10-K 1 fhlbdallas10-k2018transiti.htm 10-K Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
 
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
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation
or organization)
71-6013989
(I.R.S. Employer
Identification Number)
8500 Freeport Parkway South, Suite 600
Irving, TX
(Address of principal executive offices)
75063-2547
(Zip Code)
Registrant’s telephone number, including area code: (214) 441-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class B Capital Stock, $100 par value 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 þ
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 þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated
filer o
 
Accelerated
filer o
 
Non-accelerated
filer þ
 
Smaller reporting
company o
 
Emerging growth
company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The registrant’s capital 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 requirements. At February 28, 2019, the registrant had 26,256,154 shares of its capital stock outstanding. As of June 30, 2018 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate par value of the registrant’s capital stock outstanding was approximately $2.661 billion
Documents Incorporated by Reference: None.
 
 
 
 
 



FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS
 
Page
 
 
 
 
 EX-10.22
 
 EX-14.1
 
 EX-31.1
 
 EX-31.2
 
 EX-32.1
 
 EX-99.1
 
 EX-99.2
 
 EX-101
 



PART I

ITEM 1. BUSINESS
Background
The Federal Home Loan Bank of Dallas (the “Bank”) is one of 11 Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System,” or the “System”). The FHLBanks were created by the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each of the 11 FHLBanks is a member-owned cooperative that operates as a separate federally chartered corporation with its own management, employees and board of directors. Each FHLBank helps finance housing, community lending, and community development needs in the specified states in its respective district. Federally insured commercial banks, savings banks, savings and loan associations, and federally or privately insured credit unions, as well as insurance companies and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994, are all eligible for membership in the FHLBank of the district in which the institution’s principal place of business is located. Housing associates, including state and local housing authorities, that meet certain statutory and regulatory criteria may also borrow from the FHLBanks.
The public purpose of the Bank is to promote housing, jobs and general prosperity through products and services that assist its members in providing affordable credit in their communities. The Bank’s primary business is to serve as a financial intermediary between the capital markets and its members. In its most basic form, this intermediation process involves raising funds by issuing debt in the capital markets and lending the proceeds to member institutions (in the form of loans known as advances) at rates that are slightly higher than the cost of the debt. The interest spread between the cost of the Bank’s liabilities and the yield on its assets, combined with the earnings on its invested capital, are the Bank’s primary sources of earnings. The Bank endeavors to manage its assets and liabilities in such a way that its net interest spread is consistent across a wide range of interest rate environments. The intermediation of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements. These agreements, commonly referred to as derivatives or derivative instruments, are discussed below in the section entitled “Use of Interest Rate Exchange Agreements.”
The Bank’s principal source of funds is debt issued in the capital markets. All 11 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent, and each FHLBank uses these funds to make loans to its members, invest in debt securities, or for other business purposes. Generally, consolidated obligations are traded in the over-the-counter market. All 11 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations. Although consolidated obligations are not obligations of or guaranteed by the U.S. government, FHLBanks are considered to be government-sponsored enterprises (“GSEs”) and thus have historically been able to borrow at the more favorable rates generally available to GSEs. Consolidated obligations are currently rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AA+/A-1+ by S&P Global Ratings (“S&P”). In the application of S&P's Government Related Entities criteria, the ratings of the FHLBanks are constrained by the long-term sovereign credit rating of the United States. These ratings indicate that each of these nationally recognized statistical rating organizations ("NRSROs") has concluded that the FHLBanks have a very strong capacity to meet their financial commitments on consolidated obligations. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks' GSE status and very high credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from the issuance of capital stock to members are also sources of funds for the Bank.
In addition to the ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to the individual obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of December 31, 2018, Moody’s had assigned a deposit rating of Aaa/P-1 to each of the FHLBanks and S&P had rated each of the FHLBanks AA+/A-1+.
Current and prospective shareholders and debtholders should understand that these credit ratings are not a recommendation to buy, hold or sell securities and they may be revised or withdrawn at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.
All members of the Bank are required to purchase capital stock in the Bank as a condition of membership and in proportion to their asset size and borrowing activity with the Bank. The Bank’s capital stock is not publicly traded and all stock is owned by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires.
The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, is responsible for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency’s

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stated mission is to ensure that the housing GSEs, including the FHLBanks, operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks.
The Bank’s debt and equity securities are exempt from registration under the Securities Act of 1933 and are “exempted securities” under the Securities Exchange Act of 1934 (the “Exchange Act”). On June 23, 2004, the Finance Agency's predecessor, the Federal Housing Finance Board, adopted a rule requiring each FHLBank to voluntarily register a class of its equity securities with the Securities and Exchange Commission (“SEC”) under Section 12(g) of the Exchange Act and the Housing and Economic Recovery Act of 2008 (the “HER Act”) subsequently codified this requirement. The Bank’s registration with the SEC became effective on April 17, 2006. As a registrant, the Bank is subject to the periodic reporting and disclosure regime as administered and interpreted by the SEC. The SEC maintains an Internet site (https://www.sec.gov) that contains reports and other information filed with the SEC. Reports and other information that the Bank files with the SEC are also available free of charge through the Bank’s website at www.fhlb.com. To access these reports and other information through the Bank’s website, click on “News,” then “Investor Relations,” and then “SEC” under the heading SEC Filings. The information on the Bank's website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of the Bank's other filings with the SEC.
Membership
The Bank’s members are financial institutions with their principal place of business in the Ninth Federal Home Loan Bank District, which consists of Arkansas, Louisiana, Mississippi, New Mexico and Texas (the "Ninth District"). The following table summarizes the Bank’s membership, by type of institution, as of December 31, 2018, 2017 and 2016.

MEMBERSHIP SUMMARY
 
December 31,
 
2018
 
2017
 
2016
Commercial banks
585

 
608

 
621

Savings institutions
57

 
58

 
60

Credit unions
118

 
114

 
108

Insurance companies
43

 
35

 
37

Community Development Financial Institutions
7

 
6

 
5

 
 
 
 
 
 
Total members
810

 
821

 
831

 
 
 
 
 
 
Housing associates
8

 
8

 
8

Non-member borrowers
5

 
6

 
8

 
 
 
 
 
 
Total
823

 
835

 
847

 
 
 
 
 
 
Community Financial Institutions (“CFIs”) (1)
572

 
600

 
619

(1) 
The figures presented above reflect the number of members that were CFIs as of December 31, 2018, 2017 and 2016 based upon the definitions of CFIs that applied as of those dates.
As of December 31, 2018, approximately 71 percent of the Bank’s members were Community Financial Institutions ("CFIs"). CFIs are defined by the FHLB Act (as amended by the HER Act) to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets over the three-year period preceding measurement of less than $1.0 billion, as adjusted annually for inflation. For 2018, CFIs were FDIC-insured institutions with average total assets as of December 31, 2017, 2016 and 2015 of less than $1.173 billion. For 2017 and 2016, the asset cap was $1.148 billion and $1.128 billion, respectively. For 2019, the asset cap is $1.199 billion.
As of December 31, 2018, 2017 and 2016, approximately 52.8 percent, 53.8 percent and 53.5 percent, respectively, of the Bank’s members had outstanding advances from the Bank. These usage rates are calculated excluding housing associates and non-member borrowers. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. Non-member borrowers consist of institutions that have acquired former members and assumed the advances and/or other extensions of credit of those former members and former members who have withdrawn from membership but that continue to have advances and/or other extensions of credit outstanding. Non-member borrowers are required to hold capital stock to support outstanding advances or other extensions of credit until the time when those advances have been repaid or the extensions of credit have expired, as applicable. During the period that their obligations remain

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outstanding, non-member borrowers may not request new extensions of credit, nor are they permitted to extend or renew the assumed advances.
As of December 31, 2015, the Bank had 835 members. The decline in the Bank's membership during the three years ended December 31, 2018 was largely attributable to intra-district merger activity.
The Bank’s membership currently includes the majority of commercial banks and savings institutions in its district that are eligible to become members. Eligible non-members are primarily insurance companies, credit unions and smaller commercial banks that have thus far elected not to join the Bank. While the Bank anticipates that some number of these eligible non-member institutions will apply for membership each year, the Bank also anticipates that some number of its existing members will be acquired or merge with other institutions and it does not currently anticipate a substantial increase in the number of member institutions.
As a cooperative, the Bank is managed with the primary objectives of enhancing the value of membership for member institutions and fulfilling its public purpose. The value of membership includes access to readily available credit and other services from the Bank, the value of the cost differential between Bank advances and other potential sources of funds, and the dividends paid on members’ investments in the Bank’s capital stock.
Business Segments
The Bank manages its operations as one business segment. Management and the Bank’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. All of the Bank’s revenues are derived from U.S. operations.
Interest Income
The Bank’s interest income is derived primarily from advances and investment activities. Each of these revenue sources is more fully described below. During the years ended December 31, 2018, 2017 and 2016, interest income derived from each of these sources (expressed as a percentage of the Bank’s total interest income) was as follows:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Advances (including prepayment fees)
53.8
%
 
52.4
%
 
51.5
%
Investments
42.8

 
45.8

 
47.7

Mortgage loans held for portfolio
3.4

 
1.8

 
0.8
%
Total
100.0
%
 
100.0
%
 
100.0
%
Total interest income (in thousands)
$
1,546,768

 
$
808,677

 
$
422,148

Substantially all of the Bank’s interest income from advances is derived from financial institutions domiciled in the Bank’s five-state district.
Products and Services
Advances. The Bank’s primary function is to provide its members with a reliable source of secured credit in the form of loans known as advances. The Bank offers advances to its members with a wide variety of terms designed to meet members’ business and risk management needs. Standard offerings include the following types of advances:
Fixed-rate, fixed-term advances. The Bank offers fixed-rate, fixed-term advances with maturities ranging from overnight to 20 years, and with maturities as long as 30 years for Community Investment advances. Interest is generally paid monthly and principal repaid at maturity for fixed-rate, fixed-term advances.
Fixed-rate, amortizing advances. The Bank offers fixed-rate advances with a variety of final maturities and fixed amortization schedules. Standard advances offerings include fully amortizing advances with final maturities of 5, 7, 10, 15 or 20 years, and advances with amortization schedules based on those maturities but with shorter final maturities accompanied by balloon payments of the remaining outstanding principal balance. Borrowers may also request alternative amortization schedules and maturities. Amortizing Community Investment advances can have maturities as long as 40 years. Interest is generally paid monthly and principal is repaid in accordance with the specified amortization schedule. Although these advances have fixed amortization schedules, borrowers may elect to pay a higher interest rate and have an option to prepay the advance without a fee after a specified lockout period (typically five years). Otherwise, early repayments are subject to the Bank’s standard prepayment fees.

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Variable-rate advances. The Bank has historically offered term variable-rate advances with maturities between one and ten years. Standard offerings include variable-rate advances indexed to either one-month LIBOR or three-month LIBOR that are priced at a constant spread to the relevant index. Beginning in December 2018, the Bank no longer offers variable-rate advances indexed to LIBOR with maturities beyond December 31, 2021. The Bank also offers variable-rate advances indexed to discount notes that reset every 8, 13 or 26 weeks based on the results of the FHLBank System's discount note auctions that typically occur twice every week. Further, the Bank offers short term variable-rate advances (maturities of 30 days or less) indexed to the daily federal funds rate. Variable-rate advances may also include an embedded cap.
Putable advances. The Bank also makes advances that include a put feature that allows the Bank to terminate the advance at specified points in time. If the Bank exercises its option to terminate the putable advance, the Bank offers replacement funding to the member for a period selected by the member up to the remaining term to maturity of the putable advance, provided the Bank determines that the member is able to satisfy the normal credit and collateral requirements of the Bank for the replacement funding requested.
Symmetrical prepayment advances. The Bank also offers fixed-rate, fixed-term or amortizing advances that include a symmetrical prepayment feature which allows a member to prepay an advance at the lower of par value or fair value plus a make-whole amount, thus allowing the member to realize a portion of the decrease in fair value that would arise if interest rates have increased since the advance was originated.
Expander advances. The Bank also offers fixed-rate, fixed-term, non-amortizing advances that provide the member with a one-time option to increase the principal amount of the advance generally up to twice the amount of the original advance at the original interest rate for the remaining term of the advance.
Fixed-rate, fixed-term advances, including Community Investment Program and Economic Development Program advances, can be forward-starting, which allows a member to lock in a rate for an advance that will settle at a future date. Amortizing advances and certain advances containing the symmetrical prepayment feature are also available on a forward-starting basis.
Finance Agency regulations require the Bank to establish a formula for and to charge, if necessary, a prepayment fee on an advance that is repaid prior to maturity in an amount sufficient to make the Bank financially indifferent to the borrower’s decision to repay the advance prior to its scheduled maturity date. Currently, these fees are generally calculated as the present value of the difference (if positive) between the interest rate on the prepaid advance and the rate derived from the FHLBank System consolidated obligations curve for the remaining term to maturity of the repaid advance.
Members are required by statute and regulation to use the proceeds of advances with an original term to maturity of greater than five years to purchase or fund new or existing residential housing finance assets which, for CFIs, are defined by statute and regulation to include small business, small farm and small agribusiness loans, loans for community development activities (subject to the Finance Agency’s requirements as described below) and securities representing a whole interest in such loans. Community Investment Cash Advances (described below) are exempt from these requirements.
The Bank prices its credit products with the objective of providing benefits of membership that are greatest for those members that use the Bank’s products most actively, while maintaining sufficient profitability to pay dividends at a rate that makes members financially indifferent to holding the Bank’s capital stock and that will allow the Bank to increase its retained earnings over time. Generally, that set of objectives results in small mark-ups over the Bank’s cost of funds for its advances. In keeping with its cooperative philosophy, the Bank provides the same pricing for advances to all similarly situated members regardless of asset or transaction size, charter type, or geographic location.
The Bank is required by the FHLB Act to obtain collateral that is sufficient, in the judgment of the Bank, to fully secure advances and other extensions of credit to members/borrowers. The Bank has not suffered any credit losses on advances since it was established in 1932. In accordance with the Bank’s Capital Plan, members and former members must hold Class B-2 capital stock in proportion to their outstanding advances. In addition, members must hold Class B-1 capital stock to meet their membership investment requirement. Pursuant to the FHLB Act, the Bank has a lien upon and holds the Bank’s Class B-1 and Class B-2 capital stock owned by each of its shareholders as additional collateral for all of the respective shareholder’s obligations to the Bank.
In order to comply with the requirement to fully secure advances and other extensions of credit, the Bank and each of its members/borrowers execute a written security agreement that establishes the Bank’s security interest in a variety of the members’/borrowers’ assets. The Bank, pursuant to the FHLB Act and Finance Agency regulations, originates, renews, or extends advances only if it has obtained and is maintaining a security interest in sufficient eligible collateral at the time such advance is made, renewed, or extended. Eligible collateral includes whole first mortgages on improved residential real property (not more than 90 days delinquent) or securities representing an undivided interest in such mortgages; securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including mortgage-backed and other debt securities issued or guaranteed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association; term deposits in the Bank; and other real

4


estate-related collateral acceptable to the Bank, provided that such collateral has a readily ascertainable value and the Bank can perfect a security interest in such assets.
In the case of CFIs, the Bank may also accept as eligible collateral secured small business, small farm, and small agribusiness loans, secured loans for community development activities, and securities representing a whole interest in such loans, provided the Bank can perfect a security interest in such collateral and the collateral (i) has a readily ascertainable value, (ii) can be reliably discounted to account for liquidation, and (iii) can be liquidated in due course.
The HER Act added secured loans for community development activities as a new type of eligible collateral for CFIs. To date, the Bank has not been requested to accept secured loans for community development activities as collateral.
Except as set forth in the next sentence, the FHLB Act affords any security interest granted to the Bank by any member/borrower of the Bank, or any affiliate of any such member/borrower, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. The Bank’s security interest is not entitled to priority over the claims and rights of a party that (i) would be entitled to priority under otherwise applicable law and (ii) is an actual bona fide purchaser for value or is a secured party who has a perfected security interest in such collateral in accordance with applicable law (e.g., a prior perfected security interest under the Uniform Commercial Code or other applicable law). For example, as discussed further below, the Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the borrower. If another secured party, without knowledge of the Bank's lien, perfected its security interest in that same collateral by taking possession of the collateral, rather than or in addition to filing a Uniform Commercial Code financing statement against the borrower, then that secured party’s security interest that was perfected by possession may be entitled to priority over the Bank’s security interest that was perfected by filing a Uniform Commercial Code financing statement.
From time to time, the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor (typically, a Federal Reserve Bank or another FHLBank). If the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor, the Bank will not extend credit against those assets or categories of assets.
As stated above, each member/borrower of the Bank executes a security agreement pursuant to which such member/borrower grants a security interest in favor of the Bank in certain assets of such member/borrower. The assets in which a member grants a security interest fall into one of two general structures. In the first structure, the member grants a security interest in all of its assets that are included in the eligible collateral categories, as described above, which the Bank refers to as a “blanket lien.” A member may request that its blanket lien be modified, such that the member grants in favor of the Bank a security interest limited to certain of the eligible collateral categories (i.e., whole first residential mortgages, securities, term deposits in the Bank and other real estate-related collateral). In the second structure, the member grants a security interest in specifically identified assets rather than in the broad categories of eligible collateral covered by the blanket lien and the Bank identifies those members as being on “specific collateral only status.”
The basis upon which the Bank will lend to a member that has granted the Bank a blanket lien depends on numerous factors, including, among others, that member’s financial condition and general creditworthiness. Generally, and subject to certain limitations, a member that has granted the Bank a blanket lien may borrow up to a specified percentage of the value of eligible collateral categories, as determined from that member’s financial reports filed with its federal regulator, without specifically identifying each item of collateral or delivering the collateral to the Bank. Under certain circumstances, including, among others, a deterioration of a member’s financial condition or general creditworthiness, the amount a member may borrow is determined only on the basis of the collateral that such member delivers to the Bank or a third-party custodian approved by the Bank. Under these circumstances, the Bank places the member on “custody status.” In addition, members on blanket lien status may choose to deliver some or all of the collateral to the Bank.
The members/borrowers that are granted specific collateral only status by the Bank are typically either insurance companies or members/borrowers with an investment grade credit rating from at least two NRSROs that have requested this type of structure. Insurance companies are permitted to borrow only against the eligible collateral that is delivered to the Bank, and insurance companies generally grant a security interest only in collateral they have delivered. Members/borrowers with an investment grade credit rating from at least two NRSROs may grant a security interest in, and would be permitted to borrow only against, delivered eligible securities and specifically identified, eligible first-lien mortgage loans. Such loans must be delivered to the Bank or a third-party custodian approved by the Bank, or the Bank and the member/borrower must otherwise take actions that ensure the priority of the Bank’s security interest in the loans. Investment grade rated members/borrowers that choose this option are subject to fewer provisions that allow the Bank to demand additional collateral or exercise other remedies based on the Bank’s discretion.
As of December 31, 2018, 684 of the Bank’s borrowers/potential borrowers with a total of $33.4 billion in outstanding advances were on blanket lien status, 25 borrowers/potential borrowers with $2.9 billion in outstanding advances were on

