Docoh
Loading...

Federal Home Loan Bank of Des Moines

Filed: 10 Nov 20, 11:03am

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-51999
FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
Federally chartered corporation42-6000149
(State or other jurisdiction of incorporation or organization)(I.R.S. employer identification number)
909 Locust Street
Des Moines, IA
(Address of principal executive offices)
50309
(Zip code)
Registrant’s telephone number, including area code: (515) 412-2100
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Shares outstanding as of October 31, 2020
Class B Stock, par value $10034,232,662





PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in millions, except capital stock par value)
(Unaudited)
September 30,
2020
December 31,
2019
ASSETS
Cash and due from banks$788 $1,029 
Interest-bearing deposits (Note 3)436 
Securities purchased under agreements to resell (Note 3)3,300 13,950 
Federal funds sold (Note 3)5,600 4,605 
Investment securities (Note 3)
Trading securities5,040 888 
Available-for-sale securities (amortized cost of $16,353 and $16,603)16,361 16,651 
Held-to-maturity securities (fair value of $2,079 and $2,439)1,968 2,370 
Total investment securities23,369 19,909 
Advances (Note 4)48,462 80,360 
Mortgage loans held for portfolio, net of allowance for credit losses of $3 and $1 (Note 5)8,733 9,334 
Accrued interest receivable110 195 
Derivative assets, net (Note 6)242 102 
Other assets114 118 
TOTAL ASSETS$91,154 $129,603 
LIABILITIES
Deposits
Interest-bearing$1,309 $987 
Non-interest-bearing305 125 
Total deposits1,614 1,112 
Consolidated obligations (Note 7)
Discount notes30,928 29,531 
Bonds52,343 91,553 
Total consolidated obligations83,271 121,084 
Mandatorily redeemable capital stock (Note 8)54 206 
Accrued interest payable181 252 
Affordable Housing Program payable169 157 
Derivative liabilities, net (Note 6)
Other liabilities69 65 
TOTAL LIABILITIES85,358 122,877 
Commitments and contingencies (Note 10)
CAPITAL (Note 8)
Capital stock - Class B putable ($100 par value); 34 and 45 issued and outstanding shares3,432 4,517 
Retained earnings
Unrestricted1,790 1,661 
Restricted569 504 
Total retained earnings2,359 2,165 
Accumulated other comprehensive income (loss)44 
TOTAL CAPITAL5,796 6,726 
TOTAL LIABILITIES AND CAPITAL$91,154 $129,603 
The accompanying notes are an integral part of these financial statements.
3

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)
(Unaudited)
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2020201920202019
INTEREST INCOME
Advances$185 $569 $815 $1,997 
Interest-bearing deposits
Securities purchased under agreements to resell57 32 139 
Federal funds sold37 30 122 
Trading securities13 36 22 
Available-for-sale securities33 118 170 394 
Held-to-maturity securities19 31 63 
Mortgage loans held for portfolio58 72 203 211 
Total interest income299 880 1,318 2,950 
INTEREST EXPENSE
Consolidated obligations - Discount notes10 166 163 684 
Consolidated obligations - Bonds147 579 780 1,810 
Deposits12 
Mandatorily redeemable capital stock
Total interest expense158 751 949 2,515 
NET INTEREST INCOME141 129 369 435 
Provision (reversal) for credit losses on mortgage loans
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES139 129 367 435 
OTHER INCOME (LOSS)
Net gains (losses) on trading securities(10)26 36 
Net gains (losses) on derivatives and hedging activities(12)(52)(45)
Gains on litigation settlements, net64 120 
Other, net10 22 20 
Total other income (loss)65 116 11 
OTHER EXPENSE
Compensation and benefits18 16 53 48 
Contractual services12 12 
Professional fees20 24 
Other operating expenses16 24 
Federal Housing Finance Agency
Office of Finance
Other, net
Total other expense37 43 119 125 
NET INCOME BEFORE ASSESSMENTS167 89 364 321 
Affordable Housing Program assessments16 36 33 
NET INCOME$151 $80 $328 $288 
The accompanying notes are an integral part of these financial statements.
4


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
(Unaudited)
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2020201920202019
Net income$151 $80 $328 $288 
Other comprehensive income (loss)
Net unrealized gains (losses) on available-for-sale securities64 (17)(40)(48)
Pension and postretirement benefits
Total other comprehensive income (loss)65 (17)(39)(48)
TOTAL COMPREHENSIVE INCOME (LOSS)$216 $63 $289 $240 
The accompanying notes are an integral part of these financial statements.



5

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in millions)
(Unaudited)
Capital Stock Class B (putable)
SharesPar Value
BALANCE, JUNE 30, 201953 $5,304 
Comprehensive income (loss)— — 
Proceeds from issuance of capital stock19 1,869 
Repurchases/redemptions of capital stock(25)(2,497)
Net shares reclassified (to) from mandatorily redeemable capital stock
Cash dividends on capital stock— — 
BALANCE, SEPTEMBER 30, 201947 $4,676 
BALANCE, JUNE 30, 202038 $3,802 
Comprehensive income (loss)— — 
Proceeds from issuance of capital stock294 
Repurchases/redemptions of capital stock(7)(664)
Net shares reclassified (to) from mandatorily redeemable capital stock
Cash dividends on capital stock— — 
BALANCE, SEPTEMBER 30, 202034 $3,432 
BALANCE, DECEMBER 31, 201854 $5,414 
Comprehensive income (loss)— — 
Proceeds from issuance of capital stock54 5,378 
Repurchases/redemptions of capital stock(61)(6,107)
Net shares reclassified (to) from mandatorily redeemable capital stock(9)
Cash dividends on capital stock— — 
BALANCE, SEPTEMBER 30, 201947 $4,676 
BALANCE, DECEMBER 31, 201945 $4,517 
Adjustment for cumulative effect of accounting change (Note 2)— — 
Comprehensive income (loss)— — 
Proceeds from issuance of capital stock29 2,915 
Repurchases/redemptions of capital stock(40)(3,994)
Net shares reclassified (to) from mandatorily redeemable capital stock(6)
Partial recovery of prior capital distribution to Financing Corporation (Note 8)— — 
Cash dividends on capital stock— — 
BALANCE, SEPTEMBER 30, 202034 $3,432 
The accompanying notes are an integral part of these financial statements.
6

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL (continued from previous page)
(dollars and shares in millions)
(Unaudited)
Retained EarningsAccumulated Other Comprehensive Income (Loss)Total
Capital
UnrestrictedRestrictedTotal
BALANCE, JUNE 30, 2019$1,652 $468 $2,120 $53 $7,477 
Comprehensive income (loss)64 16 80 (17)63 
Proceeds from issuance of capital stock— — — — 1,869 
Repurchases/redemptions of capital stock— — — — (2,497)
Net shares reclassified (to) from mandatorily redeemable capital stock— — — — 
Cash dividends on capital stock(69)— (69)— (69)
BALANCE, SEPTEMBER 30, 2019$1,647 $484 $2,131 $36 $6,843 
BALANCE, JUNE 30, 2020$1,718 $539 $2,257 $(60)$5,999 
Comprehensive income (loss)121 30 151 65 216 
Proceeds from issuance of capital stock— — — — 294 
Repurchases/redemptions of capital stock— — — �� (664)
Net shares reclassified (to) from mandatorily redeemable capital stock— — — — 
Cash dividends on capital stock(49)— (49)— (49)
BALANCE, SEPTEMBER 30, 2020$1,790 $569 $2,359 $$5,796 
BALANCE, DECEMBER 31, 2018$1,623 $427 $2,050 $84 $7,548 
Comprehensive income (loss)231 57 288 (48)240 
Proceeds from issuance of capital stock— — — — 5,378 
Repurchases/redemptions of capital stock— — — — (6,107)
Net shares reclassified (to) from mandatorily redeemable capital stock— — — — (9)
Cash dividends on capital stock(207)— (207)— (207)
BALANCE, SEPTEMBER 30, 2019$1,647 $484 $2,131 $36 $6,843 
BALANCE, DECEMBER 31, 2019$1,661 $504 $2,165 $44 $6,726 
Adjustment for cumulative effect of accounting change (Note 2)— — 
Comprehensive income (loss)263 65 328 (39)289 
Proceeds from issuance of capital stock— — — — 2,915 
Repurchases/redemptions of capital stock— — — — (3,994)
Net shares reclassified (to) from mandatorily redeemable capital stock— — — — (6)
Partial recovery of prior capital distribution to Financing Corporation (Note 8)26 — 26 — 26 
Cash dividends on capital stock(161)— (161)— (161)
BALANCE, SEPTEMBER 30, 2020$1,790 $569 $2,359 $$5,796 
The accompanying notes are an integral part of these financial statements.

7

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
(Unaudited)
For the Nine Months Ended
September 30,
20202019
OPERATING ACTIVITIES
Net income$328 $288 
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization(21)(85)
Net (gains) losses on trading securities(26)(36)
Net change in derivatives and hedging activities(329)(96)
Other adjustments
Net change in:
Accrued interest receivable37 (11)
Other assets(5)
Accrued interest payable(71)11 
Other liabilities17 
Total adjustments(382)(213)
Net cash provided by (used in) operating activities(54)75 
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits(727)(219)
Securities purchased under agreements to resell10,650 (3,300)
Federal funds sold(995)(1,485)
Trading securities
Proceeds from sales2,949 
Proceeds from maturities and paydowns493 50 
Purchases(7,568)
Available-for-sale securities
Proceeds from maturities and paydowns1,822 1,981 
Purchases(1,280)
Held-to-maturity securities
Proceeds from maturities and paydowns392 371 
Advances
Repaid156,489 222,201 
Originated(124,219)(200,553)
Mortgage loans held for portfolio
Principal collected2,326 1,024 
Purchased(1,753)(2,152)
Other investing activities, net(4)(5)
Net cash provided by (used in) investing activities38,575 17,913 
The accompanying notes are an integral part of these financial statements.
8

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
(Unaudited)
For the Nine Months Ended
September 30,
20202019
FINANCING ACTIVITIES
Net change in deposits503 173 
Borrowings from other FHLBanks(500)
Net proceeds from issuance of consolidated obligations
Discount notes129,774 93,081 
Bonds28,638 44,913 
Payments for maturing and retiring consolidated obligations
Discount notes(128,303)(109,141)
Bonds(68,002)(45,426)
Proceeds from issuance of capital stock2,915 5,378 
Proceeds from issuance of mandatorily redeemable capital stock18 
Payments for repurchases/redemptions of capital stock(3,994)(6,107)
Payments for repurchases/redemptions of mandatorily redeemable capital stock(176)(63)
Partial recovery of prior capital distribution to Financing Corporation26 
Cash dividends paid(161)(207)
Net cash provided by (used in) financing activities(38,762)(17,898)
Net increase (decrease) in cash and due from banks(241)90 
Cash and due from banks at beginning of the period1,029 119 
Cash and due from banks at end of the period$788 $209 
SUPPLEMENTAL DISCLOSURES
Cash Transactions:
Interest paid$1,151 $2,637 
Affordable Housing Program payments24 28 
Non-Cash Transactions:
Capitalized interest on reverse mortgage investment securities45 95 
Transfers of mortgage loans to other assets
Capital stock reclassified to (from) mandatorily redeemable capital stock, net
Initial right-of-use lease asset recognition
Initial lease liability recognition
The accompanying notes are an integral part of these financial statements.
9

FEDERAL HOME LOAN BANK OF DES MOINES
CONDENSED NOTES TO THE UNAUDITED FINANCIAL STATEMENTS

Background Information

The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation that is exempt from all federal, state, and local taxation (except real property taxes and certain employer payroll taxes) and is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) and were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act) in order to serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank is regulated by the Federal Housing Finance Agency (Finance Agency).

The Bank is a cooperative, meaning it is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain capital stock to support business activities with the Bank. In return, the Bank provides a readily available source of funding and liquidity to its member institutions and eligible housing associates in Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. Commercial banks, savings institutions, credit unions, insurance companies, and community development financial institutions (CDFIs) may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by the Bank’s Board of Directors.


10

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. Accordingly, they do not include all of the disclosures required by GAAP for annual financial statements and should be read in conjunction with the audited financial statements for the year ended December 31, 2019, which are contained in the Bank’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 11, 2020 (2019 Form 10-K).

In the opinion of management, the unaudited financial information is complete and reflects all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of results for the interim periods. The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank’s significant accounting policies during the nine months ended September 30, 2020, with the exception of the policies noted below. Descriptions of all significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” in the 2019 Form 10-K.

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

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

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

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

Investment Securities

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

11

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

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

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

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

Advances

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

Mortgage Loans Held for Portfolio

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

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

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

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

12

Off-Balance Sheet Credit Exposures

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

Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Coronavirus Aid, Relief, and Economic Security (CARES) Act Section 4013
On March 27, 2020, the CARES Act was signed into law and provides optional, temporary relief from the accounting and reporting requirements for troubled debt restructurings (TDRs) on certain loan modifications related to the coronavirus pandemic (COVID-19) that are offered by financial institutions. The modifications that would qualify for this relief include any COVID-19 modification involving a conventional mortgage loan that was not more than 30 days past due as of December 31, 2019 and occurs between March 1, 2020 and the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States.

