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Federal Home Loan Bank of Cincinnati

Filed: 5 Aug 21, 1:51pm


 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 June 30, 2021
or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
Federally chartered corporation of the United States31-6000228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
600 Atrium Two, P.O. Box 598, Cincinnati, OH45201-0598
(Address of principal executive offices)
(Zip Code)
(513) 852-7500
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None
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 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 Filer 
Accelerated 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
The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share. As of July 31, 2021, the registrant had 25,385,576 shares of capital stock outstanding, which included stock classified as mandatorily redeemable.
Page 1 of


Table of Contents
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited):
Statements of Condition - June 30, 2021 and December 31, 2020
Statements of Income - Three and six months ended June 30, 2021 and 2020
Statements of Comprehensive Income - Three and six months ended June 30, 2021 and 2020
Statements of Capital - Three and six months ended June 30, 2021 and 2020
Statements of Cash Flows - Six months ended June 30, 2021 and 2020
Notes to Unaudited Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II - OTHER INFORMATION
Item 1.Legal Proceedings
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
Signatures
2

PART I – FINANCIAL INFORMATION

Item 1.     Financial Statements.

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(Unaudited)

(In thousands, except par value)
 June 30, 2021 December 31, 2020
ASSETS   
Cash and due from banks$135,003  $2,984,073 
Interest-bearing deposits374,147  555,104 
Securities purchased under agreements to resell436,500  1,818,268 
Federal funds sold6,175,000  4,240,000 
Investment securities:
Trading securities9,327,467  10,488,124 
Available-for-sale securities (amortized cost of $1,931,506 and $286,869 at June 30, 2021 and December 31, 2020, respectively)1,947,871  291,587 
Held-to-maturity securities (includes $0 and $0 pledged as collateral at June 30, 2021 and December 31, 2020, respectively, that may be repledged) (a)
8,835,019  9,648,171 
Total investment securities20,110,357 20,427,882 
Advances (includes $26,066 and $27,202 at fair value under fair value option at June 30, 2021 and December 31, 2020, respectively)23,586,541  25,362,003 
Mortgage loans held for portfolio, net of allowance for credit losses of $248 and $248 at June 30, 2021 and December 31, 2020, respectively7,716,841  9,548,506 
Accrued interest receivable96,727  113,701 
Derivative assets216,216  215,888 
Other assets, net24,787  30,814 
TOTAL ASSETS$58,872,119  $65,296,239 
LIABILITIES   
Deposits$1,336,420  $1,327,202 
Consolidated Obligations:   
Discount Notes (includes $2,866,877 and $0 at fair value under fair value option at June 30, 2021 and December 31, 2020, respectively)21,180,119  27,500,244 
Bonds (includes $2,295,683 and $2,262,388 at fair value under fair value option at June 30, 2021 and December 31, 2020, respectively)31,678,112  31,996,311 
Total Consolidated Obligations52,858,231  59,496,555 
Mandatorily redeemable capital stock13,719  19,454 
Accrued interest payable67,258  77,521 
Affordable Housing Program payable101,724  110,772 
Derivative liabilities2,389  3,813 
Other liabilities479,408  331,008 
Total liabilities54,859,149  61,366,325 
Commitments and contingencies00
CAPITAL   
Capital stock Class B putable ($100 par value); issued and outstanding shares: 27,184 shares at June 30, 2021 and 26,409 shares at December 31, 20202,718,430  2,640,863 
Retained earnings:
Unrestricted791,390 802,715 
Restricted505,136 501,321 
Total retained earnings1,296,526  1,304,036 
Accumulated other comprehensive loss(1,986) (14,985)
Total capital4,012,970  3,929,914 
TOTAL LIABILITIES AND CAPITAL$58,872,119  $65,296,239 
(a)Fair values: $8,947,316 and $9,792,136 at June 30, 2021 and December 31, 2020, respectively.

The accompanying notes are an integral part of these financial statements.
3

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(Unaudited)

(In thousands)Three Months Ended June 30,Six Months Ended June 30,
 2021 202020212020
INTEREST INCOME:   
Advances$31,371  $158,437 $72,531 $330,604 
Prepayment fees on Advances, net5,060  13,320 6,400 17,594 
Interest-bearing deposits164  410 381 3,760 
Securities purchased under agreements to resell53  236 267 10,390 
Federal funds sold1,204  554 2,546 29,080 
Investment securities:
Trading securities53,670  67,691 111,722 135,595 
Available-for-sale securities344  619 1,679 4,015 
Held-to-maturity securities24,412 48,379 54,143 116,683 
Total investment securities78,426 116,689 167,544 256,293 
Mortgage loans held for portfolio38,430  74,151 82,844 163,408 
Loans to other FHLBanks 60 
Total interest income154,708  363,797 332,513 811,189 
INTEREST EXPENSE:   
Consolidated Obligations:
Discount Notes1,761  83,332 7,229 259,456 
Bonds86,589  129,808 182,775 315,795 
Total Consolidated Obligations88,350 213,140 190,004 575,251 
Deposits97  198 248 3,174 
Mandatorily redeemable capital stock110  864 204 1,054 
Total interest expense88,557  214,202 190,456 579,479 
NET INTEREST INCOME66,151  149,595 142,057 231,710 
NON-INTEREST INCOME (LOSS):   
Net gains (losses) on investment securities(15,389)(10,404)(154,249)362,002 
Net gains (losses) on financial instruments held under fair value option2,602 25,741 6,507 (25,089)
Net gains (losses) on derivatives and hedging activities(36,079) (33,972)61,065 (327,938)
Standby Letters of Credit fees6,632 3,234 12,443 5,704 
Other, net394  376 829 985 
Total non-interest income (loss)(41,840) (15,025)(73,405)15,664 
NON-INTEREST EXPENSE:   
Compensation and benefits12,086  11,951 24,989 25,291 
Other operating expenses5,232  4,968 11,184 11,071 
Finance Agency1,879  1,629 3,758 3,257 
Office of Finance1,171  1,445 2,442 2,703 
Other3,543  4,025 5,061 5,976 
Total non-interest expense23,911  24,018 47,434 48,298 
INCOME BEFORE ASSESSMENTS400  110,552 21,218 199,076 
Affordable Housing Program assessments51  11,142 2,142 20,013 
NET INCOME$349  $99,410 $19,076 $179,063 
The accompanying notes are an integral part of these financial statements.
4

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(In thousands)Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Net income$349 $99,410 $19,076 $179,063 
Other comprehensive income adjustments:
Net unrealized gains (losses) on available-for-sale securities8,960 22 11,647 (883)
Pension and postretirement benefits676 581 1,352 1,144 
Total other comprehensive income (loss) adjustments9,636 603 12,999 261 
Comprehensive income$9,985 $100,013 $32,075 $179,324 