5


specific collateral only status and 114 borrowers/potential borrowers with $4.5 billion in outstanding advances were on custody status.
The Bank perfects its security interest in members'/borrowers’ collateral in a number of ways. The Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the relevant assets of the member/borrower. In the case of certain borrowers, the Bank perfects its security interest by taking possession or control of the collateral, which may be in addition to the filing of a financing statement. In these cases, the Bank also generally takes assignments of most of the mortgages and deeds of trust that are designated as collateral. Instead of requiring delivery of the collateral to the Bank, the Bank may allow certain borrowers to deliver specific collateral to a third-party custodian approved by the Bank or otherwise take actions that ensure the priority of the Bank’s security interest in such collateral.
On at least a quarterly basis, the Bank obtains updated information relating to collateral pledged to the Bank by depository institution members/borrowers, including those on blanket lien status. This information is either obtained directly from the member/borrower or obtained by the Bank from appropriate regulatory filings. In addition, on a monthly basis or as otherwise requested by the Bank, members/borrowers on custody status and members/borrowers on specific collateral only status must update information relating to collateral pledged to the Bank. Bank personnel regularly verify the existence and eligibility of collateral securing advances to members/borrowers on blanket lien status and members/borrowers on specific collateral only status with respect to any collateral not delivered to the Bank. The frequency and the extent of these collateral verifications depend on the average amount by which a member's/borrower’s outstanding obligations to the Bank during the year exceed the collateral value of its securities, loans and term deposits held by the Bank. Collateral verifications are not required for members/borrowers that have had no, or only a de minimis amount of, outstanding obligations to the Bank secured by a blanket lien during the prior 12-month period ending on November 30, are on custody status, or are on blanket lien status but at all times have delivered to the Bank or an approved custodian eligible loans, securities and term deposits with a collateral value in excess of the advances and other extensions of credit to the member/borrower.
As of December 31, 2018, the Bank’s outstanding advances (at par value) totaled $40.8 billion. As of that date, advances outstanding to the Bank’s five largest borrowers represented 37.9 percent of the Bank’s total outstanding advances. Advances to the Bank’s two largest borrowers (Texas Capital Bank, N.A. and Comerica Bank) represented 9.6 percent and 9.3 percent, respectively, of the Bank’s total outstanding advances as of December 31, 2018. For additional information regarding the composition and concentration of the Bank’s advances, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Advances.
Community Investment Offerings. The Bank offers a Community Investment Cash Advances (“CICA”) program (which includes a Community Investment Program and an Economic Development Program) as authorized by Finance Agency regulations. Advances made under the CICA program benefit low- to moderate-income households by providing funds for housing or economic development projects. CICA advances are made at rates below the rates the Bank charges on standard advances. CICA advances are provided separately from and do not count toward the Bank’s statutory obligations under the Affordable Housing Program, through which the Bank provides grants to support projects that benefit low-income households (see the “Affordable Housing Program” section below). As of December 31, 2018, the par value of advances outstanding under the CICA program totaled approximately $395.3 million, representing approximately 1.0 percent of the Bank’s total advances outstanding as of that date.
Prior to 2019, if a member institution was approved for an Economic Development Program ("EDP") advance, the member's customer could then be eligible for an accompanying EDP Plus grant. In 2018, a total of $750,000 in EDP Plus grants were available to members' customers. Beginning in January 2019, the Bank launched a Small Business Boost ("SBB") Program, which is designed to provide recoverable assistance to small businesses in their first few years of operation. SBB funds awarded to small businesses will be disbursed through member institutions. With the launch of the SBB Program, the Bank no longer offers EDP Plus grants. Up to $3 million in SBB funds will be made available in 2019.
The Bank also offers an Affordable Housing Program (“AHP”) as required by the FHLB Act and in accordance with Finance Agency regulations. The Bank sets aside 10 percent of each year’s earnings (as adjusted for interest expense on mandatorily redeemable capital stock) for its AHP, which provides grants for projects that facilitate development of rental and owner-occupied housing for low-income households. Each year, a portion of the amount set aside is typically allocated specifically for the Bank's Homebuyer Equity Leverage Partnership ("HELP") program and its Special Needs Assistance Program ("SNAP"). HELP provides grant funds for down payment and closing cost assistance for eligible first-time homebuyers. SNAP provides grant funds to special needs homeowners for rehabilitation costs. The calculation of the amount to be set aside is further discussed below in the section entitled “AHP Assessments.” Each year, the Bank conducts a competitive application process to allocate the AHP funds set aside from the prior year’s earnings. Applications submitted by Bank members and their community partners are scored in accordance with Finance Agency regulations and the Bank’s AHP Implementation Plan. The highest scoring proposals are approved to receive funds, which are disbursed upon receipt of documentation that the projects are progressing as specified in the original applications or in approved modifications thereto.

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In addition, the Bank offers a Housing Assistance for Veterans program that is designed to provide grants to households of veterans or active service members who were disabled as a result of an injury during their active military service since September 11, 2001.
Further, the Bank offers a Partnership Grant Program which provides funding for the operational needs of community-based organizations ("CBOs"). CBOs include non-profit organizations involved in affordable housing, local community development funds and small business technical assistance providers.
Letters of Credit. The Bank’s credit services also include letters of credit issued or confirmed on behalf of members to facilitate business transactions with third parties that support residential housing finance, community lending, or asset/liability management or to provide liquidity to members. Letters of credit are also issued on behalf of members to secure the deposits of public entities that are held by such members. All letters of credit must be fully collateralized as though they were funded advances. At December 31, 2018 and 2017, outstanding letters of credit totaled $18.5 billion and $16.2 billion, respectively, of which $0.3 billion had been issued or confirmed under the Bank’s CICA program at each of those dates.
Correspondent Banking and Collateral Services. The Bank provides its members with a variety of correspondent banking and collateral services. These services include overnight and term deposit accounts, wire transfer services, securities safekeeping, and securities pledging services.
SecureConnect. The Bank provides secure on-line access to many of its products, services and reports through SecureConnect, a proprietary, secure on-line product delivery system. A substantial portion of the Bank’s advances and wire transfers are initiated by members through SecureConnect. In addition, a large proportion of account statements and other reports are made available through SecureConnect. Further, members may participate in auctions for Bank advances and deposits through SecureConnect.
Interest Rate Swaps, Caps and Floors. The Bank offers interest rate swaps, caps and floors to its member institutions. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties which, if required, will be a third-party central clearinghouse. In order to be eligible, a member must have executed a master swap agreement with the Bank. The Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. At December 31, 2018 and 2017, the total notional amount of interest rate exchange agreements with members totaled $0.9 billion and $1.2 billion, respectively.
Standby Bond Purchase Agreements. The Bank offers standby bond purchase services to state housing finance agencies within its district. In these transactions, in order to enhance the liquidity of bonds issued by a state housing finance agency, the Bank, for a fee, agrees to stand ready to purchase, in certain circumstances specified in the standby agreement, a state housing finance agency’s bonds that the remarketing agent for the bonds is unable to sell. The specific terms for any bonds purchased by the Bank are specified in the standby bond purchase agreement entered into by the Bank and the state housing finance agency. The Bank reserves the right to sell any bonds it purchases at any time, subject to any conditions the Bank agrees to in the standby bond purchase agreement. In November 2017 and June 2018, the Bank entered into standby bond purchase agreements with a state housing finance agency located within its district. At December 31, 2018, the Bank had outstanding standby bond purchase agreements totaling $449.9 million, which expire in 2022 and 2023. The Bank was not required to purchase any bonds under these agreements during the years ended December 31, 2018 or 2017. The Bank was not a party to any standby bond purchase agreements prior to 2017.
MPF Xtra. The Bank offers MPF Xtra® to its members. MPF Xtra is offered under the Mortgage Partnership Finance® (“MPF”®) program administered by the FHLBank of Chicago, which is discussed on pages 9-10 of this report (“Mortgage Partnership Finance,” “MPF,” and "MPF Xtra" are registered trademarks of the FHLBank of Chicago). MPF Xtra provides members that participate in the MPF program (known as participating financial institutions or "PFIs") an opportunity to sell certain fixed-rate, conforming mortgage loans into the secondary market. Under this program, loans are sold to the FHLBank of Chicago and are concurrently sold to Fannie Mae as a third-party investor. These loans are not held by the Bank, nor are they recorded on the Bank's balance sheet. Unlike other products offered under the MPF program, PFIs are not required to provide credit enhancement and do not receive credit enhancement fees when using the MPF Xtra product. Under the MPF Xtra program, the Bank receives a fee for any loans sold by its PFIs. During 2018, 2017 and 2016, $40.2 million, $41.4 million and $59.0 million, respectively, of loans were sold through the MPF Xtra program and the fees earned on the sale of these loans totaled $28,000, $29,000 and $41,000, respectively.
Investment Activities
The Bank maintains a portfolio of investments to enhance interest income and meet liquidity needs, including certain regulatory liquidity requirements, as discussed in Item 7. Management’s Discussion and Analysis of Financial Condition and

7


Results of Operations — Liquidity and Capital Resources. To ensure the availability of funds to meet members’ credit needs, the Bank’s operating needs, and its other general and regulatory liquidity requirements, the Bank maintains a portfolio of short-term investments typically consisting of overnight federal funds issued by highly rated domestic banks and U.S. branches of foreign financial institutions, overnight reverse repurchase agreements, overnight interest-bearing deposits with highly rated domestic banks and U.S. Treasury Bills and Notes. From time to time, the Bank may also invest in short-term commercial paper and GSE discount notes. At December 31, 2018, the Bank’s short-term investments were comprised of $1.7 billion of overnight federal funds sold, $6.2 billion of overnight reverse repurchase agreements, $2.5 billion of overnight interest-bearing deposits and $1.7 billion of U.S. Treasury Notes with short remaining terms to maturity.
To enhance net interest income, the Bank maintains a long-term investment portfolio, which currently includes mortgage-backed securities ("MBS") issued by U.S. government-sponsored enterprises (i.e., Fannie Mae and Freddie Mac); non-agency (i.e., private label) residential MBS; non-MBS debt instruments issued or guaranteed by the U.S. government or secured by U.S. government guaranteed obligations; non-MBS debt instruments issued by U.S. government-sponsored enterprises (i.e., Fannie Mae, Freddie Mac and the Farm Credit System); and state housing agency obligations. The interest rate and, in the case of MBS, prepayment risk inherent in the securities is managed through a variety of debt and interest rate derivative instruments. As of December 31, 2018, 2017 and 2016, the composition of the Bank’s long-term investment portfolio was as follows (dollars in millions):
 
December 31,
 
2018
 
2017
 
2016
 
Amortized
Cost
 
Percentage
 
Amortized
Cost
 
Percentage
 
Amortized
Cost
 
Percentage
Government-sponsored enterprises
 
 


 
 
 


 
 
 
 
Commercial MBS
$
9,478

 
54.8
%
 
$
7,669

 
47.2
%
 
$
5,896

 
37.5
%
Debentures
5,611

 
32.5

 
5,912

 
36.4

 
6,475

 
41.1

Residential MBS
1,254

 
7.3

 
1,656

 
10.2

 
2,211

 
14.1

Government-guaranteed securities
557

 
3.2

 
586

 
3.6

 
611

 
3.9

Non-agency residential MBS
76

 
0.4

 
95

 
0.6

 
115

 
0.7

Other
306

 
1.8

 
333

 
2.0

 
428

 
2.7

Total
$
17,282

 
100.0
%
 
$
16,251

 
100.0
%
 
$
15,736

 
100.0
%

The Bank is precluded from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed an amount equal to 300 percent of its total regulatory capital. At December 31, 2018, the Bank's MBS holdings (at amortized cost) represented 297 percent of its total regulatory capital.
The Bank has historically attempted to maintain its investments in MBS close to the regulatory dollar limit. While the Finance Agency has established limits with respect to the types and structural characteristics of the FHLBanks’ MBS investments, the Bank has generally adhered to a more conservative set of guidelines.
The Bank is permitted to invest in the non-MBS debt obligations of any GSE provided such investments in any single GSE do not exceed the lesser of the Bank’s total regulatory capital or that GSE's total capital (taking into account the financial support provided by the U.S. Department of the Treasury, if applicable) at the time new investments are made. The Bank's investments in the non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System are each currently limited to an amount equal to 100 percent of the Bank's total regulatory capital.
In accordance with Finance Agency policy and regulations, total capital for purposes of determining the Bank’s MBS and non-MBS investment limitations excludes accumulated other comprehensive income (loss) and includes all amounts paid in for the Bank’s capital stock regardless of accounting classification (see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). The Bank is not required to sell or otherwise reduce any investments that exceed these regulatory limits due to reductions in capital or changes in value after the investments are made, but it is precluded from making additional investments that exceed these limits.
Finance Agency regulations include a variety of restrictions and limitations on the FHLBanks’ investment activities, including limits on the types, amounts, and maturities of unsecured investments in private issuers. Finance Agency rules and regulations also prohibit the Bank from investing in certain types of securities, including:
instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies, or certain investments targeted to low-income persons or communities;
instruments issued by non-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;

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debt instruments that are not investment quality, other than certain investments targeted to low-income persons or communities and instruments that became non-investment quality after purchase by the Bank;
whole mortgages or other whole loans, other than 1) those acquired by the Bank through a duly authorized Acquired Member Assets program such as the Mortgage Partnership Finance program discussed below; 2) certain investments targeted to low-income persons or communities; 3) certain marketable direct obligations of state, local, or tribal government units or agencies that are investment quality; 4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and 5) certain foreign housing loans authorized under Section 12(b) of the FHLB Act;
non-U.S. dollar denominated securities;
interest-only or principal-only stripped MBS;
residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits; and
fixed-rate MBS or floating-rate MBS that, on trade date, are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest rate change of 300 basis points.
Acquired Member Assets ("AMA")
Through the MPF program, the Bank currently invests in conventional residential mortgage loans originated by its PFIs. The Bank previously purchased conventional mortgage loans and government-guaranteed/insured mortgage loans (i.e., those insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs) during the period from 1998 to mid-2003, and resumed acquiring conventional mortgage loans under this program in early 2016. All of the mortgage loans acquired during the period from 2016 to 2018 were originated by certain of the Bank's PFIs and the Bank acquired a 100 percent interest in such loans. For the loans that were acquired from its members during the period from 1998 to mid-2003, the Bank retained title to the mortgage loans, subject to any participation interest in such loans that was sold to the FHLBank of Chicago; the interest in the loans retained by the Bank ranged from 1 percent to 49 percent. Additionally, during the period from 1998 to 2000, the Bank also acquired from the FHLBank of Chicago a percentage interest (ranging up to 75 percent) in certain MPF loans originated by PFIs of other FHLBanks. Substantially all of the $2.1 billion (unpaid principal balance) of mortgage loans on the Bank's balance sheet at December 31, 2018 were conventional loans acquired during the period from 2016 through 2018.
The Bank manages the liquidity, interest rate and prepayment risk of these loans, while the PFIs or their designees retain the servicing activities. The Bank and the PFIs share in the credit risk of the loans with the Bank assuming a limited first loss obligation defined as the First Loss Account (“FLA”), and the PFIs assuming credit losses in excess of the FLA, up to the amount of the required credit enhancement obligation ("CE Obligation") as specified in the master agreement (“Second Loss Credit Enhancement”). Depending on the MPF product structure, the FLA is either a memo account calculated as the cumulative amount of a specified portion of the monthly interest payments on the MPF loans (e.g., 4 basis points, annualized, per month), or a specified percentage amount of MPF loans outstanding (e.g., 35 basis points of the principal amount of the loans). In the first case, the Bank’s first loss obligation is limited to the accumulated amount of the FLA, while in the second case the Bank’s first loss obligation is limited to the specified percentage of the loans outstanding, subject to recovery from future credit enhancement fees otherwise payable to the PFI as described below.
The CE Obligation is the amount of credit enhancement needed for a pool of loans delivered under a master commitment to be considered “AMA investment grade,” which is defined in the Finance Agency's regulations as sufficient credit enhancement such that the Bank expects to be “paid principal and interest in all material respects, even under reasonably likely adverse changes to expected economic conditions.” Prior to December 2016, credit enhancements were required to be established such that each master commitment would have an estimated rating equivalent to an investment grade rated MBS and to be set by the Bank using an NRSRO model. Prior to December 22, 2016, the Bank set the credit enhancement level at a double-A equivalent. For loans delivered on and after that date, the credit enhancement level has been set at a triple-B equivalent which the Bank has determined is sufficient to meet the AMA investment grade standard. The Bank assumes all losses in excess of the Second Loss Credit Enhancement. As further described below, the PFIs are paid a fee by the Bank for assuming a portion of the credit risk of the loans.