In the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act on its conventional mortgage loan portfolio. As such, all COVID-19 modifications meeting the provisions of the CARES Act will be excluded from TDR classification and accounting. COVID-19 modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15)
On August 29, 2018, the Financial Accounting Standards Board (FASB) issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance.
The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance outlined in ASC Topic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. They require the customer to expense the capitalized implementation costs over the term of the hosting arrangement. The amendments also require the customer to present the expense in the same line item on the statement of income as the fees associated with the hosting element (service) and classify payments for capitalized implementation costs on the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Lastly, capitalized implementation costs should be presented on the statement of condition in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.
This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020, and was adopted on a prospective basis. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it reduced certain disclosures.
13

Measurement of Credit Losses on Financial Instruments (ASU 2016-13)
On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected. The guidance also requires, among other things, the following:
The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.

Entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of purchased credit deterioration since origination that is measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price of the assets acquired.

Entities to record credit losses relating to AFS debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.

Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).

The FASB issued subsequent amendments to clarify the scope of the credit losses standard and address issues including, but not limited to, accrued interest receivable balances, recoveries, variable interest rates and prepayments. All of this guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020 and was adopted on a modified retrospective basis. Upon adoption, the Bank recorded no credit losses on its advances, standby letters of credit, and other extensions of credit to borrowers as well as its investment portfolio. For its mortgage loans held for portfolio, the Bank recorded a $1 million decrease in its allowance for credit losses through a cumulative effect adjustment to retained earnings on January 1, 2020. This decrease was attributable to recoveries on mortgage loans that were previously written down and have had their collateral values subsequently improve, partially offset by the incorporation of lifetime credit losses on its mortgage loan portfolio.

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

This guidance becomes effective for the Bank upon election of any of the amendments and will be applied prospectively from the date elected until December 31, 2022. For certain hedge accounting optional expedients, they will be applied through the end of the hedging relationship, which could extend beyond December 31, 2022. The Bank is in the process of evaluating this guidance, and its effect on the Bank’s financial condition, results of operations, and cash flows has not yet been determined.

Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for defined benefit plans to improve disclosure effectiveness. This guidance becomes effective for the Bank for the annual period ending on December 31, 2020. Early adoption is permitted; however, the Bank does not intend to early adopt this guidance. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, cash flows, or disclosures.
14

Note 3 — Investments

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

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

The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received a credit rating of triple-B or greater (investment grade) by a Nationally Recognized Statistical Rating Organization (NRSRO). At September 30, 2020, NaN of these investments were with counterparties rated below triple-B; however, approximately 35 percent were secured securities purchased under agreements to resell with unrated counterparties. These may differ from any internal ratings of the investments by the Bank.

Federal funds sold are unsecured loans that are generally transacted on an overnight term. Finance Agency regulations include a limit on the amount of unsecured credit the Bank may extend to a counterparty. At September 30, 2020 and December 31, 2019, no allowance for credit losses was recorded for interest-bearing deposits and federal funds sold as all assets were repaid or expected to be repaid according to their contractual terms. Carrying values of interest-bearing deposits and federal funds sold excluded accrued interest receivable of less than $1 million as of September 30, 2020 and December 31, 2019.

Securities purchased under agreements to resell are secured, short-term, and are structured such that they are evaluated regularly to determine if the market value of the underlying securities decreases below the market value required as collateral (i.e. subject to collateral maintenance provisions). If so, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash, generally by the next business day. Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at September 30, 2020 and December 31, 2019. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of less than $1 million and $2 million as of September 30, 2020 and December 31, 2019.

DEBT SECURITIES

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

Trading Securities

Trading securities by major security type were as follows (dollars in millions):
September 30,
2020
December 31,
2019
Non-mortgage-backed securities
U.S. Treasury obligations1
$4,212 $
Other U.S. obligations1
115 150 
GSE and Tennessee Valley Authority obligations65 60 
Other2
262 259 
     Total non-mortgage-backed securities4,654 469 
Mortgage-backed securities
GSE multifamily386 419 
Total fair value$5,040 $888 

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

2    Consists of taxable municipal bonds.

15

Net Gains (Losses) on Trading Securities

During the three and nine months ended September 30, 2020, the Bank sold trading securities and realized net gains of less than $1 million. The Bank did not sell any trading securities during the three and nine months ended September 30, 2019. During the three and nine months ended September 30, 2020, the Bank recorded net unrealized losses of $10 million and net unrealized gains of $26 million on its trading securities held at period end compared to net unrealized gains of $8 million and $36 million for the same periods in 2019.

AFS Securities

AFS securities by major security type were as follows (dollars in millions):
September 30, 2020
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses

Fair
Value
Non-mortgage-backed securities
Other U.S. obligations2
$1,766 $$(11)$1,759 
GSE and Tennessee Valley Authority obligations1,020 16 1,036 
State or local housing agency obligations736 (24)712 
Other3
292 10 302 
Total non-mortgage-backed securities3,814 30 (35)3,809 
Mortgage-backed securities
U.S. obligations single-family2
3,673 15 (2)3,686 
GSE single-family507 (1)511 
GSE multifamily8,359 35 (39)8,355 
Total mortgage-backed securities12,539 55 (42)12,552 
Total$16,353 $85 $(77)$16,361 

1    Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of $26 million at September 30, 2020.

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

3    Consists of taxable municipal bonds and/or Private Export Funding Corporation (PEFCO) bonds.


16

AFS securities by major security type were as follows (dollars in millions):
December 31, 2019
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses

Fair
Value
Non-mortgage-backed securities
Other U.S. obligations2
$2,122 $$(1)$2,127 
GSE and Tennessee Valley Authority obligations1,034 26 1,060 
State or local housing agency obligations761 (5)756 
Other3
276 285 
Total non-mortgage-backed securities4,193 41 (6)4,228 
Mortgage-backed securities
U.S. obligations single-family2
4,044 17 (2)4,059 
GSE single-family646 (1)649 
GSE multifamily7,720 13 (18)7,715 
Total mortgage-backed securities12,410 34 (21)12,423 
Total$16,603 $75 $(27)$16,651 

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

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

3    Consists of taxable municipal bonds and/or Private Export Funding Corporation (PEFCO) bonds.


17

Unrealized Losses

The following tables summarize AFS securities with unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
September 30, 2020
Less than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities
Other U.S. obligations1
$550 $(3)$747 $(8)$1,297 $(11)
State or local housing agency obligations403 (16)296 (8)699 (24)
Total non-mortgage-backed securities953 (19)1,043 (16)1,996 (35)
Mortgage-backed securities
U.S. obligations single-family1
205 649 (2)854 (2)
GSE single-family78 (1)78 (1)
GSE multifamily1,668 (10)3,694 (29)5,362 (39)
Total mortgage-backed securities1,873 (10)4,421 (32)6,294 (42)
Total$2,826 $(29)$5,464 $(48)$8,290 $(77)

December 31, 2019
Less than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities
Other U.S. obligations1
$196 $$706 $(1)$902 $(1)
State or local housing agency obligations57 344 (5)401 (5)
Total non-mortgage-backed securities253 1,050 (6)1,303 (6)
Mortgage-backed securities
U.S. obligations single-family1
169 564 (2)733 (2)
GSE single-family133 104 (1)237 (1)
GSE multifamily2,001 (8)2,766 (10)4,767 (18)
Total mortgage-backed securities2,303 (8)3,434 (13)5,737 (21)
Total$2,556 $(8)$4,484 $(19)$7,040 $(27)

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




18

Contractual Maturity

The following table summarizes AFS securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
September 30, 2020December 31, 2019
Year of Contractual MaturityAmortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Non-mortgage-backed securities
Due in one year or less$$$92 $92 
Due after one year through five years2,179 2,183 2,099 2,110 
Due after five years through ten years864 861 1,294 1,302 
Due after ten years762 756 708 724 
Total non-mortgage-backed securities3,814 3,809 4,193 4,228 
Mortgage-backed securities12,539 12,552 12,410 12,423 
Total$16,353 $16,361 $16,603 $16,651 

Net Gains (Losses) from Sale of AFS Securities

During the three and nine months ended September 30, 2020 and 2019, the Bank did not sell any AFS securities.

19

HTM Securities

HTM securities by major security type were as follows (dollars in millions):
September 30, 2020
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations$380 $102 $$482 
State or local housing agency obligations207 (1)208 
Total non-mortgage-backed securities587 104 (1)690 
Mortgage-backed securities
U.S. obligations single-family2
GSE single-family1,371 (1)1,379 
Private-label
Total mortgage-backed securities1,381 (1)1,389 
Total$1,968 $113 $(2)$2,079 

December 31, 2019
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations$384 $72 $$456 
State or local housing agency obligations221 (1)221 
Total non-mortgage-backed securities605 73 (1)677 
Mortgage-backed securities
U.S. obligations single-family2
U.S. obligations commercial2
GSE single-family1,752 (7)1,749 
Private-label
Total mortgage-backed securities1,765 (7)1,762 
Total$2,370 $77 $(8)$2,439 

1    Amortized cost includes adjustments made to the cost basis of an investment for accretion or amortization and excludes accrued interest receivable of $11 million and $7 million as of September 30, 2020 and December 31, 2019.

2    Represents investment securities backed by the full faith and credit of the U.S. Government.
20

Contractual Maturity

The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
September 30, 2020December 31, 2019
Year of Contractual MaturityAmortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Non-mortgage-backed securities
Due after five years through ten years$451 $504 $412 $446 
Due after ten years136 186 193 231 
Total non-mortgage-backed securities587 690 605 677 
Mortgage-backed securities1,381 1,389 1,765 1,762 
Total$1,968 $2,079 $2,370 $2,439 

Net Gains (Losses) from Sale of HTM Securities

During the three and nine months ended September 30, 2020 and 2019, the Bank did not sell any HTM securities.

ALLOWANCE FOR CREDIT LOSSES ON AFS AND HTM SECURITIES

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

AFS and HTM Securities (Excluding Private-label MBS)

The Bank’s AFS and HTM securities may include, but are not limited to, certificates of deposit, commercial paper, U.S. obligations, GSE and Tennessee Valley Authority (TVA) obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. The Bank only purchases securities considered investment quality. Excluding private-label MBS, at September 30, 2020, all of the Bank’s AFS securities and HTM securities, based on amortized cost, were rated single-A, or above, by an NRSRO, based on the lowest long-term credit rating for each security. These may differ from any internal ratings of the securities by the Bank.

The Bank evaluates its individual AFS securities for impairment by comparing the security’s fair value to its amortized cost. Impairment may exist when the fair value of the investment is less than its amortized cost (i.e. in an unrealized loss position). At September 30, 2020, certain AFS securities held by the Bank were in an unrealized loss position. These losses are considered temporary as the Bank expects to recover the entire amortized cost basis on these AFS investment securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. Further, the Bank has not experienced any payment defaults on the instruments. In addition, substantially all of these securities carry an implicit or explicit government guarantee. As a result, 0 allowance for credit losses was recorded on these AFS securities at September 30, 2020.

The Bank evaluates its HTM securities for impairment on a collective, or pooled basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. As of September 30, 2020, the Bank had 0 allowance for credit losses recorded on its HTM securities because the securities: (i) were all highly-rated, (ii) had not experienced, nor did the Bank expect, any payment default on the instruments, and (iii) in the case of U.S. obligations and GSE and TVA obligations, carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero.

21

Private-label MBS

The Bank holds investments in private-label MBS classified as HTM. As of September 30, 2020, these investments represented less than one percent of the Bank’s HTM portfolio and approximately 69 percent of these securities, based on amortized cost, were rated single-A, or above, by an NRSRO. As of September 30, 2020, the Bank had 0 allowance for credit losses recorded on its private-label MBS because the securities (i) were highly-rated and/or (ii) had not experienced, nor did the Bank expect, any payment default on the instruments.

Note 4 — Advances

REDEMPTION TERM

The following table summarizes the Bank’s advances outstanding by redemption term (dollars in millions):
September 30, 2020December 31, 2019
Redemption Term
Amount1
Weighted
Average
Interest
Rate
Amount1
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts2
$1.30 %$2.73 %
Due in one year or less14,093 1.02 35,432 1.97 
Due after one year through two years9,379 1.83 21,959 2.23 
Due after two years through three years9,590 1.43 8,693 2.33 
Due after three years through four years6,886 1.65 5,109 2.51 
Due after four years through five years4,570 1.20 5,978 2.17 
Thereafter3,397 2.26 3,013 2.72 
Total par value47,915 1.46 %80,185 2.16 %
Premiums21 25 
Discounts(4)(6)
Fair value hedging adjustments530 156 
Total$48,462 $80,360 

1    Excludes accrued interest receivable of $15 million and $91 million as of September 30, 2020 and December 31, 2019.

2    The amount at September 30, 2020 was less than $1 million.

The following table summarizes advances by year of redemption term or next call date for callable advances, and by year of redemption term or next put date for putable advances (dollars in millions):
Redemption Term
or Next Call Date
Redemption Term
or Next Put Date
September 30,
2020
December 31, 2019September 30,
2020
December 31, 2019
Overdrawn demand deposit accounts$$$$
Due in one year or less24,216 53,156 15,125 36,278 
Due after one year through two years7,486 11,967 9,383 22,101 
Due after two years through three years5,819 5,427 9,615 8,730 
Due after three years through four years4,676 3,802 5,951 5,004 
Due after four years through five years2,445 3,461 4,455 5,069 
Thereafter3,273 2,371 3,386 3,002 
Total par value$47,915 $80,185 $47,915 $80,185 
The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). Other advances may require a prepayment fee or credit that makes the Bank financially indifferent to the prepayment of the advance. At September 30, 2020 and December 31, 2019, the Bank had callable advances outstanding totaling $10.5 billion and $25.5 billion.

