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Federal Home Loan Bank of Des Moines

Filed: 10 May 21, 1:30pm

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 March 31, 2021
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 April 30, 2021
Class B Stock, par value $10035,757,492



Table of Contents
Part I - Financial Information
Item 1.
Item 2.
Item 3.
Item 4.
Part II - Other Information
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


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)
March 31,
2021
December 31,
2020
ASSETS
Cash and due from banks$255 $978 
Interest-bearing deposits (Note 3)401 401 
Securities purchased under agreements to resell (Note 3)3,500 4,800 
Federal funds sold (Note 3)7,095 3,695 
Investment securities (Note 3)
Trading securities3,348 4,875 
Available-for-sale securities (amortized cost of $15,074 and $15,858)15,179 15,910 
Held-to-maturity securities (fair value of $1,767 and $1,921)1,679 1,816 
Total investment securities20,206 22,601 
Advances (Note 4)47,514 46,530 
Mortgage loans held for portfolio, net of allowance for credit losses of $0 and $1 (Note 5)7,906 8,242 
Accrued interest receivable104 97 
Derivative assets, net (Note 6)249 227 
Other assets, net123 120 
TOTAL ASSETS$87,353 $87,691 
LIABILITIES
Deposits
Interest-bearing1,686 1,635 
Non-interest-bearing282 273 
Total deposits1,968 1,908 
Consolidated obligations (Note 7)
Discount notes23,898 27,345 
Bonds55,066 52,254 
Total consolidated obligations78,964 79,599 
Mandatorily redeemable capital stock (Note 8)36 52 
Accrued interest payable153 145 
Affordable Housing Program payable160 162 
Derivative liabilities, net (Note 6)
Other liabilities59 81 
TOTAL LIABILITIES81,341 81,951 
Commitments and contingencies (Note 10)00
CAPITAL (Note 8)
Capital stock - Class B putable ($100 par value); 35 and 34 issued and outstanding shares3,535 3,341 
Retained earnings
Unrestricted1,788 1,775 
Restricted589 576 
Total retained earnings2,377 2,351 
Accumulated other comprehensive income (loss)100 48 
TOTAL CAPITAL6,012 5,740 
TOTAL LIABILITIES AND CAPITAL$87,353 $87,691 
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 Ended
March 31,
20212020
INTEREST INCOME
Advances$131 $399 
Interest-bearing deposits
Securities purchased under agreements to resell30 
Federal funds sold27 
Trading securities12 
Available-for-sale securities36 75 
Held-to-maturity securities14 
Mortgage loans held for portfolio53 78 
Total interest income241 633 
INTEREST EXPENSE
Consolidated obligations - Discount notes110 
Consolidated obligations - Bonds126 410 
Deposits
Mandatorily redeemable capital stock
Total interest expense131 524 
NET INTEREST INCOME110 109 
Provision (reversal) for credit losses on mortgage loans(1)
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES111 109 
OTHER INCOME (LOSS)
Net gains (losses) on trading securities(22)26 
Net gains (losses) on derivatives17 (48)
Gains on litigation settlements, net56 
Standby letter of credit fees
Other, net(1)
Total other income (loss)36 
OTHER EXPENSE
Compensation and benefits21 18 
Contractual services
Professional fees
Other operating expenses
Federal Housing Finance Agency
Office of Finance
Other, net
Total other expense40 43 
NET INCOME BEFORE ASSESSMENTS73 102 
Affordable Housing Program assessments10 
NET INCOME$66 $92 
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 Ended
March 31,
20212020
Net income$66 $92 
Other comprehensive income (loss)
Net unrealized gains (losses) on available-for-sale securities52 (164)
Pension and postretirement benefits
Total other comprehensive income (loss)52 (163)
TOTAL COMPREHENSIVE INCOME (LOSS)$118 $(71)
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)Retained EarningsAccumulated Other Comprehensive Income (Loss)Total
Capital
SharesPar ValueUnrestrictedRestrictedTotal
BALANCE, DECEMBER 31, 201945 $4,517 $1,661 $504 $2,165 $44 $6,726 
Adjustment for cumulative effect of accounting change— — — — 
Comprehensive income (loss)— — 74 18 92 (163)(71)
Proceeds from issuance of capital stock21 2,074 — — — — 2,074 
Repurchases/redemptions of capital stock(19)(1,932)— — — — (1,932)
Net shares reclassified (to) from mandatorily redeemable capital stock(6)— — — — (6)
Cash dividends on capital stock— — (59)— (59)— (59)
BALANCE, MARCH 31, 202047 $4,653 $1,677 $522 $2,199 $(119)$6,733 
BALANCE, DECEMBER 31, 202034 $3,341 $1,775 $576 $2,351 $48 $5,740 
Comprehensive income (loss)— — 53 13 66 52 118 
Proceeds from issuance of capital stock719 — — — — 719 
Repurchases/redemptions of capital stock(6)(525)— — — — (525)
Net shares reclassified (to) from mandatorily redeemable capital stock— — — — — — 
Cash dividends on capital stock— — (40)— (40)— (40)
BALANCE, MARCH 31, 202135 $3,535 $1,788 $589 $2,377 $100 $6,012 
The accompanying notes are an integral part of these financial statements.

6

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
(Unaudited)
For the Three Months Ended
March 31,
20212020
OPERATING ACTIVITIES
Net income$66 $92 
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization18 (6)
Net (gains) losses on trading securities22 (26)
Net change in derivatives and hedging activities248 (262)
Other adjustments, net13 
Net change in:
Accrued interest receivable(12)(7)
Other assets(4)10 
Accrued interest payable
Other liabilities(5)
Total adjustments288 (278)
Net cash provided by (used in) operating activities354 (186)
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits108 (346)
Securities purchased under agreements to resell1,300 7,400 
Federal funds sold(3,400)(4,330)
Trading securities
Proceeds from maturities and paydowns2,105 57 
Purchases(600)(871)
Available-for-sale securities
Proceeds from maturities and paydowns585 772 
Purchases(18)
Held-to-maturity securities
Proceeds from maturities and paydowns135 113 
Advances
Repaid24,171 79,358 
Originated(25,419)(78,332)
Mortgage loans held for portfolio
Principal collected811 357 
Purchased(489)(571)
Other investing activities, net(2)
Net cash provided by (used in) investing activities(711)3,605 
The accompanying notes are an integral part of these financial statements.
7

FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
(Unaudited)
For the Three Months Ended
March 31,
20212020
FINANCING ACTIVITIES
Net change in deposits75 155 
Net proceeds from issuance of consolidated obligations
Discount notes67,278 32,197 
Bonds15,897 17,706 
Payments for maturing and retiring consolidated obligations
Discount notes(70,724)(28,645)
Bonds(13,030)(25,217)
Proceeds from issuance of capital stock719 2,074 
Proceeds from issuance of mandatorily redeemable capital stock19 
Payments for repurchases/redemptions of capital stock(525)(1,932)
Payments for repurchases/redemptions of mandatorily redeemable capital stock(16)(135)
Cash dividends paid(40)(59)
Net cash provided by (used in) financing activities(366)(3,837)
Net increase (decrease) in cash and due from banks(723)(418)
Cash and due from banks at beginning of the period978 1,029 
Cash and due from banks at end of the period$255 $611 
SUPPLEMENTAL DISCLOSURES
Cash Transactions:
Interest paid$154 $569 
Affordable Housing Program payments
Non-Cash Transactions:
Capitalized interest on reverse mortgage investment securities22 
Traded but not yet settled investment security purchases139 
Capital stock reclassified to (from) mandatorily redeemable capital stock, net
The accompanying notes are an integral part of these financial statements.
8

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.

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, 2020, which are contained in the Bank’s 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 10, 2021 (2020 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, 2021.

Reclassifications

Certain amounts in the Bank’s 2020 financial statements have been reclassified to conform to the presentation for the three months ended March 31, 2021. These amounts were not deemed to be material.

SIGNIFICANT ACCOUNTING POLICIES

There have been no material changes to the Bank’s significant accounting policies during the three months ended March 31, 2021. Descriptions of all significant accounting policies are included in “Note 1 — Summary of Significant Accounting Policies” in the 2020 Form 10-K.


9

Note 2 — Recently Adopted and Issued Accounting Guidance

Reference Rate Reform (ASU 2020-04)
On March 12, 2020, the Financial Accounting Standards Board 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 available-for-sale (AFS) or trading classification any held-to-maturity (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 continues to evaluate this guidance, and its effect on the Bank’s financial condition, results of operations, and cash flows has not yet been determined.

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 March 31, 2021 and December 31, 2020, NaN of these investments were with counterparties rated below triple-B; however, approximately five percent and 21 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 March 31, 2021 and December 31, 2020, 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. The carrying values of interest-bearing deposits and federal funds sold exclude accrued interest receivable of less than $1 million at March 31, 2021 and December 31, 2020.

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 March 31, 2021 and December 31, 2020. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of less than $1 million at March 31, 2021 and December 31, 2020.

10

DEBT SECURITIES

The Bank invests in debt securities, which are classified as either trading, AFS, or HTM. 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):
March 31,
2021
December 31,
2020
Non-mortgage-backed securities
U.S. Treasury obligations1
$2,565 $4,069 
Other U.S. obligations1
106 114 
GSE and Tennessee Valley Authority obligations61 64 
Other2
238 246 
     Total non-mortgage-backed securities2,970 4,493 
Mortgage-backed securities
GSE multifamily378 382 
Total fair value$3,348 $4,875 

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

2    Consists of taxable municipal bonds.


Net Gains (Losses) on Trading Securities

The Bank did not sell any trading securities during the three months ended March 31, 2021 and 2020. During the three months ended March 31, 2021, the Bank recorded net unrealized losses of $22 million on its trading securities held at period end compared to net unrealized gains of $26 million for the same period in 2020.

AFS Securities

AFS securities by major security type were as follows (dollars in millions):
March 31, 2021
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses

Fair
Value
Non-mortgage-backed securities
Other U.S. obligations2
$1,558 $$(1)$1,564 
GSE and Tennessee Valley Authority obligations949 31 980 
State or local housing agency obligations711 (17)694 
Other3
282 12 294 
Total non-mortgage-backed securities3,500 50 (18)3,532 
Mortgage-backed securities
U.S. obligations single-family2
3,393 25 3,418 
GSE single-family386 391 
GSE multifamily7,795 68 (25)7,838 
Total mortgage-backed securities11,574 98 (25)11,647 
Total$15,074 $148 $(43)$15,179 

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 $25 million at March 31, 2021.

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.
11

AFS securities by major security type were as follows (dollars in millions):

December 31, 2020
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses

Fair
Value
Non-mortgage-backed securities
Other U.S. obligations2
$1,670 $$(2)$1,672 
GSE and Tennessee Valley Authority obligations1,000 22 1,022 
State or local housing agency obligations712 (19)693 
Other3
290 12 302 
Total non-mortgage-backed securities3,672 38 (21)3,689 
Mortgage-backed securities
U.S. obligations single-family2
3,527 18 (1)3,544 
GSE single-family442 446 
GSE multifamily8,217 47 (33)8,231 
Total mortgage-backed securities12,186 69 (34)12,221 
Total$15,858 $107 $(55)$15,910 

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 $31 million at December 31, 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 PEFCO bonds.


Unrealized Losses

The following table summarizes 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.
March 31, 2021
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
$31 $$525 $(1)$556 $(1)
State or local housing agency obligations136 (4)489 (13)625 (17)
Total non-mortgage-backed securities167 (4)1,014 (14)1,181 (18)
Mortgage-backed securities
U.S. obligations single-family1
279 279 
GSE single-family
GSE multifamily29 3,612 (25)3,641 (25)
Total mortgage-backed securities29 3,900 (25)3,929 (25)
Total$196 $(4)$4,914 $(39)$5,110 $(43)

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

12

The following table summarizes 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.

December 31, 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
$348 $$698 $(2)$1,046 $(2)
State or local housing agency obligations336 (15)288 (4)624 (19)
Total non-mortgage-backed securities684 (15)986 (6)1,670 (21)
Mortgage-backed securities
U.S. obligations single-family1
593 (1)593 (1)
GSE single-family14 14 
GSE multifamily662 (8)3,561 (25)4,223 (33)
Total mortgage-backed securities662 (8)4,168 (26)4,830 (34)
Total$1,346 $(23)$5,154 $(32)$6,500 $(55)

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


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):
March 31, 2021December 31, 2020
Year of Contractual MaturityAmortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Non-mortgage-backed securities
Due in one year or less$363 $364 $$
Due after one year through five years2,038 2,050 2,430 2,438 
Due after five years through ten years401 406 494 498 
Due after ten years698 712 744 749 
Total non-mortgage-backed securities3,500 3,532 3,672 3,689 
Mortgage-backed securities11,574 11,647 12,186 12,221 
Total$15,074 $15,179 $15,858 $15,910 



13

HTM Securities

HTM securities by major security type were as follows (dollars in millions):
March 31, 2021
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations$378 $79 $$457 
State or local housing agency obligations199 (1)199 
Total non-mortgage-backed securities577 80 (1)656 
Mortgage-backed securities
U.S. obligations single-family2
GSE single-family1,094 10 (1)1,103 
Private-label
Total mortgage-backed securities1,102 10 (1)1,111 
Total$1,679 $90 $(2)$1,767 

December 31, 2020
Amortized
Cost
1
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations$379 $97 $$476 
State or local housing agency obligations203 (1)204 
Total non-mortgage-backed securities582 99 (1)680 
Mortgage-backed securities
U.S. obligations single-family2
GSE single-family1,225 (2)1,232 
Private-label
Total mortgage-backed securities1,234 (2)1,241 
Total$1,816 $108 $(3)$1,921 

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 $5 million at March 31, 2021 and December 31, 2020.