The PFI’s CE Obligation arises under its PFI Agreement while the amount and nature of the obligation are determined with respect to each master commitment. Under the Finance Agency’s Acquired Member Asset regulation (12 C.F.R. part 1268) (“AMA Regulation”), the PFI must “bear the economic consequences” of certain credit losses with respect to a master commitment based upon the MPF product and other criteria. Under the MPF program, the PFI’s credit enhancement protection may take the form of the CE Obligation, which represents the direct liability to pay credit losses incurred with respect to that master commitment, or may require the PFI to obtain and pay for a supplemental mortgage insurance (“SMI”) policy insuring the Bank for a portion of the credit losses arising from the master commitment, and/or the PFI may contract for a contingent

9


performance-based credit enhancement fee whereby such fees are reduced by losses up to a certain amount arising under the master commitment. The credit risk-sharing structures utilized by the Bank during the period from 2016 through 2018 did not include SMI. Under the AMA Regulation, any portion of the CE Obligation that is a PFI’s direct liability must be collateralized by the PFI in the same way that advances are collateralized. The PFI Agreement provides that the PFI’s obligations under the PFI Agreement are secured along with other obligations of the PFI under its regular advances agreement with the Bank and, further, that the Bank may request additional collateral to secure the PFI’s obligations. PFIs are paid a credit enhancement fee (“CE fee”) as an incentive to minimize credit losses, to share in the risk of loss on MPF loans and to pay for SMI (if applicable), rather than paying a guaranty fee to other secondary market purchasers. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans. The required CE Obligation may vary depending on the MPF product alternatives selected. The Bank also pays performance-based CE fees that are based on the actual performance of the pool of MPF loans under each individual master commitment. To the extent that losses incurred by the Bank as part of its first loss obligation in the current month exceed accrued performance-based CE fees, the remaining losses may be recovered from future performance-based CE fees payable to the PFI.
PFIs must comply with the requirements of the PFI agreement, MPF guides, applicable law and the terms of mortgage documents. If a PFI fails to comply with any of these requirements, it may be required to repurchase the MPF loans that are impacted by such failure. The reasons that a PFI could be required to repurchase an MPF loan include, but are not limited to, the failure of the loan to meet underwriting standards, the PFI’s failure to deliver a qualifying promissory note and certain other relevant documents to an approved custodian, a servicing breach, fraud or other misrepresentations by the PFI. In addition, a PFI may, under the terms of the MPF servicing guide, elect to repurchase any government-guaranteed/insured loan for an amount equal to the loan’s then current scheduled principal balance and accrued interest thereon, provided no payment has been made by the borrower for three consecutive months. This policy allows PFIs to comply with loss mitigation requirements of the applicable government agency in order to preserve the insurance guaranty coverage.
As of December 31, 2018 and 2017, MPF loans held for portfolio (net of allowance for credit losses) were $2.186 billion and $0.878 billion, respectively, representing approximately 3.0 percent and 1.3 percent, respectively, of the Bank’s total assets at each of those dates. Over time, the Bank expects to increase the balance of its mortgage loan portfolio to an amount that approximates 10 percent of its total assets. For the foreseeable future, the Bank intends to acquire a 100 percent interest in the mortgage loans that it purchases from its PFIs.
Core Mission Achievement
On July 14, 2015, the Finance Agency issued an Advisory Bulletin ("AB 2015-05") that provides guidance to the FHLBanks regarding core mission achievement. As stipulated in the Advisory Bulletin, the Finance Agency assesses each FHLBank’s core mission achievement by calculating the ratio of a FHLBank's primary mission assets (defined for this purpose as advances and mortgage loans held for portfolio) relative to its consolidated obligations (hereinafter referred to as the core mission asset or "CMA" ratio). On August 23, 2018, the Finance Agency issued an Advisory Bulletin that, among other things, allows each FHLBank (beginning January 1, 2019) to adjust its CMA ratio (as defined in AB 2015-05) by deducting from the ratio's denominator the average par value of the FHLBank's holdings of U.S. Treasury securities with a remaining maturity no greater than 10 years that are classified as trading or available-for-sale. The CMA ratio is calculated for each calendar year using annual average par values.
AB 2015-05 also provides the Finance Agency’s expectations for each FHLBank’s strategic plan based on the FHLBank's CMA ratio, which are:
when the CMA ratio is 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining that level of core mission achievement;
when the CMA ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plans to increase its mission focus; and
when the CMA ratio is below 55 percent, the strategic plan should include a robust explanation of the circumstances that caused the CMA ratio to be below that level, as well as a detailed description of the FHLBank's plans to increase the ratio. The Advisory Bulletin provides that if a FHLBank has a CMA ratio below 55 percent over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives as part of its strategic planning.
Currently, the Bank's core mission assets are comprised primarily of advances. For the years ended December 31, 2018, 2017 and 2016, the Bank's CMA ratio was 64.7 percent, 62.9 percent and 60.7 percent, respectively. As noted previously in the Acquired Member Assets section (and for reasons unrelated to AB 2015-05), the Bank began to purchase mortgage loans through the MPF Program in early 2016. Over time, mortgage loan purchases are expected to further increase the Bank's core mission assets. For the year ending December 31, 2019, the Bank's goal is to increase its CMA ratio to approximately 65.5 percent.

10


Notwithstanding the negative impact that holding higher amounts of liquidity has on its CMA ratio, the Bank has at times maintained, and may continue from time to time to maintain higher balances of liquidity if short-term debt markets are volatile or if, in management's judgment, they are expected to become more volatile, or if the returns from holding those higher balances are attractive. In the future, the Bank may use more U.S Treasury securities to meet its liquidity requirements given the favorable treatment afforded such investments in the Bank's CMA ratio relative to other short-term investment alternatives. The Bank does not currently intend to reduce the size of its long-term investment portfolio by selling assets (which would have the effect of increasing the Bank's CMA ratio but at the same time reducing its earnings), electing instead to focus on the continued growth of its advances and mortgage loans held for portfolio.
Funding Sources
General. The principal funding source for the Bank is consolidated obligations issued in the capital markets through the Office of Finance. Member deposits and the proceeds from the issuance of capital stock are also funding sources for the Bank. Consolidated obligations consist of consolidated obligation bonds and consolidated obligation discount notes. Discount notes are consolidated obligations with maturities of one year or less, and consolidated obligation bonds typically have maturities in excess of one year.
The Bank determines its participation in the issuance of consolidated obligations based upon, among other things, its own funding and operating requirements and the amounts, maturities, rates of interest and other terms available in the marketplace. The issuance terms for consolidated obligations are established by the Office of Finance, subject to policies established by its board of directors and the regulations of the Finance Agency. In addition, the Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the U.S. Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations, the way and time issued, and the selling price.
Consolidated obligation bonds generally satisfy long-term funding needs. Typically, the maturities of these securities range from 1 to 20 years, but their maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be fixed-rate or variable-rate and may be callable or non-callable.
Consolidated obligation bonds are issued and distributed through negotiated or competitively bid transactions with underwriters or bidding group members. The Bank receives 100 percent of the proceeds of bonds issued through direct negotiation with underwriters of System debt when it is the sole primary obligor on consolidated obligation bonds. When the Bank and one or more other FHLBanks jointly agree to the issuance of bonds directly negotiated with underwriters, the Bank receives the portion of the proceeds of the bonds agreed upon with the other FHLBanks; in those cases, the Bank is the primary obligor for a pro rata portion of the bonds based on the proceeds it receives. In these cases, the Bank records on its balance sheet only that portion of the bonds for which it is the primary obligor. The majority of the Bank’s consolidated obligation bond issuance has been conducted through direct negotiation with underwriters of System debt, and a majority of that issuance has been without participation by the other FHLBanks.
The Bank may also request that specific amounts of specific bonds be offered by the Office of Finance for sale through competitive auction conducted with underwriters that are bidding group members. One or more other FHLBanks may also request that amounts of these same bonds be offered for sale for their benefit through the same auction. The Bank may receive from zero to 100 percent of the proceeds of the bonds issued through competitive auction depending on the amounts and costs for the bonds bid by underwriters, the maximum costs the Bank or other FHLBanks, if any, participating in the same issue are willing to pay for the bonds, and Office of Finance guidelines for allocation of bond proceeds among multiple participating FHLBanks.
Consolidated obligation discount notes are a significant funding source for money market instruments and for advances with short-term maturities or repricing frequencies of less than one year, or advances for which the interest rate is indexed to discount notes. Discount notes are generally sold at a discount and mature at par, and are offered daily through a consolidated obligation discount notes selling group and through other authorized securities dealers.
On a daily basis, the Bank may request that specific amounts of consolidated obligation discount notes with specific maturity dates be offered by the Office of Finance at a specific cost for sale to securities dealers in the discount note selling group. One or more other FHLBanks may also request that amounts of discount notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when securities dealers in the selling group submit orders for the specific discount notes offered for sale. The Bank may receive from zero to 100 percent of the proceeds of the discount notes issued through this sales process depending on the maximum costs the Bank or other FHLBanks, if any, participating in the same discount notes are willing to pay for the discount notes, the amounts of orders for the discount notes submitted by securities dealers, and Office of Finance guidelines for allocation of discount note proceeds among multiple participating FHLBanks. Under the Office of Finance guidelines, FHLBanks generally receive funding on a first-come-first-served basis subject to threshold limits within each category of discount notes. For overnight discount notes, sales are allocated to the FHLBanks in lots of $250 million for identical commitments. For all other discount

11


note maturities, sales are allocated in lots of $50 million. Within each category of discount notes, the allocation process is repeated until all orders are filled or canceled.
Twice weekly, the Bank may also request that specific amounts of consolidated obligation discount notes with fixed maturity dates ranging from 4 to 26 weeks be offered by the Office of Finance through competitive auctions conducted through securities dealers in the discount note selling group. One or more other FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. The FHLBanks receive funding at a single price based on a Dutch auction format. If the bids submitted are less than the total of the FHLBanks’ requests, the Bank receives funding based on the ratio of the Bank’s regulatory capital (defined on page 33 of this report) relative to the regulatory capital of the other FHLBanks offering discount notes. The majority of the Bank’s discount note issuance in maturities of 4 weeks or longer is conducted through the auction process. Regardless of the method of issuance, as with consolidated obligation bonds, the Bank is the primary obligor for the portion of discount notes issued for which it has received the proceeds.
On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed-rate, fixed-term, non-callable debt, and may be in the form of discount notes or bonds. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt.
The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the years ended December 31, 2018, 2017 or 2016.
In addition, the Bank occasionally transfers debt that it no longer needs to other FHLBanks. The Bank did not transfer any consolidated obligations to other FHLBanks during the years ended December 31, 2018, 2017 or 2016.
Joint and Several Liability. Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. If principal of or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.
The FHLBanks and the Office of Finance are parties to the Amended and Restated Federal Home Loan Banks P&I Funding and Contingency Plan Agreement which is designed to facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner. For additional information regarding this agreement, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.
According to the Office of Finance, the 11 FHLBanks had (at par value) approximately $1.032 trillion and $1.034 trillion in consolidated obligations outstanding at December 31, 2018 and 2017, respectively. The Bank was the primary obligor on $68.0 billion and $64.1 billion (at par value), respectively, of these consolidated obligations.
Certification and Reporting Obligations. Under Finance Agency regulations, before the end of each calendar quarter and before paying any dividends for that quarter, the President and Chief Executive Officer of the Bank must certify to the Finance Agency that, based upon known current facts and financial information, the Bank will remain in compliance with its depository and

12


contingent liquidity requirements and will remain capable of making full and timely payment of all current obligations (which includes the Bank’s obligation to pay principal of and interest on consolidated obligations) coming due during the next quarter. The Bank is required to provide notice to the Finance Agency if it (i) is unable to provide the required certification, (ii) projects at any time that it will fail to comply with its liquidity requirements or will be unable to meet all of its current obligations due during the quarter, (iii) actually fails to comply with its liquidity requirements or to meet all of its current obligations due during the quarter, or (iv) negotiates to enter into or enters into an agreement with one or more other FHLBanks to obtain financial assistance to meet its current obligations due during the quarter. The Bank has been in compliance with the applicable reporting requirements at all times since they became effective in 1999.
A FHLBank must file a consolidated obligation payment plan for the Finance Agency’s approval if (i) the FHLBank becomes a non-complying FHLBank as a result of failing to provide the required certification, (ii) the FHLBank becomes a non-complying FHLBank as a result of being required to provide the notice described above to the Finance Agency, except in the case of a failure to make a payment on a consolidated obligation caused solely by an external event such as a power failure, or (iii) the Finance Agency determines that the FHLBank will cease to be in compliance with its liquidity requirements or will lack the capacity to meet all of its current obligations due during the quarter.
A non-complying FHLBank is permitted to continue to incur and pay normal operating expenses in the regular course of business, but may not incur or pay any extraordinary expenses, or declare or pay dividends, or redeem any capital stock, until such time as the Finance Agency has approved the FHLBank’s consolidated obligation payment plan or inter-FHLBank assistance agreement, or ordered another remedy, and all of the non-complying FHLBank’s direct obligations have been paid.
Negative Pledge Requirements. Each FHLBank must maintain specified assets free from any lien or pledge in an amount at least equal to its participation in outstanding consolidated obligations. Eligible assets for this purpose include (i) cash; (ii) obligations of, or fully guaranteed by, the U.S. government; (iii) secured advances; (iv) mortgages having any guaranty, insurance, or commitment from the U.S. government or any related agency; and (v) investments described in Section 16(a) of the FHLB Act, which, among other items, include securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located. At December 31, 2018 and 2017, the Bank had eligible assets free from pledge of $72.0 billion and $67.7 billion, respectively, compared to its participation in outstanding consolidated obligations of $68.0 billion and $64.1 billion, respectively. In addition, the Bank was in compliance with its negative pledge requirements at all times during the years ended December 31, 2018, 2017 and 2016.
Office of Finance. The Office of Finance (“OF”) is a joint office of the 11 FHLBanks that executes the issuance of consolidated obligations, as agent, on behalf of the FHLBanks. The OF also services all outstanding consolidated obligation debt, serves as a source of information for the FHLBanks on capital market developments, manages the FHLBank System’s relationship with rating agencies as it pertains to the consolidated obligations, and prepares and distributes the annual and quarterly combined financial reports for the FHLBanks.
The OF’s board of directors is comprised of 16 directors: the 11 FHLBank presidents, who serve ex officio, and 5 independent directors, who each serve five-year terms that are staggered so that not more than one independent directorship is scheduled to become vacant in any one year. Independent directors are limited to two consecutive full terms. Independent directors must be United States citizens. As a group, the independent directors must have substantial experience in financial and accounting matters and they must not have any material relationship with any FHLBank or the OF.
One of the responsibilities of the board of directors of the OF is to establish policies regarding consolidated obligations to ensure that, among other things, such obligations are issued efficiently and at the lowest all-in funding costs for the FHLBanks over time consistent with prudent risk management practices and other market and regulatory factors.
The Finance Agency has regulatory oversight and enforcement authority over the OF and its directors and officers generally to the same extent as it has such authority over a FHLBank and its respective directors and officers. The FHLBanks are responsible for jointly funding the expenses of the OF, which are shared on a pro rata basis with two-thirds based on each FHLBank’s total consolidated obligations outstanding (as of each month end) and one-third divided equally among all of the FHLBanks.
Use of Interest Rate Exchange Agreements
Finance Agency regulations authorize and establish general guidelines for the FHLBanks’ use of derivative instruments, and the Bank’s Enterprise Market Risk Management Policy establishes specific guidelines for their use. The Bank can use interest rate swaps, swaptions, cap and floor agreements, calls, puts, and futures and forward contracts as part of its interest rate risk management and funding strategies. Regulations prohibit derivative instruments that do not qualify as hedging instruments pursuant to U.S. generally accepted accounting principles unless a non-speculative use is documented.
In general, the Bank uses interest rate exchange agreements in three ways: (1) by designating the agreement as a fair value hedge of a specific financial instrument or firm commitment; (2) by designating the agreement as a cash flow hedge of a forecasted transaction; or (3) by designating the agreement as a hedge of some defined risk in the course of its balance sheet

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management. For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets, including advances and investments, and/or to adjust the interest rate sensitivity of advances and investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities and to reduce funding costs.
The Bank frequently enters into interest rate exchange agreements concurrently with the issuance of consolidated obligation bonds and it simultaneously designates the agreement as a fair value hedge. This strategy of issuing bonds while simultaneously entering into interest rate exchange agreements enables the Bank to offer a wider range of attractively priced advances to its members. The attractiveness of such debt generally depends on yield relationships between the consolidated obligation bond and interest rate exchange markets. As conditions in these markets change, the Bank may alter the types or terms of the consolidated obligations that it issues.
To a lesser extent, the Bank uses interest rate exchange agreements to hedge the variability of cash flows associated with the forecasted issuances of consolidated obligation discount notes.
In addition, as discussed in the section above entitled “Products and Services,” the Bank offers interest rate swaps, caps and floors to its member institutions. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties.
For further discussion of interest rate exchange agreements, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Derivatives and Hedging Activities and the audited financial statements accompanying this report.
Competition
Demand for the Bank’s advances is affected by, among other things, the cost of other available sources of funds for its members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banking concerns, commercial banks and, in certain circumstances, other FHLBanks. Historically, sources of wholesale funds for its members have included unsecured long-term debt, unsecured short-term debt such as federal funds, repurchase agreements and deposits issued into the brokered certificate of deposit market. The availability of funds through these wholesale funding sources can vary from time to time as a result of a variety of factors including, among others, market conditions, members’ creditworthiness and availability of collateral. The availability of these alternative private funding sources could significantly influence the demand for the Bank’s advances. The Bank competes against other financing sources on the basis of cost, the relative ease by which the members can access the various sources of funds, collateral requirements, and the flexibility desired by the member when structuring the liability.
As a debt issuer, the Bank competes with Fannie Mae, Freddie Mac and other GSEs, as well as corporate, sovereign and supranational entities for funds raised in the national and global debt markets. Increases in the supply of competing debt products could, in the absence of increases in demand, result in higher debt costs for the FHLBanks. Although investor demand for FHLBank debt has historically been sufficient to meet the Bank’s funding needs, there can be no assurance that this will always be the case.
Capital
The Bank’s capital consists of capital stock owned by its members (and, in some cases, non-member borrowers or former members as described below), plus retained earnings and accumulated other comprehensive income (loss). Consistent with the FHLB Act and the Finance Agency's regulations, the Bank’s Capital Plan requires each member to own Class B stock (redeemable with five years’ written notice subject to certain restrictions) in an amount equal to the sum of a membership investment requirement and an activity-based investment requirement. Specifically, the Bank’s Capital Plan requires members to hold capital stock in proportion to their total asset size and borrowing activity with the Bank.
The Bank’s capital stock is not publicly traded and it may be issued, repurchased, redeemed and, with the prior approval of the Bank, transferred only at its par value. In addition, the Bank’s capital stock may only be held by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires.
The Bank has two sub-classes of Class B Stock. Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Subject to the limitations in the Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following