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

5

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(Unaudited)
(In thousands)Capital Stock
Class B - Putable
Retained EarningsAccumulated Other ComprehensiveTotal
 SharesPar ValueUnrestrictedRestrictedTotalLossCapital
BALANCE, MARCH 31, 202047,394 $4,739,413 $690,615 $461,979 $1,152,594 $(16,736)$5,875,271 
Comprehensive income (loss)79,528 19,882 99,410 603 100,013 
Proceeds from sale of capital stock313 31,339 31,339 
Repurchase of capital stock(9,500)(950,000)(950,000)
Net shares reclassified to mandatorily redeemable capital stock(76)(7,642)(7,642)
Partial recovery of prior capital distribution to Financing Corporation16,533 16,533 16,533 
Cash dividends on capital stock(21,592)(21,592)(21,592)
BALANCE, JUNE 30, 202038,131 $3,813,110 $765,084 $481,861 $1,246,945 $(16,133)$5,043,922 
BALANCE, MARCH 31, 202127,479 $2,747,938 $803,806 $505,066 $1,308,872 $(11,622)$4,045,188 
Comprehensive income (loss)  279 70 349 9,636 9,985 
Proceeds from sale of capital stock6,289 628,894  628,894 
Repurchase of capital stock(5,984)(598,402)(598,402)
Net shares reclassified to mandatorily
   redeemable capital stock
(600)(60,000) (60,000)
Cash dividends on capital stock  (12,695)(12,695) (12,695)
BALANCE, JUNE 30, 202127,184 $2,718,430 $791,390 $505,136 $1,296,526 $(1,986)$4,012,970 
(In thousands)Capital Stock
Class B - Putable
Retained EarningsAccumulated Other ComprehensiveTotal
 SharesPar ValueUnrestrictedRestrictedTotalLossCapital
BALANCE, DECEMBER 31, 201933,664 $3,366,428 $648,374 $446,048 $1,094,422 $(16,394)$4,444,456 
Adjustment for cumulative effect of accounting change366 366 366 
Comprehensive income (loss)143,250 35,813 179,063 261 179,324 
Proceeds from sale of capital stock21,042 2,104,201 2,104,201 
Repurchase of capital stock(11,000)(1,100,000)(1,100,000)
Net shares reclassified to mandatorily redeemable capital stock(5,575)(557,519)(557,519)
Partial recovery of prior capital distribution to Financing Corporation16,533 16,533 16,533 
Cash dividends on capital stock(43,439)(43,439)(43,439)
BALANCE, JUNE 30, 202038,131 $3,813,110 $765,084 $481,861 $1,246,945 $(16,133)$5,043,922 
BALANCE, DECEMBER 31, 202026,409 $2,640,863 $802,715 $501,321 $1,304,036 $(14,985)$3,929,914 
Comprehensive income (loss)  15,261 3,815 19,076 12,999 32,075 
Proceeds from sale of capital stock10,049 1,004,972  1,004,972 
Repurchase of capital stock(8,664)(866,402)(866,402)
Net shares reclassified to mandatorily redeemable capital stock(610)(61,003) (61,003)
Cash dividends on capital stock  (26,586)(26,586) (26,586)
BALANCE, JUNE 30, 202127,184 $2,718,430 $791,390 $505,136 $1,296,526 $(1,986)$4,012,970 

The accompanying notes are an integral part of these financial statements.
6

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(Unaudited)

(In thousands)Six Months Ended June 30,
 2021 2020
OPERATING ACTIVITIES:   
Net income$19,076  $179,063 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:   
Depreciation and amortization47,699  40,466 
Net change in derivative and hedging activities96,090  (224,019)
Net change in fair value adjustments on trading securities154,249  (362,002)
Net change in fair value adjustments on financial instruments held under fair value option(6,507)25,089 
Other adjustments, net447  569 
Net change in:  
Accrued interest receivable16,981  36,565 
Other assets4,868  3,172 
Accrued interest payable(19,376) (40,551)
Other liabilities(13,293) 20,018 
Total adjustments281,158  (500,693)
Net cash provided by (used in) operating activities300,234  (321,630)
INVESTING ACTIVITIES:   
Net change in:   
Interest-bearing deposits232,472  (590,355)
Securities purchased under agreements to resell1,381,768  1,384,740 
Federal funds sold(1,935,000) 1,308,000 
Premises, software, and equipment(501) (863)
Trading securities:   
Proceeds from maturities750,062  54 
Proceeds from sale256,346 
Available-for-sale securities:   
Proceeds from maturities 1,810,000 
Purchases(1,649,104)(400,000)
Held-to-maturity securities:   
Proceeds from maturities1,582,303  1,659,909 
Purchases(616,065) (34,234)
Advances:   
Repaid254,966,449  359,827,848 
Originated(253,337,180) (360,969,150)
Mortgage loans held for portfolio:   
Principal collected2,205,296  1,667,502 
Purchases(432,636) (2,161,320)
Net cash provided by (used in) investing activities3,404,210  3,502,131 
The accompanying notes are an integral part of these financial statements.
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(continued from previous page)
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)Six Months Ended June 30,
2021 2020
FINANCING ACTIVITIES:   
Net change in deposits and pass-through reserves$9,718  $281,252 
Net proceeds (payments) on derivative contracts with financing elements (689)
Net proceeds from issuance of Consolidated Obligations:   
Discount Notes99,552,017  180,208,634 
Bonds19,762,205  20,341,399 
Payments for maturing and retiring Consolidated Obligations:   
Discount Notes(105,864,700) (184,963,367)
Bonds(20,058,000) (19,462,565)
Proceeds from issuance of capital stock1,004,972  2,104,201 
Payments for repurchase of capital stock(866,402)(1,100,000)
Payments for repurchase/redemption of mandatorily redeemable capital stock(66,738) (560,138)
Cash dividends paid(26,586) (43,439)
Partial recovery of prior capital distribution to Financing Corporation16,533 
Net cash provided by (used in) financing activities(6,553,514) (3,178,179)
Net increase (decrease) in cash and due from banks(2,849,070) 2,322 
Cash and due from banks at beginning of the period2,984,073  20,608 
Cash and due from banks at end of the period$135,003  $22,930 
Supplemental Disclosures:   
Interest paid$214,794  $643,599 
Affordable Housing Program payments, net$11,190  $14,108 


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

8

FEDERAL HOME LOAN BANK OF CINCINNATI

NOTES TO UNAUDITED FINANCIAL STATEMENTS


Background Information    

The Federal Home Loan Bank of Cincinnati (the FHLB), a federally chartered corporation, is one of 11 District Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLB is regulated by the Federal Housing Finance Agency (Finance Agency).

Note 1 - Basis of Presentation

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates. These assumptions and estimates affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates. The interim financial statements presented are unaudited, but they include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, and cash flows for such periods. These financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the audited financial statements and notes included in the FHLB's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (SEC). Results for the six months ended June 30, 2021 are not necessarily indicative of operating results for the full year.

The FHLB presents certain financial instruments, including derivative instruments and securities purchased under agreements to resell, on a net basis when it has a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these instruments, the FHLB has elected to offset its asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements. The FHLB did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 6. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. For more information about the FHLB's investments in securities purchased under agreements to resell, see “Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies” in the FHLB's 2020 Annual Report on Form 10-K.

Subsequent Events

The FHLB has evaluated subsequent events for potential recognition or disclosure through the issuance of these financial statements and believes there have been no material subsequent events requiring additional disclosure or recognition in these financial statements.


Note 2 - Recently Issued and Adopted Accounting Guidance

Facilitation of the Effects of Reference Rate Reform on Financial Reporting, as amended. On March 12, 2020, the Financial Accounting Standards Board (FASB) issued temporary, optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include (1) contract modifications, (2) hedging relationships, and (3) sale and/or transfer of debt securities classified as held-to-maturity. This guidance became effective immediately for the FHLB, and the amendments may be applied prospectively through December 31, 2022. The FHLB either elected or plans to elect the majority of the optional expedients and exceptions provided; however, the full effect on the FHLB's financial condition, results of operations and cash flows has not yet been determined. In particular, during the
9

fourth quarter of 2020, the FHLB elected optional practical expedients specific to the discounting transition on a retrospective basis, which did not have a material effect.


Note 3 - Investments

The FHLB makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold and may make other investments in debt securities, which are classified as either trading, available-for-sale, or held-to-maturity.

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

The FHLB invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold to provide short-term liquidity. These investments are transacted with counterparties that have received a credit rating of single-A or greater by a nationally recognized statistical rating organization (NRSRO). The FHLB’s internal ratings of these counterparties may differ from those issued by an NRSRO.