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


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):
March 31, 2021December 31, 2020
Year of Contractual MaturityAmortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Non-mortgage-backed securities
Due after one year through five years$261 $299 $252 $297 
Due after five years through ten years186 190 198 203 
Due after ten years130 167 132 180 
Total non-mortgage-backed securities577 656 582 680 
Mortgage-backed securities1,102 1,111 1,234 1,241 
Total$1,679 $1,767 $1,816 $1,921 


14

ALLOWANCE FOR CREDIT LOSSES ON AFS AND HTM SECURITIES

The Bank evaluates AFS and HTM investment securities for credit losses on a quarterly basis.

AFS and HTM Securities

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 mortgage-backed securities (MBS). The Bank only purchases securities considered investment quality. At March 31, 2021 and December 31, 2020 , over 99 percent 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 March 31, 2021 and December 31, 2020, certain AFS securities held by the Bank were in an unrealized loss position. These losses were 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. 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 March 31, 2021 and December 31, 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. At March 31, 2021 and December 31, 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.

Note 4 — Advances

REDEMPTION TERM

The following table summarizes the Bank’s advances outstanding by redemption term (dollars in millions):
March 31, 2021December 31, 2020
Redemption Term
Amount1
Weighted
Average
Interest
Rate
Amount1
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts2
$1.28 %$1.29 %
Due in one year or less3
14,155 1.09 12,499 1.16 
Due after one year through two years8,894 1.65 8,265 1.69 
Due after two years through three years9,426 1.34 10,550 1.42 
Due after three years through four years8,146 1.22 7,011 1.38 
Due after four years through five years3,310 0.80 4,106 1.12 
Thereafter3,405 2.07 3,654 2.10 
Total par value47,336 1.32 %46,088 1.42 %
Premiums18 18 
Discounts(14)(3)
Fair value hedging adjustments174 427 
Total$47,514 $46,530 

1    Excludes accrued interest receivable of $15 million and $13 million at March 31, 2021 and December 31, 2020.

2    The Bank’s overdrawn demand deposit accounts were less than $1 million at March 31, 2021.

3    Includes $8 million of advances that have passed their original contractual redemption date as of March 31, 2021 due to a member bank default event. Refer to the “Allowance for Credit Losses” section of this footnote for additional details.


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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
March 31,
2021
December 31, 2020March 31,
2021
December 31, 2020
Overdrawn demand deposit accounts1
$$$$
Due in one year or less2
26,522 23,622 15,144 13,486 
Due after one year through two years6,730 6,276 8,966 8,319 
Due after two years through three years5,074 6,436 9,219 10,464 
Due after three years through four years4,604 4,053 7,303 6,116 
Due after four years through five years1,047 2,169 3,310 4,057 
Thereafter3,359 3,529 3,394 3,643 
Total par value$47,336 $46,088 $47,336 $46,088 
1    The Bank’s overdrawn demand deposit accounts were less than $1 million at March 31, 2021.

2    Includes $8 million of advances that have passed their original contractual redemption date as of March 31, 2021 due to a member bank default event. Refer to the “Allowance for Credit Losses” section of this footnote for additional details.


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 March 31, 2021 and December 31, 2020, the Bank had callable advances outstanding totaling $13.2 billion and $11.7 billion.

The Bank also holds putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on predetermined exercise dates. Generally, these put options are exercised when interest rates increase relative to contractual rates. At both March 31, 2021 and December 31, 2020, 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 interest income on the Statements of Income. The Bank recorded net prepayment fees on advances of $17 million and $3 million for the three months ended March 31, 2021 and 2020.

ADVANCE CONCENTRATIONS

The Bank’s advances are primarily concentrated in commercial banks and insurance companies. At March 31, 2021 and December 31, 2020, the Bank did not have any members who individually held 10 percent or more of the Bank’s advances.

ALLOWANCE FOR CREDIT LOSSES

The Bank evaluates advances for credit losses on a quarterly basis and 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.
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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 Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, 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.

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 a default or a 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 March 31, 2021 and December 31, 2020, 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. The Bank has never experienced a credit loss on its advances. The Bank considers an advance past due for financial reporting purposes if a default of contractual principal or interest exists for a period of 30 days or more.

In December 2020, the Bank declared a member bank in default under its contractual terms and demanded all of their outstanding advances to be repaid in full. As of March 31, 2021, the Bank had advances outstanding with a par value of $365 million from this member bank, all of which are considered past due by the Bank based on their interest being in default for 30 days or more. In addition, the par value outstanding includes $8 million of advances that have passed their original contractual redemption date as of March 31, 2021. All of these past due advances continue to remain on accrual status and are not considered impaired, as they are well-secured with underlying collateral and in the process of collection. At December 31, 2020, none of the Bank’s advances were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings (TDRs) related to advances during the three months ended March 31, 2021 and 2020.


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In light of the above member event, the Bank individually assessed the related advances for expected credit losses as of March 31, 2021 and December 31, 2020, and concluded that no allowance for credit losses was necessary due to the advances being well-secured with underlying collateral. Refer to “Note 10 — Commitments and Contingencies” for additional information.

All other advances were evaluated on a collective basis as of March 31, 2021 and December 31, 2020, and 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 those advances.

Note 5 — Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio includes conventional mortgage loans and government-guaranteed or -insured mortgage loans obtained primarily through the Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago). The Bank’s mortgage loan program involves investment by the Bank in single-family mortgage loans held for portfolio that are purchased from participating financial institutions (PFIs). Mortgage loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank’s PFIs generally originate, service, and credit enhance mortgage loans that are sold to the Bank. 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 PFI to a designated mortgage service provider.

The following table presents information on the Bank’s mortgage loans held for portfolio (dollars in millions):
March 31,
2021
December 31, 2020
Fixed rate, long-term single-family mortgage loans$6,555 $6,945 
Fixed rate, medium-term1 single-family mortgage loans
1,242 1,182 
Total unpaid principal balance7,797 8,127 
Premiums102 107 
Discounts(3)(3)
Basis adjustments from mortgage loan purchase commitments10 12 
Total mortgage loans held for portfolio2
7,906 8,243 
Allowance for credit losses3
(1)
Total mortgage loans held for portfolio, net$7,906 $8,242 

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

2    Excludes accrued interest receivable of $38 million and $40 million at March 31, 2021 and December 31, 2020.

3    The Bank’s allowance for credit losses was less than $1 million at March 31, 2021.


The following table presents the Bank’s mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):
March 31,
2021
December 31, 2020
Conventional mortgage loans$7,336 $7,646 
Government-insured mortgage loans461 481 
Total unpaid principal balance$7,797 $8,127 

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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 conventional mortgage loans (dollars in millions):
March 31, 2021
Origination Year
Prior to 20172017 to 2021Total
Past due 30 - 59 days$26 $20 $46 
Past due 60 - 89 days16 
Past due 90 - 179 days15 11 26 
Past due 180 days or more30 13 43 
Total past due mortgage loans80 51 131 
Total current mortgage loans2,384 4,921 7,305 
Total amortized cost of mortgage loans1
$2,464 $4,972 $7,436 
December 31, 2020
Origination Year
Prior to 20162016 to 2020Total
Past due 30 - 59 days$19 $18 $37 
Past due 60 - 89 days18 
Past due 90 - 179 days21 21 42 
Past due 180 days or more25 17 42 
Total past due mortgage loans74 65 139 
Total current mortgage loans1,952 5,661 7,613 
Total amortized cost of mortgage loans1
$2,026 $5,726 $7,752 

1    Amortized cost represents the unpaid principal balance adjusted for unamortized premiums, discounts, basis adjustments, and direct write-downs. Amortized cost excludes accrued interest receivable.


Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications related to the coronavirus pandemic (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 January 1, 2022, 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 $5 million and $1 million of these modifications outstanding as of March 31, 2021 and December 31, 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.


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The following table presents the unpaid principal balance of conventional mortgage loans in a forbearance plan as a result of COVID-19 (dollars in millions):
March 31, 2021December 31, 2020
Past due 30 - 59 days$$
Past due 60 - 89 days
Past due 90 days or more and in non-accrual status31 42 
Current mortgage loans
Total unpaid principal balance1
$43 $53 

1    These conventional loans in forbearance represent less than one percent of the Bank’s mortgage loans held for portfolio at March 31, 2021 and December 31, 2020.    


The following tables present other delinquency statistics for mortgage loans (dollars in millions):
March 31, 2021
Amortized CostConventionalGovernment-InsuredTotal
In process of foreclosure1
$$$
Serious delinquency rate2
%%%
Past due 90 days or more and still accruing interest3
$$13 $13 
Non-accrual mortgage loans4
$76 $$76 

December 31, 2020
Amortized CostConventionalGovernment- InsuredTotal
In process of foreclosure1
$$$
Serious delinquency rate2
%%%
Past due 90 days or more and still accruing interest3
$$13 $13 
Non-accrual mortgage loans4
$93 $$93 

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. At March 31, 2021 and December 31, 2020, none of these conventional mortgage loans on non-accrual status had an associated allowance for expected credit losses.


ALLOWANCE FOR CREDIT LOSSES

The Bank evaluates mortgage loans for credit losses on a quarterly basis.

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. The Bank also incorporates associated credit enhancements when determining its estimate of expected credit losses. 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.


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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 March 31, 2021, the Bank had an allowance for credit losses of less than $1 million on its conventional mortgage loans. During the three months ended March 31, 2021, the Bank’s cash flow model for collectively evaluated loans projected a decrease in expected credit losses due primarily to decreased loan delinquencies and an acceleration in forecasted regional home price appreciation. These lower expected credit losses were offset in part by expected recoveries of prior charge-offs on individually evaluated loans, stemming from improved property values. At December 31, 2020, the Bank’s allowance for credit losses on conventional mortgage loans totaled $1 million.

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. At March 31, 2021 and December 31, 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 March 31, 2021 and December 31, 2020. 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.

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
21


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 policies, see “Note 1 — Summary of Significant Accounting Policies” in the 2020 Form 10-K.

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.


22

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):
March 31, 2021December 31, 2020
Notional
Amount
Derivative
Assets
Derivative
 Liabilities
Notional
Amount
Derivative
Assets
Derivative
 Liabilities
Derivatives designated as hedging instruments (fair value hedges)
Interest rate swaps$33,636 $103 $185 $33,552 $46 $262 
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps1,759 54 1,817 12 73 
Forward settlement agreements (TBAs)105 169 
Mortgage loan purchase commitments113 177 
Total derivatives not designated as hedging instruments1,977 55 2,163 13 74 
Total derivatives before netting and collateral adjustments$35,613 112 240 $35,715 59 336 
Netting adjustments and cash collateral1
137 (239)168 (332)
Total derivative assets and derivative liabilities$249 $$227 $

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 March 31, 2021 and December 31, 2020, cash collateral, including accrued interest, posted by the Bank was $398 million and $507 million. At March 31, 2021 and December 31, 2020, the Bank held cash collateral, including accrued interest, from clearing agents or counterparties of $22 million and $7 million.

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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 March 31, 2021
Interest Income (Expense)
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$131 $36 $(126)
Gains (losses) on fair value hedging relationships
Interest rate contracts
   Derivatives2
$199 $173 $(7)
   Hedged items3
(253)(203)43 
Net gains (losses) on fair value hedging relationships$(54)$(30)$36 
For the Three Months Ended March 31, 2020
Interest Income (Expense)
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$399 $75 $(410)
Gains (losses) on fair value hedging relationships
Interest rate contracts
Derivatives2
$(435)$(316)$237 
Hedged items3
423 290 (233)
Net gains (losses) on fair value hedging relationships$(12)$(26)$

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 and net interest settlements on derivatives.    
3    Includes changes in fair value and amortization/accretion of basis adjustments on closed hedge relationships.
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The following tables summarize cumulative fair value hedging adjustments and the related amortized cost of the hedged items (dollars in millions):
March 31, 2021
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Amortized cost of hedged asset/liability1
$17,421 $6,709 $11,872 
Fair value hedging adjustments
Changes in fair value for active hedging relationships included in amortized cost$146 $137 $117 
Basis adjustments for discontinued hedging relationships included in amortized cost28 (9)
Total amount of fair value hedging adjustments$174 $137 $108 
December 31, 2020
AdvancesAvailable-for-Sale SecuritiesConsolidated Obligation Bonds
Amortized cost of hedged asset/liability1
$17,875 $7,137 $12,163 
Fair value hedging adjustments
Changes in fair value for active hedging relationships included in amortized cost$406 $340 $161 
Basis adjustments for discontinued hedging relationships included in amortized cost21 (10)
Total amount of fair value hedging adjustments$427 $340 $151 

1    Represents the portion of amortized cost designated as a hedged item in a fair value hedging relationship.

The following table summarizes the components of “Net gains (losses) on derivatives” as presented on the Statements of Income (dollars in millions):
For the Three Months Ended
March 31,
20212020
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps$21 $(45)
Forward settlement agreements (TBAs)(8)
Mortgage loan purchase commitments(3)
Net interest settlements(4)(2)
Net gains (losses) on derivatives$17 $(48)


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.