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circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement. All excess stock is held as Class B-1 Stock at all times.
For more information about the Bank’s minimum capital requirements, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements.
Retained Earnings. The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount at least sufficient to protect the par value of the Bank's capital stock against potential economic losses that could arise from a variety of designated risk factors. The Bank updates its retained earnings target calculations quarterly under an analytic framework that takes into account the potential losses for each risk factor at the 99 percent confidence stress level, or a stress scenario that approximates the 99th percentile. The Board of Directors reviews the Bank's retained earnings policy annually and revises the methodology as appropriate. The Bank’s current retained earnings policy target is described in Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
On February 28, 2011, the Bank entered into a Joint Capital Enhancement Agreement (the “JCE Agreement”) with the other FHLBanks. Effective August 5, 2011, the FHLBanks amended the JCE Agreement (the "Amended JCE Agreement"), and the Finance Agency approved an amendment to the Bank's Capital Plan to incorporate its provisions on that same date. The Amended JCE Agreement provides that the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a separate restricted retained earnings account (“RRE Account”). Pursuant to the provisions of the Amended JCE Agreement, the Bank is required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all consolidated obligations, excluding hedging adjustments (“Total Consolidated Obligations”).
The Amended JCE Agreement provides that any quarterly net losses incurred by the Bank may be netted against its net income, if any, for other quarters during the same calendar year to determine the minimum required year-to-date or annual allocation to its RRE Account. In the event the Bank incurs a net loss for a cumulative year-to-date or annual period, the Bank may decrease the amount of its RRE Account such that the cumulative year-to-date or annual addition to its RRE Account is zero and the Bank shall apply any remaining portion of the net loss first to reduce retained earnings that are not restricted retained earnings until such retained earnings are reduced to zero, and thereafter may apply any remaining portion of the net loss to reduce its RRE Account. For any subsequent calendar quarter in the same calendar year, the Bank may decrease the amount of its quarterly allocation to its RRE Account in that subsequent calendar quarter such that the cumulative year-to-date addition to the RRE Account is equal to 20 percent of the amount of such cumulative year-to-date net income. In the event the Bank sustains a net loss for a calendar year, any such net loss first shall be applied to reduce retained earnings that are not restricted retained earnings until such retained earnings are reduced to zero, and thereafter any remaining portion of the net loss for the calendar year may be applied to reduce the Bank’s RRE Account. If during a period in which the Bank’s RRE Account is less than one percent of its Total Consolidated Obligations, the Bank incurs a net loss for a cumulative year-to-date or annual period that results in a decrease to the balance of its RRE Account as of the beginning of that calendar year, the Bank’s quarterly allocation requirement shall thereafter increase to 50 percent of quarterly net income until the cumulative difference between the allocations made at the 50 percent rate and the allocations that would have been made at the regular 20 percent rate is equal to the amount of the decrease to the balance of its RRE Account at the beginning of that calendar year.
The Amended JCE Agreement provides that if the Bank’s RRE Account exceeds 1.5 percent of its Total Consolidated Obligations, the Bank may transfer amounts from its RRE Account to its unrestricted retained earnings account, but only to the extent that the balance of its RRE Account remains at least equal to 1.5 percent of the Bank’s Total Consolidated Obligations immediately following such transfer.
The Amended JCE Agreement further provides that the Bank may not pay dividends out of its RRE Account, nor may it reallocate or transfer amounts out of its RRE Account except as described above. In addition, during periods in which the Bank’s RRE Account is less than one percent of its Total Consolidated Obligations, the Bank may not pay dividends out of the amount of its quarterly net income that is required to be allocated to its RRE Account.
Dividends. Subject to the FHLB Act, Finance Agency regulations and other Finance Agency directives, the Bank pays dividends to holders of its capital stock quarterly or as otherwise determined by its Board of Directors. The Board of Directors may declare dividends at the same rate for all shares of Class B Stock, or at different rates for Class B-1 Stock and Class B-2 Stock, provided that in no event can the dividend rate on Class B-2 Stock be lower than the dividend rate on Class B-1 Stock. Dividends may be paid in the form of cash, additional shares of either, or both, sub-classes of Class B Stock, or a combination thereof as determined by the Bank’s Board of Directors. The dividend rates on Class B-1 Stock and Class B-2 Stock are paid on all shares of Class B-1 Stock and Class B-2 Stock, respectively, regardless of their classification for accounting purposes. The

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Bank is permitted by statute and regulation to pay dividends only from previously retained earnings or current net earnings, and the payment of dividends is also subject to the terms of the Amended JCE Agreement.
Because the Bank’s returns from net interest income generally track short-term interest rates, the Bank benchmarks the dividend rate that it pays on capital stock to a short-term index. While there can be no assurances about future dividends or future dividend rates, the current target for quarterly dividends on Class B-1 Stock is an annualized rate that approximates the average one-month LIBOR rate for the immediately preceding quarter. The current target range for quarterly dividends on Class B-2 Stock is an annualized rate that approximates the average one-month LIBOR rate for the immediately preceding quarter plus 0.5 – 1.0 percent.
The Bank generally pays dividends in the form of capital stock. When dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. For a more detailed discussion of the Bank’s dividend policy and the restrictions relating to its payment of dividends, see Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Legislative and Regulatory Developments
Final Rule on FHLBank Capital Requirements
On February 20, 2019, the Finance Agency published a final rule that adopts, with amendments, the regulations of the Federal Housing Finance Board pertaining to the capital requirements for the FHLBanks. The rule, which becomes effective on January 1, 2020, carries over most of the existing regulations without material change but substantively revises the credit risk component of the risk-based capital requirement, as well as the limitations on certain extensions of unsecured credit.
The revisions remove the requirements that the FHLBanks calculate credit risk capital charges and unsecured credit limits based on ratings issued by an NRSRO, and instead require that the FHLBanks establish and use their own internal rating methodology. The rule imposes a new credit risk capital charge for cleared derivatives. The rule also revises the percentages used in the regulation’s tables to calculate credit risk capital charges for advances and non-mortgage assets. The Bank is currently evaluating the impact that these changes will have on its risk-based capital requirement.
The rule also reduces the amount of unsecured credit that the Bank can extend to GSEs that are not operating with capital support or some other form of direct financial assistance from the U.S. government ("Non-supported GSEs"), which could adversely impact the Bank's future operating results by limiting the amount of its long-term investments. After the rule becomes effective, the Bank will not be required to sell Non-supported GSE investments that exceed the new exposure limit, but it will be precluded from purchasing additional Non-supported GSE investments until such time that its unsecured exposure falls below that limit.
Finally, the rule rescinds certain contingency liquidity requirements set forth in the existing regulations, as the Finance Agency's liquidity requirements are now addressed in an Advisory Bulletin that was issued in August 2018 (see “Liquidity Guidance” below).
Final Rule on Reciprocal Deposits
On February 4, 2019, the FDIC issued a final rule related to the treatment of “reciprocal deposits” that implements Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The 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, which became effective on March 6, 2019, well-capitalized and well-rated depositories are not required to treat reciprocal deposits as brokered deposits up to the lesser of 20 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.
This rule could enhance depositories’ liquidity by increasing the attractiveness of deposits that exceed FDIC insurance limits, which could adversely affect demand for the Bank's advances.
Final Rule on Golden Parachute and Indemnification Payments
On December 20, 2018, the Finance Agency published a final rule on golden parachute and indemnification payments (the “Golden Parachute Rule”) to address areas of supervisory concern and to reduce administrative and compliance burdens. The Golden Parachute Rule, which became effective on January 22, 2019, sets forth the standards the Finance Agency would take into consideration when limiting or prohibiting golden parachute and indemnification payments by a FHLBank to an entity-affiliated party if the FHLBank were in a troubled condition, in conservatorship or receivership, or insolvent. The provisions of the rule:
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 to employees other than executive officers who may have engaged in certain types of wrongdoing; and

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revise and clarify definitions, exemptions and procedures to implement the Finance Agency’s supervisory approach.
Proposed Rule on Housing Goals
On November 2, 2018, the Finance Agency published a proposed rule that would amend the existing FHLBank 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 amendments would:
eliminate the annual $2.5 billion AMA mortgage purchase volume threshold that triggers the application of housing goals;
establish the target level for the new prospective AMA mortgage purchase housing goal at 20 percent of total AMA mortgage purchases that are for very low-income families, low-income families, or families in low-income areas, and require that at least 75 percent of all mortgage purchases that count toward the goal be for 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 CFI asset cap; and
allow the FHLBanks to request Finance Agency approval of alternative target percentages for mortgage purchase housing goals and small member participation goals.
Comments on the proposed rule were due by January 31, 2019.
Final Rule on Indemnification Payments
On October 4, 2018, the Finance Agency published a final rule establishing standards for identifying when an indemnification payment by a FHLBank to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the Finance Agency is prohibited or permissible. The rule, which became effective on November 5, 2018, generally prohibits these payments except in the following circumstances:
premiums for any commercial liability 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 Finance Agency or a civil money penalty imposed by the Finance Agency;
expenses of defending an action, subject to an agreement to repay those expenses in certain instances; 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).
The rule also outlines the process that a FHLBank's board of directors must undertake prior to making a permitted payment relating to expenses associated with defending an action.
Liquidity Guidance
On August 23, 2018, the Finance Agency issued an Advisory Bulletin and accompanying supervisory letter that, together, set forth its expectations with respect to the maintenance of sufficient liquidity to enable the FHLBanks to provide advances and fund letters of credit during a sustained capital markets disruption. More specifically, the Advisory Bulletin (hereinafter referred to as the “Liquidity AB”) sets forth the Finance Agency’s expectations with respect to base case liquidity and funding gaps, among other things. The Liquidity AB sets forth ranges for the prescribed base case liquidity and funding gap measures and the supervisory letter identifies the initial thresholds within those ranges that the Finance Agency believes are appropriate in light of current market conditions. Subsequent revisions to the initial thresholds, if any, will be communicated to the FHLBanks via supervisory letters.
With respect to base case liquidity, the Liquidity AB requires each FHLBank to maintain a positive cash balance during a prescribed period of time ranging from 10 to 30 calendar days assuming no access to the market for consolidated obligations or other unsecured funding sources and the renewal of all advances that are scheduled to mature during the measurement period. Initially, the Finance Agency has indicated that it will consider a FHLBank to have adequate reserves of liquid assets if, by March 31, 2019, it maintains 10 calendar days or more of positive daily cash balances and if, by December 31, 2019, it maintains 20 calendar days or more of positive daily cash balances. The supervisory letter sets forth the cash flow assumptions to be used by the FHLBanks which include, among other things, a reserve for potential draws on standby letters of credit. Effective March 31, 2019, the Liquidity AB rescinds the Finance Agency’s March 2009 liquidity guidance, which currently requires the Bank to meet two daily liquidity standards (specifically, the 5-day renewal and 15-day roll-off scenarios that are described in the Liquidity and Capital Resources section of this report beginning on page 62).

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Funding gaps measure the difference between a FHLBank’s assets and liabilities that are scheduled to mature during a specified period, expressed as a percentage of the FHLBank’s total assets. Depending on conditions in the financial markets, the Finance Agency believes (as stated in the Liquidity AB) that the FHLBanks should operate so as not to exceed a funding gap ratio between negative 10 percent and negative 20 percent for a three-month time horizon and between negative 25 percent and negative 35 percent for a one-year time horizon. These limits are designed to reduce the liquidity risks associated with a mismatch in a FHLBank’s asset and liability maturities, including an undue reliance on short-term debt funding, which may increase a FHLBank’s debt rollover risk. Initially, the Finance Agency will consider a FHLBank to have adequate liquidity to address funding gap risks if, on and after December 31, 2018, the FHLBank maintains a funding gap ratio of negative 15 percent or better for the three-month time horizon and negative 30 percent or better for the one-year time horizon. For purposes of calculating the funding gap ratios, the FHLBanks may include estimates of expected cash inflows, including anticipated prepayments, for mortgage loans and mortgage-backed securities. The Bank was in compliance with these limits as of December 31, 2018.
The Liquidity AB also sets forth the Finance Agency’s expectations for liquidity stress testing and contingency funding plans. Further, because the guidance encourages the FHLBanks to hold U.S. Treasury securities for liquidity purposes, it generally allows for the exclusion of those securities when calculating a FHLBank’s CMA ratio (for additional discussion, see the section entitled "Core Mission Achievement" beginning on page 10 of this report).
To the extent this guidance requires the Bank to hold more lower-yielding assets and/or issue more longer-term, higher-cost debt, the Bank’s results of operations could be adversely impacted.
Advance Pricing Guidance
On August 3, 2018, the Finance Agency issued an Advisory Bulletin that provides guidance to the FHLBanks on the methods a FHLBank may use to demonstrate and document its compliance with the minimum advance pricing requirements set forth in the Finance Agency’s regulations (hereinafter referred to as the “Advances AB”). Specifically, Section 1266.5(b)(1) of the Finance Agency’s regulations states “A Bank shall not price its advances to members below: (1) the marginal cost to the Bank of raising matching term and maturity funds in the marketplace, including embedded options and (2) the administrative and operating costs associated with making such advances to members.”
The Advances AB describes several methods a FHLBank may use to demonstrate and document its compliance with the minimum pricing requirement of the regulation related to the marginal cost of raising matching term and maturity funds when a Bank-issued debt equivalent is not available in the marketplace. In addition, the Advances AB makes clear that including only the marginal administrative and operating costs associated with making an advance in its advance pricing does not provide for an appropriate allocation of costs. Instead, the Advances AB requires the Bank to document the portion of the Bank’s total operating expenses that are associated with making advances and to incorporate those costs into its advance pricing.
The guidance provided by the Advances AB became effective on January 1, 2019. The implementation of this guidance did not have a significant impact on the Bank's advance pricing. However, it is possible that the Finance Agency could at some point in the future seek to have the Bank modify its compliance approach. If this were to occur, it is possible that the Bank could be required to increase the pricing of its advances and/or reduce its operating expenses associated with making advances. If the Bank were to increase its pricing, the demand for the Bank’s advances could decline which, in turn, would negatively affect its financial condition and results of operations. A reduction in the Bank’s operating expenses could cause a reduction in service levels.
Joint Final Rule on Margin and Capital Requirements for Covered Swap Entities
In October 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Farm Credit Administration, and the Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants that are subject to the jurisdiction of one of the Agencies (such entities, “Covered Swap Entities,” and the joint final rules, the “Final Margin Rules”).
When they take effect, the Final Margin Rules will subject non-cleared derivatives and non-cleared security-based derivatives between Covered Swap Entities and financial end-users that have material derivatives exposure (i.e., an average daily aggregate notional of $8 billion or more in non-cleared derivatives calculated in accordance with the Final Margin Rules) to a mandatory two-way minimum initial margin requirement. The minimum amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity.
The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin for non-cleared derivatives and non-cleared security-based derivatives with financial end-users (generally cash, certain government and GSE

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securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold) and set forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated, except that cash may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.
The Final Margin Rules require minimum variation margin to be exchanged daily for non-cleared derivatives and non-cleared security-based derivatives between Covered Swap Entities and all financial end-users (without regard to the derivatives exposure of the particular financial end-user). The minimum variation margin amount is the daily mark-to-market change in the value of the derivative to the Covered Swap Entity, taking into account variation margin previously posted or collected. For non-cleared derivatives and security-based derivatives between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian and may, if permitted by contract, be rehypothecated.
The variation margin requirement under the Final Margin Rules became effective for the Bank on March 1, 2017. Because the Bank was already posting and collecting variation margin on non-cleared derivatives, the implementation of the variation margin requirement under the Final Margin Rules did not have a significant impact on the Bank.
The initial margin requirement under the Final Margin Rules is expected to become effective for the Bank on September 1, 2020. While the Bank is not a Covered Swap Entity under the Final Margin Rules, it is a financial end-user under those rules, and it is likely that it will have material non-cleared derivatives exposure when the initial margin requirements become effective (at December 31, 2018, the notional balance of the Bank's non-cleared derivatives totaled $18.1 billion). As a result, the Bank anticipates that its costs of engaging in non-cleared derivatives may increase at that time.
In December 2015, the Commodity Futures Trading Commission (“CFTC”) adopted its own version of the Final Margin Rules that is substantially similar to the Final Margin Rules. The CFTC’s rule applies only to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.
Regulatory Oversight
As discussed above, the Finance Agency supervises and regulates the FHLBanks and the OF. The Finance Agency has a statutory responsibility and corresponding authority to ensure that the FHLBanks operate in a safe and sound manner. Consistent with that duty, the Finance Agency has an additional responsibility to ensure the FHLBanks carry out their housing and community development finance mission. In order to carry out those responsibilities, the Finance Agency establishes regulations governing the entire range of operations of the FHLBanks, conducts ongoing off-site monitoring and supervisory reviews, performs annual on-site examinations and periodic interim on-site reviews, and requires the FHLBanks to submit monthly and quarterly information regarding their financial condition, results of operations and risk metrics.
The Comptroller General of the United States (the “Comptroller General”) has authority under the FHLB Act to audit or examine the Finance Agency and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLB Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of a FHLBank’s financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of the financial statements of any FHLBank.
As an SEC registrant, the Bank is subject to the periodic reporting and disclosure regime as administered and interpreted by the SEC. The Bank must also submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General; these reports are required to include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements. In addition, the Treasury receives the Finance Agency’s annual report to Congress and other reports reflecting the operations of the FHLBanks.
Employees
As of December 31, 2018, the Bank employed 197 people, all but one of whom was located in one office in Irving, Texas. None of the Bank’s employees are subject to a collective bargaining agreement and the Bank believes its relationship with its employees is good.
AHP Assessments
Although the Bank is exempt from all federal, state, and local income taxes, the FHLB Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks must collectively set aside for the AHP the greater of $100 million or 10 percent of their current year’s income before AHP expenses. Interest expense on capital stock that is classified as a liability (i.e.,