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 FHLB may extend to a counterparty. At June 30, 2021 and December 31, 2020, all investments in interest-bearing deposits and Federal funds sold were repaid or expected to be repaid according to the contractual terms. NaN allowance for credit losses was recorded for these assets at June 30, 2021 and December 31, 2020. Carrying values of interest-bearing deposits and Federal funds sold exclude accrued interest receivable of (in thousands) $50 and $12 as of June 30, 2021, and $72 and $10 as of December 31, 2020.

Securities purchased under agreements to resell are 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 counterparties, the FHLB determined that 0 allowance for credit losses was needed for its securities purchased under agreements to resell at June 30, 2021 and December 31, 2020. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of (in thousands) $8 and $13 as of June 30, 2021 and December 31, 2020.

Debt Securities

The FHLB invests in debt securities, which are classified as either trading, available-for-sale, or held-to-maturity. The FHLB is prohibited by Finance Agency regulations from purchasing certain higher-risk securities, such as equity securities and debt instruments that are not investment quality, other than certain investments targeted at low-income persons or communities and instruments that experienced credit deterioration after their purchase by the FHLB.

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Trading Securities

Table 3.1 - Trading Securities by Major Security Types (in thousands)
Fair ValueJune 30, 2021 December 31, 2020
Non-mortgage-backed securities (non-MBS):
U.S. Treasury obligations$7,536,087 $8,362,211 
GSE obligations1,791,111  2,125,580 
Total non-MBS9,327,198 10,487,791 
Mortgage-backed securities (MBS):   
U.S. obligation single-family MBS269  333 
Total$9,327,467  $10,488,124 

Table 3.2 - Net Gains (Losses) on Trading Securities (in thousands)
Three Months Ended June 30,Six Months Ended June 30,
 2021202020212020
Net unrealized gains (losses) on trading securities held at period end$(8,603)$(10,404)$(143,842) $362,002 
Net gains (losses) on trading securities sold/matured during the period(6,786)(10,407) 
Net gains (losses) on trading securities$(15,389)$(10,404)$(154,249) $362,002 

Available-for-Sale Securities

Table 3.3 - Available-for-Sale Securities by Major Security Types (in thousands)
 June 30, 2021
 
Amortized
Cost (1)
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
Non-MBS:
U.S. Treasury obligations$1,654,897  $8,783  $$1,663,680 
GSE obligations135,740 2,423 138,163 
Total non-MBS1,790,637 11,206 1,801,843 
MBS:
GSE multi-family MBS140,869 5,159 146,028 
Total MBS140,869 5,159 146,028 
Total$1,931,506 $16,365 $$1,947,871 
 December 31, 2020
 
Amortized
Cost (1)
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
Non-MBS:
GSE obligations$140,600 $1,802 $$142,402 
Total non-MBS140,600 1,802 142,402 
MBS:
GSE multi-family MBS146,269 2,916 149,185 
Total MBS146,269 2,916 149,185 
Total$286,869 $4,718 $$291,587 
(1)Amortized cost of available-for-sale securities 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 (in thousands) $5,390 and $1,242 at June 30, 2021 and December 31, 2020.

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All securities outstanding at June 30, 2021 and December 31, 2020 had gross unrealized gains.
Table 3.4 - Available-for-Sale Securities by Contractual Maturity (in thousands)
 June 30, 2021 December 31, 2020
Year of MaturityAmortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
Non-MBS:
Due in 1 year or less$ $ $ $
Due after 1 year through 5 years82,990 84,147 11,248 11,309 
Due after 5 years through 10 years1,695,070 1,704,598 116,096 117,507 
Due after 10 years12,577 13,098 13,256 13,586 
Total non-MBS1,790,637 1,801,843 140,600 142,402 
MBS (1)
140,869 146,028 146,269 149,185 
Total$1,931,506 $1,947,871 $286,869 $291,587 
(1)MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.5 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
 June 30, 2021 December 31, 2020
Amortized cost of non-MBS:   
Fixed-rate$1,790,637  $140,600 
Total amortized cost of non-MBS1,790,637 140,600 
Amortized cost of MBS:
Fixed-rate140,869 146,269 
Total amortized cost of MBS140,869 146,269 
Total$1,931,506 $286,869 

The FHLB had 0 sales of securities out of its available-for-sale portfolio for the six months ended June 30, 2021 or 2020.

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Held-to-Maturity Securities

Table 3.6 - Held-to-Maturity Securities by Major Security Types (in thousands)
June 30, 2021
Amortized Cost (1)
Gross Unrecognized Holding
Gains
Gross Unrecognized Holding LossesFair Value
Non-MBS:
U.S. Treasury obligations$40,499 $$$40,499 
Total non-MBS40,499 40,499 
MBS:    
U.S. obligation single-family MBS1,092,017 27,780 (297)1,119,500 
GSE single-family MBS2,317,442 80,500 2,397,942 
GSE multi-family MBS5,385,061 6,252 (1,938)5,389,375 
Total MBS8,794,520 114,532 (2,235)8,906,817 
Total$8,835,019 $114,532 $(2,235)$8,947,316 
 
 December 31, 2020
 
Amortized Cost (1)
Gross Unrecognized Holding
Gains
Gross Unrecognized Holding LossesFair Value
Non-MBS:
U.S. Treasury obligations$41,398 $$$41,399 
Total non-MBS41,398 41,399 
MBS:   
U.S. obligation single-family MBS986,399 41,218 1,027,617 
GSE single-family MBS3,013,326 105,657 (2)3,118,981 
GSE multi-family MBS5,607,048 5,146 (8,055)5,604,139 
Total MBS9,606,773 152,021 (8,057)9,750,737 
Total$9,648,171 $152,022 $(8,057)$9,792,136 
 
(1)Carrying value equals amortized cost. Amortized cost of held-to-maturity securities includes adjustments made to the cost basis of an investment for accretion and amortization and excludes accrued interest receivable of (in thousands) $7,964 and $9,609 as of June 30, 2021 and December 31, 2020.

Table 3.7 - Net Purchased Premiums Included in the Amortized Cost of MBS Classified as Held-to-Maturity (in thousands)
June 30, 2021December 31, 2020
Premiums$17,262 $18,299 
Discounts(6,262)(7,269)
Net purchased premiums$11,000 $11,030 



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Table 3.8 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
June 30, 2021December 31, 2020
Year of Maturity
Amortized Cost (1)
Fair Value
Amortized Cost (1)
Fair Value
Non-MBS:    
Due in 1 year or less$40,499 $40,499 $41,398 $41,399 
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
Total non-MBS40,499 40,499 41,398 41,399 
MBS (2)
8,794,520 8,906,817 9,606,773 9,750,737 
Total$8,835,019 $8,947,316 $9,648,171 $9,792,136 
(1)Carrying value equals amortized cost.
(2)MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.9 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
 June 30, 2021December 31, 2020
Amortized cost of non-MBS:   
Fixed-rate$40,499  $41,398 
Total amortized cost of non-MBS40,499  41,398 
Amortized cost of MBS:   
Fixed-rate3,158,930  3,677,199 
Variable-rate5,635,590  5,929,574 
Total amortized cost of MBS8,794,520  9,606,773 
Total$8,835,019  $9,648,171 

From time to time the FHLB may sell securities out of its held-to-maturity portfolio. These securities, generally, have less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification. For the six months ended June 30, 2021 and 2020, the FHLB did 0t sell any held-to-maturity securities.
Allowance for Credit Losses on Available-for-Sale and Held-to-Maturity Securities

The FHLB evaluates available-for-sale and held-to-maturity investment securities for credit losses on a quarterly basis. The FHLB’s available-for-sale and held-to-maturity securities are U.S. Treasury obligations, GSE obligations, and MBS issued by Fannie Mae, Freddie Mac and Ginnie Mae that are backed by single-family or multi-family mortgage loans. The FHLB only purchases securities considered investment quality. At June 30, 2021 and December 31, 2020, all available-for-sale and held-to-maturity securities were rated single-A, or above, by an NRSRO, based on the lowest long-term credit rating for each security used by the FHLB. The FHLB’s internal ratings of these securities may differ from those obtained from an NRSRO.