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.

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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 Bank had no uncleared derivative instruments with credit-risk related contingent features that were in a net liability position (before cash collateral and related accrued interest) at March 31, 2021. As such, 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 March 31, 2021.
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 March 31, 2021. 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 2020 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.
26

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):
March 31, 2021
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$105 $(99)$$
   Cleared derivatives236 243 
Total$112 $137 $$249 
Derivative Liabilities
   Uncleared derivatives$237 $(237)$$
   Cleared derivatives(2)
Total$239 $(239)$$
December 31, 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$58 $(58)$$
   Cleared derivatives226 226 
Total$58 $168 $$227 
Derivative Liabilities
   Uncleared derivatives$328 $(324)$$
   Cleared derivatives(8)
Total$336 $(332)$$

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 short-, 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 generally 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 March 31, 2021 and December 31, 2020, the total par value of outstanding consolidated obligations of the FHLBanks was $696.4 billion and $746.8 billion.


27

DISCOUNT NOTES

The following table summarizes the Bank’s discount notes (dollars in millions):
March 31, 2021December 31, 2020
AmountWeighted
Average
Interest
Rate
AmountWeighted
Average
Interest
Rate
Par value$23,900 0.06 %$27,350 0.10 %
Discounts and concessions1
(2)(5)
Total$23,898 $27,345 

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):
March 31, 2021December 31, 2020
Year of Contractual MaturityAmountWeighted
Average
Interest
Rate
AmountWeighted
Average
Interest
Rate
Due in one year or less$32,580 0.78 %$29,224 0.88 %
Due after one year through two years9,547 1.02 9,398 1.10 
Due after two years through three years3,014 2.52 3,296 2.42 
Due after three years through four years3,404 2.94 3,548 3.00 
Due after four years through five years872 2.11 1,058 2.19 
Thereafter5,381 2.45 5,406 2.50 
Total par value54,798 1.24 %51,930 1.36 %
Premiums183 199 
Discounts and concessions1
(23)(26)
Fair value hedging adjustments108 151 
Total$55,066 $52,254 

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):
March 31,
2021
December 31,
2020
Non-callable or non-putable$51,412 $48,610 
Callable3,386 3,320 
Total par value$54,798 $51,930 

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 DateMarch 31,
2021
December 31,
2020
Due in one year or less$35,284 $31,749 
Due after one year through two years10,054 10,038 
Due after two years through three years3,064 3,326 
Due after three years through four years3,454 3,648 
Due after four years through five years657 805 
Thereafter2,285 2,364 
Total par value$54,798 $51,930 


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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 issues a single class of capital stock (Class B capital stock) and has 2 subclasses of Class B 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. In addition, each member is required to purchase and hold activity-based stock in an amount equal to 0.10 percent of its standby letters of credit. 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 March 31, 2021 and December 31, 2020, 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 or MRCS) 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 MRCS are classified as interest expense on the Statements of Income.

At March 31, 2021 and December 31, 2020, the Bank’s MRCS totaled $36 million and $52 million. During the three months ended March 31, 2021, interest expense on MRCS was less than $1 million. During the three months ended March 31, 2020, interest expense on MRCS was $3 million.

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. 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 MRCS. On February 19, 2021, all remaining captive insurance companies that were admitted as members prior to September 12, 2014 had their membership terminated. The Bank immediately redeemed all membership stock from these captive insurance companies; however, the remaining activity-based stock will become subject to the five year redemption period.

The following tables summarize changes in MRCS (dollars in millions):
For the Three Months Ended March 31,
20212020
Balance, beginning of period$52 $206 
Capital stock reclassified to (from) MRCS, net
Net payments for repurchases/redemptions of MRCS(16)(116)
Balance, end of period$36 $96 


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The following table summarizes the Bank’s MRCS by year of contractual redemption (dollars in millions):
Year of Contractual Redemption1
March 31,
2021
December 31, 2020
Due in one year or less$10 $
Due after one year through two years11 
Due after two years through three years
Due after three years through four years
Due after four years through five years10 
Thereafter2
27 
Past contractual redemption date due to outstanding activity with the Bank11 12 
Total$36 $52 

1    At the Bank’s election, the MRCS 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 MRCS with certain captive insurance companies whose membership terminated on February 19, 2021. As their five year redemption period did not start until the membership termination date, all associated MRCS was reported in this line item as of December 31, 2020.


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, calculated as of the last day of each calendar quarter, equals at least one percent of its average balance of outstanding consolidated obligations for the calendar quarter. The restricted retained earnings are not available to pay dividends. At March 31, 2021 and December 31, 2020, the Bank’s restricted retained earnings account totaled $589 million and $576 million.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes changes in accumulated other comprehensive income (loss) (AOCI) (dollars in millions):
Net unrealized gains (losses) on AFS securities (Note 3)Pension and postretirement benefitsTotal AOCI
Balance, December 31, 2019$48 $(4)$44 
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities(164)(164)
Reclassifications from AOCI to net income
Amortization - pension and postretirement
Net current period other comprehensive income (loss)(164)(163)
Balance, March 31, 2020$(116)$(3)$(119)
Balance, December 31, 2020$52 $(4)$48 
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities52 52 
Reclassifications from AOCI to net income
Amortization - pension and postretirement
Net current period other comprehensive income (loss)52 52 
Balance, March 31, 2021$104 $(4)$100 


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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 capital stock (including MRCS), 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 capital stock (including MRCS) and retained earnings. It does not include AOCI.

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 March 31, 2021 and December 31, 2020.

In addition to the requirements previously discussed, the Finance Agency Advisory Bulletin on capital stock (the Capital Stock AB) requires each FHLBank to maintain at all times a ratio of at least two percent of capital stock to total assets. For purposes of the Capital Stock AB, capital stock includes MRCS. 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):
March 31, 2021December 31, 2020
RequiredActualRequiredActual
Regulatory capital requirements
Risk-based capital$839 $5,948 $704 $5,744 
Regulatory capital$3,494 $5,948 $3,508 $5,744 
Leverage capital$4,368 $8,921 $4,385 $8,616 
Capital-to-assets ratio4.00 %6.81 %4.00 %6.55 %
Capital stock-to-assets ratio2.00 %3.89 %2.00 %3.78 %
Leverage ratio5.00 %10.21 %5.00 %9.83 %

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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 into or out of Level 3 of the fair value hierarchy during the three months ended March 31, 2021 and 2020.

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The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments (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 impaired 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.
March 31, 2021
Fair Value
Financial InstrumentsCarrying ValueLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Cash and due from banks$255 $255 $$$— $255 
Interest-bearing deposits401 401 — 401 
Securities purchased under agreements to resell3,500 3,500 — 3,500 
Federal funds sold7,095 7,095 — 7,095 
Trading securities3,348 3,348 — 3,348 
Available-for-sale securities15,179 15,179 — 15,179 
Held-to-maturity securities1,679 1,762 — 1,767 
Advances47,514 48,015 — 48,015 
Mortgage loans held for portfolio, net7,906 8,059 83 — 8,142 
Accrued interest receivable104 104 — 104 
Derivative assets, net249 112 137 249 
Other assets40 40 — 40 
Liabilities
Deposits(1,968)(1,968)— (1,968)
Consolidated obligations
Discount notes(23,898)(23,899)— (23,899)
Bonds(55,066)(55,734)— (55,734)
Total consolidated obligations(78,964)(79,633)— (79,633)
Mandatorily redeemable capital stock(36)(36)— (36)
Accrued interest payable(153)(153)— (153)
Derivative liabilities, net(1)(240)239 (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.
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The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments (dollars in millions):
December 31, 2020
Fair Value
Financial InstrumentsCarrying ValueLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Cash and due from banks$978 $978 $$$— $978 
Interest-bearing deposits401 401 — 401 
Securities purchased under agreements to resell4,800 4,800 — 4,800 
Federal funds sold3,695 3,695 — 3,695 
Trading securities4,875 4,875 — 4,875 
Available-for-sale securities15,910 15,910 — 15,910 
Held-to-maturity securities1,816 1,915 — 1,921 
Advances46,530 47,146 — 47,146 
Mortgage loans held for portfolio, net8,242 8,443 75 — 8,518 
Accrued interest receivable97 97 — 97 
Derivative assets, net227 59 168 227 
Other assets39 39 — 39 
Liabilities
Deposits(1,908)(1,908)— (1,908)
Consolidated obligations
Discount notes(27,345)(27,346)— (27,346)
Bonds(52,254)(53,246)— (53,246)
Total consolidated obligations(79,599)(80,592)— (80,592)
Mandatorily redeemable capital stock(52)(52)— (52)
Accrued interest payable(145)(145)— (145)
Derivative liabilities, net(4)(336)332 (4)

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.

34

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 March 31, 2021 and December 31, 2020, 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 primary mortgage insurance 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 overnight index swap (OIS) or SOFR OIS curve depending on the terms of the derivative agreement. 

Forward interest rate assumption. The Bank utilizes the swap curve of the instrument’s index rate.

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



35

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.

36

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 (dollars in millions):
March 31, 2021
Recurring Fair Value MeasurementsLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Trading securities
U.S. Treasury obligations$$2,565 $$— $2,565 
Other U.S. obligations106 — 106 
GSE and Tennessee Valley Authority obligations61 — 61 
Other non-MBS
238 — 238 
GSE multifamily MBS378 — 378 
Total trading securities3,348 — 3,348 
Available-for-sale securities
Other U.S. obligations1,564 — 1,564 
GSE and Tennessee Valley Authority obligations980 — 980 
State or local housing agency obligations694 — 694 
Other non-MBS294 — 294 
U.S. obligations single-family MBS3,418 — 3,418 
GSE single-family MBS391 — 391 
GSE multifamily MBS7,838 — 7,838 
Total available-for-sale securities15,179 — 15,179 
Derivative assets, net
Interest-rate related112 137 249 
Other assets40 — 40 
Total recurring assets at fair value$40 $18,639 $$137 $18,816 
Liabilities
Derivative liabilities, net
Interest-rate related$$(239)$$239 $
Mortgage loan purchase commitments(1)(1)
Total derivative liabilities, net(240)239 (1)
Total recurring liabilities at fair value$$(240)$$239 $(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.

37

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 (dollars in millions):
December 31, 2020
Recurring Fair Value MeasurementsLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral1
Total
Assets
Trading securities
U.S. Treasury obligations$$4,069 $$— $4,069 
Other U.S. obligations114 — 114 
GSE and Tennessee Valley Authority obligations64 — 64 
Other non-MBS
246 — 246 
GSE multifamily MBS382 — 382 
Total trading securities4,875 — 4,875 
Available-for-sale securities
Other U.S. obligations1,672 — 1,672 
GSE and Tennessee Valley Authority obligations1,022 — 1,022 
State or local housing agency obligations693 — 693 
Other non-MBS302 — 302 
U.S. obligations single-family MBS3,544 — 3,544 
GSE single-family MBS446 — 446 
GSE multifamily MBS8,231 — 8,231 
Total available-for-sale securities15,910 — 15,910 
Derivative assets, net
Interest-rate related58 168 226 
Mortgage loan purchase commitments— 
Total derivative assets, net59 168 227 
Other assets39 — 39 
Total recurring assets at fair value$39 $20,844 $$168 $21,051 
Liabilities
Derivative liabilities, net
Interest-rate related$$(335)$$332 $(3)
Forward settlement agreements (TBAs)(1)— (1)
Total derivative liabilities, net(336)332 (4)
Total recurring liabilities at fair value$$(336)$$332 $(4)

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 March 31, 2021 and December 31, 2020, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $2 million and $7 million. These fair values were as of the date the fair value adjustment was recorded during the three months ended March 31, 2021 and year ended December 31, 2020.

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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 March 31, 2021 and December 31, 2020, 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 $617.7 billion and $667.5 billion.

The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):
March 31, 2021December 31, 2020
Expire
within one year
Expire
after one year
TotalTotal
Standby letters of credit1,2
$8,220 $50 $8,270 $9,361 
Standby bond purchase agreements2
385 403 788 797 
Commitments to purchase mortgage loans113 113 177 
Commitments to issue bonds36 36 
Commitments to fund advances2
898 898 252 

1    Excludes commitments to issue standby letters of credit of $858 million at March 31, 2021. At December 31, 2020, the Bank had 0 commitments to issue standby letters of credit outstanding.

2    The Bank has deemed it unnecessary to record any liability for credit losses on these agreements at March 31, 2021 and December 31, 2020.


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 March 31, 2021, 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 March 31, 2021 and December 31, 2020.