22

The Bank holds certain putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on the predetermined exercise dates. Generally, these put options are exercised when interest rates increase relative to contractual rates. At both September 30, 2020 and December 31, 2019, the Bank had putable advances outstanding totaling $1.4 billion.

PREPAYMENT FEES

The Bank generally charges a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank financially indifferent to the prepayment of the advance. For certain advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Prepayment fees and credits are recorded net of the hedged item fair value hedging adjustments in advance income on the Statements of Income. During the three and nine months ended September 30, 2020, the Bank recorded prepayment fees on advances, net of $45 million and $58 million compared to $2 million and $3 million for the same periods in 2019.

ADVANCE CONCENTRATIONS

The Bank’s advances are concentrated in commercial banks, savings institutions, and insurance companies. At September 30, 2020, the Bank did not have any members who individually held 10 percent or more of the Bank’s advances. At December 31, 2019, the Bank had outstanding advances of $25.5 billion to Wells Fargo Bank, N.A. who individually held 10 percent or more of the Bank’s advances, which represented 32 percent of the total principal amount of outstanding advances.

ALLOWANCE FOR CREDIT LOSSES

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

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

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

Eligible collateral includes:

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

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

cash deposited with the Bank; and

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

Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank has a lien on each member’s capital stock investment; however, capital stock cannot be pledged as collateral to secure advances.
23


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

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

Using a risk-based approach and taking into consideration each borrower’s financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its advances. At September 30, 2020 and December 31, 2019, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, as applicable, in excess of its outstanding advances.

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

At September 30, 2020 and December 31, 2019, none of the Bank’s advances were past due, on non-accrual status, or considered impaired. In addition, there were no TDRs related to advances during the nine months ended September 30, 2020 and 2019.

The Bank has never experienced a credit loss on its advances. Based upon the Bank’s collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no expected credit losses on its advances as of September 30, 2020. For the same reasons, the Bank did not record any allowance for credit losses for its advances at December 31, 2019.

Note 5 — Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio includes conventional mortgage loans and government-guaranteed or -insured mortgage loans obtained through the Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) and the Mortgage Purchase Program (MPP). The MPF program, which represented 98 percent of the Bank’s mortgage loans held for portfolio at both September 30, 2020 and December 31, 2019, involves investment by the Bank in single-family mortgage loans held for portfolio that are either purchased from participating financial institutions (PFIs) or funded by the Bank through PFIs. MPF loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank’s MPF PFIs generally originate, service, and credit enhance mortgage loans that are sold to the Bank. MPF PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the MPF PFI to a designated mortgage service provider.

Under the MPP, the Bank acquired single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to the Bank. The MPP program represented two percent of the Bank’s mortgage loans held for portfolio at both September 30, 2020 and December 31, 2019. The Bank does not currently purchase mortgage loans under this program. All loans in this portfolio were originated prior to 2006.

24

The following table presents information on the Bank’s mortgage loans held for portfolio (dollars in millions):
September 30,
2020
December 31, 2019
Fixed rate, long-term single-family mortgage loans$7,435 $8,192 
Fixed rate, medium-term1 single-family mortgage loans
1,177 1,016 
Total unpaid principal balance8,612 9,208 
Premiums114 125 
Discounts(3)(4)
Basis adjustments from mortgage loan purchase commitments13 
Total mortgage loans held for portfolio2
8,736 9,335 
Allowance for credit losses(3)(1)
Total mortgage loans held for portfolio, net$8,733 $9,334 

1    Medium-term is defined as a term of 15 years or less.

2    Excludes accrued interest receivable of $43 million and $48 million as of September 30, 2020 and December 31, 2019.


The following table presents the Bank’s mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):
September 30,
2020
December 31, 2019
Conventional mortgage loans$8,117 $8,712 
Government-insured mortgage loans495 496 
Total unpaid principal balance$8,612 $9,208 

PAYMENT STATUS OF MORTGAGE LOANS

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

The following tables present the payment status for MPF and MPP conventional mortgage loans (dollars in millions):
September 30, 2020
Origination Year
Prior to 20162016 to 2020Total
Past due 30 - 59 days$21 $21 $42 
Past due 60 - 89 days13 12 25 
Past due 90 - 179 days38 46 84 
Past due 180 days or more12 13 
Total past due mortgage loans84 80 164 
Total current mortgage loans2,193 5,874 8,067 
Total amortized cost of mortgage loans1
$2,277 $5,954 $8,231 
December 31, 2019
Past due 30 - 59 days$57 
Past due 60 - 89 days14 
Past due 90 - 179 days10 
Past due 180 days or more10 
Total past due mortgage loans91 
Total current mortgage loans8,783 
Total recorded investment of mortgage loans1
$8,874 

1    Amortized cost represents the unpaid principal balance adjusted for unamortized premiums, discounts, basis adjustments, and direct write-downs. Recorded investment at December 31, 2019 includes accrued interest receivable whereas the amortized cost at September 30, 2020 excludes accrued interest receivable.
25

Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications related to COVID-19. The modifications that would qualify for this relief include any COVID-19 modification involving a conventional mortgage loan, including a forbearance arrangement, an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest. To be eligible under the CARES Act, the conventional loan must be not more than 30 days past due as of December 31, 2019 and the modification must occur between March 1, 2020 and the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States.

In the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act on its conventional mortgage loan portfolio. As such, all COVID-19 modifications meeting the provisions of the CARES Act will be excluded from TDR classification and accounting. The Bank had NaN of these modifications outstanding as of September 30, 2020. COVID-19 modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification.

The Bank’s servicers may grant a forbearance period to borrowers who have requested forbearance based on COVID-19 related difficulties regardless of the status of the loan at the time of the request. The Bank continues to apply its accounting policy for past due loans and charge-offs to loans during the forbearance period. The accrual status for loans under forbearance will be driven by the past due status of the loan as the legal terms of the contractual arrangement have not been modified.

The following table presents the unpaid principal balance of conventional loans in a forbearance plan as a result of COVID-19 (dollars in millions):
September 30, 2020
Past due 30 - 59 days$
Past due 60 - 89 days13 
Past due 90 days or more and in non-accrual status54 
Current mortgage loans
Total unpaid principal balance1
$85 

1    These conventional loans in forbearance represent one percent of the Bank’s mortgage loans held for portfolio at September 30, 2020.    


The following tables present other delinquency statistics for MPF and MPP mortgage loans (dollars in millions):
September 30, 2020
Amortized CostConventionalGovernment-InsuredTotal
In process of foreclosure1
$$$
Serious delinquency rate2
%%%
Past due 90 days or more and still accruing interest3
$$11 $11 
Non-accrual mortgage loans4
$106 $$106 

December 31, 2019
Recorded InvestmentConventionalGovernment- InsuredTotal
In process of foreclosure1
$$$
Serious delinquency rate2
%%%
Past due 90 days or more and still accruing interest3
$$$
Non-accrual mortgage loans4
$31 $$31 

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

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

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

4    Represents conventional mortgage loans that are 90 days or more past due or TDRs. As of September 30, 2020, none of these conventional mortgage loans on non-accrual status had an associated allowance for expected credit losses.



26

ALLOWANCE FOR CREDIT LOSSES

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

Conventional Mortgage Loans

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

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

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

At September 30, 2020 and December 31, 2019, the Bank’s allowance for credit losses on conventional mortgage loans totaled $3 million and $1 million. As a result of adopting Measurement of Credit Losses on Financial Instruments (ASU 2016-13), the Bank recorded a $1 million decrease in its allowance for credit losses through a cumulative effect adjustment to retained earnings on January 1, 2020. This decrease was attributable to recoveries on conventional mortgage loans that were previously written down and have had their collateral values subsequently improve, partially offset by the incorporation of lifetime credit losses on its mortgage loan portfolio. During the nine months ended September 30, 2020, the Bank’s cash flow model for collectively evaluated loans projected an increase in expected credit losses due primarily to increased loan delinquencies, including those associated with COVID-19 related forbearance plans, and also due to a deceleration in forecasted regional home price appreciation. Expected recoveries of prior charge-offs remained stable during the nine months ended September 30, 2020.

Government-Insured Mortgage Loans

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

The Bank has never experienced a credit loss on its government-insured mortgage loans. As of September 30, 2020, the Bank assessed its servicers and determined there was no expectation that a servicer would fail to remit payments due until paid in full. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at September 30, 2020 and December 31, 2019. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

27

Note 6 — Derivatives and Hedging Activities

NATURE OF BUSINESS ACTIVITY

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

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

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

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

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

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

manage embedded options in assets and liabilities; and

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

TYPES OF DERIVATIVES

The Bank may use the following derivative instruments:

interest rate swaps;

options;

swaptions;

interest rate caps and floors; and

futures/forwards contracts.

The Bank may have the following types of hedged items:

investment securities;

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

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

28

FINANCIAL STATEMENT EFFECT AND ADDITIONAL FINANCIAL INFORMATION

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

The following table summarizes the Bank’s notional amount and fair value of derivative instruments and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest (dollars in millions):
September 30, 2020December 31, 2019
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedging instruments (fair value hedges)
Interest rate swaps$34,883 $43 $285 $37,684 $31 $159 
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps1,807 12 84 1,038 43 
Forward settlement agreements (TBAs)176 122 
Mortgage loan purchase commitments182 127 
Total derivatives not designated as hedging instruments2,165 12 84 1,287 43 
Total derivatives before netting and collateral adjustments$37,048 55 369 $38,971 39 202 
Netting adjustments and cash collateral1
187 (369)63 (201)
Total derivative assets and derivative liabilities$242 $$102 $

1     Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral, including accrued interest, held or placed with the same clearing agent and/or counterparty. At September 30, 2020 and December 31, 2019, cash collateral, including accrued interest, posted by the Bank was $557 million and $264 million. At September 30, 2020 the Bank held cash collateral, including accrued interest, from clearing agents or counterparties of $1 million. At December 31, 2019, the Bank did not hold any cash collateral, including accrued interest, from clearing agents or counterparties.

29

The following tables summarize the income effect from fair value hedging relationships recorded in net interest income as well as total income (expense) by product recorded on the Statements of Income (dollars in millions):
For the Three Months Ended September 30, 2020
Interest Income (Expense)
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$185 $33 $(147)
Gains (losses) on fair value hedging relationships
Interest rate contracts
   Derivatives2
$15 $21 $
   Hedged items3
(82)(55)42 
Net gains (losses) on fair value hedging relationships$(67)$(34)$42 
For the Three Months Ended September 30, 2019
Interest Income (Expense)
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$569 $118 $(579)
Gains (losses) on fair value hedging relationships
Interest rate contracts
Derivatives2
$(48)$(72)$21 
Hedged items3
60 63 (52)
Net gains (losses) on fair value hedging relationships$12 $(9)$(31)

1     Amounts shown to give context to the disclosure and include total interest income (expense) of the products indicated, including coupon, prepayment fees, amortization, and derivative net interest settlements. Interest income (expense) amounts also include gains and losses on derivatives and hedged items in fair value hedging relationships.
2     Includes changes in fair value, net interest settlements on derivatives, and amortization of the financing element of off-market derivatives.     
3    Includes changes in fair value and amortization/accretion of basis adjustments on closed hedge relationships.
30

The following tables summarize the income effect from fair value hedging relationships recorded in net interest income as well as total income (expense) by product recorded on the Statements of Income (dollars in millions):
For the Nine Months Ended September 30, 2020
Interest Income (Expense)
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$815 $170 $(780)
Gains (losses) on fair value hedging relationships
Interest rate contracts
   Derivatives2
$(486)$(329)$261 
   Hedged items3
374 248 (185)
Net gains (losses) on fair value hedging relationships$(112)$(81)$76 
For the Nine Months Ended September 30, 2019
Interest Income (Expense)
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$1,997 $394 $(1,810)
Gains (losses) on fair value hedging relationships
Interest rate contracts
Derivatives2
$(288)$(299)$217 
Hedged items3
344 294 (375)
Net gains (losses) on fair value hedging relationships$56 $(5)$(158)

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

2     Includes changes in fair value, net interest settlements on derivatives, and amortization of the financing element of off-market derivatives.