The FHLB evaluates individual available-for-sale 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 June 30, 2021 and December 31, 2020, 0 available-for-sale securities were in an unrealized loss position. As a result, 0 allowance for credit losses was recorded on these available-for-sale securities at June 30, 2021 and December 31, 2020.

The FHLB evaluates its held-to-maturity securities for impairment on a collective, or pooled basis, unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. As of June 30, 2021 and December 31, 2020, the FHLB had 0t established an allowance for credit loss on any held-to-maturity securities because the securities: (1) were all highly-rated and/or had short remaining terms to maturity, (2) had not experienced, nor did the FHLB expect, any payment default on the instruments, and (3) in the case of U.S., GSE, or other agency obligations, carry an implicit or explicit government guarantee such that the FHLB considered the risk of nonpayment to be zero.

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Note 4 - Advances

The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.

Table 4.1 - Advances by Redemption Term (dollars in thousands)
June 30, 2021December 31, 2020
Redemption TermAmountWeighted Average Interest
Rate
AmountWeighted Average Interest
Rate
Due in 1 year or less$11,594,813 0.51 %$12,064,753 0.75 %
Due after 1 year through 2 years1,507,005 1.70 1,986,446 1.88 
Due after 2 years through 3 years1,730,057 2.22 1,445,139 2.15 
Due after 3 years through 4 years1,510,405 1.54 1,809,523 1.97 
Due after 4 years through 5 years3,377,957 0.82 2,361,604 1.02 
Thereafter3,657,892 1.52 5,339,932 1.34 
Total principal amount23,378,129 0.98 25,007,397 1.16 
Commitment fees(160) (170) 
Discount on Affordable Housing Program (AHP) Advances(1,689) (2,053) 
Discounts(1,675) (2,046) 
Hedging adjustments212,370  358,173  
Fair value option valuation adjustments and accrued interest(434)702 
Total (1)
$23,586,541  $25,362,003  
(1)Carrying values exclude accrued interest receivable of (in thousands) $19,583 and $26,426 as of June 30, 2021 and December 31, 2020.

The FHLB offers certain fixed and variable-rate Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). If the call option is exercised, replacement funding may be available to members. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLB that makes the FHLB financially indifferent to the prepayment of the Advance.

Table 4.2 - Advances by Redemption Term or Next Call Date (in thousands)
Redemption Term or Next Call DateJune 30, 2021December 31, 2020
Due in 1 year or less$14,907,547 $15,375,354 
Due after 1 year through 2 years1,222,522 1,716,058 
Due after 2 years through 3 years1,708,257 1,434,377 
Due after 3 years through 4 years1,503,954 1,785,672 
Due after 4 years through 5 years399,457 877,504 
Thereafter3,636,392 3,818,432 
Total principal amount$23,378,129 $25,007,397 

The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates.

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Table 4.3 - Advances by Redemption Term or Next Put Date for Putable Advances (in thousands)
Redemption Term or Next Put DateJune 30, 2021December 31, 2020
Due in 1 year or less$14,072,063 $14,407,003 
Due after 1 year through 2 years1,587,005 2,146,446 
Due after 2 years through 3 years1,675,057 1,485,139 
Due after 3 years through 4 years1,531,155 1,855,273 
Due after 4 years through 5 years3,377,957 2,346,604 
Thereafter1,134,892 2,766,932 
Total principal amount$23,378,129 $25,007,397 

Table 4.4 - Advances by Interest Rate Payment Terms (in thousands)                    
June 30, 2021December 31, 2020
Total fixed-rate (1)
$17,772,835 $19,195,790 
Total variable-rate (1)
5,605,294 5,811,607 
Total principal amount$23,378,129 $25,007,397 
(1)Payment terms based on current interest rate terms, which reflect any option exercises or rate conversions that have occurred subsequent to the related Advance issuance.

Credit Risk Exposure and Security Terms

The FHLB's Advances are made to member financial institutions. The FHLB manages its credit exposure to Advances through an integrated approach that includes establishing a credit limit for each borrower and ongoing review of each borrower's financial condition, coupled with collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding.

In addition, the FHLB lends to eligible borrowers in accordance with federal law and Finance Agency regulations, which require the FHLB to obtain sufficient collateral to fully secure credit products. Collateral eligible to secure new or renewed Advances includes:

one-to-four family and multi-family mortgage loans (delinquent for no more than 90 days) and securities representing such mortgages;
loans and securities issued, insured, or guaranteed by the U.S. government or any U.S. government agency (for example, mortgage-backed securities issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae);
cash or deposits in the FHLB;
certain other collateral that is real estate-related, provided that the collateral has a readily ascertainable value and that the FHLB can perfect a security interest in it; and
certain qualifying securities representing undivided equity interests in eligible Advance collateral.

Residential mortgage loans are the principal form of collateral for Advances. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business and agribusiness loans. The FHLB's capital stock owned by its member borrowers is also pledged as collateral. Collateral arrangements and a member’s borrowing capacity vary based on the financial condition and performance of the institution, the types of collateral pledged and the overall quality of those assets. The FHLB can also require additional or substitute collateral to protect its security interest. The FHLB also has policies and procedures for validating the reasonableness of its collateral valuations and makes changes to its collateral guidelines, as necessary, based on current market conditions. In addition, collateral verifications and reviews are performed by the FHLB based on the risk profile of the borrower. Management of the FHLB believes that these policies effectively manage the FHLB's credit risk from Advances.

Members experiencing financial difficulties are subject to FHLB-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of over-collateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLB or its agent, or may be required to provide details on those loans to facilitate an estimate of their fair value. The FHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLB by a member priority over the claims or rights of any other party except for claims or rights of a third
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party that would otherwise be entitled to priority under applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At June 30, 2021 and December 31, 2020, the FHLB did 0t have any Advances that were past due, in non-accrual status or considered impaired. In addition, there were 0 troubled debt restructurings related to Advances of the FHLB during the six months ended June 30, 2021 or 2020. At June 30, 2021 and December 31, 2020, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

Based upon the collateral held as security, its credit extension and collateral policies and the repayment history on Advances, the FHLB did not expect any credit losses on Advances as of June 30, 2021 and, therefore, 0 allowance for credit losses on Advances was recorded. For the same reasons, the FHLB did 0t record any allowance for credit losses on Advances at December 31, 2020.

Advance Concentrations

The FHLB's Advances are concentrated in commercial banks, savings institutions, and insurance companies. Advance borrower concentrations can change significantly due to members' ability to quickly increase or decrease their amount of Advances based on their current funding needs.