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 March 31, 2021, the Bank had standby bond purchase agreements with 7 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 three months ended March 31, 2021 and 2020, 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 March 31, 2021 and December 31, 2020 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 March 31, 2021, the Bank had commitments to issue $36 million of consolidated obligation bonds. At December 31, 2020, the Bank had no commitments to issue consolidated obligation bonds.
39

Commitments to Fund Advances. The Bank enters into commitments to fund additional advances up to 24 months in the future. At March 31, 2021 and December 31, 2020, the Bank had commitments to fund advances of $898 million and $252 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 $157 million and $154 million at March 31, 2021 and December 31, 2020.
Legal Proceedings. The Bank is subject to various pending legal proceedings arising in the normal course of business. Certain of these legal proceedings involve pending litigation with a current member of the Bank stemming from alleged breaches by the member under the Bank’s MPF program and the member’s failure to repay its outstanding advances owed to the Bank. See “Note 4 — Advances” for additional information. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on the Bank’s financial condition or results of operations.
The Bank records legal expenses related to litigation settlements as incurred in other expense 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 months ended March 31, 2021, the Bank did not recognize any gains on litigation settlements. During the three months ended March 31, 2020, the Bank recognized $56 million in net gains on litigation settlements through other income (loss), due to the settlement of one of the Bank’s private-label MBS claims, as previously discussed in the Bank’s 2020 Form 10-K.
The Bank is not currently aware of any pending or threatened legal proceedings to which it is a party that could have a material impact on its financial condition, results of operations, or cash flows.

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):
March 31, 2021December 31, 2020
Amount% of TotalAmount% of Total
Advances$42 $1,526 
Mortgage loans136 154 
Deposits15 17 
Capital stock45 110 

BUSINESS CONCENTRATIONS

The Bank considers itself to have business concentrations with stockholders owning 10 percent or more of its total capital stock outstanding (including MRCS). At March 31, 2021 and December 31, 2020, the Bank did not have any stockholders owning 10 percent or more of its total capital stock outstanding.
40


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 three months ended March 31, 2021 and 2020 (dollars in millions):
Other FHLBankBeginning
Balance
LoansPrincipal
Repayment
Ending
Balance
2021
Chicago$$301 $(301)$
2020
Boston$$250 $(250)$
    
During the three months ended March 31, 2021 and 2020, the Bank did not borrow funds from other FHLBanks.

Note 13 — Subsequent Events

Subsequent events have been evaluated from April 1, 2021, through the time of the Form 10-Q filing with the SEC. No material subsequent events requiring disclosure were identified.


41

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, 2020, filed with the Securities and Exchange Commission (SEC) on March 10, 2021 (2020 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:
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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:
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 the Secured Overnight Financing Rate (SOFR) or an alternative benchmark;

member consolidations and failures;

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

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, negative interest rates, 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;

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 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;

significant business interruptions resulting from third party failures;

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; and

the ability to attract and retain key personnel.
43


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 2020 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).

Financial Results
For the three months ended March 31, 2021, we reported net income of $66 million compared to $92 million for the same period in 2020. Our change in net income was primarily driven by net gains on litigation settlements of $56 million recorded during the three months ended March 31, 2020, as discussed further below. Our net income is calculated in accordance with accounting principles generally accepted in the United States of America (GAAP).

Net interest income totaled $110 million for the three months ended March 31, 2021 compared to $109 million for the same period last year. Net interest income was impacted by an increase in net gains on fair value hedge relationships of $23 million and an increase in advance prepayment fee income of $14 million, offset by lower average advance balances and the lower interest rate environment. Our net interest margin increased to 0.51 percent during the three months ended March 31, 2021 compared to 0.35 percent for the same period in 2020 due to these factors.

During the three months ended March 31, 2021, we recorded other income (loss) of $2 million compared to $36 million in the same period last year. During the three months ended March 31, 2020, other income (loss) was primarily impacted by net gains on litigation settlements of $56 million as a result of a settlement with a defendant in our private-label mortgage-backed securities (MBS) litigation. During 2020, all of our remaining private-label MBS litigation cases initially filed were settled. As such, we did not record any litigation settlements during the three months ended March 31, 2021. Other factors impacting other income (loss) included net gains (losses) on trading securities and net gains (losses) on derivatives not qualifying for hedge accounting treatment (economic derivatives), as described below.

    During the three months ended March 31, 2021, we recorded net combined losses of $5 million on our trading securities and associated economic derivatives compared to net combined losses of $22 million for the same period in 2020. These changes in fair value were primarily driven by market volatility, caused in part by COVID-19 and the impact it had on interest rates, as well as credit spreads on our fixed rate trading securities.

Our total assets were $87.4 billion at March 31, 2021 compared to $87.7 billion at December 31, 2020. Advances at March 31, 2021 increased by $1.0 billion from December 31, 2020 due primarily to an increase in borrowings by insurance company members. This increase was partially offset by decreased demand for advances across other institution types, mainly due to increased liquidity in the financial markets and higher member deposit levels.

Total capital increased to $6.0 billion at March 31, 2021 from $5.7 billion at December 31, 2020. Our regulatory capital ratio increased to 6.81 percent at March 31, 2021, from 6.55 percent at December 31, 2020, 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.


44

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, but not limited to, net asset prepayment fee income, mandatorily redeemable capital stock interest expense, discretionary pension contributions, and net gains on litigation settlements, if applicable. 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 months ended March 31, 2021 when compared to the same period in 2020. The decline was driven by lower adjusted net interest income due primarily to lower average advance balances and the lower interest rate environment.

The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):
For the Three Months Ended
March 31,
20212020
GAAP net interest income$110 $109 
Exclude:
Prepayment fees on advances, net1
17 
Prepayment fees on investments, net2
— 
Mandatorily redeemable capital stock interest expense— (3)
Market value adjustments on fair value hedges3
12 (12)
Total adjustments29 (10)
Include items reclassified from other income (loss):
Net interest expense on economic hedges(4)(1)
Adjusted net interest income$77 $118 
Adjusted net interest margin0.36 %0.37 %

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 market value gains (losses) on derivatives and hedged items in qualifying hedging relationships.


45

The following table summarizes the reconciliation between GAAP net income before assessments and adjusted net income (dollars in millions):
For the Three Months Ended
March 31,
20212020
GAAP net income before assessments$73 $102 
Exclude:
Prepayment fees on advances, net1
17 
Prepayment fees on investments, net2
— 
Mandatorily redeemable capital stock interest expense— (3)
Market value adjustments on fair value hedges3
12 (12)
Net gains (losses) on trading securities(22)26 
Net gains (losses) on derivatives17 (48)
Gains on litigation settlements, net— 56 
Include:
Net interest expense on economic hedges(4)(1)
Adjusted net income before assessments45 77 
Adjusted AHP assessments4
Adjusted net income$41 $69 

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 market value gains (losses) on derivatives and hedged items in qualifying hedging relationships.

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 10 — Affordable Housing Program” in our 2020 Form 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 Alternative Reference Rates Committee proposed 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. 

In March 2021, the Financial Conduct Authority further announced that LIBOR will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021 (or, in the case of some more frequently used LIBOR settings, immediately after June 30, 2023). Although the Financial Conduct Authority does not expect LIBOR to become unrepresentative before the applicable cessation date and intends to consult on requiring the administrator of LIBOR to continue publishing LIBOR of certain currencies and tenors on a non-representative, synthetic basis for a period after the applicable cessation date, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published or be representative through any particular date.

As previously discussed in our 2020 Form 10-K, many of our advances, investments, consolidated obligation bonds, derivatives, and related collateral are indexed to LIBOR. We are preparing for a transition away from LIBOR as a benchmark interest rate and plan to utilize SOFR as the dominant replacement rate on an ongoing basis. We ceased purchasing investments that reference LIBOR in 2018. In addition, we ceased execution of new LIBOR indexed transactions with maturities beyond December 31, 2021 as of June 30, 2020. We continue to monitor fallback language on our products and are in the process of ensuring we are operationally ready for these fallback activities, 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. We are also utilizing interest rate swaps based on the federal funds or SOFR overnight index swap (OIS) rates as an alternative to using LIBOR when entering into new derivative transactions.


46

The following tables summarize our variable rate advances, investments, consolidated obligation bonds and derivatives by interest-rate index at March 31, 2021 and December 31, 2020 (in millions):
March 31, 2021
LIBORSOFR OISFederal Funds OISOtherTotal
Advances, principal amount$1,106 $175 $— $12,603 $13,884 
Investment securities
Non-mortgage-backed securities, principal amount1,754 — — — 1,754 
Mortgage-backed securities, principal amount7,379 — — — 7,379 
Total investment securities9,133 — — — 9,133 
Consolidated obligation bonds, principal amount1,450 5,963 — — 7,413 
Total variable rate financial instruments amount$11,689 $6,138 $— $12,603 $30,430 
Derivatives
Pay leg, notional amount$10,197 $— $192 $— $10,389 
Receive leg, notional amount14,731 10,270 — 25,006 

December 31, 2020
LIBORSOFR OISFederal Funds OISOtherTotal
Advances, principal amount$1,157 $175 $— $11,267 $12,599 
Investment securities
Non-mortgage-backed securities, principal amount1,819 — — — 1,819 
Mortgage-backed securities, principal amount7,726 — — — 7,726 
Total investment securities9,545 — — — 9,545 
Consolidated obligation bonds, principal amount4,940 7,983 — — 12,923 
Total variable rate financial instruments amount$15,642 $8,158 $— $11,267 $35,067 
Derivatives
Pay leg, notional amount$10,412 $— $76 $— $10,488 
Receive leg, notional amount15,761 9,115 — 24,881 
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The following tables present our exposure to LIBOR-indexed advances, investments, consolidated obligation bonds and derivatives at March 31, 2021 and December 31, 2020 (in millions):
March 31, 2021
LIBOR Tenors That Cease or Will no Longer be Representative Immediately After June 30, 2023
Due/Terminates in 2021Due/Terminates in 2022Due/Terminates through June 30, 2023Due/Terminates ThereafterTotal
Assets Indexed to LIBOR
Advances, principal amount by redemption term$243 $221 $50 $592 $1,106 
Investment securities, by contractual maturity1
Non-mortgage-backed securities, principal amount— — 133 1,621 1,754 
Mortgage-backed securities, principal amount12 70 205 7,092 7,379 
Derivatives, receive leg
Cleared, notional amount1,735 1,891 1,896 4,420 9,942 
Uncleared, notional amount482 1,054 946 2,307 4,789 
Total Principal/Notional Amount$2,472 $3,236 $3,230 $16,032 $24,970 
Liabilities Indexed to LIBOR
Consolidated obligation bonds, principal amount by contractual maturity$1,450 $— $— $— $1,450 
Derivatives, pay leg
Cleared, notional amount8,637 80 265 660 9,642 
Uncleared, notional amount152 103 50 250 555 
Total Principal/Notional Amount$10,239 $183 $315 $910 $11,647 
December 31, 2020
LIBOR Tenors That Cease or Will no Longer be Representative Immediately After June 30, 2023
Due/Terminates in 2021Due/Terminates in 2022Due/Terminates through June 30, 2023Due/Terminates ThereafterTotal
Assets Indexed to LIBOR
Advances, principal amount by redemption term$293 $221 $50 $593 $1,157 
Investment securities, by contractual maturity1
Non-mortgage-backed securities, principal amount— — 141 1,678 1,819 
Mortgage-backed securities, principal amount12 70 214 7,430 7,726 
Derivatives, receive leg
Cleared, notional amount2,304 1,895 1,928 4,755 10,882 
Uncleared, notional amount482 1,056 1,001 2,340 4,879 
Total Principal/Notional Amount$3,091 $3,242 $3,334 $16,796 $26,463 
Liabilities Indexed to LIBOR
Consolidated obligation bonds, principal amount by contractual maturity$4,940 $— $— $— $4,940 
Derivatives, pay leg
Cleared, notional amount8,837 80 264 660 9,841 
Uncleared, notional amount168 103 50 250 571 
Total Principal/Notional Amount$13,945 $183 $314 $910 $15,352 
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.
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For a summary of our risks on the replacement of the LIBOR benchmark interest rate, refer to “Item 1A. Risk Factors” in our 2020 Form 10-K.
CONDITIONS IN THE FINANCIAL MARKETS

Economy and Financial Markets

The COVID-19 outbreak continues to cause human and economic hardship across the U.S. Following a moderation in the pace of the recovery toward the end of 2020, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak. Inflation continues to run below two percent. Overall financial conditions remain accommodative, 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, including progress on vaccinations. The ongoing public health crisis continues to weigh on economic activity, employment, and inflation, and poses considerable risks to the economic outlook. In its March 17, 2021 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 Committee also stated that 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.

In response to COVID-19, the Federal Reserve and Congress implemented a multitude of programs to help stabilize market conditions. The Federal Reserve indicated that it will continue to increase its holdings of U.S. Treasuries and agency MBS, until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Mortgage Markets

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 first quarter of 2021, the housing market began to show signs of recovery and home sales increased to levels above the first quarter of 2020, while housing inventory remained low, resulting in higher home prices. During the first quarter of 2021, mortgage rates increased slightly from the prior year end, however, remained lower, on average, compared to the same period last year. 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 first quarter of 2021. Forbearances and delinquencies of mortgage loans continued to trend down in the first quarter of 2021, consistent with a decline in the rate of unemployment. The federal government programs are set to expire on June 30, 2021, which could result in an increase in delinquencies and foreclosures in 2021 and beyond.

Interest Rates

    The following table shows information on key market interest rates1:
First Quarter 2021
3-Month Average
First Quarter 2020
3-Month Average
March 31,
2021
Ending Rate
December 31, 2020
Ending Rate
Federal funds0.08 %1.23 %0.06 %0.09 %
Three-month LIBOR0.20 1.52 0.19 0.24 
SOFR0.04 1.23 0.01 0.07 
2-year U.S. Treasury0.13 1.09 0.16 0.12 
10-year U.S. Treasury1.33 1.37 1.74 0.92 
30-year residential mortgage note2.87 3.52 3.17 2.67 

1    Source: Bloomberg.

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In March 2020, the FOMC lowered the Federal Reserve’s key target interest rate, the federal funds rate, to a range of zero to 0.25 percent and maintained that range throughout 2020 and the first quarter of 2021.