3     Includes changes in fair value and amortization/accretion of basis adjustments on closed hedge relationships.
31

The following tables summarize cumulative fair value hedging adjustments and the related amortized cost of the hedged items (dollars in millions):
September 30, 2020
Line Item on Statements of Condition
Amortized Cost of Hedged Asset/ Liability1
Changes in Fair Value for Active Hedging Relationships Included in Amortized CostBasis Adjustments for Discontinued Hedging Relationships Included in Amortized CostTotal Amount of Fair Value Hedging Basis Adjustments
Advances$17,859 $507 $23 $530 
Available-for-sale securities7,193 415 415 
Consolidated obligation bonds13,535 197 (11)186 
December 31, 2019
Line Item on Statements of Condition
Amortized Cost of Hedged Asset/ Liability1
Changes in Fair Value for Active Hedging Relationships Included in Amortized CostBasis Adjustments for Discontinued Hedging Relationships Included in Amortized CostTotal Amount of Fair Value Hedging Basis Adjustments
Advances$14,806 $146 $10 $156 
Available-for-sale securities6,221 167 167 
Consolidated obligation bonds20,256 16 (15)
1    Includes the portion of amortized cost representing the hedged items in fair value hedging relationships.

The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented on the Statements of Income (dollars in millions):
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2020201920202019
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps$$(12)$(40)$(45)
Forward settlement agreements (TBAs)(1)(2)(11)(6)
Mortgage loan purchase commitments
Net interest settlements(5)(10)
Net gains (losses) on derivatives and hedging activities$$(12)$(52)$(45)


MANAGING CREDIT RISK ON DERIVATIVES

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

32

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

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

Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a NRSRO, the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions, unless the collateral delivery threshold is set to zero. The aggregate fair value of all uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at September 30, 2020 was less than $1 million, for which the Bank was not required to post collateral in the normal course of business. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would not have been required to deliver additional collateral to its uncleared derivative counterparties at September 30, 2020.
For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Bank utilizes one Clearinghouse, CME Clearing for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin requirements, and the clearing agent in turn notifies the Bank.

The Clearinghouse determines initial margin requirements which are considered cash collateral. Generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agent, based on credit considerations, at September 30, 2020. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, rather than cash collateral.

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

OFFSETTING OF DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

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

The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and has determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.
33

The following tables present the fair value of derivative instruments meeting or not meeting the netting requirements and the related collateral received from or pledged to counterparties (dollars in millions):
September 30, 2020
Derivative Instruments Meeting Netting Requirements
Gross Amount Recognized1
Gross Amount of Netting Adjustments and Cash Collateral
Derivative Instruments Not Meeting Netting Requirements2
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
   Uncleared derivatives$49 $(44)$$
   Cleared derivatives231 237 
Total$55 $187 $$242 
Derivative Liabilities
   Uncleared derivatives$368 $(368)$$
   Cleared derivatives(1)
Total$369 $(369)$$
December 31, 2019
Derivative Instruments Meeting Netting Requirements
Gross Amount Recognized1
Gross Amount of Netting Adjustments and Cash Collateral
Derivative Instruments Not Meeting Netting Requirements2
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
   Uncleared derivatives$34 $(28)$$
   Cleared derivatives91 96 
Total$39 $63 $$102 
Derivative Liabilities
   Uncleared derivatives$199 $(198)$$
   Cleared derivatives(3)
Total$202 $(201)$$

1    Represents derivative assets and derivative liabilities prior to netting adjustments and cash collateral, including accrued interest.

2    Represents mortgage loan purchase commitments not subject to enforceable master netting requirements.


Note 7 — Consolidated Obligations

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

    Although the Bank is primarily liable for the portion of consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all FHLBank System consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority. At September 30, 2020 and December 31, 2019, the total par value of outstanding consolidated obligations of the FHLBanks was $819.9 billion and $1,025.9 billion.

34

DISCOUNT NOTES

The following table summarizes the Bank’s discount notes (dollars in millions):
September 30, 2020December 31, 2019
AmountWeighted
Average
Interest
Rate
AmountWeighted
Average
Interest
Rate
Par value$30,935 0.12 %$29,592 1.65 %
Discounts and concessions1
(7)(61)
Total$30,928 $29,531 

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


BONDS

The following table summarizes the Bank’s bonds outstanding by contractual maturity (dollars in millions):
September 30, 2020December 31, 2019
Year of Contractual MaturityAmountWeighted
Average
Interest
Rate
AmountWeighted
Average
Interest
Rate
Due in one year or less$28,538 0.69 %$58,106 1.81 %
Due after one year through two years9,516 2.18 16,997 1.91 
Due after two years through three years3,454 2.30 3,907 2.35 
Due after three years through four years3,588 3.05 3,083 2.53 
Due after four years through five years1,294 2.30 3,503 3.03 
Thereafter5,580 2.61 5,777 3.00 
Total par value51,970 1.48 %91,373 1.99 %
Premiums215 217 
Discounts and concessions1
(28)(38)
Fair value hedging adjustments186 
Total$52,343 $91,553 

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


The following table summarizes the Bank’s bonds outstanding by call features (dollars in millions):
September 30,
2020
December 31,
2019
Non-callable or non-putable$48,687 $87,246 
Callable3,283 4,127 
Total par value$51,970 $91,373 

The following table summarizes the Bank’s bonds outstanding by year of contractual maturity or next call date (dollars in millions):
Year of Contractual Maturity or Next Call DateSeptember 30,
2020
December 31,
2019
Due in one year or less$30,881 $60,639 
Due after one year through two years10,198 17,643 
Due after two years through three years3,587 4,410 
Due after three years through four years3,638 2,788 
Due after four years through five years1,135 3,376 
Thereafter2,531 2,517 
Total par value$51,970 $91,373 


35

Note 8 — Capital

CAPITAL STOCK

The Bank’s capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. The Bank generally issues a single class of capital stock (Class B stock) and has 2 subclasses of capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding on the Bank’s Statements of Condition. All capital stock issued is subject to a notice of redemption period of five years.

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

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under its Capital Plan, the Bank, at its discretion and upon 15 days’ written notice, may repurchase excess membership capital stock. The Bank, at its discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At September 30, 2020 and December 31, 2019, the Bank’s excess capital stock outstanding was less than $1 million.

MANDATORILY REDEEMABLE CAPITAL STOCK

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

At September 30, 2020 and December 31, 2019, the Bank’s mandatorily redeemable capital stock totaled $54 million and $206 million. During the three and nine months ended September 30, 2020, interest expense on mandatorily redeemable capital stock was $1 million and $5 million. Interest expense on mandatorily redeemable capital stock was $2 million and $9 million for the three and nine months ended September 30, 2019.

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

36

The following tables summarize changes in mandatorily redeemable capital stock (dollars in millions):
For the Three Months Ended September 30,
20202019
Balance, beginning of period$81 $203 
Net payments for repurchases/redemptions of mandatorily redeemable capital stock(27)(1)
Balance, end of period$54 $202 

For the Nine Months Ended September 30,
20202019
Balance, beginning of period$206 $255 
Capital stock reclassified to (from) mandatorily redeemable capital stock, net
Net payments for repurchases/redemptions of mandatorily redeemable capital stock(158)(62)
Balance, end of period$54 $202 

The following table summarizes the Bank’s mandatorily redeemable capital stock by year of contractual redemption (dollars in millions):
Year of Contractual Redemption1
September 30,
2020
December 31, 2019
Due after one year through two years$11 $
Due after two years through three years11 
Due after three years through four years
Thereafter2
28 175 
Past contractual redemption date due to outstanding activity with the Bank12 14 
Total$54 $206 

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

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

RESTRICTED RETAINED EARNINGS

The Bank entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of the Bank over time. Under the JCE Agreement, each FHLBank is required to allocate 20 percent of its quarterly net income to a separate restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations calculated as of the last day of each calendar quarter. The restricted retained earnings are not available to pay dividends. At September 30, 2020 and December 31, 2019, the Bank’s restricted retained earnings account totaled $569 million and $504 million.

PARTIAL RECOVERY OF PRIOR CAPITAL DISTRIBUTION TO FINANCING CORPORATION

The Competitive Equality Banking Act of 1987 was enacted in August 1987, which, among other things, provided for the recapitalization of the Federal Savings and Loan Insurance Corporation through a newly-chartered entity, the Financing Corporation (FICO). The capitalization of FICO was provided by capital distributions from the FHLBanks to FICO in exchange for FICO nonvoting capital stock. Capital distributions were made by the FHLBanks in 1987, 1988, and 1989 that aggregated to $680 million. Upon passage of Financial Institutions Reform, Recovery and Enforcement Act of 1989, the FHLBanks’ previous investment in capital stock of FICO was determined to be non-redeemable and the FHLBanks charged their prior capital distributions to FICO directly against retained earnings.

37

In connection with the dissolution of FICO in July 2020, FICO determined that excess funds aggregating to $200 million were available for distribution to its stockholders, the FHLBanks, and FICO distributed these funds to the FHLBanks in June 2020. Specifically, the Bank’s partial recovery of prior capital distribution approximated $26 million, which was determined based on its share of the $680 million originally contributed. The FHLBanks treated the receipt of these funds as a return of the FHLBanks’ investment in FICO capital stock, and therefore as a partial recovery of the prior capital distributions made by the FHLBanks to FICO. These funds have been credited to unrestricted retained earnings.

ACCUMULATED OTHER COMPREHENSIVE INCOME

The following table summarizes changes in AOCI (dollars in millions):
Net unrealized gains (losses) on AFS securities (Note 3)Pension and postretirement benefitsTotal AOCI
Balance, June 30, 2019$56 $(3)$53 
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities(17)(17)
Net current period other comprehensive income (loss)(17)(17)
Balance, September 30, 2019$39 $(3)$36 
Balance, June 30, 2020$(56)$(4)$(60)
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities64 64 
Reclassifications from other comprehensive income (loss) to net income
Amortization - pension and postretirement
Net current period other comprehensive income (loss)64 65 
Balance, September 30, 2020$$(3)$
Balance, December 31, 2018$87 $(3)$84 
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities(48)(48)
Net current period other comprehensive income (loss)(48)(48)
Balance, September 30, 2019$39 $(3)$36 
Balance, December 31, 2019$48 $(4)$44 
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities(40)(40)
Reclassifications from other comprehensive income (loss) to net income
Amortization - pension and postretirement
Net current period other comprehensive income (loss)(40)(39)
Balance, September 30, 2020$$(3)$

REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to 3 regulatory capital requirements:

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

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

38

Leverage capital. The Bank is required to maintain a minimum five percent leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. The Bank did not hold any nonpermanent capital at September 30, 2020 and December 31, 2019.

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

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

The following table shows the Bank’s compliance with the Finance Agency’s regulatory capital requirements (dollars in millions):
September 30, 2020December 31, 2019
RequiredActualRequiredActual
Regulatory capital requirements
Risk-based capital$706 $5,845 $1,138 $6,888 
Regulatory capital$3,646 $5,845 $5,184 $6,888 
Leverage capital$4,558 $8,767 $6,480 $10,332 
Capital-to-assets ratio4.00 %6.41 %4.00 %5.31 %
Capital stock-to-assets ratio2.00 %3.72 %
N/A1
N/A1
Leverage ratio5.00 %9.62 %5.00 %7.97 %

1     The Capital Stock AB became effective in February 2020.

Note 9 — Fair Value

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

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

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

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

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

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. The Bank had no transfers of assets or liabilities between fair value levels during the nine months ended September 30, 2020 and 2019.

39

The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at September 30, 2020 (dollars in millions). The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio on a non-recurring basis. The Bank records all other financial assets and liabilities at amortized cost. The fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.
Fair Value
Financial InstrumentsCarrying ValueLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Cash and due from banks$788 $788 $$$— $788 
Interest-bearing deposits436 436 — 436 
Securities purchased under agreements to resell3,300 3,300 — 3,300 
Federal funds sold5,600 5,600 — 5,600 
Trading securities5,040 5,040 — 5,040 
Available-for-sale securities16,361 16,361 — 16,361 
Held-to-maturity securities1,968 2,073 — 2,079 
Advances48,462 49,084 — 49,084 
Mortgage loans held for portfolio, net8,733 8,973 49 — 9,022 
Accrued interest receivable110 110 — 110 
Derivative assets, net242 55 187 242 
Other assets35 35 — 35 
Liabilities
Deposits(1,614)(1,614)— (1,614)
Consolidated obligations
Discount notes(30,928)(30,930)— (30,930)
Bonds(52,343)(53,436)— (53,436)
Total consolidated obligations(83,271)(84,366)— (84,366)
Mandatorily redeemable capital stock(54)(54)— (54)
Accrued interest payable(181)(181)— (181)
Derivative liabilities, net(369)369 

1    Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.
40

The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at December 31, 2019 (dollars in millions):
Fair Value
Financial InstrumentsCarrying ValueLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Cash and due from banks$1,029 $1,029 $$$— $1,029 
Interest-bearing deposits— 
Securities purchased under agreements to resell13,950 13,950 — 13,950 
Federal funds sold4,605 4,605 — 4,605 
Trading securities888 888 — 888 
Available-for-sale securities16,651 16,651 — 16,651 
Held-to-maturity securities2,370 2,432 — 2,439 
Advances80,360 80,576 — 80,576 
Mortgage loans held for portfolio, net9,334 9,458 52 — 9,510 
Accrued interest receivable195 195 — 195 
Derivative assets, net102 39 63 102 
Other assets34 34 — 34 
Liabilities
Deposits(1,112)(1,112)— (1,112)
Consolidated obligations
Discount notes(29,531)(29,532)— (29,532)
Bonds(91,553)(92,002)— (92,002)
Total consolidated obligations(121,084)(121,534)— (121,534)
Mandatorily redeemable capital stock(206)(206)— (206)
Accrued interest payable(252)(252)— (252)
Derivative liabilities, net(1)(202)201 (1)

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

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

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

41

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

As of September 30, 2020 and December 31, 2019, multiple prices were received for the majority of the Bank’s trading and AFS investment securities. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy.