Table 4.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLB (dollars in millions)
June 30, 2021 December 31, 2020
 Principal% of Total Principal Amount of Advances  Principal% of Total Principal Amount of Advances
U.S. Bank, N.A.$3,272 14 %U.S. Bank, N.A.$4,273 17 %
Third Federal Savings and Loan Association3,141 13 Third Federal Savings and Loan Association3,443 14 
Nationwide Life Insurance Company2,607 11 Nationwide Life Insurance Company2,062 
Protective Life Insurance Company2,225 10 Protective Life Insurance Company1,955 
Western-Southern Life Assurance Co.1,504 Western-Southern Life Assurance Co.1,344 
Total$12,749 54 %Total$13,077 52 %


Note 5 - Mortgage Loans

Total mortgage loans held for portfolio represent residential mortgage loans under the Mortgage Purchase Program (MPP) that the FHLB's members originate, credit enhance, and then sell to the FHLB. The FHLB does not service any of these loans. The FHLB plans to retain its existing portfolio of mortgage loans.
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Table 5.1 - Mortgage Loans Held for Portfolio (in thousands)
 June 30, 2021December 31, 2020
Fixed rate medium-term single-family mortgage loans (1)
$687,922 $731,756 
Fixed rate long-term single-family mortgage loans6,843,302 8,584,239 
Total unpaid principal balance7,531,224 9,315,995 
Premiums169,493 208,281 
Discounts(1,328)(1,636)
Hedging basis adjustments (2)
17,700 26,114 
Total mortgage loans held for portfolio (3)
7,717,089 9,548,754 
Allowance for credit losses on mortgage loans(248)(248)
Mortgage loans held for portfolio, net$7,716,841 $9,548,506 
(1)Medium-term is defined as a term of 15 years or less.
(2)Represents the unamortized balance of the mortgage purchase commitments' market values at the time of settlement. The market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.
(3)Excludes accrued interest receivable of (in thousands) $24,129 and $30,109 at June 30, 2021 and December 31, 2020.

Table 5.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)
 June 30, 2021December 31, 2020
Conventional mortgage loans$7,371,386 $9,133,942 
Federal Housing Administration (FHA) mortgage loans159,838 182,053 
Total unpaid principal balance$7,531,224 $9,315,995 

Table 5.3 - Members, Including Any Known Affiliates that are Members of the FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
 June 30, 2021 December 31, 2020
 Principal% of Total Principal% of Total
Union Savings Bank$1,998 27 %Union Savings Bank$2,826 30 %
Guardian Savings Bank FSB567 Guardian Savings Bank FSB796 

Credit Risk Exposure

The FHLB manages credit risk exposure for conventional mortgage loans primarily though conservative underwriting and purchasing loans with characteristics consistent with favorable expected credit performance and by applying various credit enhancements.

Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those members participating in an aggregated MPP pool). These credit enhancements apply after a homeowner’s equity is exhausted. Beginning in February 2011, the FHLB discontinued the use of SMI for all new loan purchases and replaced it with expanded use of the LRA. The LRA is funded by the FHLB upfront as a portion of the purchase proceeds. The LRA is recorded in other liabilities in the Statement of Condition. Excess funds from the LRA are released to the member in accordance with the terms of the Master Commitment Contract, which is typically after five years, subject to performance of the related loan pool. The LRA established for a pool of loans is limited to only covering losses of that specific pool of loans. Because the FHA makes an explicit guarantee on FHA mortgage loans, the FHLB does not require any credit enhancements on these loans beyond primary mortgage insurance.

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Table 5.4 - Changes in the LRA (in thousands)
Six Months Ended
June 30, 2021
LRA at beginning of year$246,435 
Additions5,327 
Claims(3)
Scheduled distributions(4,569)
LRA at end of period$247,190 

Mortgage Loans Forbearance Plans. In response to the COVID-19 pandemic, which has caused economic strain on many home loan borrowers, the FHLB’s mortgage loan servicers may grant a forbearance period to borrowers who have had COVID-19 related hardships regardless of the payment status of the loan at the time of the request. Based on the most recent information received from mortgage servicers, as of June 30, 2021, there was approximately (in thousands) $44,378 in unpaid principal balance of conventional mortgage loans under a forbearance plan as a result of COVID-19, which represented one percent of conventional mortgage loans held for portfolio.

Payment Status of Mortgage Loans. The key credit quality indicator for conventional mortgage loans is payment status, which allows the FHLB to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make a full payment of principal and interest within one month of its due date. Although certain loans have been granted a forbearance period as noted above, there has been no change in the terms of the loan. Accordingly, when a borrower fails to make timely payments of principal and/or interest for loans under forbearance, they are considered past due. Table 5.5 presents the payment status of conventional mortgage loans. As of June 30, 2021, (in thousands) $6,139 in unpaid principal balance of conventional loans under forbearance had a current payment status, (in thousands) $3,649 was 30 to 59 days past due, (in thousands) $4,758 was 60 to 89 days past due, and (in thousands) $29,832 was greater than 90 days past due.

Table 5.5 - Credit Quality Indicator of Conventional Mortgage Loans (in thousands)
June 30, 2021
Origination Year
Payment status, at amortized cost:Prior to 20172017 to June 30, 2021Total
Past due 30-59 days$17,455 $9,987 $27,442 
Past due 60-89 days5,836 4,059 9,895 
Past due 90 days or more20,074 23,004 43,078 
Total past due mortgage loans43,365 37,050 80,415 
Current mortgage loans3,136,125 4,339,425 7,475,550 
Total conventional mortgage loans$3,179,490 $4,376,475 $7,555,965 
December 31, 2020
Origination Year
Payment status, at amortized cost:Prior to 20162016 to 2020Total
Past due 30-59 days$16,812 $19,036 $35,848 
Past due 60-89 days7,245 7,553 14,798 
Past due 90 days or more24,651 39,921 64,572 
Total past due mortgage loans48,708 66,510 115,218 
Current mortgage loans2,555,139 6,694,837 9,249,976 
Total conventional mortgage loans$2,603,847 $6,761,347 $9,365,194 

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Other delinquency statistics include loans in process of foreclosure, serious delinquency rates, loans past due 90 days or more and still accruing interest, and non-accrual loans. Table 5.6 presents other delinquency statistics of mortgage loans.

Table 5.6 - Other Delinquency Statistics (dollars in thousands)
June 30, 2021
Amortized Cost:Conventional MPP LoansFHA LoansTotal
In process of foreclosure (1)
$4,393 $406 $4,799 
Serious delinquency rate (2)
0.57 %2.44 %0.61 %
Past due 90 days or more still accruing interest (3)
$37,820 $3,930 $41,750 
Loans on non-accrual status$6,316 $$6,316 
December 31, 2020
Amortized Cost:Conventional MPP LoansFHA LoansTotal
In process of foreclosure (1)
$5,031 $617 $5,648 
Serious delinquency rate (2)
0.69 %3.28 %0.74 %
Past due 90 days or more still accruing interest (3)
$58,881 $5,961 $64,842 
Loans on non-accrual status$6,721 $$6,721 
(1)Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. During the six months ended June 30, 2021 and year ended December 31, 2020, there were foreclosure moratoriums enacted in response to the COVID-19 pandemic.
(2)Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class.
(3)Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status.

The FHLB did 0t have any real estate owned at June 30, 2021 or December 31, 2020.

Evaluation of Current Expected Credit Losses

Mortgage Loans - FHA. The FHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. The FHLB expects to recover any losses from such loans from the FHA. Any losses from these loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions. Therefore, the FHLB only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by the FHA insurance. As a result, the FHLB did not record an allowance for credit losses on its FHA insured mortgage loans. Furthermore, due to the insurance, none of these mortgage loans have been placed on non-accrual status.

Mortgage Loans - Conventional MPP. Conventional loans are evaluated collectively when similar risk characteristics exist; loans that do not share risk characteristics with other pools are removed from the collective evaluation and evaluated for expected credit losses on an individual basis. For loans with similar risk characteristics, the FHLB determines the allowance for credit losses through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. The FHLB uses a model that employs a variety of methods, such as projected cash flows to estimate expected credit losses over the life of the loans. This model relies on a number of inputs, such as both current and forecasted property values and interest rates as well as historical borrower behavior experience. The FHLB’s calculation of expected credit losses includes a forecast of home prices over the entire contractual terms of its conventional loans rather than a reversion to historical home price trends after an initial forecast period. The FHLB also incorporates associated credit enhancements to determine estimated expected credit losses.