The global concerns related to COVID-19 and the resulting impact on economic activity led to lower interest rates, on average, in the first quarter of 2021 when compared to the same period last year. However, as vaccination efforts continue to progress, economic activity has turned up and longer-term interest rates increased during the first quarter of 2021 when compared to the prior year end.

Funding Spreads

The following table reflects our funding spreads to SOFR (basis points)1:
First Quarter 2021
3-Month Average
First Quarter 2020
3-Month Average
March 31,
2021
 Ending Spread
December 31, 2020
Ending Spread
3-month2.1 5.1 1.2 3.8 
2-year6.4 27.3 5.9 6.6 
5-year13.4 38.7 14.2 16.6 
10-year30.4 70.3 29.6 38.2 

1    Source: The Office of Finance.

The following table reflects our funding spreads to U.S. Treasuries (basis points)1:
First Quarter 2021
3-Month Average
First Quarter 2020
3-Month Average
March 31,
2021
 Ending Spread
December 31, 2020
Ending Spread
3-month1.8 8.4 0.7 2.3 
2-year1.4 12.4 1.2 1.0 
5-year3.3 20.4 2.0 5.3 
10-year11.8 44.4 9.0 18.5 

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 first quarter of 2021, our funding spreads to SOFR and U.S. Treasuries generally improved when compared to the prior year end and the same period last year. During the three months ended March 31, 2021, we utilized discount notes and short-term floating rate consolidated obligation bonds in an effort to capture attractive funding, match the repricing structures on assets, and/or meet our liquidity requirements.
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SELECTED FINANCIAL DATA

    The following tables present selected financial data for the periods indicated (dollars in millions):
Statements of ConditionMarch 31,
2021
December 31,
2020
September 30,
2020
June 30,
2020
March 31,
2020
Cash and due from banks$255 $978 $788 $483 $611 
Investments1
31,202 31,497 32,705 34,315 35,634 
Advances47,514 46,530 48,462 57,942 79,757 
Mortgage loans held for portfolio, net2
7,906 8,242 8,733 9,246 9,546 
Total assets87,353 87,691 91,154 102,485 126,068 
Consolidated obligations
Discount notes23,898 27,345 30,928 21,364 33,071 
Bonds55,066 52,254 52,343 72,748 84,266 
Total consolidated obligations3
78,964 79,599 83,271 94,112 117,337 
Mandatorily redeemable capital stock36 52 54 81 96 
Total liabilities81,341 81,951 85,358 96,486 119,335 
Capital stock — Class B putable3,535 3,341 3,432 3,802 4,653 
Retained earnings2,377 2,351 2,359 2,257 2,199 
Accumulated other comprehensive income (loss)100 48 (60)(119)
Total capital6,012 5,740 5,796 5,999 6,733 
Regulatory capital ratio4
6.81 6.55 6.41 5.99 5.51 
For the Three Months Ended
Statements of IncomeMarch 31,
2021
December 31,
2020
September 30,
2020
June 30,
2020
March 31,
2020
Net interest income$110 $103 $141 $119 $109 
Provision (reversal) for credit losses on mortgage loans(1)(1)— — 
Other income (loss)5
65 15 36 
Other expense6
40 70 37 39 43 
AHP assessments16 10 10 
Net income66 34 151 85 92 
Selected Financial Ratios7
Net interest spread8
0.46 %0.40 %0.53 %0.37 %0.25 %
Net interest margin9
0.51 0.46 0.57 0.43 0.35 
Return on average equity (annualized)4.60 2.37 9.94 5.58 5.51 
Return on average capital stock (annualized)7.88 4.02 16.43 8.53 8.26 
Return on average assets (annualized)0.30 0.15 0.60 0.31 0.29 
Average equity to average assets6.48 6.34 6.05 5.48 5.27 
Dividend payout ratio10
59.69 125.75 31.82 63.14 63.50 

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 less than $1 million at March 31, 2021, $1 million at December 31, 2020, $3 million at September 30, 2020, and $1 million at both June 30, 2020 and March 31, 2020.

3    The total par value of outstanding consolidated obligations of the 11 FHLBanks was $696.4 billion, $746.8 billion, $819.9 billion, $915.8 billion, and $1,174.7 billion at March 31, 2021, December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020.

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 and net gains (losses) on derivatives. During the three months ended September 30, 2020 and March 31, 2020, other income (loss) was also impacted by net gains on litigation settlements. The Bank did not record any litigation settlements during the three months ended March 31, 2021, December 31, 2020, and June 30, 2020.

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.
51

RESULTS OF OPERATIONS

Net Income

The following table presents comparative highlights of our net income for the three months ended March 31, 2021 and 2020 (dollars in millions). See further discussion of these items in the sections that follow.
For the Three Months Ended
March 31,
20212020$ Change% Change
Net interest income$110 $109 $%
Provision (reversal) for credit losses on mortgage loans(1)— (1)(100)
Other income (loss)36 (34)(94)
Other expense40 43 (3)(7)
AHP assessments10 (3)(30)
Net income$66 $92 $(26)(28)%
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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 March 31,
20212020
Average
Balance1
Yield/Cost
Interest
Income/
Expense2
Average
Balance1
Yield/Cost
Interest
Income/
Expense2
Interest-earning assets
Interest-bearing deposits$863 0.10 %$— $384 0.84 %$
Securities purchased under agreements to resell2,880 0.06 8,709 1.41 30 
Federal funds sold7,634 0.08 8,718 1.25 27 
Mortgage-backed securities3,4
13,373 0.89 29 14,396 2.00 72 
    Other investments3,4,5
8,022 1.30 26 5,447 1.92 26 
Advances4
47,287 1.13 131 78,875 2.04 399 
Mortgage loans6
8,069 2.65 53 9,403 3.33 78 
     Loans to other FHLBanks0.12 — 1.61 — 
Total interest-earning assets88,131 1.11 241 125,940 2.02 633 
Non-interest-earning assets1,003 — — 1,053 — — 
Total assets$89,134 1.10 %$241 $126,993 2.01 %$633 
Interest-bearing liabilities   
Deposits$1,870 0.01 %$— $969 0.44 %$
Consolidated obligations   
Discount notes23,620 0.09 28,695 1.54 110 
Bonds4
56,300 0.90 126 89,139 1.85 410 
Other interest-bearing liabilities7
45 4.46 — 200 5.54 
Total interest-bearing liabilities81,835 0.65 131 119,003 1.77 524 
Non-interest-bearing liabilities1,527 — — 1,304 — — 
Total liabilities83,362 0.64 131 120,307 1.75 524 
Capital5,772 — — 6,686 — — 
Total liabilities and capital$89,134 0.60 %$131 $126,993 1.66 %$524 
Net interest income and spread8
0.46 %$110  0.25 %$109 
Net interest margin9
0.51 % 0.35 % 
Average interest-earning assets to interest-bearing liabilities107.69 % 105.83 % 

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.








53


    
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 Ended
March 31, 2021 vs. March 31 2020
Total Increase
(Decrease) Due to
Total Increase
(Decrease)
VolumeRate
Interest income
Interest-bearing deposits$— $(1)$(1)
Securities purchased under agreements to resell(12)(17)(29)
Federal funds sold(3)(23)(26)
Mortgage-backed securities(5)(38)(43)
Other investments10 (10)— 
Advances(127)(141)(268)
Mortgage loans(10)(15)(25)
Total interest income(147)(245)(392)
Interest expense
Deposits(2)(1)
Consolidated obligations
Discount notes(17)(88)(105)
Bonds(119)(165)(284)
Other interest-bearing liabilities(2)(1)(3)
Total interest expense(137)(256)(393)
Net interest income$(10)$11 $
    
NET INTEREST MARGIN

Net interest margin equals net interest income expressed as a percentage of average interest-earning assets. Our net interest income was impacted by an increase in net gains on fair value hedge relationships of $23 million and an increase in advance prepayment fee income of $14 million, offset by lower average advance balances and the lower interest rate environment during the three months ended March 31, 2021 when compared to the same period last year. These factors were the primary reason our net interest margin increased to 0.51 percent during the three months ended March 31, 2021 compared to 0.35 percent for the same period in 2020. The primary components of our interest income and interest expense are discussed further below.

Advances

Interest income on advances decreased during the three months ended March 31, 2021 when compared to the same period in 2020 due primarily to the lower interest rate environment and lower average advance balances, partially offset by an increase of $14 million in advance prepayment fee income. The decrease in average advance balances from the same period in the prior year was primarily a result of a decline in advances from Wells Fargo, Bank N.A. and decreased demand for advances across other institution types, driven primarily by increased liquidity in the financial markets and higher member deposit levels.

Investments

Interest income on investments decreased during the three months ended March 31, 2021 when compared to the same period in 2020 due primarily to the lower interest rate environment. The decline was partially offset by an increase of $24 million in net gains on our investment fair value hedge relationships compared to the same period in 2020.






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Bonds

Interest expense on bonds decreased during the three months ended March 31, 2021 when compared to the same period in 2020 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.

Discount Notes

    Interest expense on discount notes decreased during the three months ended March 31, 2021 when compared to the same period in 2020 primarily due to the lower interest rate environment.

Other Income (Loss)

    The following table summarizes the components of other income (loss) (dollars in millions):
For the Three Months Ended
March 31,
20212020
Net gains (losses) on trading securities$(22)$26 
Net gains (losses) on derivatives17 (48)
Gains on litigation settlements, net— 56 
Standby letter of credit fees
Other, net(1)
Total other income (loss)$$36 
    
We recorded other income (loss) of $2 million during the three months ended March 31, 2021 compared to $36 million during the same period in 2020. During the three months ended March 31, 2020, other income (loss) was primarily impacted by net gains on litigation settlements of $56 million as a result of a settlement with a defendant in our private-label MBS litigation. During 2020, all of our remaining private-label MBS litigation cases initially filed were settled. As such, we did not record any litigation settlements during the three months ended March 31, 2021. Other factors impacting other income (loss) included net gains (losses) on economic derivatives and net gains (losses) on trading securities, as described below.

During the three months ended March 31, 2021, we recorded net gains of $17 million on our economic derivatives through other income (loss) compared to net losses of $48 million during the same period in 2020. The changes were primarily driven by changes in the fair value of interest rate swaps used to economically hedge our investment securities portfolio. The fair value changes were primarily driven by market volatility, caused in part by COVID-19 and the impact it had on interest rates. 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 economic derivatives.

During the three months ended March 31, 2021, we recorded net losses on trading securities of $22 million compared to net gains of $26 million during the same period in 2020. These changes in fair value were primarily due to the impact of changes in interest rates and credit spreads on our fixed rate trading securities which stemmed from market volatility, caused in part by COVID-19. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

55

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 net 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 is 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;” 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 March 31, 2021
Net Effect of Hedging ActivitiesAdvancesInvestmentsMortgage
Loans
BondsTotal
Net interest income:
Net amortization/accretion1
$(8)$(9)$(1)$(1)$(19)
Net gains (losses) on derivatives and hedged items11 — (1)12 
Net interest settlements on derivatives2
(48)(32)— 38 (42)
Total impact to net interest income(54)(30)(1)36 (49)
Other income (loss):
Net gains (losses) on derivatives3
— 17 — — 17 
Net gains (losses) on trading securities4
— (22)— — (22)
Total impact to other income (loss)— (5)— — (5)
Total net effect of hedging activities5
$(54)$(35)$(1)$36 $(54)

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

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

3    Represents net gains (losses) on economic derivatives and the related interest settlements.

4    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.

5    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.

56

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
For the Three Months Ended March 31, 2020
Net Effect of Hedging ActivitiesAdvancesInvestmentsMortgage
Loans
BondsTotal
Net interest income:
Net amortization/accretion1
$(6)$(1)$— $(1)$(8)
Net gains (losses) on derivatives and hedged items(13)— (11)
Net interest settlements on derivatives2
(7)(12)— (15)
Total impact to net interest income(12)(26)— (34)
Other income (loss):
Net gains (losses) on derivatives3
— (47)(1)— (48)
Net gains (losses) on trading securities4
— 26 — — 26 
Total impact to other income (loss)— (21)(1)— (22)
Total net effect of hedging activities5
$(12)$(47)$(1)$$(56)

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

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

3    Represents net gains (losses) on economic derivatives and the related interest settlements.

4    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.

5    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 months ended March 31, 2021, we experienced increased amortization activity, primarily due to an increase in prepayments of advances and investments that were previously in a hedge relationship.

NET GAINS (LOSSES) ON DERIVATIVES AND HEDGED ITEMS

The net gains and losses on derivatives and hedged items designated in fair value hedge relationships 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 months ended March 31, 2021, we recorded net gains of $12 million on our fair value hedge relationships compared to losses of $11 million in the same period of the prior year, which primarily stemmed from market volatility, caused in part by COVID-19 and the impact it had on interest rates.