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mandatorily redeemable capital stock) is added back to income for purposes of computing the Bank’s AHP assessment. The Bank’s AHP funds are made available to members in the form of direct grants to assist in the purchase, construction, or rehabilitation of housing for very low-, low- and moderate-income households.
Business Strategy and Outlook
The Bank maintains a Strategic Business Plan that provides the framework for its future business direction. The goals and strategies for the Bank’s major business activities are encompassed in this plan, which is updated and approved by the Board of Directors at least annually and at any other time that revisions are deemed necessary.
As described in its Strategic Business Plan, the Bank operates under a cooperative business model that is intended to maximize the overall value of membership in the Bank. This business model envisions that the Bank will limit and carefully manage its risk profile while generating sufficient profitability to maintain an appropriate level of retained earnings, to pay dividends on Class B-1 Stock at a rate at least equal to average one-month LIBOR and on Class B-2 Stock at a rate at least equal to average one-month LIBOR plus 0.5-1.0 percent, and to absorb periodic earnings volatility related to hedging and derivatives or other external shocks. Consistent with this business model, the Bank places the highest priority on being able to meet its members’ liquidity and funding needs.
The Bank intends to continue to operate under its cooperative business model for the foreseeable future. All other things being equal, the Bank’s earnings are typically expected to rise and fall with the general level of market interest rates, particularly short-term money market rates, and the Bank's total capital and asset size. Other factors that may have an effect on the Bank’s earnings include general economic and credit market conditions; the level, volatility of and relationships between short-term money market rates such as federal funds and one-month and three-month LIBOR; the future availability and cost of the Bank’s short- and long-term debt relative to benchmark rates such as federal funds, one- and three-month LIBOR, and long-term fixed mortgage rates; the availability of interest rate exchange agreements at competitive prices; whether the Bank’s larger borrowers continue to be members of the Bank and the level at which they maintain their borrowing activity; the extent to which the Bank's members continue to sell mortgage loans to the Bank; the impact of any future credit market disruptions; and the impact of ongoing economic conditions on demand for the Bank’s credit products from its members.
The Bank's business declined in the years immediately following the 2008 financial crisis, reaching a low point in the first quarter of 2014, but has grown steadily since then. From March 31, 2014 to December 31, 2018, advances (at carrying value) increased by $25.5 billion (167 percent), from $15.3 billion to $40.8 billion. Over that same time period, outstanding letters of credit increased by $15.6 billion (538 percent), from $2.9 billion to $18.5 billion.
The amount and timing of future growth in the Bank's advances is uncertain and will likely be dependent upon current non-borrowing members becoming borrowers and small balance borrowers increasing their borrowing activity, either as a result of increased demand for credit at those institutions or as a result of adopting funding strategies that incorporate larger amounts of advances borrowing. Because a significant portion of the Bank's advances have short-term maturities or prepayment options, there is also the possibility that advances could decrease depending upon members' future funding needs, which will depend in part on their customers' credit demand. Growth in both advances and mortgage loans held for portfolio continue to be strategic priorities for the Bank as these assets contribute to the value the Bank provides its members, as well as the Bank's earnings, core mission assets and, correspondingly, its CMA ratio.
Supporting the growth in the Bank's business in recent years, economic growth has generally been positive in many parts of the Ninth District and strong in others, interest rates have remained very low until recently, housing markets have been strong and member loan demand has been healthy, and the relationship between deposit and loan growth has been relatively stable.
Looking forward, there have been recent signs that economic conditions may not remain quite as favorable over the next few years. The Federal Reserve has raised short-term interest rates several times, resulting in higher mortgage rates. Price appreciation in the Ninth District's housing markets has generally slowed to the smallest increases in several years, and the economic outlook in general looks less positive over the next several years. It remains unclear whether there will be an actual recession in the next few years, or when one might occur, but slower rates of growth than in the recent past seem likely.
Also, it appears that market conditions for FHLBank consolidated obligations are not likely to be as favorable going forward as they have been since late 2016. Larger U.S. budget deficits and the Federal Reserve's plans to reduce the size of its balance sheet may increase the supply of short-term Treasury debt, which could increase the cost of FHLBank discount notes. In addition, the supply of debt obligations being issued by other GSEs (one of the Bank's few allowable long-term investment alternatives) has diminished, which could make it more difficult to find attractive investments in future years.
While the Bank cannot predict future economic conditions or future levels of business from its members, based on its current balance sheet and capital position, the Bank anticipates that its earnings will be sufficient both to pay quarterly dividends at targeted levels and to continue building retained earnings for the foreseeable future.

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Finally, the Bank continues to consider ways in which it can enhance its product and/or service offerings in order to become a more valuable resource to its members. The FHLB Act and Finance Agency regulations limit the products and services that the Bank can offer to its members and govern many of the terms of the products and services that the Bank offers. The Bank is also required by regulation to file New Business Activity notices with the Finance Agency for any new products or services that would constitute new business activities under the regulation and, therefore, it will have to assess any potential new products or services offerings in light of these statutory and regulatory restrictions.

ITEM 1A. RISK FACTORS
Our profitability is vulnerable to interest rate fluctuations.
We are subject to significant risks from changes in interest rates because most of our assets and liabilities are financial instruments. Our profitability depends significantly on our net interest income and is impacted by changes in the fair value of interest rate derivatives and any associated hedged items. Changes in interest rates can impact our net interest income as well as the values of our derivatives and certain other assets and liabilities. Changes in overall market interest rates, changes in the relationships between short-term and long-term market interest rates, changes in the relationship between different interest rate indices, or differences in the timing of rate resets for assets and liabilities or related interest rate derivatives with interest rates tied to those indices, can affect the interest rates received from our interest-earning assets differently than those paid on our interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income, which would result in a decrease in our net interest spread, or a net decrease in earnings related to the relationship between changes in the valuation of our derivatives and any associated hedged items.
Our profitability may be adversely affected if we are not successful in managing our interest rate risk.
Like most financial institutions, our results of operations are significantly affected by our ability to manage interest rate risk. We use a number of tools to monitor and manage interest rate risk, including income simulations and duration/market value sensitivity analyses. Given the unpredictability of the financial markets, capturing all potential outcomes in these analyses is extremely difficult. Key assumptions used in our market value sensitivity analyses include interest rate volatility, mortgage prepayment projections and the future direction of interest rates, among other factors. Key assumptions used in our income simulations include projections of advances volumes and pricing, MPF volumes and pricing, market conditions for our debt, prepayment speeds and cash flows on mortgage-related assets, the level of short-term interest rates, and other factors. These assumptions are inherently uncertain and, as a result, the measures cannot precisely estimate net interest income or the market value of our equity nor can they precisely predict the effect of higher or lower interest rates or changes in other market factors on net interest income or the market value of our equity. Actual results will most likely differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. Our ability to maintain a positive spread between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities may be affected by the unpredictability of changes in interest rates.
Exposure to credit risk from our customers could have a negative impact on our profitability and financial condition.
We are subject to credit risk from advances and other extensions of credit to members, non-member borrowers and housing associates (collectively, our customers). Other extensions of credit include letters of credit issued or confirmed on behalf of customers, customers’ credit enhancement obligations associated with MPF loans held in portfolio, and interest rate exchange agreements we enter into with our customers.
We require that all outstanding advances and other extensions of credit to our customers be fully collateralized. We evaluate the types of collateral pledged by our customers and assign a borrowing capacity to the collateral, generally based on either a percentage of its book value or estimated market value. The vast majority of the collateral is assigned a borrowing capacity based on its estimated market value. During economic downturns, the number of our member institutions exhibiting significant financial stress generally increases. If member institutions fail, and if the FDIC (or other receiver, conservator or acquiror) does not promptly repay all of the failed institution’s obligations to us or assume the outstanding extensions of credit, we might be required to liquidate the collateral pledged by the failed institution in order to satisfy its obligations to us. A devaluation of or our inability to liquidate collateral in a timely manner in the event of a default by the obligor could cause us to incur a credit loss and adversely affect our financial condition or results of operations.
Loss of members or borrowers could adversely affect our earnings, which could result in lower investment returns and/or higher borrowing rates for remaining members.
One or more members or borrowers could withdraw their membership or decrease their business levels as a result of a merger with an institution that is not one of our members, or for other reasons, which could lead to a decrease in our total assets and capital.

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As the financial services industry has consolidated, acquisitions involving some of our members have resulted in membership withdrawals or business level decreases. Additional acquisitions that lead to similar results are possible, including acquisitions in which the acquired institutions are merged into institutions located outside our district with which we cannot do business. We could also be adversely impacted by the reduction in business volume that would arise from the failure of one or more of our members.
The loss of one or more borrowers that represent a significant proportion of our business, or a significant reduction in the borrowing levels of one or more of these borrowers, could, depending on the magnitude of the impact, cause us to lower dividend rates, raise advances rates, attempt to reduce operating expenses (which could cause a reduction in service levels), or undertake some combination of these actions. The magnitude of the impact would depend, in part, on our size and profitability at the time such institution repays its advances to us.
Members’ funding needs may decline, which could reduce loan demand and adversely affect our earnings.
Market factors or regulatory changes could reduce loan demand from our member institutions, which could adversely affect our earnings. Demand for advances from all segments of our membership increased throughout the period of credit market disruption that began in the third quarter of 2007, peaked at the beginning of the fourth quarter of 2008 and declined to a cyclical low in the first quarter of 2014 before increasing over the remainder of 2014 and in 2015 through 2018. At December 31, 2018, our outstanding advances were approximately 40 percent lower than they were at September 30, 2008 but approximately 169 percent higher than they were at March 31, 2014. High deposit levels and/or low demand for loans at member institutions could limit members’ needs for funding. A decline in the demand for advances, if significant, could negatively affect our results of operations.
We face competition for loan demand, which could adversely affect our earnings.
Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources, which may provide more favorable terms than we do on our advances, including more flexible credit or collateral standards.
The availability to our members of alternative funding sources that are more attractive than the funding products offered by us may significantly decrease the demand for our advances. Any change made by us in the pricing of our advances in an effort to compete more effectively with these competitive funding sources may decrease the profitability on advances. A decrease in the demand for advances or a decrease in our profitability on advances would negatively affect our financial condition and results of operations.
Alternatively, if we were to increase the pricing of our advances due to an increase in our debt costs or for any other reason, demand for our advances could decline, which would negatively affect our financial condition and results of operations.
Changes in investors’ perceptions of the creditworthiness of the FHLBanks may adversely affect our ability to issue consolidated obligations on favorable terms.
We, and the other ten FHLBanks, currently have the highest credit rating from Moody’s and are rated AA+/A-1+ by S&P. The consolidated obligations issued by the FHLBanks are rated Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. Each of these NRSROs has assigned a stable outlook to its long-term credit rating on the FHLBank System's consolidated obligations and to its long-term rating of each of the FHLBanks.
Pursuant to criteria used by S&P and Moody's, the FHLBank System's debt rating and the credit ratings of the individual FHLBanks are linked closely to the U.S. sovereign credit rating because of the FHLBanks' GSE status. The U.S. government's fiscal challenges could negatively impact the credit rating of the U.S. government, which could in turn result in a downgrade of the rating assigned to us and/or the consolidated obligations of the FHLBank System.
Because the FHLBanks have joint and several liability for all of the FHLBanks' consolidated obligations, negative developments at any FHLBank could also adversely affect S&P's and/or Moody's credit ratings on us and/or the FHLBanks' consolidated obligations or result in one or both of these NRSROs issuing a negative credit report on the FHLBank System.
Our primary source of liquidity is the issuance of consolidated obligations. Historically, the FHLBank System’s status as a GSE and its favorable credit ratings have provided us with excellent access to the capital markets. Any downgrades of the FHLBank System’s consolidated obligations by S&P and/or Moody’s, negative guidance from the rating agencies, or negative announcements by one or more of the FHLBanks could result in higher funding costs and/or disruptions in our access to the capital markets. To the extent that we cannot access funding when needed on acceptable terms, our financial condition and results of operations could be adversely impacted.

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Changes in overall credit market conditions and/or competition for funding may adversely affect our cost of funds and our access to the capital markets.
The cost of our consolidated obligations depends in part on prevailing conditions in the capital markets at the time of issuance, which are generally beyond our control. For instance, a decline in overall investor demand for debt issued by the FHLBanks and similar issuers could adversely affect our ability to issue consolidated obligations on favorable terms or in amounts that are sufficient to meet our funding needs. Investor demand is influenced by many factors including changes or perceived changes in general economic conditions, changes in investors’ risk tolerances or balance sheet capacity, or, in the case of overseas investors, changes in preferences for holding dollar-denominated assets. Credit market disruptions similar to those that occurred during the period from late 2007 through early 2009 and which dampened investor demand for longer-term debt, including longer-term FHLBank consolidated obligations, could occur again, making it more difficult for us to match the maturities of our assets and liabilities. In addition, changes in the relationships between the cost of our consolidated obligations and interest rate swaps could increase our net cost of funds, which could negatively impact our results of operations. Further, higher long-term debt costs and/or lack of demand for our long-term debt at attractive prices (or at all) could cause us to fund some long-term assets with short-term debt, creating mismatches between the maturities of our assets and liabilities. Such mismatches expose us to refinancing risk, which is the risk that we may have difficulty rolling over our short-term obligations if market conditions change and/or investor demand for our debt is suddenly insufficient to satisfy our funding needs.
We compete with Fannie Mae, Freddie Mac and other GSEs, as well as commercial banking, corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the global debt markets. Increases in the supply of competing debt products may, in the absence of increased investor demand, result in higher debt costs, which could negatively affect our financial condition and results of operations. Further, if investors limit their demand for our debt, our ability to fund our operations and to meet the credit and liquidity needs of our members by accessing the capital markets could eventually be compromised.
Our inability to issue consolidated obligations for a relatively short period of time could jeopardize our ability to continue operating.
We typically issue consolidated obligations almost every day. As more fully described in the Liquidity and Capital Resources section of this report, we currently manage our liquidity to ensure that, at a minimum, we have sufficient funds to meet our obligations under 5- and 15-day scenarios in which we assume we are unable to access the market for consolidated obligations. Beginning March 31, 2019 and continuing through December 30, 2019, we will manage our liquidity to ensure that, at a minimum, we maintain 10 calendar days or more of positive daily cash balances assuming no access to the market for consolidated obligations or other unsecured funding sources and the renewal of all advances that are scheduled to mature during the measurement period. On and after December 31, 2019, we will manage our liquidity to ensure that, at a minimum, we maintain 20 calendar days or more of positive daily cash balances or such higher or lower number of days as the Finance Agency may from time to time require us to maintain under its new liquidity guidance, which is more fully described in the Legislative and Regulatory Developments section of Item 1. Business. We also maintain access to other sources of contingent liquidity. However, if we were unable to issue consolidated obligations for a relatively short period of time and our other sources of contingent liquidity were either not available or were not available in sufficient quantities, our ability to meet our obligations and otherwise conduct our operations would be compromised.
Our joint and several liability for all consolidated obligations may adversely impact our earnings, our ability to pay dividends, and our ability to redeem or repurchase capital stock.
Under the FHLB Act and Finance Agency regulations, we are jointly and severally liable with the other FHLBanks for the consolidated obligations 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 consolidated obligations.
If another FHLBank were to default on its obligation to pay principal of or interest on any consolidated obligations, the Finance Agency may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. In addition, the Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations, 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 consolidated obligations due to the failure of other FHLBanks to meet their payment obligations, which could negatively affect our financial condition and results of operations.
Further, the FHLBanks may not pay any dividends to members or redeem or repurchase any shares of stock unless the principal and interest due on all consolidated obligations has been paid in full. Accordingly, our ability to pay dividends or to redeem or repurchase stock could be affected not only by our own financial condition but also by the financial condition of one or more of the other FHLBanks.

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Exposure to credit risk on our investments and MPF loans could have a negative impact on our profitability and financial condition.
We are exposed to credit risk from our MPF loans held in portfolio (the balance of which is expected to continue to grow) and our secured and unsecured investment portfolio. A deterioration of economic conditions, declines in residential real estate values, changes in monetary policy or other events that could negatively impact the economy and the markets as a whole could lead to borrower defaults, which in turn could cause us to incur losses on our MPF loans or additional losses on our investment portfolio.
During 2009, 2010 and 2011, delinquencies and losses with respect to residential mortgage loans generally increased and residential property values declined in many states. Due to these deteriorating conditions, 14 of our non-agency residential mortgage-backed securities were deemed to be other-than-temporarily impaired during the period from January 1, 2009 through June 30, 2012. One additional non-agency residential mortgage-backed security was deemed to be other-than-temporarily impaired at December 31, 2014, at each quarter-end in 2015 and at the first three quarter-ends in 2016. We recognized credit losses on these securities totaling $13.1 million. As of December 31, 2018, the unpaid principal balance of the Bank's 22 non-agency residential mortgage-backed securities totaled $84 million.
If the actual and/or projected performance of the loans underlying our non-agency residential mortgage-backed securities is worse than our current expectations, we could recognize additional losses on these 15 securities as well as losses on our other investments in non-agency residential mortgage-backed securities, which would negatively impact our results of operations and financial condition.
In addition, if delinquencies, default rates and loss severities on residential mortgage loans increase, and/or there is a decline in residential real estate values, we could experience losses on our MPF loans held in portfolio.
Changes in the regulatory environment could negatively impact our operations and financial results and condition.
We could be materially adversely affected by the adoption of new laws, policies, regulations or directives or changes in existing laws, policies, regulations or directives, including, but not limited to, changes in the interpretations or applications by the Finance Agency or as the result of judicial reviews that modify the present regulatory environment. For instance, since 2013, several housing reform proposals have been introduced by members of the U.S. Congress. It is not possible to determine if or when legislation regarding housing reform will be enacted, nor are the ultimate provisions of any such legislation determinable at this time. To the extent that legislation is enacted, it is possible that the FHLBanks could be impacted. Further, and by way of example only, the Finance Agency's recent guidance on FHLBank advance pricing and liquidity requirements and its final rule, effective January 1, 2020, limiting the amount of unsecured credit that we can extend to GSEs that are not operating with capital support or some other form of direct financial assistance from the U.S. government could have an adverse effect on our profitability.
In addition, the regulatory environment affecting our members could change in a manner that could have a negative impact on their ability to own our stock or take advantage of our products and services.
For a discussion of recent legislative and regulatory developments, see Item 1. Business — Legislative and Regulatory Developments beginning on page 16 of this report.
Our business operations, financial condition and profitability could be adversely affected if LIBOR is discontinued.
In July 2017, the United Kingdom’s Financial Conduct Authority ("FCA") announced that it intends to stop persuading or compelling banks to voluntarily submit LIBOR rates after 2021, and that the FCA will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate (or rates). Other financial services regulators and industry groups, including the International Swaps and Derivatives Association, have been evaluating and are continuing to evaluate the possible phase-out of LIBOR and the development of alternative interest rate indices or reference rates. As noted throughout this report, many of our assets and liabilities are indexed to LIBOR and in all of our fair value hedging relationships ($43.0 billion notional balance as of December 31, 2018) we are hedging the risk of changes in the hedged items' fair values that are attributable to changes in LIBOR. In 2014, the Federal Reserve Board convened the Alternative Reference Rates Committee (“ARRC”) to identify alternative reference rates for possible use as market benchmarks. In June 2017, the ARRC selected the Secured Overnight Financing Rate ("SOFR"), a broad measure of overnight Treasury financing transactions, as a replacement for U.S. dollar LIBOR. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. During the third quarter of 2018, several market participants began issuing variable-rate debt securities indexed to SOFR. In November 2018, the FHLBank System issued its first SOFR-linked consolidated obligation bonds.
We are unable to predict at this time whether LIBOR will cease to be available after 2021, whether the alternative rates that the Federal Reserve Board is publishing will become market benchmarks in place of LIBOR, or what impact a transition from LIBOR to an alternative reference rate (or rates) could have on our business, risk management practices (including, but not limited to, our hedging activities), financial condition and results of operations.