Certain conventional loans may be evaluated for credit losses by using 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 FHLB may estimate the fair value of this collateral by either applying an appropriate loss severity rate, using third-party estimates, or 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
20

fair value of the collateral, less estimated selling costs. The FHLB will either reserve for these estimated losses or record a direct charge-off of the loan balance, if certain triggering criteria are met. Expected recoveries of prior charge-offs, if any, are included in the allowance for credit losses.

The FHLB also assesses other qualitative factors in its estimation of loan losses for the collectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, which is intended to cover other expected losses that may not otherwise be captured in the methodology described above.

Allowance for Credit Losses on Conventional Mortgage Loans. The FHLB established an allowance for credit losses on its conventional mortgage loans held for portfolio. The following table presents a rollforward of the allowance for credit losses on conventional mortgage loans.

Table 5.7 - Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)
Three Months Ended June 30,
20212020
Balance, beginning of period$248 $297 
Net charge offs(33)
Balance, end of period$248 $264 
Six Months Ended June 30,
20212020
Balance, beginning of period$248 $711 
Adjustment for cumulative effect of accounting change(366)
Net charge offs(81)
Balance, end of period$248 $264 


Note 6 - Derivatives and Hedging Activities

Nature of Business Activity

The FHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the interest-bearing liabilities that finance these assets. The goal of the FHLB'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 FHLB has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities. The FHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives. See Note 7 - Derivatives and Hedging Activities in the FHLB's 2020 Annual Report on Form 10-K for additional information on the FHLB's derivative transactions.

The FHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be executed either with a counterparty, referred to as uncleared derivatives, or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization, referred to as cleared derivatives. Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.

Financial Statement Effect and Additional Financial Information

The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLB to credit and market risk; the overall risk is much smaller. The risks of derivatives only 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.

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Table 6.1 summarizes the 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.

Table 6.1 - Fair Value of Derivative Instruments (in thousands)
 June 30, 2021
 Notional Amount of DerivativesDerivative AssetsDerivative Liabilities
Derivatives designated as fair value hedging instruments:   
Interest rate swaps$10,307,599 $53 $111,378 
Derivatives not designated as hedging instruments:   
Interest rate swaps14,041,364 1,213 2,440 
Interest rate swaptions1,436,000 1,127 
Mortgage delivery commitments513,208 2,200 
Total derivatives not designated as hedging instruments15,990,572 4,540 2,446 
Total derivatives before adjustments$26,298,171 4,593 113,824 
Netting adjustments and cash collateral (1)
 211,623 (111,435)
Total derivative assets and total derivative liabilities $216,216 $2,389 
 December 31, 2020
 Notional Amount of DerivativesDerivative AssetsDerivative Liabilities
Derivatives designated as fair value hedging instruments:   
Interest rate swaps$10,477,703 $272 $163,174 
Derivatives not designated as hedging instruments:
Interest rate swaps13,267,539 691 2,563 
Interest rate swaptions2,175,000 713 
Mortgage delivery commitments137,352 1,056 
Total derivatives not designated as hedging instruments15,579,891 2,460 2,563 
Total derivatives before adjustments$26,057,594 2,732 165,737 
Netting adjustments and cash collateral (1)
 213,156 (161,924)
Total derivative assets and total derivative liabilities $215,888 $3,813 
 
(1)Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions, and also cash collateral, including accrued interest, held or placed by the FHLB with the same clearing agent and/or counterparty. Cash collateral posted, including accrued interest, was (in thousands) $323,868 and $375,390 at June 30, 2021 and December 31, 2020. Cash collateral received, including accrued interest, was (in thousands) $810 and $310 at June 30, 2021 and December 31, 2020.

Table 6.2 presents the impact of qualifying fair value hedging relationships on net interest income as well as the total interest income (expense) by product.

Table 6.2 - Impact of Fair Value Hedging Relationships on Net Interest Income (in thousands)
 Three Months Ended June 30, 2021
AdvancesAvailable-for-Sale SecuritiesConsolidated Bonds
Total interest income (expense) recorded in the Statements of Income$31,371 $344 $(86,589)
Impact of Fair Value Hedging Relationships
Interest rate swaps:
Net interest settlements$(27,851)$(2,829)$269 
Gain (loss) on derivatives(2,194)(11,891)(451)
Gain (loss) on hedged items(993)11,295 445 
Effect on net interest income$(31,038)$(3,425)$263 

22

Three Months Ended June 30, 2020
AdvancesAvailable-for-Sale SecuritiesConsolidated Bonds
Total interest income (expense) recorded in the Statements of Income$158,437 $619 $(129,808)
Impact of Fair Value Hedging Relationships
Interest rate swaps:
Net interest settlements$(19,243)$(524)$429 
Gain (loss) on derivatives(7,608)(1,019)17 
Gain (loss) on hedged items9,736 1,218 103 
Effect on net interest income$(17,115)$(325)$549 

 Six Months Ended June 30, 2021
AdvancesAvailable-for-sale SecuritiesConsolidated Bonds
Total interest income (expense) recorded in the Statements of Income$72,531 $1,679 $(182,775)
Impact of Fair Value Hedging Relationships
Interest rate swaps:
Net interest settlements$(60,695)$(3,708)$520 
Gain (loss) on derivatives146,420 4,716 (826)
Gain (loss) on hedged items(145,802)(4,479)815 
Effect on net interest income$(60,077)$(3,471)$509 

 Six Months Ended June 30, 2020
AdvancesAvailable-for-Sale SecuritiesConsolidated Bonds
Total interest income (expense) recorded in the Statements of Income$330,604 $4,015 $(315,795)
Impact of Fair Value Hedging Relationships
Interest rate swaps:
Net interest settlements$(20,957)$(798)$813 
Gain (loss) on derivatives(411,919)(12,202)2,540 
Gain (loss) on hedged items400,200 12,013 (2,443)
Effect on net interest income$(32,676)$(987)$910 
23

Table 6.3 presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items.

Table 6.3 - Cumulative Basis Adjustments for Fair Value Hedges (in thousands)
June 30, 2021
AdvancesAvailable-for-Sale SecuritiesConsolidated Bonds
Amortized cost of hedged asset or liability (1)
$8,342,700 $1,931,506 $295,869 
Fair value hedging adjustments
Basis adjustments for active hedging relationships included in amortized cost$211,082 $7,291 $1,270 
Basis adjustments for discontinued hedging relationships included in amortized cost1,288 370 
Total amount of fair value hedging basis adjustments$212,370 $7,661 $1,270 
December 31, 2020
AdvancesAvailable-for-Sale SecuritiesConsolidated Bonds
Amortized cost of hedged asset or liability (1)
$10,483,218 $286,869 $132,852 
Fair value hedging adjustments
Basis adjustments for active hedging relationships included in amortized cost$356,624 $11,751 $2,086 
Basis adjustments for discontinued hedging relationships included in amortized cost1,549 389 
Total amount of fair value hedging basis adjustments$358,173 $12,140 $2,086 
(1)     Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships.

24

Table 6.4 presents net gains (losses) recorded in non-interest income (loss) on derivatives not designated as hedging instruments.