NET INTEREST SETTLEMENTS ON DERIVATIVES

Net interest settlements represent the interest component on derivatives that qualify for fair value hedge accounting. 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 DERIVATIVES

We utilize economic derivatives to manage certain risks on our Statements of Condition. Gains and losses on economic derivatives are driven 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 months ended March 31, 2021, we recorded net gains of $17 million on our economic derivatives compared to net losses of $48 million during the same period last year. The changes were primarily driven by changes in the fair value of interest rate swaps used to economically hedge our investment securities portfolio as highlighted in the table below. These fair value changes were primarily driven by market volatility, caused in part by COVID-19 and the impact it had on interest rates.


57

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 Ended
March 31,
20212020
Gains (losses) on interest rate swaps economically hedging our investments$21 $(45)
Interest settlements(4)(2)
Net gains (losses) on investment derivatives17 (47)
Net gains (losses) on related trading securities(22)26 
Net gains (losses) on economic investment hedge relationships$(5)$(21)

Other Expense
The following table shows the components of other expense (dollars in millions):
For the Three Months Ended March 31,
 20212020
Compensation and benefits$21 $18 
Contractual services
Professional fees
Other operating expenses
Total operating expenses34 36 
Federal Housing Finance Agency
Office of Finance
Other, net
Total other expense$40 $43 

Other expense decreased for the three months ended March 31, 2021 compared to the same period last year. The decrease was driven primarily by a decline in professional fees resulting from fewer external resources to assist with our technology and operational initiatives, and was offset in part by an increase in compensation and benefits.

58

STATEMENTS OF CONDITION

Financial Highlights

    Our total assets decreased to $87.4 billion at March 31, 2021 from $87.7 billion at December 31, 2020. Our total liabilities decreased to $81.3 billion at March 31, 2021 from $82.0 billion at December 31, 2020. Total capital increased to $6.0 billion at March 31, 2021 from $5.7 billion at December 31, 2020. See further discussion of changes in our financial condition in the appropriate sections that follow.

Cash and Due from Banks

At March 31, 2021, our total cash balance was $255 million compared to $978 million at December 31, 2020, a decrease of $723 million. 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):
 March 31,
2021
December 31,
2020
Commercial banks$13,121 $14,267 
Savings institutions667 702 
Credit unions4,407 4,787 
Insurance companies28,891 26,074 
CDFIs18 20 
Total member advances47,104 45,850 
Housing associates47 50 
Non-member borrowers185 188 
Total par value$47,336 $46,088 

Our total advance par value increased $1.2 billion or three percent at March 31, 2021 when compared to December 31, 2020, primarily due to an increase in borrowings by insurance companies. This increase was partially offset by decreased demand for advances across other institution types mainly due to increased liquidity in the financial markets and higher member deposit levels.

The following table summarizes our advances by product type (dollars in millions):
March 31, 2021December 31, 2020
Amount% of TotalAmount% of Total
Variable rate$13,884 29 $12,599 27 
Fixed rate31,858 67 31,546 69 
Amortizing1,594 1,943 
Total par value47,336 100 46,088 100 
Premiums18 18 
Discounts(14)(3)
Fair value hedging adjustments174 427 
Total advances$47,514 $46,530 

Fair value hedging adjustments changed $253 million at March 31, 2021 when compared to December 31, 2020 due primarily to the impact of interest rates on our cumulative fair value adjustments on advances in hedge relationships.


59

At March 31, 2021 and December 31, 2020, 28 percent and 25 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 underlying cost of funds rate. 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 March 31, 2021 and December 31, 2020, advances outstanding to our five largest member borrowers totaled $16.8 billion and $15.5 billion, representing 35 percent and 34 percent of our total advances outstanding. The following table summarizes advances outstanding to our five largest member borrowers at March 31, 2021 (dollars in millions):
Amount% of Total
Principal Life Insurance Company$4,250 
Allianz Life Insurance Company of North America3,600 
EquiTrust Life Insurance Company3,100 
Midland National Life Insurance Company1
3,073 
Transamerica Life Insurance Company2,755 
Total par value$16,778 35 

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 and have never experienced a credit loss on our advances. 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.”

Mortgage Loans

    The following tables summarize information on our mortgage loans held for portfolio (dollars in millions):
March 31,
2021
December 31, 2020
Fixed rate conventional loans$7,336 $7,646 
Fixed rate government-insured loans461 481 
Total unpaid principal balance7,797 8,127 
Premiums102 107 
Discounts(3)(3)
Basis adjustments from mortgage loan purchase commitments10 12 
Total mortgage loans held for portfolio7,906 8,243 
Allowance for credit losses1
— (1)
Total mortgage loans held for portfolio, net$7,906 $8,242 
1    Our allowance for credit losses was less than $1 million at March 31, 2021.

Our total mortgage loans decreased $0.3 billion or four percent at March 31, 2021 when compared to December 31, 2020. The decrease was primarily due to principal paydowns exceeding loan purchases as a result of continued refinancing activity driven by lower rates.

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.”

60

Investments

The following table summarizes the carrying value of our investments (dollars in millions):
March 31, 2021December 31, 2020
Amount% of TotalAmount% of Total
Short-term investments1
Interest-bearing deposits$401 $401 
Securities purchased under agreements to resell3,500 11 4,800 15 
Federal funds sold7,095 23 3,695 12 
U.S. Treasury obligations2
1,712 3,211 10 
Total short-term investments12,708 41 12,107 38 
Long-term investments3
Mortgage-backed securities
GSE single-family1,485 1,671 
GSE multifamily8,216 26 8,613 28 
U.S. obligations single-family2
3,421 11 3,547 11 
Private-label residential— — 
Total mortgage-backed securities13,127 42 13,837 44 
Non-mortgage-backed securities
U.S. Treasury obligations2
853 858 
Other U.S. obligations2
1,670 1,786 
GSE and Tennessee Valley Authority obligations1,419 1,465 
State or local housing agency obligations893 896 
Other532 548 
Total non-mortgage-backed securities5,367 17 5,553 18 
Total long-term investments18,494 59 19,390 62 
Total investments$31,202 100 $31,497 100 

1    Short-term investments have original maturities equal to or less than one year.

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

3    Long-term investments have original maturities of greater than one year.


Our investments decreased $0.3 billion or one percent at March 31, 2021 when compared to December 31, 2020 due primarily to paydowns and/or maturities of U.S. Treasury obligations and MBS. The decline was offset in part by an increase in money market investments, which are primarily held for liquidity purposes.

The Finance Agency limits our investments in MBS by requiring that the balance of our MBS not exceed three times regulatory capital at the time of purchase. Our ratio of MBS to regulatory capital was 2.18 and 2.40 at March 31, 2021 and December 31, 2020.

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

    Consolidated obligations, which include bonds and discount notes, are the primary source of funds to support our advances, mortgage loans, and investments. At March 31, 2021 and December 31, 2020, the carrying value of consolidated obligations for which we are primarily liable totaled $79.0 billion and $79.6 billion.

DISCOUNT NOTES

The following table summarizes our discount notes, all of which are due within one year (dollars in millions):
March 31,
2021
December 31,
2020
Par value$23,900 $27,350 
Discounts and concession fees1
(2)(5)
Total$23,898 $27,345 
1    Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation discount notes.
    
Our discount notes decreased $3.4 billion or 13 percent at March 31, 2021 when compared to December 31, 2020. Although the balance declined from prior year end, during the three months ended March 31, 2021, we continued to utilize discount notes in an effort to capture attractive funding and meet our liquidity requirements.

BONDS

The following table summarizes information on our bonds (dollars in millions):
March 31,
2021
December 31,
2020
Total par value$54,798 $51,930 
Premiums183 199 
Discounts and concession fees1
(23)(26)
Fair value hedging adjustments108 151 
Total bonds$55,066 $52,254 
1    Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation bonds.

Our bonds increased $2.8 billion or five percent at March 31, 2021 when compared to December 31, 2020. During the three months ended March 31, 2021, we increased our utilization of short-term floating rate consolidated obligation bonds in an effort to capture attractive funding and match the repricing structures on assets. Fair value hedging adjustments also changed $43 million at March 31, 2021 when compared to December 31, 2020 due primarily to the impact of interest rates on our cumulative fair value adjustments on bonds in hedge relationships.

For additional information on our consolidated obligations, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

Capital

The following table summarizes information on our capital (dollars in millions):
March 31,
2021
December 31,
2020
Capital stock$3,535 $3,341 
Retained earnings2,377 2,351 
Accumulated other comprehensive income (loss)100 48 
Total capital$6,012 $5,740 

Our capital increased $0.3 billion or five percent at March 31, 2021 when compared to December 31, 2020, due primarily to an increase in required membership capital stock. Refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital” for additional information on our capital.

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Derivatives

    We use derivatives to manage interest rate risk. 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 our overall exposure to credit and market risk.

The following table categorizes the notional amount of our derivatives by type (dollars in millions):
March 31,
2021
December 31,
2020
Interest rate swaps
Noncallable$33,891 $33,848 
Callable by counterparty1,378 1,383 
Callable by the Bank126 138 
Total interest rate swaps35,395 35,369 
Forward settlement agreements (TBAs)105 169 
Mortgage loan purchase commitments113 177 
Total notional amount$35,613 $35,715 
    
The notional amount of our derivative contracts remained relatively stable at March 31, 2021 when compared to December 31, 2020. For additional discussion regarding our use of derivatives, see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Derivatives.”

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital positions are actively managed in an effort to preserve stable, reliable, and cost-effective sources of funds to meet current and projected future operating financial commitments, as well as regulatory, liquidity, and capital requirements.

Liquidity

SOURCES OF LIQUIDITY

We utilize several sources of liquidity to carry out our business activities. These include, but are not limited to, proceeds from the issuance of consolidated obligations, payments collected on advances and mortgage loans, proceeds from investment securities, member deposits, the issuance of capital stock, and current period earnings.

Our primary source of liquidity is proceeds from the issuance of consolidated obligations (bonds and discount notes) in the capital markets. During the three months ended March 31, 2021, proceeds from the issuance of bonds and discount notes were $15.9 billion and $67.3 billion compared to $17.7 billion and $32.2 billion for the same period in 2020. During the three months ended March 31, 2021, we increased our utilization of discount notes and short-term floating rate consolidated obligation bonds compared to the first quarter of 2020 in an effort to capture attractive funding, match the repricing structures on assets, and/or meet our liquidity requirements.

Access to debt markets has been reliable because investors, driven by increased liquidity preference and our government affiliation, have sought the FHLBanks’ debt as an asset of choice. However, due to the short-term maturity of the debt, we may be exposed to additional risks associated with refinancing and our ability to access the capital markets.

We are focused on maintaining an adequate liquidity balance and a funding balance between our financial assets and financial liabilities and work collectively with the other FHLBanks to manage the system-wide liquidity and funding needs. We monitor our debt refinancing risk and liquidity position primarily by tracking the maturities of financial assets and financial liabilities. In managing and monitoring the amounts of assets that require refunding, we consider contractual maturities of our financial assets and liabilities, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments). External factors, including member borrowing needs, supply and demand in the debt markets, and other factors may affect liquidity balances and the funding balances between financial assets and financial liabilities. Refer to “Item 1. Financial Statements” for additional information regarding the contractual maturities of certain of our financial assets and liabilities.

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Our ability to raise funds in the capital markets as well as our cost of borrowing may be affected by our credit ratings. As of April 30, 2021, our consolidated obligations were rated AA+/A-1+ by Standard and Poor’s and Aaa/P-1 by Moody’s and both ratings had a stable outlook. As of April 30, 2021, our consolidated obligations were rated AAA with a negative outlook by Fitch Ratings, consistent with the U.S. sovereign AAA rating and negative outlook. For further discussion of how credit rating changes and our ability to access the capital markets may impact us in the future, refer to “Item 1A. Risk Factors” in our 2020 Form 10-K.

Although we are primarily liable for the portion of consolidated obligations that are issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations issued by the FHLBank System. At March 31, 2021 and December 31, 2020, the total par value of outstanding consolidated obligations for which we are primarily liable was $78.7 billion and $79.3 billion. At March 31, 2021 and December 31, 2020, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which we are jointly and severally liable was $617.7 billion and $667.5 billion.

The Office of Finance and FHLBanks have contingency plans in place that prioritize the allocation of proceeds from the issuance of consolidated obligations during periods of financial distress if consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand. In the event of significant market disruptions or local disasters, our President or designee is authorized to establish interim borrowing relationships with other FHLBanks. To provide further access to funding, the FHLBank Act also authorizes the U.S. Treasury to directly purchase new issue consolidated obligations of the GSEs, including FHLBanks, up to an aggregate principal amount of $4.0 billion. As of April 30, 2021, no purchases had been made by the U.S. Treasury under this authorization.

USES OF LIQUIDITY

    We use our available liquidity, including proceeds from the issuance of consolidated obligations, primarily to repay consolidated obligations, fund advances, and purchase investments. During the three months ended March 31, 2021, repayments of consolidated obligations totaled $83.8 billion compared to $53.9 billion for the same period in 2020.

During the three months ended March 31, 2021, advance disbursements totaled $25.4 billion compared to $78.3 billion for the same period in 2020. Advance disbursements will vary from period to period depending on member needs and declined during 2021 mainly due to increased liquidity in the financial markets and higher member deposit levels. During the three months ended March 31, 2021, investment purchases (excluding overnight investments) totaled $0.6 billion compared to $7.8 billion for the same period in 2020. Investment purchases during each period were primarily driven by the purchase of money market investments, including secured resale agreements, or U.S. Treasury securities in an effort to manage our liquidity position.