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

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

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

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

Discount rate assumption. The Bank utilizes the federal funds OIS curve. 

Forward interest rate assumption. The Bank utilizes the LIBOR swap curve or federal funds OIS curve.

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

42

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

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

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

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

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

43

FAIR VALUE ON A RECURRING BASIS

The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on the Statements of Condition at September 30, 2020 (dollars in millions):
Recurring Fair Value MeasurementsLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Trading securities
U.S. Treasury obligations$$4,212 $$— $4,212 
Other U.S. obligations115 — 115 
GSE and Tennessee Valley Authority obligations65 — 65 
Other non-MBS
262 — 262 
GSE multifamily MBS386 — 386 
Total trading securities5,040 — 5,040 
Available-for-sale securities
Other U.S. obligations1,759 — 1,759 
GSE and Tennessee Valley Authority obligations1,036 — 1,036 
State or local housing agency obligations712 — 712 
Other non-MBS302 — 302 
U.S. obligations single-family MBS3,686 — 3,686 
GSE single-family MBS511 — 511 
GSE multifamily MBS8,355 — 8,355 
Total available-for-sale securities16,361 — 16,361 
Derivative assets, net
Interest-rate related55 187 242 
Other assets35 — 35 
Total recurring assets at fair value$35 $21,456 $$187 $21,678 
Liabilities
Derivative liabilities, net
Interest-rate related(369)369 
Total recurring liabilities at fair value$$(369)$$369 $

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

44

The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on the Statements of Condition at December 31, 2019 (dollars in millions):
Recurring Fair Value MeasurementsLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Trading securities
Other U.S. obligations$$150 $$— $150 
GSE and Tennessee Valley Authority obligations60 — 60 
Other non-MBS
259 — 259 
GSE multifamily MBS419 — 419 
Total trading securities888 — 888 
Available-for-sale securities
Other U.S. obligations2,127 — 2,127 
GSE and Tennessee Valley Authority obligations1,060 — 1,060 
State or local housing agency obligations756 — 756 
Other non-MBS285 — 285 
U.S. obligations single-family MBS4,059 — 4,059 
GSE single-family MBS649 — 649 
GSE multifamily MBS7,715 — 7,715 
Total available-for-sale securities16,651 — 16,651 
Derivative assets, net
Interest-rate related39 63 102 
Other assets34 — 34 
Total recurring assets at fair value$34 $17,578 $$63 $17,675 
Liabilities
Derivative liabilities, net
Interest-rate related(202)201 (1)
Total recurring liabilities at fair value$$(202)$$201 $(1)

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


FAIR VALUE ON A NON-RECURRING BASIS

    The Bank measures certain impaired mortgage loans held for portfolio at level 3 fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances. At September 30, 2020 and December 31, 2019, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $1 million and $2 million. These fair values were as of the date the fair value adjustment was recorded during the nine months ended September 30, 2020 and year-ended December 31, 2019.

45

Note 10 — Commitments and Contingencies

Joint and Several Liability. The FHLBanks have joint and several liability for all consolidated obligations issued. Accordingly, if an FHLBank were unable to repay any consolidated obligation for which it is the primary obligor, each of the other FHLBanks could be called upon by the Finance Agency to repay all or part of such obligations. No FHLBank has ever been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. At September 30, 2020 and December 31, 2019, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable was approximately $737.0 billion and $904.9 billion.

The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):
September 30, 2020December 31, 2019
Expire
within one year
Expire
after one year
Total1
Total
Standby letters of credit2
$9,520 $79 $9,599 $10,193 
Standby bond purchase agreements432 423 855 819 
Commitments to purchase mortgage loans182 182 127 
Commitments to issue bonds55 55 
Commitments to fund advances713 713 527 

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

2    Excludes commitments to issue standby letters of credit of $34 million at December 31, 2019. At September 30, 2020, the Bank had 0 commitments to issue standby letters of credit outstanding.

Standby Letters of Credit. The Bank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed with members for a fee. If the Bank is required to make payment for a beneficiary’s draw, the member either reimburses the Bank for the amount drawn or, subject to the Bank’s discretion, the amount drawn may be converted into a collateralized advance to the member. The original terms of standby letters of credit outstanding at September 30, 2020, range from less than one month to 10 years, currently no later than 2025. The carrying value of guarantees related to standby letters of credit are recorded in “Other liabilities” on the Statements of Condition and amounted to $2 million at both September 30, 2020 and December 31, 2019.

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

Standby Bond Purchase Agreements. The Bank has entered into standby bond purchase agreements with state housing associates within its district whereby, for a fee, it agrees to serve as a standby liquidity provider if required, to purchase and hold the housing associate’s bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which the Bank would be required to purchase the bonds and typically allows the Bank to terminate the agreement upon the occurrence of a default event of the issuer. At September 30, 2020, the Bank had standby bond purchase agreements with 8 housing associates. The standby bond purchase commitments entered into by the Bank have original expiration periods of up to seven years, currently no later than 2026. During both the nine months ended September 30, 2020 and 2019, the Bank was not required to purchase any bonds under these agreements.

Commitments to Purchase Mortgage Loans. The Bank enters into commitments that unconditionally obligate it to purchase mortgage loans from its members. These commitments are considered derivatives and their estimated fair value at September 30, 2020 and December 31, 2019 is reported in “Note 6 — Derivatives and Hedging Activities” as mortgage loan purchase commitments.

Commitments to Issue Bonds. The Bank enters into commitments to issue consolidated obligation bonds in the normal course of its business. At September 30, 2020, the Bank had commitments to issue $55 million of consolidated obligation bonds. At December 31, 2019, the Bank had 0 commitments to issue consolidated obligation bonds.

46

Commitments to Fund Advances. The Bank enters into commitments to fund additional advances up to 24 months in the future. At September 30, 2020 and December 31, 2019, the Bank had commitments to fund advances of $713 million and $527 million.

Other Commitments. For each MPF master commitment, the Bank’s potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the first loss account (FLA). For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all MPF master commitments with a PFI credit enhancement obligation was $150 million and $138 million at September 30, 2020 and December 31, 2019.
Legal Proceedings. As a result of the merger with the Federal Home Loan Bank of Seattle (Seattle Bank), the Bank has been involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label MBS. Of the 11 cases initially filed, as of September 2020, all have been settled (one dismissed in part and settled in part).
The Bank records legal expenses related to litigation settlements as incurred in other expenses on the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement.  During the three and nine months ended September 30, 2020, the Bank settled two and three of the Bank’s private-label MBS claims and recognized $64 million and $120 million, respectively, in net gains on litigation settlements through other income (loss). During the three and nine months ended September 30, 2019, the Bank did not recognize any net gains on litigation settlements.

Note 11 — Activities with Stockholders

The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain membership capital stock based on a percentage of their total assets, subject to a minimum and maximum amount, as of the preceding December 31st. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with the Bank. All transactions with stockholders are entered into in the ordinary course of business.

TRANSACTIONS WITH DIRECTORS’ FINANCIAL INSTITUTIONS

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

The following table summarizes the Bank’s outstanding transactions with Directors’ Financial Institutions (dollars in millions):
September 30, 2020December 31, 2019
Amount% of TotalAmount% of Total
Advances$2,060 $3,337 
Mortgage loans175 208 
Deposits18 27 
Capital stock131 182 


47

BUSINESS CONCENTRATIONS

The Bank considers itself to have business concentrations with stockholders owning 10 percent or more of its total capital stock outstanding (including mandatorily redeemable capital stock). At September 30, 2020, the Bank did not have any stockholders owning 10 percent or more of its total capital stock outstanding. At December 31, 2019, the Bank had the following business concentrations with stockholders (dollars in millions):
December 31, 2019
Capital StockMortgageInterest
StockholderAmount
% of Total1
AdvancesLoans
Income2
Wells Fargo Bank, N.A.$1,029 22 $25,450 $21 $1,059 
Superior Guaranty Insurance Company3
15 350 
Total$1,044 22 $25,450 $371 $1,059 

1    Pursuant to applicable Finance Agency regulations, the Bank’s voting structure limits the voting rights of these stockholders and other members holding a significant amount of the Bank’s capital stock.

2    Represents interest income earned on advances during the year ended December 31, 2019. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.

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


Note 12 — Activities with Other FHLBanks

    Overnight Funds. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. The following table summarizes loan activity to other FHLBanks during the nine months ended September 30, 2020 and 2019 (dollars in millions):
Other FHLBankBeginning
Balance
LoansPrincipal
Repayment
Ending
Balance
2020
Boston$$250 $(250)$
2019
Atlanta$$565 $(565)$
Indianapolis550 (550)
Topeka150 (150)
$$1,265 $(1,265)$
    
During the nine months ended September 30, 2020, the Bank did not borrow funds from other FHLBanks. The following table summarizes borrowing activity from other FHLBanks during the nine months ended September 30, 2019 (dollars in millions):
Other FHLBankBeginning
Balance
BorrowingPrincipal PaymentEnding
Balance
2019
Atlanta$500 $400 $(900)$

At September 30, 2020 and 2019, none of the previous transactions were outstanding on the Bank’s Statements of Condition. The interest income and expense related to this activity were immaterial.

48

Note 13 — Subsequent Events

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


49

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

Our Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations should be read in conjunction with our financial statements and condensed notes at the beginning of this Form 10-Q and in conjunction with our MD&A and Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission (SEC) on March 11, 2020 (2019 Form 10-K). Our MD&A is designed to provide information that will help the reader develop a better understanding of our financial statements, key financial statement changes from quarter to quarter, and the primary factors driving those changes. Our MD&A is organized as follows:
50

FORWARD-LOOKING INFORMATION

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

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

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

the ability to meet capital and other regulatory requirements;

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

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

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

member consolidations and failures;

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

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

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

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

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

increases in delinquency or loss estimates on mortgage loans;

the ability to attract and retain key personnel;

significant business interruptions resulting from third party failures; and

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

51


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

EXECUTIVE OVERVIEW

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

COVID-19
The effects of COVID-19 and the response to the virus continue to impact financial markets and overall economic conditions. In keeping with our mission to be a reliable provider of liquidity in all economic environments, we remain dedicated to meeting the needs of members through these challenging and unusual times. We have implemented certain relief measures to help members serve customers affected by COVID-19, such as accommodating forbearance and modifications to pledged loan collateral, allowing electronic signatures on loan documentation in specific circumstances, and adding payment deferment as another viable post-forbearance repayment option for participating financial institution (PFI) servicers to assist impacted borrowers.
We have also temporarily expanded our Community Investment Advance (CIA) product to accept loans from Paycheck Protection Program (PPP)-eligible entities who did not previously qualify as a small business for CIA purposes. In addition, we have made collateral policy changes and clarifications including accepting PPP loans guaranteed by the Small Business Administration (SBA) as eligible collateral.
We remain focused on both the health and safety of our employees. The majority of our employees continue to work remotely, with only a limited number of employees voluntarily working from our headquarters. We have not experienced and do not expect to experience any impairment of our ability to meet the needs of members.
The effects of COVID-19 are rapidly evolving, and the full impact and duration of the virus are unknown. As a result of measures taken to address the impact of the COVID-19 shutdown, interest rates have declined significantly and our financial statements have been adversely impacted. The extent of the impact to our future performance will depend upon how long the current conditions persist. For additional information, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Conditions in the Financial Markets — Economy and Financial Markets” and “Item 1A. Risk Factors.”
Financial Results
For the three and nine months ended September 30, 2020, we reported net income of $151 million and $328 million compared to $80 million and $288 million for the same periods in 2019. Our net income for the three and nine months ended September 30, 2020, calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), was primarily driven by net interest income and other income.