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Changes in our access to the interest rate derivatives market on acceptable terms may adversely affect our ability to maintain our current hedging strategies.
We actively use derivative instruments to manage interest rate risk. The effectiveness of our interest rate risk management strategy depends to a significant extent upon our ability to enter into these instruments with acceptable counterparties in the necessary quantities and under satisfactory terms to hedge our corresponding assets and liabilities. We currently enjoy ready access to the market for uncleared interest rate derivatives through a diverse group of investment grade rated counterparties. Several factors could have an adverse impact on our access to this market, including changes in our credit rating, changes in the current counterparties’ credit ratings, reductions in our counterparties’ allocation of resources to the interest rate derivatives business, and changes in the liquidity of that market created by a variety of regulatory or market factors. In addition, the financial market disruptions that occurred during the period from late 2007 through early 2009 resulted in mergers of several of our derivatives counterparties. Further consolidation of the financial services industry, if it occurs, could increase our concentration risk with respect to counterparties in this industry. Further, defaults by, or even negative rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide disruptions in which it may be difficult for us to find acceptable counterparties for such transactions. If changes in our access to the derivatives market result in our inability to manage our hedging activities efficiently and economically, we may be unable to find economical alternative means to manage our interest rate risk effectively, which could adversely affect our financial condition and results of operations.
Prior to June 10, 2013, all of the derivatives we used to manage our interest rate risk were negotiated in the over-the-counter (“OTC”) derivatives market. Beginning on June 10, 2013, many of the derivative transactions that we enter into are required to be cleared through a third-party clearinghouse, which exposes us to credit risk to other parties that we do not have when transacting in the OTC market. In addition, many of the other derivatives that we continue to trade in the OTC market could eventually be subject to central clearing. For our derivative transactions that are not cleared, we will be subject to an initial margin requirement beginning in September 2020 if those transactions have an aggregate notional balance of $8 billion or more (for additional discussion, see the Legislative and Regulatory Developments section in Item 1. Business). If applicable, this requirement may increase our hedging costs, which would negatively impact our results of operations.
Defaults by or the insolvency of one or more of our derivative counterparties could adversely affect our profitability and financial condition.
We regularly enter into derivative transactions with major financial institutions and third-party clearinghouses. Our financial condition and results of operations could be adversely affected if derivative counterparties to whom we have exposure fail.
Cleared trades are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Currently, all of our cleared derivatives are settled daily and these daily settlements are not subject to any maximum unsecured credit exposure thresholds. With cleared transactions, we are exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to us.
We have entered into master agreements with all of our non-member bilateral derivative counterparties that require the delivery (or return) of collateral consisting of cash or very liquid, highly rated securities if credit risk exposures rise above certain minimum amounts (generally ranging from $50,000 to $500,000). Upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure must deliver sufficient collateral to reduce the unsecured credit exposure to zero. In addition, excess collateral must be returned by a party in an oversecured position. Delivery or return of the collateral generally occurs within one business day and, until such delivery or return, we may be in an undersecured position, which could result in a loss in the event of a default by the counterparty, or we may be due excess collateral, which could result in a loss in the event that the counterparty is unable or unwilling to return the collateral.
Because derivative valuations are determined based on market conditions at particular points in time, they can change quickly. Even after the settlement of a derivative or the delivery or return of collateral, as the case may be, we may be in an undersecured position (or be entitled to the return of excess collateral) as the values upon which the settlement, delivery or return was based may have changed since the valuation was performed. In addition, we may incur additional losses if any non-cash collateral held by us cannot be readily liquidated at prices that are sufficient to fully recover the value of the derivatives. Further, the initial margin and any excess variation margin that we post with third-party clearinghouses is over and above the amount that is needed to fully settle the value of our derivative positions and therefore exposes us to additional credit risk in the event that the clearinghouse or clearing member fails.
An interruption in our access to the capital markets would limit our ability to obtain funds.
We conduct our business and fulfill our public purpose primarily by acting as an intermediary between our members and the capital markets. Certain events, such as a natural disaster or terrorist act, could limit or prevent us from accessing the capital markets in order to issue consolidated obligations for some period of time. An event that precludes us from accessing the

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capital markets may also limit our ability to enter into transactions to obtain funds from other sources. External forces are difficult to predict or prevent, but can have a significant impact on our ability to manage our financial needs and to meet the credit and liquidity needs of our members.
A failure or interruption in our information systems or other technology may adversely affect our ability to conduct and manage our business effectively.
We rely heavily upon information systems and other technology to conduct and manage our business and deliver a very large portion of our services to members on an automated basis. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions, including "cyberattacks" (e.g., breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) that could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations. To the extent that we experience a failure or interruption in any of these systems or other technology, we may be unable to conduct and manage our business effectively, including, without limitation, our hedging and advances activities. We can make no assurance that we will be able to prevent or timely and adequately address any such failure or interruption. Any failure or interruption could significantly harm our customer relations, reputation, risk management, and profitability, which could negatively affect our financial condition and results of operations.
Lack of a public market and restrictions on transferring our stock could result in an illiquid investment for the holder.
Under the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), Finance Agency regulations, and our capital plan, our stock may be redeemed upon the expiration of a five-year redemption period following a redemption request. Only stock in excess of a member’s minimum investment requirement, stock held by a member that has submitted a notice to withdraw from membership, or stock held by a member whose membership has been terminated may be redeemed at the end of the redemption period. Further, we may elect to repurchase excess stock of a member at any time at our sole discretion.
There is no guarantee, however, that we will be able to redeem stock held by an investor even at the end of the redemption period. If the redemption or repurchase of the stock would cause us to fail to meet our minimum capital requirements, then the redemption or repurchase is prohibited by Finance Agency regulations and our capital plan. Likewise, under such regulations and the terms of our capital plan, we could not honor a member’s capital stock redemption notice if the redemption would cause the member to fail to maintain its minimum investment requirement. Moreover, because our stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member may transfer any of its stock to another member, there can be no assurance that a member would be allowed to sell or transfer any excess stock to another member at any point in time.
We may also suspend the redemption of stock if we reasonably believe that the redemption would prevent us from maintaining adequate capital against a potential risk, or would otherwise prevent us from operating in a safe and sound manner. In addition, approval from the Finance Agency for redemptions or repurchases would be required if the Finance Agency or our Board of Directors were to determine that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital. Under such circumstances, there can be no assurance that the Finance Agency would grant such approval or, if it did, upon what terms it might do so. Redemption and repurchase of our stock would also be prohibited if the principal and interest due on any consolidated obligations issued on behalf of any FHLBank through the Office of Finance have not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations.
Accordingly, there are a variety of circumstances that would preclude us from redeeming or repurchasing our stock that is held by a member. Because there is no public market for our stock and transfers require our approval, there can be no assurance that a member’s purchase of our stock would not effectively become an illiquid investment.
Failure by a member to comply with our minimum investment requirement could result in substantial penalties to that member and could cause us to fail to meet our capital requirements.
Members must comply with our minimum investment requirement at all times. Our Board of Directors may increase the members’ minimum investment requirement within certain ranges specified in our capital plan. The minimum investment requirement may also be increased beyond such ranges pursuant to an amendment to the capital plan, which would have to be adopted by our Board of Directors and approved by the Finance Agency. We would provide members with 30 days’ notice prior to the effective date of any increase in their minimum investment requirement. Under the capital plan, members are required to purchase an additional amount of our stock as necessary to comply with any new requirements or, alternatively, they may reduce their outstanding advances activity (subject to any prepayment fees applicable to the reduction in activity) on or prior to the effective date of the increase. To facilitate the purchase of additional stock to satisfy an increase in the minimum investment requirement, the capital plan authorizes us to issue stock in the name of the member and to correspondingly debit the member’s demand deposit account maintained with us.
The GLB Act requires members to “comply promptly” with any increase in the minimum investment requirement to ensure that we continue to satisfy our minimum capital requirements. However, the Finance Agency's predecessor stated, when it published

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the final regulation implementing this provision of the GLB Act, that it did not believe this provision provides the FHLBanks with an unlimited call on the assets of their members. As a result, it is not clear whether we or our regulator would have the legal authority to compel a member to invest additional amounts in our capital stock.
Thus, while the GLB Act and our capital plan contemplate that members would be required to purchase whatever amounts of stock are necessary to ensure that we continue to satisfy our capital requirements, and while we may seek to enforce this aspect of the capital plan, our ability ultimately to compel a member, either through automatic deductions from a member’s demand deposit account or otherwise, to purchase an additional amount of our stock is not free from doubt.
Nevertheless, even if a member could not be compelled to make additional stock purchases, the failure by a member to comply with the stock purchase requirements of our capital plan could subject it to substantial penalties, including the possible termination of its membership. In the event of termination for this reason, we may call any outstanding advances to the member prior to their maturity and the member would be subject to any fees applicable to the prepayment.
Furthermore, if our members fail to comply with the minimum investment requirement, we may not be able to satisfy our capital requirements, which could adversely affect our operations and financial condition.
Finance Agency authority to approve changes to our capital plan and to impose other restrictions and limitations on us and our capital management may adversely affect members.
Under Finance Agency regulations and our capital plan, amendments to the capital plan must be approved by the Finance Agency. However, amendments to our capital plan are not subject to member consent or approval. While amendments to our capital plan must be consistent with the FHLB Act and Finance Agency regulations, it is possible that they could result in changes to the capital plan that could adversely affect the rights and obligations of members.
Moreover, the Finance Agency has significant supervisory authority over us and may impose various limitations and restrictions on us, our operations, and our capital management as it deems appropriate to ensure our safety and soundness, and the safety and soundness of the FHLBank System. Among other things, the Finance Agency may impose higher capital requirements on us that might include, but not be limited to, the imposition of a minimum retained earnings requirement, and may suspend or otherwise limit stock repurchases, redemptions and/or dividends.
Limitations on our ability to pay dividends could result in lower investment returns for members.
Under Finance Agency regulations and our capital plan, we may pay dividends on our stock only out of unrestricted retained earnings or a portion of our current net earnings. However, if we are not in compliance with our minimum capital requirements or if the payment of dividends would make us noncompliant, we are precluded from paying dividends. In addition, we may not declare or pay a dividend if the par value of our stock is impaired or is projected to become impaired after paying such dividend. Further, we may not declare or pay any dividends in the form of capital stock if our excess stock is greater than one percent of our total assets or if, after the issuance of such shares, our outstanding excess stock would be greater than one percent of our total assets. Payment of dividends would also be suspended if the principal and interest due on any consolidated obligations issued on behalf of any FHLBank through the Office of Finance have not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations. In addition to these explicit limitations, it is also possible that the Finance Agency could restrict our ability to pay a dividend even if we have sufficient retained earnings to make the payment and are otherwise in compliance with the requirements for the payment of dividends.
The terms of any liquidation, merger or consolidation involving us may have an adverse impact on members’ investments in us.
Under the GLB Act, holders of Class B Stock own our retained earnings, if any. With respect to liquidation, our capital plan provides that, after payment of creditors, all Class B Stock will be redeemed at par, or pro rata if liquidation proceeds are insufficient to redeem all of the stock in full. Any remaining assets will be distributed to the shareholders in proportion to their stock holdings relative to the total outstanding Class B Stock.
Our capital plan also stipulates that its provisions governing liquidation are subject to the Finance Agency’s statutory authority to prescribe regulations or orders governing liquidations of a FHLBank, and that consolidations and mergers may be subject to any lawful order of the Finance Agency. We cannot predict how the Finance Agency might exercise its authority with respect to liquidations or reorganizations or whether any actions taken by the Finance Agency in this regard would be inconsistent with the provisions of our capital plan or the rights of holders of our Class B Stock. Consequently, there can be no assurance that any liquidation, merger or consolidation involving us will be consummated on terms that do not adversely affect our members’ investment in us.
An increase in our AHP contribution rate could adversely affect our ability to pay dividends to our shareholders.
The FHLB Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks are required to set aside, in the aggregate, the greater of $100 million or 10 percent of their current year’s income (before charges for AHP, as adjusted for

27


interest expense on mandatorily redeemable capital stock) for their AHPs. If the FHLBanks’ combined income does not result in an aggregate AHP contribution of at least $100 million in a given year, we could be required to contribute more than 10 percent of our income to the AHP. An increase in our AHP contribution would reduce our net income and could adversely affect our ability to pay dividends to our shareholders.
A natural or man-made disaster, especially one affecting our region, could adversely affect our profitability or financial condition.
Portions of our district are subject to risks from hurricanes, tornadoes, floods and other natural disasters. In addition to natural disasters, our business could be negatively impacted by man-made disasters. Natural or man-made disasters that occur within or outside our district may damage or dislocate our members’ facilities, may damage or destroy collateral pledged to secure advances or other extensions of credit, may adversely affect the livelihood of MPF borrowers or members’ customers or otherwise cause significant economic dislocation in the affected areas. If this were to occur, our business could be negatively impacted.
For instance, during 2017 and 2018, four significant hurricanes struck the continental United States (Harvey, Irma, Florence and Michael) and several significant wildfires destroyed thousands of homes and businesses in Northern and Southern California. These disasters had varying degrees of impact on our members, our members' borrowers and the properties pledged as collateral for those borrowings, and MPF mortgage loan borrowers and the properties pledged as collateral for those mortgage loans.
Significant borrower defaults on loans made by our members could cause members to fail. If one or more member institutions fail, and if the value of the collateral pledged to secure advances from us has declined below the amount borrowed, we could incur a credit loss that would adversely affect our financial condition and results of operations. A decline in the local economies in which our members operate could reduce members’ needs for funding, which could reduce demand for our advances. We could be adversely impacted by the reduction in business volume that would arise either from the failure of one or more of our members or from a decline in member funding needs. In addition, it is possible that the protections we have in place for our MPF loans including, but not limited to, borrowers' equity, PMI, hazard insurance and, if applicable, flood insurance, along with MPF credit enhancements, may not be sufficient to prevent us from incurring losses on the loans that are secured by properties located in the areas affected by the disasters.

ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

ITEM 2. PROPERTIES
The Bank owns a 157,000 square foot office building located at 8500 Freeport Parkway South, Irving, Texas. The Bank occupies approximately 89,000 square feet of space in this building.
The Bank also maintains leased off-site business resumption, storage and co-location facilities comprising approximately 12,000, 5,000 and 500 square feet of space, respectively.

ITEM 3. LEGAL PROCEEDINGS
The Bank is not a party to any material pending legal proceedings.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

28


PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Bank is a cooperative and all of its outstanding capital stock, which is known as Class B Stock, is owned by its members or, in some cases, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other extensions of credit that remain outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must hold stock in the Bank. All of the Bank’s shareholders are financial institutions; no individual may own any of the Bank’s capital stock. The Bank’s capital stock is not publicly traded, nor is there an established market for the stock. The Bank’s capital stock has a par value of $100 per share and it may be purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank’s stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, such transfer could occur only upon approval of the Bank and then only at par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years' written notice to the Bank. The Bank does not issue options, warrants or rights relating to its capital stock, nor does it provide any type of equity compensation plan. As of February 28, 2019, the Bank had 816 shareholders and 26,256,154 shares of capital stock outstanding.
The Bank has two sub-classes of Class B stock. Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Daily, subject to the limitations in the Bank's Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement. All excess stock is held as Class B-1 Stock at all times.
Subject to Finance Agency directives and the terms of the Amended JCE Agreement described below, the Bank is permitted by statute and regulation to pay dividends on members’ capital stock in either cash or capital stock only from previously retained earnings or a portion of current net earnings. The Bank’s Board of Directors may not declare or pay a dividend based on projected or anticipated earnings, nor may it declare or pay a dividend if the Bank is not in compliance with its minimum capital requirements or if the Bank would fail to meet its minimum capital requirements after paying such dividend (for a discussion of the Bank’s minimum capital requirements, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements). Further, the Bank may not declare or pay any dividends in the form of capital stock if excess stock held by its shareholders is greater than one percent of the Bank’s total assets or if, after the issuance of such shares, excess stock held by its shareholders would be greater than one percent of the Bank’s total assets. Shares of capital stock issued as dividend payments have the same rights, obligations, and restrictions as all other shares of capital stock, including rights, privileges, and restrictions related to the repurchase and redemption of capital stock. To the extent such shares represent excess stock, they may be repurchased or redeemed by the Bank in accordance with the provisions of the Bank’s Capital Plan.
The Bank, and the other FHLBanks, are parties to the Amended JCE Agreement, which provides that the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a restricted retained earnings account ("RRE Account"). Pursuant to the provisions of the Amended JCE Agreement, the Bank is required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all outstanding consolidated obligations, excluding hedging adjustments. The Amended JCE Agreement provides that during periods in which the Bank’s RRE Account is less than the amount prescribed in the preceding sentence, it may pay dividends only from unrestricted retained earnings or from the portion of its quarterly net income that exceeds the amount required to be allocated to its RRE Account. The allocations to, and restrictions associated with, its RRE Account have not had, nor are they currently expected to have, an effect on the Bank’s dividend payment practices. For additional information regarding the Amended JCE Agreement, see Item 1. Business — Capital — Retained Earnings.
The Bank has had a long-standing practice of paying quarterly dividends in the form of capital stock. While there can be no assurances about future dividends or future dividend rates, the target for quarterly dividends on Class B-1 Stock is an annualized rate that approximates average one-month LIBOR for the preceding quarter. The target range for quarterly dividends on Class B-2 Stock is an annualized rate that approximates average one-month LIBOR for the preceding quarter plus 0.5 – 1.0 percent. When stock dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. Dividends are typically paid during the last week of each calendar quarter and are based upon the Bank’s operating results,

29


shareholders’ average capital stock holdings and the applicable rate for the preceding quarter. All capital stock dividends are paid in the form of Class B-1 shares.
By way of example, the Bank’s fourth quarter 2018 dividends on Class B-1 Stock and Class B-2 Stock were paid at annualized rates of 2.11 percent (a rate equal to average one-month LIBOR for the third quarter of 2018) and 3.11 percent (a rate equal to average one-month LIBOR for the third quarter of 2018 plus 1.0 percent), respectively. The annualized dividend rates of 2.11 percent and 3.11 percent were applied to shareholders' average balances of Class B-1 Stock and Class B-2 Stock, respectively, which were held during the period from July 1, 2018 through September 30, 2018.
The following table sets forth certain information regarding the quarterly dividends that were declared and paid by the Bank during the years ended December 31, 2018 and 2017.
DIVIDENDS PAID
(dollars in thousands)
 
2018
 
2017
 
Amount(1)
 
Annualized
Rate(3)
 
Amount(2)
 
Annualized
Rate(3)
First Quarter
$
11,064

 
1.963
%
 
$
6,080

 
1.239
%
Second Quarter
13,581

 
2.273
%
 
7,261

 
1.455
%
Third Quarter
16,168

 
2.609
%
 
8,643

 
1.686
%
Fourth Quarter
18,358

 
2.760
%
 
10,524

 
1.869
%
 
 
 
 
 
 
 
 
Total Dividends Paid During the Year
$
59,171

 
 
 
$
32,508

 
 
____________________________________
(1) 
Amounts exclude (in thousands) $22, $24, $6 and $21 of dividends paid on mandatorily redeemable capital stock for the first, second, third and fourth quarters of 2018, respectively. For financial reporting purposes, these dividends were classified as interest expense.
(2) 
Amounts exclude (in thousands) $6, $8, $47 and $30 of dividends paid on mandatorily redeemable capital stock for the first, second, third and fourth quarters of 2017, respectively. For financial reporting purposes, these dividends were classified as interest expense.
(3) 
Reflects the annualized rate paid on all of the Bank’s average capital stock outstanding regardless of its classification for financial reporting purposes as either capital stock or mandatorily redeemable capital stock. Rates represent the blended rates paid on Class B-1 and Class B-2 stock (computed as the total dividend paid divided by the aggregate average balance of both classes of stock).
The following table sets forth the annualized dividend rates that were paid on Class B-1 and Class B-2 Stock during the years ended December 31, 2018 and 2017.
 