We also use liquidity to purchase mortgage loans, redeem member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, pay expenses, and pay dividends.

LIQUIDITY REQUIREMENTS
We are subject to certain liquidity requirements set forth by the Finance Agency and maintain a liquidity contingency funding plan designed to enable us to meet our obligations and the liquidity needs of our members in the event of short-term capital market disruptions, or operational disruptions at our Bank and/or the Office of Finance. For additional details on these liquidity requirements, refer to our 2020 Form 10-K. Our primary liquidity requirement is discussed further below.
Finance Agency Advisory Bulletin on FHLBank Liquidity (the Liquidity Guidance AB) – This guidance requires us to maintain sufficient liquidity for a period of 10 to 30 calendar days. The base case scenario requires 20 days of positive daily cash balances and assumes that we cannot access the capital markets to issue debt, and during that time we will automatically renew maturing and called advances for all members, including very large highly-rated members, and we hold additional liquid assets equal to one percent of our letters of credit balances. At March 31, 2021 and December 31, 2020, we were in compliance with this base case liquidity guidance.

This Liquidity Guidance AB also specifies appropriate funding gap limits to address the risks associated with a FHLBank having too large a mismatch between the contractual maturities of its assets and liabilities. A funding gap measures the difference between assets and liabilities that are scheduled to mature during a specified period and is expressed as a percentage of total assets. The guidance provides funding gap limits within the range of negative 10 percent to negative 20 percent for a three-month horizon and negative 25 percent to negative 35 percent for a one-year horizon. At March 31, 2021 and December 31, 2020, we adhered to these funding gap requirements.

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Capital

CAPITAL REQUIREMENTS

    We are subject to certain regulatory capital requirements. First, the FHLBank Act requires that we maintain at all times permanent capital greater than or equal to the sum of our credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock, (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement. Second, the FHLBank Act requires 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 capital stock (including mandatorily redeemable capital stock) and retained earnings. It does not include accumulated other comprehensive income (loss) (AOCI). Third, the FHLBank Act imposes a five percent minimum 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. At March 31, 2021 and December 31, 2020, we did not hold any nonpermanent capital. At March 31, 2021 and December 31, 2020, we were in compliance with all three of the Finance Agency’s regulatory capital requirements.

    In addition to the requirements previously discussed, the Finance Agency Advisory Bulletin on capital stock (the Capital Stock AB) requires each FHLBank to maintain at all times a ratio of at least two percent of capital stock to total assets. 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. At March 31, 2021 and December 31, 2020, we were in compliance with the Capital Stock AB. Refer to “Item 1. Financial Statements — Note 8 — Capital” for additional information on our regulatory capital requirements.

CAPITAL STOCK
Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We issue a single class of capital stock (Class B stock) and have two subclasses of Class B 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 $10.0 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. In addition, we require each member to purchase and hold activity-based stock in an amount equal to 0.10 percent of its standby letters of credit. All capital stock issued is subject to a notice of redemption period of five years.

The capital stock requirements established in our Capital Plan are designed so that we can remain adequately capitalized as member activity changes. Our Board of Directors may make adjustments to the capital stock requirements within ranges established in our Capital Plan.
        
The following table summarizes our regulatory capital stock by type of member (dollars in millions):
March 31,
2021
December 31,
2020
Commercial banks$1,491 $1,446 
Savings institutions85 77 
Credit unions536 514 
Insurance companies1,422 1,303 
CDFIs
Total GAAP capital stock3,535 3,341 
Mandatorily redeemable capital stock36 52 
Total regulatory capital stock$3,571 $3,393 

The increase in regulatory capital stock held at March 31, 2021 when compared to December 31, 2020 was primarily due to an increase in required membership capital stock. For additional information on our capital stock, refer to Item 1. Financial Statements — Note 8 — Capital.”


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Retained Earnings
Our risk management policies include a target level of retained earnings based on the amount we believe necessary to help protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to achieve our targeted level of retained earnings. At March 31, 2021 and December 31, 2020, our actual retained earnings exceeded our retained earnings target.
We entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other Federal Home Loan Banks in 2011. Under the JCE Agreement, we are required to allocate 20 percent of our quarterly net income to a separate restricted retained earnings account until the balance of that account, calculated as of the last day of each calendar quarter, equals at least one percent of our average balance of outstanding consolidated obligations for the calendar quarter. The restricted retained earnings are not available to pay dividends and are presented separately on our Statements of Condition. At March 31, 2021 and December 31, 2020, our restricted retained earnings account totaled $589 million and $576 million. One percent of our average balance of outstanding consolidated obligations for the three months ended March 31, 2021 was $798 million.
Dividends

Our current dividend philosophy is to pay a membership capital stock dividend similar to a reference rate of interest, such as SOFR, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. Prior to the second quarter of 2020 dividend, we used average three-month LIBOR as our reference rate. Beginning with the second quarter dividend paid in the third quarter of 2020, we used SOFR as our reference rate.

Our dividend rates seek to strike a balance between providing reasonable and consistent returns to members while preserving our financial position, flexibility, and ability to serve as a long-term liquidity provider. Our actual dividend is determined quarterly by our Board of Directors, based on policies, regulatory requirements, actual performance, and other considerations that the Board determines to be appropriate.

The following table summarizes dividend-related information (dollars in millions):
For the Three Months Ended
March 31,
20212020
Aggregate cash dividends paid1
$40 $59 
Effective combined annualized dividend rate paid on capital stock2
4.61 %5.14 %
Annualized dividend rate paid on membership capital stock3.00 %3.25 %
Annualized dividend rate paid on activity-based capital stock5.50 %5.75 %
Average three-month LIBOR0.20 %1.52 %
Average SOFR0.04 %1.23 %

1    Includes aggregate cash dividends paid during the 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.

2    Effective combined annualized dividend rate is paid on total capital stock, including mandatorily redeemable capital stock.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a discussion of our critical accounting policies and estimates, refer to our 2020 Form 10-K. There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2021.


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LEGISLATIVE AND REGULATORY DEVELOPMENTS

LIBOR Transition

In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that after 2021 it will no longer persuade or compel banks to submit rates for the calculation of LIBOR. On March 5, 2021, the Financial Conduct Authority further announced that LIBOR will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month U.S. dollar LIBOR, and immediately after June 30, 2023, in the case of the remaining U.S. dollar LIBOR settings. Although the Financial Conduct Authority does not expect LIBOR to become unrepresentative before the applicable cessation date and intends to consult on requiring the administrator of LIBOR to continue publishing LIBOR of certain currencies and tenors on a non-representative, synthetic basis for a period after the applicable cessation date, there is no assurance that LIBOR, of any particular currency or tenor, will continue to be published or be representative through any particular date. The Financial Conduct Authority’s announcement constitutes an index cessation event under the 2006 International Swaps and Derivatives Association, Inc. (ISDA) Definitions (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Protocol). As a result, the fallback spread adjustment for each tenor is fixed as of the date of the announcement.

For a discussion of the potential impact of the LIBOR transition, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview.”

COVID-19 Developments

AMERICAN RESCUE PLAN ACT OF 2021

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, which provided an additional $1.9 trillion dollars for COVID-19 pandemic relief. Among other appropriations, the legislation allocated $7.25 billion in additional funds to support the Paycheck Protection Program (PPP) loan program. Also, as part of the legislation, eligibility for PPP was expanded to include certain nonprofits and digital news services. Since the legislation did not expand the PPP application deadline beyond March 31, 2021, the PPP Extension Act of 2021 was signed into law on March 30, 2021, which extended the application deadline to May 31, 2021.

FEDERAL RESERVE BOARD EXTENDS PPP LIQUIDITY FACILITY

On March 8, 2021, the Federal Reserve Board issued a press release announcing it will extend the PPP Liquidity Facility (PPPLF), which was set to expire on March 31, 2021 to June 30, 2021. The Commercial Paper Funding Facility, Money Market Mutual Fund Liquidity Facility, and the Primary Dealer Credit Facility expired on March 31, 2021, since such facilities had not received significant usage. The PPPLF provides collateralized PPP loan liquidity to eligible Federal Reserve member financial institutions in order to facilitate PPP loan originations at such financial institutions.

FINANCE AGENCY EXTENSION OF LOAN ORIGINATION FLEXIBILITIES

On March 31, 2020, the Finance Agency announced authorization of loan processing flexibilities for Fannie Mae and Freddie Mac customers. Origination flexibilities included allowing desktop appraisals on new construction loans; allowing flexibility on demonstrating construction has been completed; allowing flexibility for borrowers to provide certain documentation; and expanding the use of power of attorney and remote online notarizations. On March 11, 2021, the Finance Agency extended previously authorized COVID-related loan flexibilities to April 30, 2021; all such flexibilities were set to expire on March 31, 2021. The flexibilities extended to April 30, 2021 include alternative appraisals on purchase and rate term refinance loans; alternative methods for documenting income and verifying employment before loan closing; and expanding the use of power of attorney to assist with loan closings. On April 21, 2021, the Finance Agency announced that some temporary loan origination flexibilities have been extended until May 31, 2021, which includes flexibilities for alternative appraisals on purchase and rate-term refinance loans. Temporary flexibilities related to employment verification, condominium project reviews, and expanded power of attorney are being allowed to expire on April 30, 2021.

While some provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) have expired, others have been extended by regulatory and legislative action. Additional phases of the CARES Act, American Rescue Plan Act of 2021, or other COVID-19 pandemic relief legislation may be enacted by Congress. We continue to evaluate the potential impact of such legislation on our business, including its continued impact to the U.S. economy, impacts to mortgages held or serviced by our members and that we accept as collateral, and the impacts on our MPF program.

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ADDITIONAL COVID-19 PRESIDENTIAL, LEGISLATIVE AND REGULATORY DEVELOPMENTS

In light of the COVID-19 pandemic, the former and current Presidents of the United States, through executive orders, governmental agencies, including the SEC, OCC, Federal Reserve, FDIC, National Credit Union Administration, CFTC and the Finance Agency, as well as state governments and agencies, have taken, and may continue to take, actions to provide various forms of relief from, and guidance regarding, the financial, operational, credit, market, and other effects of the pandemic, some of which may have a direct or indirect impact on us or our members. Many of these actions are temporary in nature. We continue to monitor these actions and guidance as they evolve and to evaluate their potential impact on us.

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RISK MANAGEMENT
    
We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, model, information security, compliance, and strategic risk, as well as capital adequacy. Our primary risk management objective is to manage our assets and liabilities in ways that ensure liquidity is available to our members and protect the par redemption value of our capital stock. We periodically evaluate our risk management policies in order to respond to changes in our financial position and general market conditions.

Market Risk

We define market risk as the risk that changes in market prices may adversely affect our financial condition and performance. Interest rate risk is the principal type of market risk to which we are exposed as our cash flows, and therefore earnings and equity value, can change significantly as interest rates change. Our general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities, and derivatives, which, taken together, limit our expected exposure to interest rate risk. Management regularly reviews our sensitivity to interest rate changes by monitoring our market risk measures in parallel and non-parallel interest rate changes and spread and volatility movements.

Our key risk measures are Market Value of Capital Stock (MVCS) Sensitivity and Projected Income Sensitivity.

MARKET VALUE OF CAPITAL STOCK SENSITIVITY

    We define MVCS as an estimate of the market value of assets minus the market value of liabilities (excluding mandatorily redeemable capital stock) divided by the total shares of capital stock (including mandatorily redeemable capital stock) outstanding. It represents an estimation of the “liquidation value” of one share of our capital stock if all assets and liabilities were liquidated at current market prices. MVCS does not represent our long-term value, as it takes into account short-term market price fluctuations. These fluctuations are often unrelated to the long-term value of the cash flows from our assets and liabilities.

We monitor and manage to MVCS policy limits in an effort to ensure the stability of the Bank’s value. Our policy limits are based on declines from the base case in parallel and non-parallel interest rate change scenarios. Any policy limit breach must be reported to the Enterprise Risk Committee of the Bank and the Risk and Compliance Committee of the Board of Directors and be remediated in a timely manner.

Prior to March 1, 2021, our down 200 basis point parallel policy limit was suspended when the 10-year swap rate was below 2.50 percent and remained so for five consecutive days. At December 31, 2020, the 10-year swap rate was below 2.50 percent for five consecutive days, and therefore the associated policy limit was suspended. As of March 1, 2021, our down 200 basis point parallel policy limit is suspended when the 10-year swap rate is below 1.50 percent and remains so for five consecutive days. At March 31, 2021, the 10-year swap rate was 1.78 percent and the associated policy limit was in effect. We were in compliance with the MVCS policy limits in effect at March 31, 2021 and December 31, 2020. Our base case MVCS remained relatively stable and was $172.5 at March 31, 2021 compared to $171.0 at December 31, 2020.

For more information on our MVCS, including policy limits, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Market Value of Capital Stock Sensitivity” in our 2020 Form 10-K.
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PROJECTED INCOME SENSITIVITY

Projected income sensitivity is measured as the change in spread between projected 24-month return on average capital stock (ROACS) and average projected SOFR. We monitor and manage projected 24-month income sensitivity in an effort to limit the short-term earnings volatility of the Bank. The projected 24-month income sensitivity is based on forward interest rates, which allows for negative rates, business, and risk management assumptions.