Net interest income totaled $141 million and $369 million for the three and nine months ended September 30, 2020 compared to $129 million and $435 million for the same periods last year. Our net interest income during the three and nine months ended September 30, 2020 was primarily impacted by higher asset liability spreads, the lower interest rate environment, and lower average advance balances. During the three and nine months ended September 30, 2020, higher asset liability spreads were driven by increases in advance prepayment fee income of $43 million and $55 million compared to the same periods in the prior year. As the majority of prepayments occurred during the third quarter of 2020, net interest income for the three months ended September 30, 2020 increased when compared to the same period last year. However, during the nine months ended September 30, 2020, the lower average advance balances and the lower interest rate environment had a larger impact on our net interest income, resulting in a decrease in net interest income when compared to the same period in the prior year. Our net interest margin was 0.57 percent and 0.44 percent during the three and nine months ended September 30, 2020 compared to 0.38 percent and 0.41 percent for the same periods in 2019.
52


We recorded net gains of $65 million and $116 million in other income (loss) for the three and nine months ended September 30, 2020 compared to net gains of $3 million and $11 million for the same periods last year. During the three and nine months ended September 30, 2020, other income (loss) was primarily impacted by net gains on litigation settlements of $64 million and $120 million as a result of settlements with defendants in our private-label mortgage-backed securities (MBS) litigation. We did not record any litigation settlements during the three and nine months ended September 30, 2019. Other factors impacting other income (loss) included net gains (losses) on trading securities and net gains (losses) on derivatives and hedging activities.

    Our total assets decreased to $91.2 billion at September 30, 2020, from $129.6 billion at December 31, 2019, driven by a decrease in advances and investments. Advances at September 30, 2020 decreased by $31.9 billion from December 31, 2019 due primarily to a decrease in borrowings of $25.5 billion by Wells Fargo Bank, N.A. We experienced decreased demand for advances across the majority of our other institution types, while borrowings by non-captive insurance companies increased $4.4 billion. Investments at September 30, 2020 decreased by $5.8 billion from December 31, 2019 primarily due to a decline in money market investments of $9.2 billion, offset in part by a net increase in U.S. Treasuries of $4.2 billion that we utilized for liquidity management during 2020.

Our total liabilities decreased to $85.4 billion at September 30, 2020, from $122.9 billion at December 31, 2019, primarily driven by a decrease in the amount of consolidated obligations needed to fund our assets.

Total capital decreased to $5.8 billion at September 30, 2020 from $6.7 billion at December 31, 2019, primarily due to a decrease in capital stock resulting from a decline in member activity. Our regulatory capital ratio increased to 6.41 percent at September 30, 2020, from 5.31 percent at December 31, 2019, and was above the required regulatory limit at each period end. Regulatory capital includes all capital stock, mandatorily redeemable capital stock, and retained earnings.

Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition” for additional discussion on our financial condition.
53

Adjusted Earnings

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

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

As indicated in the tables that follow, our adjusted net interest income and adjusted net income decreased during the three and nine months ended September 30, 2020 when compared to the same periods in 2019. The decline was driven by lower adjusted net interest income due primarily to lower average advance volumes and lower adjusted net interest margin.

The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2020201920202019
GAAP net interest income$141 $129 $369 $435 
Exclude:
Prepayment fees on advances, net1
45 59 
Prepayment fees on investments, net2
(4)(2)
Mandatorily redeemable capital stock interest expense(1)(2)(5)(9)
Market value adjustments on fair value hedges3
(4)(6)
Total adjustments45 (2)55 (7)
Include items reclassified from other income (loss):
Net interest expense on economic hedges(5)— (10)— 
Adjusted net interest income$91 $131 $304 $442 
Adjusted net interest margin0.37 %0.39 %0.36 %0.42 %

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

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

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


54

The following table summarizes the reconciliation between GAAP net income before assessments and adjusted net income (dollars in millions):
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2020201920202019
GAAP net income before assessments$167 $89 $364 $321 
Exclude:
Prepayment fees on advances, net1
45 59 
Prepayment fees on investments, net2
(4)(2)
Mandatorily redeemable capital stock interest expense(1)(2)(5)(9)
Market value adjustments on fair value hedges3
(4)(6)
Net gains (losses) on trading securities(10)26 36 
Net gains (losses) on derivatives and hedging activities(12)(52)(45)
Gains on litigation settlements, net64 — 120 — 
Include:
Net interest expense on economic hedges(5)— (10)— 
Adjusted net income before assessments62 95 205 337 
Adjusted AHP assessments4
10 21 34 
Adjusted net income$55 $85 $184 $303 

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

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

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

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

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

Replacement of the LIBOR Benchmark Interest Rate

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

On September 27, 2019, the Finance Agency issued a Supervisory Letter to all FHLBanks providing LIBOR transition guidance. The Supervisory Letter stated that by March 31, 2020, the FHLBanks should no longer enter into new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021 for all product types other than investments. For investments, the Supervisory Letter indicated the FHLBanks, by December 31, 2019, should stop purchasing investments that reference LIBOR and mature after December 31, 2021. We ceased purchasing investments that reference LIBOR in 2018.

As noted throughout this report, many of our advances, investments, consolidated obligation bonds, derivatives, and related collateral are indexed to LIBOR. Some of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. We are preparing for a transition away from LIBOR as a benchmark interest rate and plan to utilize SOFR as the dominant replacement on an ongoing basis. We have developed a transition plan that will change with market developments and member needs and addresses considerations such as LIBOR exposure, member products, fallback language, which provides for contractual alternatives to the use of LIBOR when LIBOR cannot be determined based on the method provided in the agreement, operational preparedness, and balance sheet management.

55

In assessing our current exposure to LIBOR, we have developed an inventory of financial instruments impacted and identified contracts that may require adding or adjusting the fallback language. We have added or adjusted fallback language to our advance agreements with members and added fallback language to our consolidated obligation agreements. We continue to monitor the market-wide efforts to address fallback language related to derivatives and investment securities as well as fallback language for new activities and issuances of financial instruments. We are in the process of ensuring we are operationally ready, including updating our processes and information technology systems to support the transition from LIBOR to an alternative reference rate.
Market activity in SOFR-indexed financial instruments continues to increase and we continue to offer SOFR-indexed advances and issue SOFR-indexed debt. In 2020, we began utilizing the federal funds Overnight Index Swap (OIS) rate as an interest-rate hedge strategy for certain financial instruments as an alternative to using LIBOR when entering into new derivative transactions. We no longer transact in financial instruments which reference LIBOR and mature beyond December 31, 2021.

The following tables summarize our variable rate advances, investments, consolidated obligation bonds and derivatives by interest-rate index at September 30, 2020 and December 31, 2019 (in millions):
September 30, 2020
LIBORSOFROISOtherTotal
Advances, principal amount$1,451 $75 $— $10,098 $11,624 
Investment securities
Non-mortgage-backed securities, principal amount1,904 — — — 1,904 
Mortgage-backed securities, principal amount8,063 — — — 8,063 
Total investment securities9,967 — — — 9,967 
Consolidated obligation bonds, principal amount10,988 5,057 — — 16,045 
Total variable rate financial instruments amount$22,406 $5,132 $— $10,098 $37,636 
Derivatives
Pay leg, notional amount$11,491 $— $19 $— $11,510 
Receive leg, notional amount17,040 — 8,140 — 25,180 
December 31, 2019
LIBORSOFROtherTotal
Advances, principal amount$22,919 $500 $17,605 $41,024 
Investment securities
Non-mortgage-backed securities, principal amount2,120 — — 2,120 
Mortgage-backed securities, principal amount9,345 — 9,346 
Total investment securities11,465 — 11,466 
Consolidated obligation bonds, principal amount48,970 3,967 — 52,937 
Total variable rate financial instruments amount$83,354 $4,467 $17,606 $105,427 
Derivatives
Pay leg, notional amount$17,473 $— $— $17,473 
Receive leg, notional amount21,249 — — 21,249 
56

The following tables present our exposure to LIBOR-indexed advances, investments, consolidated obligation bonds and derivatives at September 30, 2020 and December 31, 2019 (in millions):
September 30, 2020
Due in 2020Due in 2021ThereafterTotal
Assets Indexed to LIBOR
Advances, principal amount by redemption term$299 $288 $864 $1,451 
Investment securities, by contractual maturity1
Non-mortgage-backed securities, principal amount— 1,900 1,904 
Mortgage-backed securities, principal amount— 12 8,051 8,063 
Derivatives, receive leg
Cleared, notional amount804 2,392 8,896 12,092 
Uncleared, notional amount16 489 4,443 4,948 
Total Principal/Notional Amount$1,123 $3,181 $24,154 $28,458 
Liabilities Indexed to LIBOR
Consolidated obligation bonds, principal amount by contractual maturity$6,048 $4,940 $— $10,988 
Derivatives, pay leg
Cleared, notional amount1,015 8,837 1,004 10,856 
Uncleared, notional amount64 168 403 635 
Total Principal/Notional Amount$7,127 $13,945 $1,407 $22,479 
1    MBS are presented by contractual maturity, however, their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
December 31, 2019
Due in 2020Due in 2021ThereafterTotal
Assets Indexed to LIBOR
Advances, principal amount by redemption term$10,445 $11,886 $588 $22,919 
Investment securities, by contractual maturity1
Non-mortgage-backed securities, principal amount— 2,112 2,120 
Mortgage-backed securities, principal amount— 12 9,333 9,345 
Derivatives, receive leg
Cleared, notional amount3,425 2,763 9,445 15,633 
Uncleared, notional amount157 514 4,945 5,616 
Total Principal/Notional Amount$14,035 $15,175 $26,423 $55,633 
Liabilities Indexed to LIBOR
Consolidated obligation bonds, principal amount by contractual maturity$44,780 $4,190 $— $48,970 
Derivatives, pay leg
Cleared, notional amount6,882 8,837 1,004 16,723 
Uncleared, notional amount179 168 403 750 
Total Principal/Notional Amount$51,841 $13,195 $1,407 $66,443 
1    MBS are presented by contractual maturity, however, their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
For a summary of our risks on the replacement of the LIBOR benchmark interest rate, refer to “Item 1A. Risk Factors” in our 2019 Form 10-K.
57

CONDITIONS IN THE FINANCIAL MARKETS

Economy and Financial Markets

The COVID-19 outbreak is causing tremendous human and economic hardship across the U.S. Economic activity and employment have picked up in recent months but remain well below their levels at the beginning of the year. Weaker demand and significantly lower oil prices are holding down consumer price inflation. Overall financial conditions have improved in recent months, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In its September 16, 2020 statement, the Federal Open Market Committee (FOMC or Committee) stated that it decided to keep the target range for the federal funds rate at zero to 0.25 percent. The Committee stated that it expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to two percent and is on track to moderately exceed two percent for some time. The assessment will take into account a wide range of information, including readings on public health, labor market conditions, indicators of inflation pressures, inflation expectations, and financial and international developments.

As the spread of COVID-19 has increased and the economic impact continues to be negative, the Federal Reserve and Congress implemented a multitude of programs to help stabilize market conditions. The Federal Reserve indicated that it will increase its holdings of U.S. Treasuries and agency MBS over the coming months, at least at the current pace to sustain smooth market functioning and help foster accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Mortgage Markets

Beginning in March 2020, the impact of COVID-19 significantly affected the U.S. housing markets and resulted in declines in interest rates, home inventory and home sales. In the third quarter of 2020, the housing market began to show signs of recovery. Home sales increased in the third quarter of 2020 to levels above the third quarter of 2019 and housing inventory remained low, resulting in higher home prices. During the third quarter of 2020, mortgage rates continued to decline and refinancing activity remained the primary driver of mortgage activity.

The federal government programs to assist homeowners affected by the pandemic, including temporary mortgage payment forbearance and a temporary moratorium on foreclosures and evictions, remained in place during the third quarter of 2020. Forbearances and delinquencies of mortgage loans stabilized and began to trend down in the third quarter of 2020, consistent with a decline in the rate of unemployment. The federal government programs are set to expire at the end of 2020, which could result in an increase in delinquencies and foreclosures in 2021.

Interest Rates

    The following table shows information on key market interest rates1:
Third Quarter 2020
3-Month Average
Third Quarter 2019
3-Month Average
Third Quarter 2020
9-Month Average
Third Quarter 2019
9-Month Average
September 30, 2020
Ending Rate
December 31, 2019
Ending Rate
Federal funds0.09 %2.20 %0.45 %2.33 %0.09 %1.55 %
Three-month LIBOR0.25 2.20 0.79 2.46 0.23 1.91 
SOFR0.09 2.28 0.45 2.38 0.08 1.55 
2-year U.S. Treasury0.14 1.69 0.47 2.10 0.13 1.57 
10-year U.S. Treasury0.65 1.80 0.89 2.26 0.69 1.92 
30-year residential mortgage note2.96 3.66 3.24 4.02 2.90 3.74 

1    Source: Bloomberg.

58

In its September 2020 meeting, the FOMC decided to maintain the Federal Reserve’s key target interest rate, the federal funds rate, at a range of zero to 0.25 percent compared to a range of 1.75 to 2.00 percent for the same period in 2019.