Table 6.4 - Net Gains (Losses) Recorded in Non-interest Income (Loss) on Derivatives Not Designated as Hedging Instruments (in thousands)
Three Months Ended June 30,
20212020
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps$8,066 $769 
Interest rate swaptions(3,375)(1,561)
Forward rate agreements(6,051)
Net interest settlements(44,587)(26,715)
Mortgage delivery commitments3,804 (500)
Total net gains (losses) related to derivatives not designated as hedging instruments(36,092)(34,058)
Price alignment amount (1)
13 86 
Net gains (losses) on derivatives and hedging activities$(36,079)$(33,972)
Six Months Ended June 30,
20212020
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps$148,846 $(366,232)
Interest rate swaptions414 90,516 
Forward rate agreements(31,935)
Net interest settlements(88,795)(37,997)
Mortgage delivery commitments540 16,594 
Total net gains (losses) related to derivatives not designated as hedging instruments61,005 (329,054)
Price alignment amount (1)
60 1,116 
Net gains (losses) on derivatives and hedging activities$61,065 $(327,938)
(1)    This amount is for derivatives for which variation margin is characterized as a daily settled contract.

Credit Risk on Derivatives

The FHLB is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions, and manages credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLB requires collateral agreements on its uncleared derivatives with the collateral delivery threshold set to zero.

For cleared derivatives, the Clearinghouse is the FHLB's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent in turn notifies the FHLB. The FHLB utilizes two Clearinghouses for all cleared derivative transactions, LCH Ltd. and CME Clearing. At both Clearinghouses, variation margin is characterized as daily settlement payments, while initial margin is considered to be collateral. The requirement that the FHLB post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLB to 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 value of cleared derivatives is posted daily through a clearing agent. On the Statements of Cash Flows, the variation margin cash payments, or daily settlement payments, are included in net change in derivative and hedging activities, as an operating activity.

25

For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At June 30, 2021, the FHLB was not required to post additional initial margin by its clearing agents based on credit considerations.

Offsetting of Derivative Assets and Derivative Liabilities

The FHLB 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.

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

26

Table 6.5 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral. At June 30, 2021 and December 31, 2020, the FHLB did not receive or pledge any non-cash collateral. Any over-collateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.

Table 6.5 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands)
June 30, 2021
Derivative Instruments Meeting Netting Requirements
Gross Recognized AmountGross Amount of Netting Adjustments and Cash Collateral
Derivative Instruments Not Meeting Netting Requirements (1)
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets:
Uncleared$2,244 $(2,211)$2,200 $2,233 
Cleared149 213,834 213,983 
Total$216,216 
Derivative Liabilities:
Uncleared$108,121 $(105,738)$$2,389 
Cleared5,697 (5,697)
Total$2,389 
December 31, 2020
Derivative Instruments Meeting Netting Requirements
Gross Recognized AmountGross Amount of Netting Adjustments and Cash Collateral
Derivative Instruments Not Meeting Netting Requirements (1)
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets:
Uncleared$1,047 $(1,047)$1,056 $1,056 
Cleared629 214,203 214,832 
Total$215,888 
Derivative Liabilities:
Uncleared$161,633 $(157,820)$$3,813 
Cleared4,104 (4,104)
Total$3,813 
(1)    Represents mortgage delivery commitments that are not subject to an enforceable netting agreement.


Note 7 - Deposits

Table 7.1 - Deposits (in thousands)
 June 30, 2021December 31, 2020
Interest-bearing:   
Demand and overnight$1,236,705  $1,190,508 
Term85,150  123,675 
Other14,565  13,019 
Total interest-bearing deposits$1,336,420  $1,327,202 

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Note 8 - Consolidated Obligations

Table 8.1 - Consolidated Discount Notes Outstanding (dollars in thousands)
 Book Value Principal Amount 
Weighted Average Interest Rate (1)
June 30, 2021$21,180,119  $21,180,728  0.02 %
December 31, 2020$27,500,244  $27,502,730  0.11 %
(1)Represents an implied rate without consideration of concessions.

Table 8.2 - Consolidated Bonds Outstanding by Original Contractual Maturity (dollars in thousands)
 June 30, 2021 December 31, 2020
Year of Original Contractual MaturityAmountWeighted Average Interest Rate AmountWeighted Average Interest Rate
Due in 1 year or less$19,735,345 0.51 % $18,676,595 0.72 %
Due after 1 year through 2 years2,506,080 2.22  2,728,885 2.38 
Due after 2 years through 3 years2,880,580 2.05  3,388,120 2.09 
Due after 3 years through 4 years1,886,000 2.04  1,793,405 2.21 
Due after 4 years through 5 years1,532,000 1.58  1,910,000 1.45 
Thereafter3,116,000 2.26  3,454,000 2.39 
Total principal amount31,656,005 1.10  31,951,005 1.32 
Premiums34,886   43,235  
Discounts(18,732)  (21,403) 
Hedging adjustments1,270   2,086  
Fair value option valuation adjustment and accrued interest4,683 21,388 
Total$31,678,112   $31,996,311  

Table 8.3 - Consolidated Bonds Outstanding by Call Features (in thousands)
 June 30, 2021 December 31, 2020
Principal Amount of Consolidated Bonds:   
Non-callable$27,395,005  $26,539,005 
Callable4,261,000  5,412,000 
Total principal amount$31,656,005  $31,951,005 

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Table 8.4 - Consolidated Bonds Outstanding by Original Contractual Maturity or Next Call Date (in thousands)

Year of Original Contractual Maturity or Next Call DateJune 30, 2021 December 31, 2020
Due in 1 year or less$23,996,345  $22,968,595 
Due after 1 year through 2 years2,481,080  2,823,885 
Due after 2 years through 3 years1,875,580  2,452,120 
Due after 3 years through 4 years1,209,000  1,253,405 
Due after 4 years through 5 years556,000  728,000 
Thereafter1,538,000  1,725,000 
Total principal amount$31,656,005  $31,951,005 

Table 8.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)
 June 30, 2021 December 31, 2020
Principal Amount of Consolidated Bonds:   
Fixed-rate$23,656,005  $21,312,005 
Variable-rate8,000,000 10,639,000 
Total principal amount$31,656,005 $31,951,005 


Note 9 - Affordable Housing Program (AHP)

The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate AHP Advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Each FHLBank is required to contribute to its AHP the greater of 10 percent of its previous year's income subject to assessment, or the prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million for each year. For purposes of the AHP calculation, income subject to assessment is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The FHLB accrues AHP expense monthly based on its income subject to assessment. The FHLB reduces the AHP liability as members use subsidies.

Table 9.1 - Analysis of AHP Liability (in thousands)
Balance at December 31, 2020$110,772 
Assessments (current year additions)2,142 
Subsidy uses, net(11,190)
Balance at June 30, 2021$101,724 


Note 10 - Capital

Table 10.1 - Capital Requirements (dollars in thousands)
 June 30, 2021December 31, 2020
 Minimum RequirementActualMinimum RequirementActual
Risk-based capital$658,569 $4,028,675 $539,321 $3,964,353 
Capital-to-assets ratio (regulatory)4.00 %6.84 %4.00 %6.07 %
Regulatory capital$2,354,885 $4,028,675 $2,611,850 $3,964,353 
Leverage capital-to-assets ratio (regulatory)5.00 %10.26 %5.00 %9.11 %
Leverage capital$2,943,606 $6,043,013 $3,264,812 $5,946,530 

29

Restricted Retained Earnings. At June 30, 2021 and December 31, 2020 the FHLB had (in thousands) $505,136 and $501,321 in restricted retained earnings. These restricted retained earnings are not available to pay dividends but are available to absorb unexpected losses, if any, that an FHLBank may experience.