We monitor and manage to policy limits, which are based on declines in 24-month projected ROACS spread to average projected SOFR from base spread for the up and down 100 and 200 basis points parallel interest rate change scenarios as well as the up and down 100 basis points non-parallel interest rate change scenarios. Additionally, there is a limit on the decline in ROACS from base ROACS for certain basis shock scenarios to limit basis risk exposure. Any policy limit breach must be reported to the Enterprise Risk Committee of the Bank and the Risk and Compliance Committee of the Board of Directors and be remediated in a timely manner.

Effective March 1, 2021, our policy limits for the up and down 100 and 200 basis points parallel interest rate change scenarios, as well as the up and down 100 basis points non-parallel interest rate change scenarios, were updated to SOFR plus 250 basis points over 24-month horizons. In addition, as of March 1, 2021, our down 200 basis point parallel policy limit is suspended when the 10-year swap rate is below 1.50 percent and remains so for five consecutive days. At March 31, 2021, the 10-year swap rate was 1.78 percent and the associated policy limit was in effect.

As of March 31, 2021, we breached our policy limit for the down 200 basis point interest rate change scenario. We may continue to be out of compliance with this policy limit in the near term; however, we are working to expand our hedging strategies in an effort to provide additional tools to manage our income. We were in compliance with all other projected 24-month income sensitivity policy limits in effect as of March 31, 2021 and December 31, 2020.

For more information on our Projected Income Sensitivity, including our policy limits in effect as of the prior year end, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Projected Income Sensitivity” in our 2020 Form 10-K.

CAPITAL ADEQUACY

An adequate capital position is necessary for providing safe and sound operations of the Bank. Our key capital adequacy measures are MVCS and regulatory capital in order to maintain capital levels in accordance with Finance Agency regulations. In addition, we maintain a targeted level of retained earnings to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend.

For a discussion of our key capital adequacy measure, MVCS, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Market Value of Capital Stock Sensitivity.”

For additional information on our compliance with regulatory capital requirements as well as our targeted retained earnings, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital.”

Liquidity Risk

We define liquidity risk as the risk that we will be unable to meet our financial obligations as they come due or meet the credit needs of our members in a timely and cost efficient manner. To manage this risk, we maintain liquidity in accordance with Finance Agency regulations. For additional information on our compliance with these requirements, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity Requirements.”

Credit Risk

    We define credit risk as the potential that our borrowers or counterparties will fail to meet their obligations in accordance with agreed upon terms. Our primary credit risks arise from our ongoing lending, investing, and hedging activities. Our overall objective in managing credit risk is to operate a sound credit granting process and to maintain appropriate credit administration, measurement, and monitoring practices.

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ADVANCES

    We manage our credit exposure to advances through an approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower’s financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

We are required by regulation to obtain sufficient collateral to fully secure our advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products). The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal or market value, as applicable, of the collateral. We also have policies and procedures for validating the reasonableness of our collateral valuations. In addition, we perform collateral verifications and on-site reviews based on the risk profile of the borrower. Management believes that these policies effectively manage our credit risk from advances.

At March 31, 2021 and December 31, 2020, borrowers pledged $285.0 billion and $280.5 billion of collateral (net of applicable discounts) to support activity with us, including advances. At March 31, 2021 and December 31, 2020, all of our advances met the requirement to be collateralized at a minimum of 100 percent, net of applicable discounts. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate available liquidity and to borrow additional amounts in the future.

    We evaluate advances for credit losses on a quarterly basis. We have never experienced a credit loss on our advances. Based upon our 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 our advances as of March 31, 2021 and December 31, 2020. Refer to “Item 1. Financial Statements — Note 4 — Advances” for additional information.

MORTGAGE LOANS

Mortgage loan credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage loans is affected by a number of factors, including loan type, borrower’s credit history, and other factors such as home price fluctuations, unemployment levels, and other economic factors in the local market or nationwide.

The following table presents the unpaid principal balance of our mortgage loans by product type (dollars in millions):
Product TypeMarch 31,
2021
December 31,
2020
Conventional$7,336 $7,646 
Government461 481 
Total mortgage loan unpaid principal balance$7,797 $8,127 

We manage the credit risk on mortgage loans by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, and (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs.

We evaluate mortgage loans for credit losses on a quarterly basis and establish an allowance for credit losses to reflect management’s estimate of expected credit losses inherent in the portfolio. At March 31, 2021, we had an allowance for credit losses of less than $1 million on our conventional mortgage loans due to expected credit losses on collectively evaluated loans being offset in part by expected recoveries of prior charge-offs on individually evaluated loans during the quarter. At December 31, 2020, the Bank’s allowance for credit losses on conventional mortgage loans totaled $1 million. We have never experienced a credit loss on our government-insured mortgage loans. At March 31, 2021 and December 31, 2020, we determined no allowance for credit losses was necessary on our government-insured mortgage loans.

Refer to “Item 1. Financial Statements — Note 5 — Mortgage Loans Held for Portfolio” for additional information on our allowance for credit losses and the payment status of our conventional mortgage loans.


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INVESTMENTS

    We maintain an investment portfolio primarily to provide investment income and liquidity. Our primary credit risk on investments is the counterparties’ ability to meet repayment terms. We mitigate this credit risk by purchasing investment quality securities. We define investment quality as a security with adequate financial backings so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security. We consider a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, nationally recognized statistical rating organization (NRSRO) credit ratings, and/or the financial health of the underlying issuer.

Finance Agency regulations limit the type of investments we may purchase. We are prohibited from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks, unless otherwise approved by the Finance Agency. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. At March 31, 2021, we were in compliance with the above regulation and did not own any financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks, and those approved by the Finance Agency.

Finance Agency regulations also include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. These limits are based on a percentage of eligible regulatory capital and the counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of our total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that we may offer for extensions of unsecured credit, excluding overnight federal funds sold, ranges from three to 15 percent based on the counterparty’s credit rating. Our total unsecured exposure to a counterparty, including overnight federal funds sold, may not exceed twice that amount, or a total of six to 30 percent of the eligible amount of regulatory capital, based on the counterparty’s credit rating. At March 31, 2021, we were in compliance with the regulatory limits established for unsecured credit.

Our short-term portfolio may include, but is not limited to, interest-bearing deposits, federal funds sold, securities purchased under agreements to resell, certificates of deposit, commercial paper, and U.S. Treasury obligations. Our long-term portfolio may include, but is not limited to, U.S. Treasury obligations, other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. We consider our long-term investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC to be of the highest credit quality and therefore those exposures are not monitored with other unsecured investments. Given the credit quality of our unsecured long-term investments, our unsecured credit risk is primarily in the short-term portfolio.

We primarily limit short-term unsecured credit exposure to the following overnight investment types:

Interest-bearing deposits. Primarily consists of unsecured deposits that earn interest.

Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions.

Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.


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At March 31, 2021, our unsecured short-term investment exposure consisted of overnight interest-bearing deposits and federal funds sold. The following table presents our unsecured short-term investment exposure by counterparty credit rating and domicile (excluding accrued interest receivable) (dollars in millions):
March 31, 2021
Credit Rating1,2
Domicile of CounterpartyAAATotal
Domestic$— $400 $400 
U.S. branches and agency offices of foreign commercial banks
Australia800 — 800 
Canada— 1,140 1,140 
Finland800 — 800 
France— 350 350 
Germany695 — 695 
Netherlands— 570 570 
Norway300 — 300 
Sweden800 1,140 1,940 
Switzerland— 500 500 
Total U.S. branches and agency offices of foreign commercial banks3,395 3,700 7,095 
Total unsecured short-term investment exposure$3,395 $4,100 $7,495 

1    Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2    Table excludes investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC.

Investment Ratings

The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
March 31, 2021
Credit Rating1
AAAAAABBB
Unrated2
Total
Interest-bearing deposits$— $$400 $— $— $401 
Securities purchased under agreements to resell— — 3,000 — 500 3,500 
Federal funds sold— 3,395 3,700 — — 7,095 
Investment securities:
Mortgage-backed securities
GSE single-family— 1,485 — — — 1,485 
GSE multifamily— 8,216 — — — 8,216 
U.S. obligations single-family3
— 3,421 — — — 3,421 
Private-label residential4
— — 
Total mortgage-backed securities— 13,125 — 13,127 
Non-mortgage-backed securities
U.S. Treasury obligations3
— 2,565 — — — 2,565 
Other U.S. obligations3
— 1,670 — — — 1,670 
GSE and Tennessee Valley Authority obligations— 1,419 — — — 1,419 
State or local housing agency obligations700 193 — — — 893 
Other443 89 — — — 532 
Total non-mortgage-backed securities1,143 5,936 — — — 7,079 
Total investments$1,143 $22,457 $7,101 $$500 $31,202 

1    Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2    Represents secured securities purchased under agreements to resell with no NRSRO or guarantor rating.

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

4     On April 26, 2021, Standard and Poor’s downgraded the credit rating on a private-label MBS from double-A to single-A.


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The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
December 31, 2020
Credit Rating1
AAAAAABBB
Unrated2
Total
Interest-bearing deposits$— $$400 $— $— $401 
Securities purchased under agreements to resell— 2,400 500 — 1,900 4,800 
Federal funds sold— 1,895 1,800 — — 3,695 
Investment securities:
Mortgage-backed securities
GSE single-family— 1,671 — — — 1,671 
GSE multifamily— 8,613 — — — 8,613 
U.S. obligations single-family3
— 3,547 — — — 3,547 
Private-label residential— — 
Total mortgage-backed securities— 13,834 — 13,837 
Non-mortgage-backed securities
U.S. Treasury obligations3
— 4,069 — — — 4,069 
Other U.S. obligations3
— 1,786 — — — 1,786 
GSE and Tennessee Valley Authority obligations— 1,465 — — — 1,465 
State or local housing agency obligations700 196 — — — 896 
Other456 92 — — — 548 
Total non-mortgage-backed securities1,156 7,608 — — — 8,764 
Total investments$1,156 $25,738 $2,701 $$1,900 $31,497 

1    Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.

2    Represents secured securities purchased under agreements to resell with no NRSRO or guarantor rating.

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


We evaluate investments for credit losses on a quarterly basis. At March 31, 2021 and December 31, 2020, we determined no allowance for credit losses was necessary on our investments. Refer to “Item 1. Financial Statements — Note 3 — Investments” for additional information on our allowance for credit losses.

Mortgage-Backed Securities

We are exposed to mortgage asset credit risk through our investments in MBS. Mortgage asset credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by a number of factors, including the strength and ability to guarantee the payments from the agency that created the structure, underlying loan performance, and other economic factors in the local market or nationwide. We limit our purchases of MBS to those guaranteed by the U.S. Government or issued by a GSE. Our risk management policies prohibit new purchases of private-label MBS. We perform ongoing analysis on these investments to determine potential credit issues.

DERIVATIVES

    We execute most of our derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives).

We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in our policies and Finance Agency regulations.


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Uncleared Derivatives. Due to risk of nonperformance by the counterparties to our derivative agreements, we generally require collateral on uncleared derivative agreements. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty or a contractually established threshold level. A counterparty generally must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our uncleared derivative agreements.

Cleared Derivatives. For cleared derivatives, the Derivative Clearing Organization (Clearinghouse) is our counterparty. We are subject to risk of nonperformance by the Clearinghouse and clearing agent. The requirement that we post initial and variation margin through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. However, 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. We do not anticipate any credit losses on our cleared derivatives.

The contractual or notional amount of derivatives reflects our involvement in the various classes of financial instruments. Our maximum credit risk is the estimated cost of replacing derivatives if there is a default, minus the value of any related collateral. In determining maximum credit risk, we consider accrued interest receivables and payables as well as our ability to net settle positive and negative positions with the same counterparty and/or clearing agent when netting requirements are met.

The following table shows our derivative counterparty credit exposure (dollars in millions):
March 31, 2021
Credit Rating1
Notional AmountNet Derivatives
Fair Value Before Collateral
Cash Collateral Pledged
To (From) Counterparty
Net Credit Exposure
 to Counterparties
Non-member counterparties:
Asset positions with credit exposure
Uncleared derivatives
AA2
$201 $19 $(19)$— 
A747 (1)
BBB2
29 (2)— 
Cleared derivatives3
29,212 238 243 
Liability positions with credit exposure
Uncleared derivatives
A3,622 (87)90 
BBB1,689 (68)70 
Total derivative positions with credit exposure to non-member counterparties35,500 (127)376 249 
Member institutions2,4
10 — — — 
Total35,510 $(127)$376 $249 
Derivative positions without credit exposure103 
Total notional$35,613 

1    Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable.

2    Net credit exposure is less than $1 million.

3    Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing's parent, CME Group Inc. was rated Aa3 by Moody's and AA- by Standard and Poor's at March 31, 2021.

4    Represents mortgage loan purchase commitments with our member institutions.
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The following table shows our derivative counterparty credit exposure (dollars in millions):
December 31, 2020
Credit Rating1
Notional AmountNet Derivatives
Fair Value Before Collateral
Cash Collateral Pledged
To (From) Counterparty
Net Credit Exposure
to Counterparties
Non-member counterparties:
Asset positions with credit exposure
Uncleared derivatives
BBB2
$29 $$(1)$— 
Liability positions with credit exposure
Uncleared derivatives
   A2
1,141 (35)