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

Funding Spreads

The following table reflects our funding spreads to LIBOR (basis points)1:
Third Quarter 2020
3-Month Average
Third Quarter 2019
3-Month Average
Third Quarter 2020
9-Month Average
Third Quarter 2019
9-Month Average
September 30, 2020
Ending Spread
December 31, 2019
Ending Spread
3-month(12.9)(15.2)(30.8)(18.1)(12.9)(32.7)
2-year(1.5)5.1 0.5 (0.7)(6.4)(7.4)
5-year12.6 13.0 16.3 9.2 5.8 2.4 
10-year39.5 41.4 48.7 40.2 30.1 28.7 

1    Source: The Office of Finance.

The following table reflects our funding spreads to U.S. Treasuries (basis points)1:
Third Quarter 2020
3-Month Average
Third Quarter 2019
3-Month Average
Third Quarter 2020
9-Month Average
Third Quarter 2019
9-Month Average
September 30, 2020
Ending Spread
December 31, 2019
Ending Spread
3-month1.7 5.8 4.3 5.1 1.0 5.1 
2-year5.9 6.3 9.4 5.9 2.5 3.6 
5-year17.5 8.6 21.0 10.6 12.5 5.2 
10-year39.5 32.6 48.0 37.0 33.0 26.0 

1    Source: The Office of Finance.

As a result of our credit quality and government-sponsored enterprise (GSE) status, we generally have ready access to funding at relatively competitive interest rates. During the third quarter of 2020, our long-term funding spreads to LIBOR improved, on average, when compared to the same period in the prior year. During the nine months ended September 30, 2020, our long-term funding spreads to LIBOR deteriorated, on average, when compared to the same period in the prior year. Our funding spreads were mixed relative to U.S. Treasuries when compared to the same periods in the prior year. During the nine months ended September 30, 2020, we utilized short-term discount notes in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements.
59

SELECTED FINANCIAL DATA

    The following tables present selected financial data for the periods indicated (dollars in millions):
Statements of ConditionSeptember 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Cash and due from banks$788 $483 $611 $1,029 $209 
Investments1
32,705 34,315 35,634 38,465 34,402 
Advances48,462 57,942 79,757 80,360 85,009 
Mortgage loans held for portfolio, net2
8,733 9,246 9,546 9,334 8,952 
Total assets91,154 102,485 126,068 129,603 129,148 
Consolidated obligations
Discount notes30,928 21,364 33,071 29,531 26,716 
Bonds52,343 72,748 84,266 91,553 93,611 
Total consolidated obligations3
83,271 94,112 117,337 121,084 120,327 
Mandatorily redeemable capital stock54 81 96 206 202 
Total liabilities85,358 96,486 119,335 122,877 122,305 
Capital stock — Class B putable3,432 3,802 4,653 4,517 4,676 
Retained earnings2,359 2,257 2,199 2,165 2,131 
Accumulated other comprehensive income (loss)(60)(119)44 36 
Total capital5,796 5,999 6,733 6,726 6,843 
Regulatory capital ratio4
6.41 5.99 5.51 5.31 5.43 
For the Three Months Ended
Statements of IncomeSeptember 30,
2020
June 30,
2020
March 31,
2020
December 31,
2019
September 30,
2019
Net interest income$141 $119 $109 $141 $129 
Provision (reversal) for credit losses on mortgage loans— — — — 
Other income (loss)5
65 15 36 
Other expense6
37 39 43 43 43 
AHP assessments16 10 10 11 
Net income151 85 92 96 80 
Selected Financial Ratios7
Net interest spread8
0.53 %0.37 %0.25 %0.33 %0.25 %
Net interest margin9
0.57 0.43 0.35 0.43 0.38 
Return on average equity (annualized)9.94 5.58 5.51 5.67 4.57 
Return on average capital stock (annualized)16.43 8.53 8.26 8.41 6.66 
Return on average assets (annualized)0.60 0.31 0.29 0.29 0.23 
Average equity to average assets6.05 5.48 5.27 5.13 5.13 
Dividend payout ratio10
31.82 63.14 63.50 64.69 87.28 

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

2    Includes an allowance for credit losses of $3 million at September 30, 2020 and $1 million at June 30, 2020, March 31, 2020, December 31, 2019, and September 30, 2019.

3    The total par value of outstanding consolidated obligations of the 11 FHLBanks was $819.9 billion, $915.8 billion, $1,174.7 billion, $1,025.9 billion, and $1,010.3 billion at September 30, 2020, June 30, 2020, March 31, 2020, December 31, 2019, and September 30, 2019.

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

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

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

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

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

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

10    Represents dividends declared and paid in the stated period expressed as a percentage of net income in the stated period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense on our Statements of Income.
60

RESULTS OF OPERATIONS

Net Income

The following table presents comparative highlights of our net income for the three and nine months ended September 30, 2020 and 2019 (dollars in millions). See further discussion of these items in the sections that follow.
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
20202019$ Change% Change20202019$ Change% Change
Net interest income$141 $129 $12 %$369 $435 $(66)(15)%
Provision (reversal) for credit losses on mortgage loans— 100 — 100 
Other income (loss)65 62 2,067 116 11 105 955 
Other expense37 43 (6)(14)119 125 (6)(5)
AHP assessments16 78 36 33 
Net income$151 $80 $71 89 %$328 $288 $40 14 %
61

Net Interest Income

Our net interest income is impacted by changes in average interest-earning asset and interest-bearing liability balances, and the related yields and costs. The following table presents average balances and annualized yields/costs of major asset and liability categories (dollars in millions):    
For the Three Months Ended September 30,
20202019
Average
Balance1
Yield/Cost
Interest
Income/
Expense2
Average
Balance1
Yield/Cost
Interest
Income/
Expense2
Interest-earning assets
Interest-bearing deposits$1,038 0.11 %$— $301 1.56 %$
Securities purchased under agreements to resell3,091 0.10 9,886 2.28 57 
Federal funds sold7,312 0.09 6,722 2.22 37 
Mortgage-backed securities3,4
14,597 0.74 27 15,530 2.68 105 
    Other investments3,4,5
9,083 1.12 26 5,650 2.79 39 
Advances4
53,821 1.37 185 86,937 2.60 569 
Mortgage loans6
8,979 2.60 58 8,653 3.26 72 
     Loans to other FHLBanks— — — 2.26 — 
Total interest-earning assets97,921 1.22 299 133,685 2.61 880 
Non-interest-earning assets1,622 — — 1,015 — — 
Total assets$99,543 1.20 %$299 $134,700 2.59 %$880 
Interest-bearing liabilities   
Deposits$1,419 0.01 %$— $1,018 1.43 %$
Consolidated obligations   
Discount notes26,850 0.15 10 28,622 2.29 166 
Bonds4
63,121 0.93 147 96,671 2.38 579 
Other interest-bearing liabilities7
64 4.51 215 5.31 
Total interest-bearing liabilities91,454 0.69 158 126,526 2.36 751 
Non-interest-bearing liabilities2,069 — — 1,259 — — 
Total liabilities93,523 0.67 158 127,785 2.33 751 
Capital6,020 — — 6,915 — — 
Total liabilities and capital$99,543 0.63 %$158 $134,700 2.21 %$751 
Net interest income and spread8
0.53 %$141  0.25 %$129 
Net interest margin9
0.57 % 0.38 % 
Average interest-earning assets to interest-bearing liabilities107.07 % 105.66 % 

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

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

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

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

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

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

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

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

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








62


    
The following table presents average balances and annualized yields/costs of major asset and liability categories (dollars in millions):
For the Nine Months Ended September 30,
20202019
Average
Balance1
Yield/Cost
Interest
Income/
Expense2
Average
Balance1
Yield/Cost
Interest
Income/
Expense2
Interest-earning assets
Interest-bearing deposits$686 0.22 %$$201 1.50 %$
Securities purchased under agreements to resell5,987 0.72 32 7,784 2.38 139 
Federal funds sold7,732 0.51 30 6,950 2.36 122 
Mortgage-backed securities3,4
14,591 1.39 151 16,073 2.89 347 
    Other investments3,4,5
7,799 1.46 86 5,780 3.06 132 
Advances4
65,501 1.66 815 97,056 2.75 1,997 
Mortgage loans6
9,292 2.92 203 8,218 3.43 211 
     Loans to other FHLBanks1.61 — 2.37 — 
Total interest-earning assets111,591 1.58 1,318 142,067 2.78 2,950 
Non-interest-earning assets1,347 — — 970 — — 
Total assets$112,938 1.56 %$1,318 $143,037 2.76 %$2,950 
Interest-bearing liabilities   
Deposits$1,231 0.13 %$$946 1.69 %$12 
Consolidated obligations   
Discount notes26,531 0.82 163 37,773 2.42 684 
Bonds4
76,824 1.36 780 95,716 2.53 1,810 
Other interest-bearing liabilities7
117 5.02 232 5.44 
Total interest-bearing liabilities104,703 1.21 949 134,667 2.50 2,515 
Non-interest-bearing liabilities1,946 — — 1,095 — — 
Total liabilities106,649 1.19 949 135,762 2.48 2,515 
Capital6,289 — — 7,275 — — 
Total liabilities and capital$112,938 1.12 %$949 $143,037 2.35 %$2,515 
Net interest income and spread8
0.37 %$369  0.28 %$435 
Net interest margin9
0.44 % 0.41 % 
Average interest-earning assets to interest-bearing liabilities106.58 % 105.50 % 

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

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

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

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

5    Other investments primarily include U.S. obligations, GSE obligations and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and PEFCO bonds.

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

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

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

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

63

The following table presents changes in interest income and interest expense. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, are allocated to the volume and rate categories based on the proportion of the absolute value of the volume and rate changes (dollars in millions).
Three Months EndedNine Months Ended
September 30, 2020 vs. September 30, 2019September 30, 2020 vs. September 30, 2019
Total Increase
(Decrease) Due to
Total Increase
(Decrease)
Total Increase
(Decrease) Due to
Total Increase
(Decrease)
VolumeRateVolumeRate
Interest income
Interest-bearing deposits$$(2)$(1)$$(3)$(1)
Securities purchased under agreements to resell(23)(33)(56)(27)(80)(107)
Federal funds sold(38)(35)13 (105)(92)
Mortgage-backed securities(6)(72)(78)(30)(166)(196)
Other investments17 (30)(13)37 (83)(46)
Advances(171)(213)(384)(533)(649)(1,182)
Mortgage loans(16)(14)26 (34)(8)
Total interest income(177)(404)(581)(512)(1,120)(1,632)
Interest expense
Deposits(5)(4)(14)(11)
Consolidated obligations
Discount notes(10)(146)(156)(162)(359)(521)
Bonds(157)(275)(432)(308)(722)(1,030)
Other interest-bearing liabilities(1)— (1)(3)(1)(4)
Total interest expense(167)(426)(593)(470)(1,096)(1,566)
Net interest income$(10)$22 $12 $(42)$(24)$(66)
    
NET INTEREST SPREAD

Net interest spread equals the annualized yield on total interest-earning assets minus the annualized cost of total interest-bearing liabilities. For the three and nine months ended September 30, 2020, our net interest spread was 0.53 percent and 0.37 percent compared to 0.25 percent and 0.28 percent during the same periods in 2019. Our net interest spread during the three and nine months ended September 30, 2020 was primarily impacted by higher advance prepayment fee income of $43 million and $55 million compared to the same periods in 2019. The primary components of our interest income and interest expense are discussed below.

NET INTEREST MARGIN

Net interest margin equals net interest income expressed as a percentage of average interest-earning assets. For the three and nine months ended September 30, 2020, our net interest margin was 0.57 percent and 0.44 percent compared to 0.38 percent and 0.41 percent during the same periods in 2019. Our net interest margin increased during the three and nine months ended September 30, 2020 compared to the same period in 2019 mainly due to higher asset liability spreads, offset in part by the lower interest rate environment.

Advances

Interest income on advances decreased during the three and nine months ended September 30, 2020 when compared to the same periods in 2019 due primarily to the lower interest rate environment and lower average advance balances, partially offset by an increase in advance prepayment fee income. The decrease in average advance balances from prior year was primarily a result of a decline in advances from Wells Fargo, Bank N.A. and decreased demand for advances across the majority of our other institution types. This decrease was partially offset by an increase in borrowings by non-captive insurance companies. We do not expect significant new advances to Wells Fargo Bank, N.A. and this trend of paydowns and decreased new borrowings by members may continue. If we continue to experience additional decreases in the amount of business with certain of our top borrowers, our financial condition and results of operations could be negatively affected.

64

Investments

Interest income on investments decreased during the three and nine months ended September 30, 2020 when compared to the same periods in 2019 due primarily to the lower interest rate environment. The decline during the three and nine months ended September 30, 2020 was partially offset by changes in net gains and losses on our fair value hedge relationships of $11 million and $8 million compared to the same periods in 2019, which stemmed from market volatility caused by COVID-19.

Bonds

Interest expense on bonds decreased during the three and nine months ended September 30, 2020 when compared to the same periods in 2019 due primarily to the lower interest rate environment and lower average bond balances, largely driven by a decrease in the amount of consolidated obligations needed to fund our assets. In addition, during 2020, we increased our usage of shorter-term discount notes relative to bonds in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements.

Discount Notes

    Interest expense on discount notes decreased during the three and nine months ended September 30, 2020 when compared to the same periods in 2019 primarily due to the lower interest rate environment and lower average discount note balances, driven by a decrease in the amount of consolidated obligations needed to fund our assets.