2018
 
2017
 
Class B-1
 
Class B-2
 
Class B-1
 
Class B-2
First Quarter
1.330
%
 
2.330
%
 
0.599
%
 
1.599
%
Second Quarter
1.650
%
 
2.650
%
 
0.830
%
 
1.830
%
Third Quarter
1.970
%
 
2.970
%
 
1.060
%
 
2.060
%
Fourth Quarter
2.110
%
 
3.110
%
 
1.230
%
 
2.230
%
The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount at least sufficient to protect the par value of the Bank's capital stock against potential economic losses that could arise from a variety of designated risk factors, including those related to potential permanent losses, potential earnings shortfalls or losses in periodic earnings, and potential reductions in the Bank's estimated market value of equity. The results of the Bank's annual stress test mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") are also considered when establishing the Bank's retained earnings targets. With certain exceptions, the Bank’s policy calls for the Bank to maintain its total retained earnings balance at or above its policy target when determining the amount of funds available to pay dividends. The Bank’s current retained earnings policy target, which was last updated as of December 31, 2018, calls for the Bank to maintain a total retained earnings balance of at least $612 million to protect against the risks identified in the policy. Notwithstanding the fact that the Bank’s December 31, 2018 retained earnings balance of $1.081 billion exceeds the policy target balance, the Bank currently expects to continue to build its retained earnings in keeping with its long-term strategic objectives and the provisions of the Amended JCE Agreement.

30


While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends on Class B-1 Stock in 2019 at a rate at least equal to average one-month LIBOR for the applicable dividend period. The Bank expects to pay dividends on Class B-2 Stock at an annualized rate that approximates average one-month LIBOR for the applicable dividend period plus 0.5 - 1.0 percent.
On March 19, 2019, the Bank’s Board of Directors approved dividends on Class B-1 and Class B-2 Stock in the form of additional shares of Class B-1 Stock for the first quarter of 2019 at annualized rates of 2.35 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2018) and 3.35 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2018 plus 1.0 percent), respectively. The first quarter 2019 dividends, to be applied to average Class B-1 Stock and Class B-2 Stock held during the period from October 1, 2018 through December 31, 2018, will be paid on March 27, 2019.
Pursuant to the terms of an SEC no-action letter dated September 13, 2005, the Bank is exempt from the requirements to report: (1) sales of its equity securities under Item 701 of Regulation S-K and (2) repurchases of its equity securities under Item 703 of Regulation S-K. In addition, the HER Act specifically exempts the Bank from periodic reporting requirements under the securities laws pertaining to the disclosure of unregistered sales of equity securities.

31


ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(dollars in thousands)
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Balance sheet (at year end)
 
 
 
 
 
 
 
 
 
Advances
$
40,793,813

 
$
36,460,524

 
$
32,506,175

 
$
24,746,802

 
$
18,942,400

Investments (1)
29,551,929

 
30,941,464

 
25,419,421

 
16,323,518

 
17,422,344

Mortgage loans
2,185,996

 
878,123

 
124,102

 
55,258

 
71,554

Allowance for credit losses on mortgage loans
493

 
271

 
141

 
141

 
143

Total assets
72,773,290

 
68,524,301

 
58,212,077

 
42,082,027

 
38,045,868

Consolidated obligations — discount notes
35,731,713

 
32,510,758

 
26,941,782

 
20,541,329

 
19,131,832

Consolidated obligations — bonds
31,931,929

 
31,376,858

 
26,997,487

 
18,024,692

 
16,078,700

Total consolidated obligations(2)
67,663,642

 
63,887,616

 
53,939,269

 
38,566,021

 
35,210,532

Mandatorily redeemable capital stock(3)
6,979

 
5,941

 
3,417

 
8,929

 
5,059

Capital stock — putable
2,554,888

 
2,317,937

 
1,930,148

 
1,540,132

 
1,222,738

Unrestricted retained earnings
932,675

 
832,826

 
745,104

 
699,213

 
650,224

Restricted retained earnings
148,692

 
108,937

 
78,880

 
62,990

 
49,552

Total retained earnings
1,081,367

 
941,763

 
823,984

 
762,203

 
699,776

Accumulated other comprehensive income (loss)
128,001

 
220,326

 
63,210

 
(103,023
)
 
(3,601
)
Total capital
3,764,256

 
3,480,026

 
2,817,342

 
2,199,312

 
1,918,913

Dividends paid(3)
59,171

 
32,508

 
17,668

 
4,766

 
4,203

Income statement
 
 
 
 
 
 
 
 
 
Net interest income after provision for loan losses
$
310,466

 
$
237,438

 
$
165,030

 
$
121,589

 
$
120,583

Other income
1,961

 
22,483

 
7,824

 
29,774

 
8,042

Other expense
91,555

 
92,924

 
84,574

 
76,702

 
74,725

Assessments
22,097

 
16,710

 
8,831

 
7,468

 
5,391

Net income
198,775

 
150,287

 
79,449

 
67,193

 
48,509

Performance ratios
 
 
 
 
 
 
 
 
 
Net interest margin(4)
0.45
%
 
0.39
%
 
0.31
%
 
0.29
%
 
0.35
%
Net interest spread (5)
0.34
%
 
0.33
%
 
0.28
%
 
0.27
%
 
0.32
%
Return on average assets
0.29
%
 
0.25
%
 
0.15
%
 
0.16
%
 
0.14
%
Return on average equity
5.22
%
 
4.75
%
 
3.16
%
 
3.26
%
 
2.67
%
Return on average capital stock (6)
7.86
%
 
7.04
%
 
4.44
%
 
4.98
%
 
4.25
%
Total average equity to average assets
5.60
%
 
5.20
%
 
4.75
%
 
4.88
%
 
5.29
%
Regulatory capital ratio(7)
5.01
%
 
4.77
%
 
4.74
%
 
5.49
%
 
5.07
%
Dividend payout ratio (3)(8)
29.77
%
 
21.63
%
 
22.24
%
 
7.09
%
 
8.66
%
Interest rates
 
 
 
 
 
 
 
 
 
Average effective federal funds rate (9)
1.83
%
 
1.00
%
 
0.39
%
 
0.13
%
 
0.09
%
Average one-month LIBOR (10)
2.02
%
 
1.11
%
 
0.50
%
 
0.20
%
 
0.16
%
Average three-month LIBOR (10)
2.31
%
 
1.26
%
 
0.74
%
 
0.32
%
 
0.23
%



32




____________________________________
(1) 
Investments consist of federal funds sold, securities purchased under agreements to resell, loans to other FHLBanks, interest-bearing deposits and securities classified as held-to-maturity, available-for-sale and trading.
(2) 
The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At December 31, 2018, 2017, 2016, 2015 and 2014, the outstanding consolidated obligations (at par value) of all of the FHLBanks totaled approximately $1.032 trillion, $1.034 trillion, $989 billion, $905 billion and $847 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $68.0 billion, $64.1 billion, $54.1 billion, $38.6 billion and $35.2 billion, respectively. The Bank records on its statement of condition only that portion of the consolidated obligations for which it has received the proceeds.
(3) 
Mandatorily redeemable capital stock represents capital stock that is classified as a liability under accounting principles generally accepted in the United States of America. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $73 thousand, $91 thousand, $28 thousand, $17 thousand and $18 thousand for the years ended December 31, 2018, 2017, 2016, 2015 and 2014, respectively.
(4) 
Net interest margin is net interest income as a percentage of average earning assets.
(5) 
Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(6) 
Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.
(7) 
The regulatory capital ratio is computed by dividing regulatory capital (the sum of capital stock — putable, mandatorily redeemable capital stock and retained earnings) by total assets at each year-end.
(8) 
Dividend payout ratio is computed by dividing dividends paid by net income for the year.
(9) 
Rates obtained from the Federal Reserve Statistical Release.
(10) 
Rates obtained from Bloomberg.


33


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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the annual audited financial statements and notes thereto for the years ended December 31, 2018, 2017 and 2016 beginning on page F-1 of this Annual Report on Form 10-K.

Forward-Looking Information
This annual report contains forward-looking statements that reflect current beliefs and expectations of the Bank about its future results, performance, liquidity, financial condition, prospects and opportunities. These statements are identified by the use of forward-looking terminology, such as “anticipates,” “plans,” “believes,” “could,” “estimates,” “may,” “should,” “would,” “will,” “might,” “expects,” “intends” or their negatives or other similar terms. The Bank cautions that forward-looking statements involve risks or uncertainties that could cause the Bank’s actual future results to 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, undue reliance should not be placed on such statements.
These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, changes in interest rates, changes in the Bank’s access to the capital markets, changes in the cost of the Bank’s debt, changes in the ratings on the Bank's debt, adverse consequences resulting from a significant regional, national or global economic downturn (including, but not limited to, reduced demand for the Bank's products and services), credit and prepayment risks, or changes in the financial health of the Bank’s members or non-member borrowers. Among other things, political events could possibly lead to changes in the Bank’s regulatory environment or its status as a GSE, or to changes in the regulatory environment for the Bank’s members or non-member borrowers. Risks and uncertainties related to competitive business forces include, but are not limited to, the potential loss of a significant amount of member borrowings through acquisitions or other means or changes in the relative competitiveness of the Bank’s products and services for member institutions. For a more detailed discussion of the risk factors applicable to the Bank, see Item 1A. Risk Factors. The Bank undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.
Overview
The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, savings institutions, insurance companies and credit unions. Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994 are also eligible for membership in the Bank. While not members of the Bank, housing associates, including state and local housing authorities, that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of investments, the vast majority of which are highly rated, for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a portfolio of predominately conventional mortgage loans that have been acquired through the Mortgage Partnership Finance® (“MPF”®) Program administered by the FHLBank of Chicago. Substantially all of the loans were acquired in 2016, 2017 and 2018 and all of those loans are conventional loans. The remainder of the portfolio (less than 1.5 percent of the unpaid principal balance) is comprised of government-guaranteed/insured and conventional mortgage loans that were acquired during the period from 1998 to mid-2003. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. Historically, the Bank has balanced the financial rewards to shareholders by seeking to pay a dividend that meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time.
The Bank's principal source of funds is debt issued in the capital markets. All 11 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent and all 11 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations.
The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps, swaptions and caps. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Topic 815 of the Financial Accounting Standards Board Accounting Standards Codification entitled “Derivatives and Hedging” (“ASC 815”). For a discussion of ASC 815, see the sections below entitled “Financial Condition — Derivatives and Hedging Activities” and “Critical Accounting Policies and Estimates.”

34



Financial Market Conditions
Economic growth in the United States expanded moderately during 2018, 2017 and 2016. The gross domestic product increased 1.6 percent, 2.2 percent and 2.9 percent in 2016, 2017 and 2018, respectively. The nationwide unemployment rate fell from 5.0 percent at the end of 2015 to 4.7 percent at the end of 2016, 4.1 percent at the end of 2017 and 3.9 percent at the end of 2018. Housing prices increased in most major metropolitan areas during 2016 and 2017. In 2018, housing prices continued to increase in most major metropolitan areas, albeit at a slower pace, and home sales slowed in many markets.
The Federal Open Market Committee ("FOMC") maintained its target for the federal funds rate at a range between 0.25 percent and 0.50 percent throughout most of 2016. In December 2016, the FOMC raised its target for the federal funds rate to a range between 0.50 percent to 0.75 percent. The FOMC continued to raise its target for the federal funds rate in 0.25 percent increments throughout 2017 and 2018, and in December 2018 it further raised the target to a range of 2.25 percent to 2.50 percent. At its most recent meeting held in March 2019, the FOMC maintained its target for the federal funds rate at a range between 2.25 percent and 2.50 percent and stated that, in light of global economic and financial developments and muted inflation pressures, it will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate. In addition, throughout 2016 and through September 2017, the FOMC maintained a policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. In October 2017, the FOMC began implementing a balance sheet normalization program, which is designed to gradually reduce the Federal Reserve's securities holdings by decreasing reinvestment of principal payments from those securities. At its March 2019 meeting, the FOMC announced that it would slow the pace of this program beginning in May 2019, and would end the runoff of its Treasury holdings at the end of September 2019.
During 2016, 2017 and 2018, the Federal Reserve paid interest on required and excess reserves held by depository institutions at a rate equivalent to or slightly below the upper boundary of the target range for federal funds. A sustained high level in bank reserves during those years combined with the rate of interest being paid on those reserves has contributed to an effective federal funds rate that has generally been below the upper end of the targeted range for all of 2016, 2017 and 2018.
One-month and three-month LIBOR rates were 0.43 percent and 0.61 percent, respectively, at the end of 2015. One-month and three-month LIBOR increased to 0.77 percent and 1.00 percent, respectively, at the end of 2016, to 1.56 percent and 1.69 percent, respectively, at the end of 2017 and to 2.50 percent and 2.81 percent, respectively, at the end of 2018. Relatively stable one-month and three-month LIBOR rates, combined with relatively small spreads between those two indices and between those indices and overnight lending rates, suggest that inter-bank lending markets are reasonably stable.
The following table presents information on various market interest rates at December 31, 2018 and 2017 and various average market interest rates for the years ended December 31, 2018, 2017 and 2016.
 
Ending Rate
 
Average Rate
 
December 31,
 
December 31,
 
For the Year Ended December 31,
 
2018
 
2017
 
2018
 
2017
 
2016
Federal Funds Target (1)
2.50%
 
1.50%
 
1.91%
 
1.10%
 
0.51%
Average Effective Federal Funds Rate (2)
2.40%
 
1.33%
 
1.83%
 
1.00%
 
0.39%
1-month LIBOR (1)
2.50%
 
1.56%
 
2.02%
 
1.11%
 
0.50%
3-month LIBOR (1)
2.81%
 
1.69%
 
2.31%
 
1.26%
 
0.74%
2-year LIBOR (1)
2.66%
 
2.08%
 
2.75%
 
1.65%
 
1.00%
5-year LIBOR (1)
2.57%
 
2.24%
 
2.87%
 
1.98%
 
1.32%
10-year LIBOR (1)
2.71%
 
2.40%
 
2.96%
 
2.29%
 
1.70%
3-month U.S. Treasury (1)
2.45%
 
1.39%
 
1.97%
 
0.95%
 
0.32%
2-year U.S. Treasury (1)
2.48%
 
1.89%
 
2.53%
 
1.40%
 
0.83%
5-year U.S. Treasury (1)
2.51%
 
2.20%
 
2.75%
 
1.91%
 
1.33%
10-year U.S. Treasury (1)
2.69%
 
2.40%
 
2.91%
 
2.33%
 
1.84%
____________________________________
(1) 
Source: Bloomberg
(2) 
Source: Federal Reserve Statistical Release

35


2018 In Summary
The Bank ended 2018 with total assets of $72.8 billion compared with $68.5 billion at the end of 2017. The $4.25 billion increase in total assets was attributable primarily to increases in the Bank's advances ($4.3 billion), long-term investments ($1.0 billion) and mortgage loans held for portfolio ($1.3 billion), partially offset by a decrease in the Bank's short-term liquidity portfolio ($2.3 billion).
Total advances at December 31, 2018 were $40.8 billion, compared to $36.5 billion at the end of 2017. During 2018, the Bank's lending activities expanded due to increased demand for loans at member institutions which the Bank attributes to favorable economic conditions and solid, albeit slowing, activity in the housing markets served by its members, and increased usage of advances to fund investment activities and members' liquidity requirements.
The Bank’s net income for 2018 was $198.8 million, which represented a return on average capital stock of 7.86 percent. In comparison, the Bank's net income for 2017 was $150.3 million, which represented a return on average capital stock of 7.04 percent for that year. The $48.5 million increase in net income from 2017 to 2018 was attributable to a $73.1 million increase in net interest income after provision for loan losses and a $1.3 million decrease in other expense, offset by a $20.5 million decrease in other income and a $5.4 million increase in the Bank's AHP assessment.
At all times during 2018, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s total retained earnings increased to $1.081 billion at December 31, 2018 from $942 million at December 31, 2017. Retained earnings represented 1.5 percent and 1.4 percent of total assets at December 31, 2018 and 2017, respectively. At December 31, 2018, the balance of the Bank's restricted retained earnings account was $148.7 million.
In 2018, the Bank paid dividends totaling $59.2 million, which, based on the applicable average capital stock balances, equated to an overall blended rate of 2.419 percent for the year.
Financial Condition
The following table provides selected period-end balances as of December 31, 2018, 2017 and 2016, as well as selected average balances for the years ended December 31, 2018, 2017 and 2016. As shown in the table, the Bank’s total assets increased by 6.2 percent (or $4.25 billion) during the year ended December 31, 2018 after increasing by 17.7 percent (or $10.3 billion) during the year ended December 31, 2017. The increase in total assets during the year ended December 31, 2018 was attributable primarily to increases in the Bank's advances ($4.3 billion), long-term available-for-sale securities portfolio ($1.4 billion) and mortgage loans ($1.3 billion), partially offset by a decrease in the Bank's short-term liquidity portfolio ($2.3 billion) and its long-term held-to-maturity securities portfolio ($0.5 billion). As the Bank’s assets increased, the funding for those assets also increased. During the year ended December 31, 2018, total consolidated obligations increased by $3.8 billion, as consolidated obligation discount notes and consolidated obligation bonds increased by $3.2 billion and $0.6 billion, respectively.
The increase in total assets during the year ended December 31, 2017 was attributable primarily to increases in the Bank's advances ($4.0 billion), short-term liquidity portfolio ($4.8 billion), long-term available-for-sale securities portfolio ($1.2 billion) and mortgage loans ($0.8 billion), partially offset by a decrease in the Bank's long-term held-to-maturity securities portfolio ($0.6 billion). As the Bank’s assets increased, the funding for those assets also increased. During the year ended December 31, 2017, total consolidated obligations increased by $9.9 billion, as consolidated obligation discount notes and consolidated obligation bonds increased by $5.5 billion and $4.4 billion, respectively.
The activity in each of the major balance sheet captions is discussed in the sections following the table.

