatman
 
 
 
 
Eric Chatman
Director
March 22, 2019
 
By:
/s/
Patrick E. Clancy
 
 
 
 
Patrick E. Clancy
Director
March 22, 2019
 
By:
/s/
Stephen G. Crowe
 
 
 
 
Stephen G. Crowe
Director
March 22, 2019
 
By:
/s/
Cornelius K. Hurley
 
 
 
 
Cornelius K. Hurley
Director
March 22, 2019
 
By:
/s/
Antoinette C. Lazarus
 
 
 
 
Antoinette C. Lazarus
Director

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March 22, 2019
 
By:
/s/
Jay F. Malcynsky
 
 
 
 
Jay F. Malcynsky
Director
March 22, 2019
 
By:
/s/
John W. McGeorge
 
 
 
 
John W. McGeorge
Director
March 22, 2019
 
By:
/s/
Emil J. Ragones
 
 
 
 
Emil J. Ragones
Director
March 22, 2019
 
By:
/s/
Gregory R. Shook
 
 
 
 
Gregory R. Shook
Director
March 22, 2019
 
By:
/s/
John F. Treanor
 
 
 
 
John F. Treanor
Director
March 22, 2019
 
By:
/s/
Michael R. Tuttle
 
 
 
 
Michael R. Tuttle
Director
March 22, 2019
 
By:
/s/
John C. Witherspoon
 
 
 
 
John C. Witherspoon
Director
March 22, 2019
 
By:
/s/
Richard E. Wyman, Jr.
 
 
 
 
Richard E. Wyman, Jr.
Director


195