Other Income (Loss)

    The following table summarizes the components of other income (loss) (dollars in millions):
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2020201920202019
Net gains (losses) on trading securities$(10)$$26 $36 
Net gains (losses) on derivatives and hedging activities(12)(52)(45)
Gains on litigation settlements, net64 — 120 — 
Other, net10 22 20 
Total other income (loss)$65 $$116 $11 
    
Other income (loss) can be volatile from period to period depending on the type of activity recorded. We recorded net gains of $65 million and $116 million during the three and nine months ended September 30, 2020 compared to net gains of $3 million and $11 million during the same periods in 2019. During the three and nine months ended September 30, 2020, other income (loss) was primarily impacted by net gains on litigation settlements of $64 million and $120 million as a result of settlements with defendants in our private-label MBS litigation. We did not record any litigation settlements during the three and nine months ended September 30, 2019. Other factors impacting other income (loss) included net gains (losses) on trading securities and net gains (losses) on derivatives and hedging activities, as described below.

During the three and nine months ended September 30, 2020, we recorded net losses on trading securities of $10 million and net gains of $26 million compared to net gains of $8 million and $36 million during the same periods in 2019. These changes in fair value were primarily due to the impact of interest rates and credit spreads on our fixed rate trading securities which stemmed from market volatility caused by COVID-19. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

During the three and nine months ended September 30, 2020, we recorded net gains of $1 million and net losses of $52 million on our derivatives and hedging activities through other income (loss) compared to net losses of $12 million and $45 million during the same periods in 2019. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio. The changes in interest rates were primarily driven by market volatility caused by COVID-19. Accounting rules require all derivatives to be recorded at fair value and therefore we may be subject to income statement volatility. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Hedging Activities” for additional discussion on our derivatives and hedging activities, including the net impact of economic hedge relationships.


65

Hedging Activities

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

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

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

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
For the Three Months Ended September 30, 2020
Net Effect of Hedging ActivitiesAdvancesInvestmentsMortgage
Loans
BondsTotal
Net interest income:
Net amortization/accretion1
$(15)$(7)$(1)$(1)$(24)
Net gains (losses) on derivatives and hedged items2
— (2)
Net interest settlements on derivatives3
(53)(34)— 45 (42)
Total impact to net interest income(67)(34)(1)42 (60)
Other income (loss):
Net gains (losses) on economic hedges4
— — — 
Net gains (losses) on trading securities5
— (10)— — (10)
Total impact to other income (loss)— (9)— — (9)
Total net effect of hedging activities6
$(67)$(43)$(1)$42 $(69)

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

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

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

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

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

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

66

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
For the Three Months Ended September 30, 2019
Net Effect of Hedging ActivitiesAdvancesInvestmentsMortgage
Loans
BondsTotal
Net interest income:
Net amortization/accretion1
$$(2)$(1)$(1)$(3)
Net gains (losses) on derivatives and hedged items2
— (4)— (2)
Net interest settlements on derivatives3
11 (3)— (32)(24)
Total impact to net interest income12 (9)(1)(31)(29)
Other income (loss):
Net gains (losses) on economic hedges4
— (12)— — (12)
Net gains (losses) on trading securities5
— — — 
Total impact to other income (loss)— (4)— — (4)
Total net effect of hedging activities6
$12 $(13)$(1)$(31)$(33)

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

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

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

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

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

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

67

The following tables categorize the net effect of hedging activities on net income by product (dollars in millions):
For the Nine Months Ended September 30, 2020
Net Effect of Hedging ActivitiesAdvancesInvestmentsMortgage
Loans
BondsTotal
Net interest income:
Net amortization/accretion1
$(24)$(13)$(3)$(3)$(43)
Net gains (losses) on derivatives and hedged items2
— (3)
Net interest settlements on derivatives3
(94)(73)— 82 (85)
Total impact to net interest income(112)(81)(3)76 (120)
Other income (loss):
Net gains (losses) on economic hedges4
— (50)(2)— (52)
Net gains (losses) on trading securities5
— 26 — — 26 
Total impact to other income (loss)— (24)(2)— (26)
Total net effect of hedging activities6
$(112)$(105)$(5)$76 $(146)

For the Nine Months Ended September 30, 2019
Net Effect of Hedging ActivitiesAdvancesInvestmentsMortgage
Loans
BondsTotal
Net interest income:
Net amortization/accretion1
$$(1)$(1)$(2)$(3)
Net gains (losses) on derivatives and hedged items2
(3)— (1)(3)
Net interest settlements on derivatives3
54 (1)— (155)(102)
Total impact to net interest income56 (5)(1)(158)(108)
Other income (loss):
Net gains (losses) on economic hedges4
— (45)— — (45)
Net gains (losses) on trading securities5
— 36 — — 36 
Total impact to other income (loss)— (9)— — (9)
Total net effect of hedging activities6
$56 $(14)$(1)$(158)$(117)

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

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

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

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

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

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


NET AMORTIZATION/ACCRETION

Amortization/accretion varies from period to period depending on our hedge relationship termination activities and the maturity, call, or prepayment of assets or liabilities previously in hedge relationships. During the three and nine months ended September 30, 2020, we experienced increased amortization activity, primarily due to an increase in prepayments of advances and investments that were previously in a hedge relationship.



68

NET GAINS (LOSSES) ON DERIVATIVES AND HEDGED ITEMS

The net gains and losses on derivatives and hedged items are recorded in net interest income. Gains (losses) on derivatives and hedged items are primarily driven by changes in the benchmark interest rate, volatility, and the divergence in the valuation curves used to value our assets, liabilities, and derivatives. During the three and nine months ended September 30, 2020, we recorded gains of $6 million and $8 million on our fair value hedge relationships which stemmed from market volatility caused by COVID-19.

NET INTEREST SETTLEMENTS

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

NET GAINS (LOSSES) ON ECONOMIC HEDGES

We utilize economic derivatives to manage certain risks on our Statements of Condition. Gains and losses on economic derivatives are driven primarily by changes in interest rates and volatility and include interest settlements. Interest settlements represent the interest component on economic derivatives. These amounts vary from period to period depending on our hedging activities and interest rates. During the three and nine months ended September 30, 2020, we recorded net gains of $1 million and net losses of $52 million on our economic derivatives. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio as highlighted in the table below. The changes in interest rates were primarily driven by market volatility caused by COVID-19.

Investments

Gains and losses on our trading securities are also due primarily to changes in interest rates and credit spreads. The following table summarizes gains and losses on these economic derivatives as well as the related trading securities (dollars in millions):
For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
2020201920202019
Gains (losses) on interest rate swaps economically hedging our investments$$(12)$(40)$(45)
Interest settlements(5)— (10)— 
Net gains (losses) on investment derivatives(12)(50)(45)
Net gains (losses) on related trading securities(10)26 36 
Net gains (losses) on economic investment hedge relationships$(9)$(4)$(24)$(9)

69

Other Expense
The following table shows the components of other expense (dollars in millions):
For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2020201920202019
Compensation and benefits$18 $16 $53 $48 
Contractual services12 12 
Professional fees20 24 
Other operating expenses16 24 
Total operating expenses31 37 101 108 
Federal Housing Finance Agency
Office of Finance
Other, net
Total other expense$37 $43 $119 $125 

Other expense decreased for the three and nine months ended September 30, 2020 compared to the same periods last year. The decrease in other expense during the three and nine months ended September 30, 2020 was driven primarily by a decrease in professional fees and other operating expenses, offset in part by an increase in compensation and benefits.

70

STATEMENTS OF CONDITION

Financial Highlights

    Our total assets decreased to $91.2 billion at September 30, 2020 from $129.6 billion at December 31, 2019. Our total liabilities decreased to $85.4 billion at September 30, 2020 from $122.9 billion at December 31, 2019. Total capital decreased to $5.8 billion at September 30, 2020 from $6.7 billion at December 31, 2019. See further discussion of changes in our financial condition in the appropriate sections that follow.

Cash and Due from Banks

At September 30, 2020, our total cash balance was $788 million compared to $1.0 billion at December 31, 2019, a decrease of $0.2 billion. Our cash balance is influenced by our liquidity needs, member advance activity, market conditions, and the availability of attractive investment opportunities.

Advances

The following table summarizes our advances by type of institution (dollars in millions):
 September 30,
2020
December 31,
2019
Commercial banks$16,361 $47,835 
Savings institutions770 1,376 
Credit unions5,213 5,976 
Non-captive insurance companies25,259 20,821 
Captive insurance companies— 3,798 
CDFIs19 14 
Total member advances47,622 79,820 
Housing associates97 100 
Non-member borrowers196 265 
Total par value$47,915 $80,185 

Our total advance par value decreased $32.3 billion or 40 percent at September 30, 2020 when compared to December 31, 2019. The decrease in total par value was primarily due to a decrease in borrowings of $25.5 billion by Wells Fargo Bank, N.A., as they paid off their remaining advance balances during the third quarter of 2020. Wells Fargo Bank, N.A. had our largest concentration of advances outstanding at December 31, 2019. We experienced decreased demand for advances across the majority of our other institution types, while borrowings by non-captive insurance companies increased $4.4 billion. We do not expect significant new advances to Wells Fargo Bank, N.A. and this trend of paydowns and decreased new borrowings by members may continue. If we continue to experience additional decreases in the amount of business with certain of our top borrowers, our financial condition and results of operations could be negatively affected.

As a result of the final rule on membership issued by the Federal Housing Finance Agency (Finance Agency) effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance company members ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014 will have their memberships terminated no later than February 19, 2021. As of September 30, 2020, while we had five captive insurance company members, none had advances outstanding.

71

The following table summarizes our advances by product type (dollars in millions):
September 30, 2020December 31, 2019
Amount% of TotalAmount% of Total
Variable rate$11,624 24 $41,024 51 
Fixed rate34,139 71 37,007 46 
Amortizing2,152 2,154 
Total par value47,915 100 80,185 100 
Premiums21 25 
Discounts(4)(6)
Fair value hedging adjustments530 156 
Total advances$48,462 $80,360 

Fair value hedging adjustments changed $374 million at September 30, 2020 when compared to December 31, 2019 due to the impact of interest rates on our cumulative fair value adjustments on advances in hedge relationships.

At September 30, 2020 and December 31, 2019, 22 percent and 31 percent of our advances were variable rate callable advances. Callable advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Interest rates on our variable rate callable advances reset at each call date to be consistent with either the underlying index or our current offering rate of our underlying cost of funds. We generally fund our variable rate callable advances with either discount notes or short-term floating rate debt. For additional discussion on our funding strategies, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

At September 30, 2020 and December 31, 2019, advances outstanding to our five largest member borrowers totaled $14.8 billion and $39.3 billion, representing 31 percent and 49 percent of our total advances outstanding. The following table summarizes advances outstanding to our five largest member borrowers at September 30, 2020 (dollars in millions):
Amount% of Total
Principal Life Insurance Company$4,250 
Midland National Life Insurance Company1
3,073 
EquiTrust Life Insurance Company2,700 
Washington Federal Bank, National Association2,700 
Athene Annuity and Life Company2,101 
Total par value$14,824 31 

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

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



72

Mortgage Loans

    The following tables summarize information on our mortgage loans held for portfolio (dollars in millions):
September 30,
2020
December 31, 2019
Fixed rate conventional loans$8,117 $8,712 
Fixed rate government-insured loans495 496 
Total unpaid principal balance8,612 9,208 
Premiums114 125 
Discounts(3)(4)
Basis adjustments from mortgage loan purchase commitments13 
Total mortgage loans held for portfolio8,736 9,335 
Allowance for credit losses(3)(1)
Total mortgage loans held for portfolio, net$8,733 $9,334 

Our total mortgage loans decreased $0.6 billion or six percent at September 30, 2020 when compared to December 31, 2019. The decrease was primarily due to principal paydowns exceeding loan purchases as a result of increased refinancing activity driven by lower rates.

During the third quarter of 2020, we recorded a provision for credit losses of $2 million, bringing our allowance for credit losses to $3 million at September 30, 2020. During the nine months ended September 30, 2020, our cash flow model for collectively evaluated loans projected an increase in expected credit losses due primarily to increased loan delinquencies, including those associated with COVID-19 related forbearance plans, and also due to a deceleration in forecasted regional home price appreciation.

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

73

Investments

The following table summarizes the carrying value of our investments (dollars in millions):
<
September 30, 2020December 31, 2019
Amount% of TotalAmount% of Total
Short-term investments1
Interest-bearing deposits$436 $— 
Securities purchased under agreements to resell3,300 10 13,950 36 
Federal funds sold5,600 17 4,605 12 
U.S. Treasury obligations2
3,349 10 — — 
Total short-term investments12,685 38 18,556 48 
Long-term investments3
Mortgage-backed securities
GSE single-family1,882 2,401 
GSE multifamily8,741 27 8,134 21 
U.S. obligations single-family2
3,690 11 4,064 11 
U.S. obligations commercial2
— — — 
Private-label residential— — 
Total mortgage-backed securities14,319 44 14,607 38