36


SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)
 
December 31, 2018
 
December 31, 2017
 
Balance at
December 31, 2016
 
 
 
Increase (Decrease)
 
 
 
Increase (Decrease)
 
 
Balance
 
Amount
 
Percentage
 
Balance
 
Amount
 
Percentage
 
Advances
$
40,794

 
$
4,333

 
11.9
 %
 
$
36,461

 
$
3,955

 
12.2
 %
 
$
32,506

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term liquidity holdings
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
2,500

 
2,500

 
*

 

 

 

 

Securities purchased under agreements to resell
6,215

 
(485
)
 
(7.2
)
 
6,700

 
3,600

 
116.1

 
3,100

Federal funds sold
1,731

 
(6,049
)
 
(77.8
)
 
7,780

 
1,538

 
24.6

 
6,242

Trading securities (U.S. Treasury Notes)
1,717

 
1,717

 
*

 

 

 

 

Loan to other FHLBank

 

 

 

 
(290
)
 
(100.0
)
 
290

Total short-term liquidity holdings
12,163

 
(2,317
)
 
(16.0
)
 
14,480

 
4,848

 
50.3

 
9,632

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities (U.S. Treasury Note)
101

 
(1
)
 
(1.0
)
 
102

 
1

 
1.0

 
101

Available-for-sale securities
15,825

 
1,423

 
9.9

 
14,402

 
1,226

 
9.3

 
13,176

Held-to-maturity securities
1,462

 
(483
)
 
(24.8
)
 
1,945

 
(555
)
 
(22.2
)
 
2,500

Total long-term investments
17,388

 
939

 
5.7

 
16,449

 
672

 
4.3

 
15,777

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans held for portfolio, net
2,186

 
1,308

 
149.0

 
878

 
754

 
608.1

 
124

Total assets
72,773

 
4,249

 
6.2

 
68,524

 
10,312

 
17.7

 
58,212

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated obligations — bonds
31,932

 
555

 
1.8

 
31,377

 
4,380

 
16.2

 
26,997

Consolidated obligations — discount notes
35,732

 
3,221

 
9.9

 
32,511

 
5,569

 
20.7

 
26,942

Total consolidated obligations
67,664

 
3,776

 
5.9

 
63,888

 
9,949

 
18.4

 
53,939

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mandatorily redeemable capital stock
7

 
1

 
16.7

 
6

 
3

 
100.0

 
3

Capital stock
2,555

 
237

 
10.2

 
2,318

 
388

 
20.1

 
1,930

Retained earnings
1,081

 
139

 
14.8

 
942

 
118

 
14.3

 
824

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average total assets
68,075

 
7,267

 
12.0

 
60,808

 
7,908

 
14.9

 
52,900

Average capital stock
2,529

 
394

 
18.5

 
2,135

 
345

 
19.3

 
1,790

Average mandatorily redeemable capital stock
4

 
(5
)
 
(55.6
)
 
9

 
4

 
80.0

 
5

____________________________________
*
The percentage increase is not meaningful.


37


Advances
The following table presents advances outstanding, by type of institution, as of December 31, 2018, 2017 and 2016.
ADVANCES OUTSTANDING BY BORROWER TYPE
(par value, dollars in millions)
 
December 31,
 
2018
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Commercial banks
$
26,105

 
64
%
 
$
25,852

 
71
%
 
$
23,416

 
72
%
Insurance companies
6,394

 
16

 
3,078

 
8

 
2,817

 
9

Savings institutions
4,631

 
11

 
3,903

 
11

 
3,318

 
10

Credit unions
3,459

 
9

 
3,479

 
10

 
2,851

 
9

Community Development Financial Institutions
16

 

 
12

 

 
14

 

Total member advances
40,605

 
100

 
36,324

 
100

 
32,416

 
100

Housing associates
170

 

 
126

 

 
46

 

Non-member borrowers
17

 

 
19

 

 
10

 

Total par value of advances
$
40,792

 
100
%
 
$
36,469

 
100
%
 
$
32,472

 
100
%
Total par value of advances outstanding to CFIs (1)
$
5,869

 
14
%
 
$
7,273

 
20
%
 
$
6,758

 
21
%
____________________________________
(1) 
The figures presented above reflect the advances outstanding to Community Financial Institutions (“CFIs”) as of December 31, 2018, 2017 and 2016 based upon the definitions of CFIs that applied as of those dates.

The Bank's advances balances (at par value) increased $4.3 billion and $4.0 billion during 2018 and 2017, respectively, due largely to increased demand for loans from its larger members, which the Bank attributed in part to increased loan demand at those institutions. The Bank's larger members also used advances to varying degrees to fund investment activities and to meet liquidity requirements. Texas Capital Bank, N.A. and Comerica Bank, the Bank's two largest borrowers at both December 31, 2018 and 2017, increased their advances by $1.1 billion and $1.0 billion, respectively, in 2018. American General Life Insurance Company, the Bank's third largest borrower at December 31, 2018, increased its advances by $2.5 billion in 2018.
At December 31, 2018, advances outstanding to the Bank’s five largest borrowers totaled $15.4 billion, representing 37.9% percent of the Bank’s total outstanding advances as of that date. The following table presents the Bank’s five largest borrowers as of December 31, 2018.
FIVE LARGEST BORROWERS
(par value, dollars in millions)
 
 
As of December 31, 2018
Name
 
Par Value of
Advances
 
Percent of
Total Par Value
of Advances
Texas Capital Bank, N.A.
 
$
3,900

 
9.6
%
Comerica Bank
 
3,800

 
9.3

American General Life Insurance Company
 
3,148

 
7.7

NexBank, SSB
 
2,428

 
6.0

Iberiabank
 
2,152

 
5.3

 
 
$
15,428

 
37.9
%

38


As of December 31, 2017 and 2016, advances outstanding to the Bank's five largest borrowers comprised $10.6 billion (29 percent) and $8.6 billion (26 percent), respectively, of the total advances portfolio at those dates.
The following table presents information regarding the composition of the Bank’s advances by product type as of December 31, 2018 and 2017.
ADVANCES OUTSTANDING BY PRODUCT TYPE
(par value, dollars in millions)
 
December 31, 2018
 
December 31, 2017
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
$
28,753

 
70.5
%
 
$
24,796

 
68.0
%
Adjustable/variable-rate indexed
10,730

 
26.3

 
10,297

 
28.2

Amortizing
1,309

 
3.2

 
1,376

 
3.8

Total par value
$
40,792

 
100.0
%
 
$
36,469

 
100.0
%
The Bank is required by statute and regulation to obtain sufficient collateral from members/borrowers to fully secure all advances and other extensions of credit. The Bank’s collateral arrangements with its members/borrowers and the types of collateral it accepts to secure advances are described in Item 1. Business. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which borrowers may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances and other extensions of credit.
In addition, as described in Item 1. Business, the Bank reviews the financial condition of its depository institution borrowers on at least a quarterly basis to identify any borrowers whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.
Short-Term Liquidity Holdings
At December 31, 2018, the Bank’s short-term liquidity holdings were comprised of $6.2 billion of overnight reverse repurchase agreements, $2.5 billion of overnight interest-bearing deposits, $1.7 billion of overnight federal funds sold and $1.7 billion of U.S. Treasury Notes that were acquired with short remaining terms to maturity. At December 31, 2017, the Bank’s short-term liquidity holdings were comprised of $7.8 billion of overnight federal funds sold and $6.7 billion of overnight reverse repurchase agreements. All of the Bank's federal funds sold during 2018 and 2017 were transacted with domestic bank counterparties and U.S. branches of foreign financial institutions on an overnight basis. To enhance the returns provided by its short-term liquidity portfolio, the Bank began investing in overnight interest-bearing deposits during the second half of 2018. During that period, all of the interest-bearing deposits were transacted with domestic bank counterparties.
As of December 31, 2018, the Bank’s overnight federal funds sold consisted of $0.5 billion sold to counterparties rated double-A, $0.7 billion sold to counterparties rated single-A and $0.5 billion sold to counterparties rated triple-B. As of December 31, 2018, substantially all of the Bank's interest-bearing deposits were held in single-A rated domestic banks. The credit ratings presented in the two preceding sentences represent the lowest long-term rating assigned to the counterparty by Moody’s or S&P.
The amount of the Bank’s short-term liquidity holdings fluctuates in response to several factors, including the anticipated demand for advances, the timing and extent of advance prepayments, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, prevailing conditions (or anticipated changes in conditions) in the short-term debt markets, changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs, the level of liquidity needed to satisfy Finance Agency requirements and the Finance Agency's expectations with regard to the Bank's core mission achievement. For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources” and Item 1. Business - Legislative and Regulatory Developments - Liquidity Guidance beginning on page 17 of this report. For a discussion of the Finance Agency's guidance regarding core mission achievement, see Item 1. Business (specifically, the section entitled Core Mission Achievement beginning on page 10 of this report).
Finance Agency regulations and Bank policies govern the Bank’s investments in unsecured money market instruments, such as overnight and term federal funds and commercial paper. Those regulations and policies establish limits on the amount of unsecured credit that may be extended to borrowers or to affiliated groups of borrowers, and require the Bank to base its investment limits on the creditworthiness of its counterparties.

39



Long-Term Investments
The composition of the Bank's long-term investment portfolio at December 31, 2018 and 2017 is set forth in the table below.
COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO
(in millions)
 
 
 
Balance Sheet Classification
 
Total Long-Term Investments
(at carrying value)
 
 
 
December 31, 2018
 
Held-to-Maturity
 (at carrying value)
 
Available-for-Sale
(at fair value)
 
Trading
(at fair value)
 
 
Held-to-Maturity
(at fair value)
 
 
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
8

 
$
453

 
$
101

 
$
562

 
$
8

 
GSE obligations
 

 
5,687

 

 
5,687

 

 
State housing agency obligations
 
135

 

 

 
135

 
134

 
Other
 

 
171

 

 
171

 

 
Total debentures
 
143

 
6,311

 
101

 
6,555

 
142

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
 
1

 

 

 
1

 
1

 
GSE residential MBS
 
1,253

 

 

 
1,253

 
1,258

 
GSE commercial MBS
 

 
9,514

 

 
9,514

 

 
Non-agency residential MBS
 
65

 

 

 
65

 
78

 
Total MBS
 
1,319

 
9,514

 

 
10,833

 
1,337

 
Total long-term investments
 
$
1,462

 
$
15,825

 
$
101

 
$
17,388

 
$
1,479

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Classification
 
Total Long-Term Investments
(at carrying value)
 
 
 
 
 
Held-to-Maturity
 (at carrying value)
 
Available-for-Sale
 (at fair value)
 
Trading
(at fair value)
 
 
Held-to-Maturity
 (at fair value)
 
December 31, 2017
 
 
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
11

 
$
479

 
$
102

 
$
592

 
$
11

 
GSE obligations
 

 
6,003

 

 
6,003

 

 
State housing agency obligations
 
160

 

 

 
160

 
160

 
Other
 

 
174

 

 
174

 

 
Total debentures
 
171

 
6,656

 
102

 
6,929

 
171

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
 
2

 

 

 
2

 
2

 
GSE residential MBS
 
1,656

 

 

 
1,656

 
1,666

 
GSE commercial MBS
 
35

 
7,746

 

 
7,781

 
35

 
Non-agency residential MBS
 
81

 

 

 
81

 
97

 
Total MBS
 
1,774

 
7,746

 

 
9,520

 
1,800

 
Total long-term investments
 
$
1,945

 
$
14,402

 
$
102

 
$
16,449

 
$
1,971



40


The Bank is precluded by regulation from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (the sum of its capital stock, mandatorily redeemable capital stock and retained earnings). As of December 31, 2018, the Bank held $10.8 billion of MBS (at amortized cost), which represented 297 percent of its total regulatory capital at that date. As of December 31, 2017, the Bank held $9.4 billion of MBS (at amortized cost), which represented 288 percent of its total regulatory capital at that date. The Bank intends to continue to purchase additional GSE MBS if securities with adequate returns are available when the Bank has the regulatory capacity to increase its MBS portfolio.
During the years ended December 31, 2018, 2017 and 2016, the Bank acquired $2.0 billion, $2.1 billion and $2.4 billion of GSE commercial MBS ("CMBS"), all of which are backed by multifamily loans. All of the GSE CMBS purchases were hedged with fixed-for-floating interest rate swaps. Because ASC 815 does not allow hedge accounting treatment for fair value hedges of investment securities designated as held-to-maturity, all of the hedged securities were classified as available-for-sale.
In addition to MBS, the Bank is also permitted under applicable policies and regulations to purchase certain other types of highly rated, long-term, non-MBS investments subject to certain limitations. These investments include but are not limited to the non-MBS debt obligations of other GSEs, provided such investments in any single GSE do not exceed the lesser of the Bank’s total regulatory capital or that GSE's total capital, taking into account the financial support provided by the U.S. Department of the Treasury, if applicable, at the time new investments are made.
During the year ended December 31, 2018, the Bank did not purchase any non-MBS investments for its long-term investment portfolio. During the years ended December 31, 2017 and 2016, the Bank purchased $0.6 billion and $3.7 billion, respectively, of GSE debentures, all of which were non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System. All of these securities were classified as available-for-sale and hedged with fixed-for-floating interest rate swaps. The Bank's investments in the non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System are each currently limited to an amount equal to 100 percent of the Bank's total regulatory capital at the time of purchase. For a discussion of changes to the Bank's authority to invest in the non-MBS debt obligations of other GSEs, which become effective on January 1, 2020, see Item 1. Business - Legislative and Regulatory Developments (specifically, the section entitled "Final Rule on FHLBank Capital Requirements" on page 16 of this report).
During the years ended December 31, 2017 and 2016, the Bank purchased for its long-term investment portfolio $0.1 billion of state housing agency obligations (classified as held-to-maturity) and $0.3 billion of U.S. Treasury Notes (classified as available-for-sale), respectively.
Subject to applicable regulatory limits and the constraints imposed by the Finance Agency's guidance regarding core mission achievement, the Bank may add additional non-MBS securities to its long-term investment portfolio if attractive opportunities to do so are available.
During the years ended December 31, 2018, 2017 and 2016, proceeds from maturities and paydowns of held-to-maturity securities totaled approximately $390 million, $527 million and $579 million, respectively. Proceeds from maturities and paydowns of available-for-sale securities totaled $305 million, $991 million and $65 million during the years ended December 31, 2018, 2017 and 2016, respectively. During the years ended December 31, 2018, 2017 and 2016, the Bank sold approximately $99 million, $163 million and $158 million (par value), respectively, of GSE residential MBS (LIBOR-indexed floating rate collateralized mortgage obligations with embedded caps) classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $1.7 million, $4.0 million and $0.9 million, respectively. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. The proceeds from these sales were reinvested in GSE CMBS. During 2017 and 2016, the Bank also sold approximately $260 million and $2.3 billion (par value), respectively, of GSE debentures, all of which had been classified as available-for-sale. In addition, in 2017 the Bank sold $123 million (par value) of GSE CMBS and, in 2016, it sold $0.3 billion of U.S. Treasury Notes, all of which had been classified as available-for-sale. The aggregate net gains recognized on these sales totaled $1.4 million and $5.1 million, respectively. The GSE debentures that were sold were replaced with longer-dated, higher-yielding GSE debentures.
As of December 31, 2018, the U.S. government and the issuers of the Bank's holdings of GSE debentures and GSE MBS were rated triple-A by Moody's and AA+ by S&P. At that same date, the Bank's holdings of other debentures, which were comprised of securities issued by the Private Export Funding Corporation, were rated triple-A by Moody's. The PEFCO debentures are not currently rated by S&P. Further, the Bank's holdings of state housing agency debentures were rated triple-A by Moody's and S&P. The credit ratings associated with the Bank's holdings of non-agency residential MBS ("RMBS") are presented in the table on page 42.
The Bank evaluates outstanding held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each calendar quarter for other-than-temporary impairment (“OTTI”). An investment security is impaired if the fair value of the investment is less than its amortized cost. At December 31, 2018, the gross unrealized losses on the Bank’s held-to-maturity and available-for-sale investment securities were $3.9 million and $38.1 million, respectively. As of that date,

41


$1.8 million (or 45 percent) of the unrealized losses associated with its held-to-maturity securities portfolio were related to the Bank's holdings of non-agency (i.e., private-label) RMBS. For a summary of the Bank's OTTI evaluation, see the audited financial statements included in this report (specifically, Notes 4 and 5 beginning on pages F-20 and F-22, respectively).
The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of December 31, 2018 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
All but one of the Bank’s non-agency RMBS are rated by Moody’s and/or S&P. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS holdings as of December 31, 2018. The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s or S&P.
NON-AGENCY RMBS BY CREDIT RATING
(dollars in thousands)
Credit
Rating
 
Number of
Securities
 
Unpaid
Principal
Balance
 
Amortized
Cost
 
Carrying
Value
 
Estimated
Fair Value
 
Unrealized
Losses
Double-A
 
1
 
$
1,368

 
$
1,368

 
$
1,368

 
$
1,320

 
$
48

Single-A
 
1
 
4,442

 
4,442

 
4,442

 
4,334

 
108

Triple-B
 
3
 
9,812

 
9,812

 
9,812

 
9,594

 
218

Single-B
 
4
 
14,186

 
14,046

 
12,315

 
13,396

 
657

Triple-C
 
12
 
53,668

 
46,541

 
37,605

 
49,431

 
746

Not Rated
 
1
 
85

 
85