Table 10.2 - Mandatorily Redeemable Capital Stock Rollforward (in thousands)
Balance, December 31, 2020$19,454 
Capital stock subject to mandatory redemption reclassified from equity61,003 
Repurchase/redemption of mandatorily redeemable capital stock(66,738)
Balance, June 30, 2021$13,719 

Table 10.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)
Contractual Year of RedemptionJune 30, 2021 December 31, 2020
Year 1$1,243  $156 
Year 2 803  1,124 
Year 3894  2,167 
Year 4 255  391 
Year 5 1,667  3,142 
Thereafter (1)
650 
Past contractual redemption date due to remaining activity (2)
8,857 11,824 
Total$13,719  $19,454 
(1)Represents mandatorily redeemable capital stock resulting from a Finance Agency rule effective February 19, 2016, that made captive insurance companies ineligible for FHLB membership. Captive insurance companies that were admitted as FHLB members prior to September 12, 2014, had their membership terminated no later than February 19, 2021. The related mandatorily redeemable capital stock is not required to be redeemed until five years after the member's termination.
(2)Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

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Note 11 - Accumulated Other Comprehensive Income (Loss)

The following tables summarize the changes in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020.

Table 11.1 - Accumulated Other Comprehensive Income (Loss) (in thousands)
Net unrealized gains (losses) on available-for-sale securitiesPension and postretirement benefitsTotal accumulated other comprehensive income (loss)
BALANCE, MARCH 31, 2020$(535)$(16,201)$(16,736)
Other comprehensive income before reclassification:
Net unrealized gains (losses)22 22 
Reclassifications from other comprehensive income (loss) to net income:
Amortization - pension and postretirement benefits581 581 
Net current period other comprehensive income (loss)22 581 603 
BALANCE, JUNE 30, 2020$(513)$(15,620)$(16,133)
BALANCE, MARCH 31, 2021$7,405 $(19,027)$(11,622)
Other comprehensive income before reclassification:
Net unrealized gains (losses)8,960 8,960 
Reclassifications from other comprehensive income (loss) to net income:
Amortization - pension and postretirement benefits676 676 
Net current period other comprehensive income (loss)8,960 676 9,636 
BALANCE, JUNE 30, 2021$16,365 $(18,351)$(1,986)
Net unrealized gains (losses) on available-for-sale securitiesPension and postretirement benefitsTotal accumulated other comprehensive income (loss)
BALANCE, DECEMBER 31, 2019$370 $(16,764)$(16,394)
Other comprehensive income before reclassification:
Net unrealized gains (losses)(883)(883)
Reclassifications from other comprehensive income (loss) to net income:
Amortization - pension and postretirement benefits01,144 1,144 
Net current period other comprehensive income (loss)(883)1,144 261 
BALANCE, JUNE 30, 2020$(513)$(15,620)$(16,133)
BALANCE, DECEMBER 31, 2020$4,718 $(19,703)$(14,985)
Other comprehensive income before reclassification:
Net unrealized gains (losses)11,647 11,647 
Reclassifications from other comprehensive income (loss) to net income:
Amortization - pension and postretirement benefits1,352 1,352 
Net current period other comprehensive income (loss)11,647 1,352 12,999 
BALANCE, JUNE 30, 2021$16,365 $(18,351)$(1,986)
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Note 12 - Pension and Postretirement Benefit Plans

Qualified Defined Benefit Multi-employer Plan. The FHLB participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. Under the Pentegra Defined Benefit Plan, contributions made by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The Pentegra Defined Benefit Plan covers all officers and employees of the FHLB who meet certain eligibility requirements. Contributions to the Pentegra Defined Benefit Plan charged to compensation and benefit expense were $1,697,000 and $1,518,000 in the three months ended June 30, 2021 and 2020, respectively, and $3,393,000 and $3,036,000 in the six months ended June 30, 2021 and 2020.

Qualified Defined Contribution Plan. The FHLB also participates in the Fidelity Defined Contribution Plan, a tax-qualified, defined contribution plan. The FHLB contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain IRS limitations. The FHLB contributed $339,000 and $324,000 in the three months ended June 30, 2021 and 2020, respectively, and $942,000 and $862,000 in the six months ended June 30, 2021 and 2020.

Non-qualified Supplemental Defined Benefit Retirement Plan (Defined Benefit Retirement Plan). The FHLB maintains a non-qualified, unfunded defined benefit plan. The plan ensures that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit plan in the absence of limits on benefit levels imposed by the IRS. There are no funded plan assets. The FHLB has established a grantor trust, which is included in held-to-maturity securities on the Statements of Condition, to meet future benefit obligations and current payments to beneficiaries.

Postretirement Benefits Plan. The FHLB also sponsors a Postretirement Benefits Plan that includes health care and life insurance benefits for eligible retirees. Future retirees are eligible for the postretirement benefits plan if they were hired prior to August 1, 1990, are age 55 or older, and their age plus years of continuous service at retirement are greater than or equal to 80. Spouses are covered subject to required contributions. There are no funded plan assets that have been designated to provide postretirement benefits.

Table 12.1 - Net Periodic Benefit Cost (in thousands)
 Three Months Ended June 30,
 Defined Benefit
Retirement Plan
 Postretirement Benefits Plan
 20212020 20212020
Net Periodic Benefit Cost     
Service cost$326 $290  $$
Interest cost274 331  29 35 
Amortization of net loss663 581  13 
Net periodic benefit cost$1,263 $1,202  $44 $37 
Six Months Ended June 30,
Defined Benefit
Retirement Plan
Postretirement Benefits Plan
2021202020212020
Net Periodic Benefit Cost
Service cost$652 $565 $$
Interest cost548 662 58 71 
Amortization of net loss1,326 1,144 26 
Net periodic benefit cost$2,526 $2,371 $88 $75 

32

For the Defined Benefit Retirement Plan and the Postretirement Benefits Plan, the related service cost is recorded as part of Non-Interest Expense - Compensation and Benefits on the Statements of Income. The non-service related components of interest cost and amortization of net loss are recorded as Non-Interest Expense - Other in the Statements of Income.


Note 13 - Segment Information

The FHLB has identified 2 primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLB's two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the principal ways the FHLB provides services to member stockholders.

Table 13.1 - Financial Performance by Operating Segment (in thousands)
 Three Months Ended June 30,
 Traditional Member
Finance
MPPTotal
2021   
Net interest income (loss)$80,863 $(14,712)$66,151 
Non-interest income (loss)(43,205)1,365 (41,840)
Non-interest expense21,342 2,569 23,911 
Income (loss) before assessments16,316 (15,916)400 
Affordable Housing Program assessments1,643 (1,592)51 
Net income (loss)$14,673 $(14,324)$349 
2020   
Net interest income$139,314 $10,281 $149,595 
Non-interest income (loss)(7,378)(7,647)(15,025)
Non-interest expense21,354 2,664 24,018 
Income (loss) before assessments110,582 (30)110,552 
Affordable Housing Program assessments11,145 (3)11,142 
Net income (loss)$99,437 $(27)$99,410 
 Six Months Ended June 30,
 Traditional Member
Finance
MPPTotal
2021   
Net interest income (loss)$168,245 $(26,188)$142,057 
Non-interest income (loss)(74,231)826 (73,405)
Non-interest expense42,066 5,368 47,434 
Income (loss) before assessments51,948 (30,730)21,218 
Affordable Housing Program assessments5,215 (3,073)2,142 
Net income (loss)$46,733 $(27,657)$19,076 
2020   
Net interest income$203,963 $27,747 $231,710 
Non-interest income (loss)(30,958)46,622 15,664 
Non-interest expense42,461 5,837 48,298 
Income before assessments130,544 68,532 199,076 
Affordable Housing Program assessments13,160 6,853 20,013 
Net income$117,384 $61,679 $179,063 
33

Table 13.2 - Asset Balances by Operating Segment (in thousands)
Assets
Traditional Member
Finance
MPPTotal
June 30, 2021$47,713,254 $11,158,865 $58,872,119 
December 31, 202053,356,209 11,940,030 65,296,239 


Note 14 - Fair Value Disclosures

The fair value amounts recorded on the Statements of Condition and presented in the related note disclosures have been determined by the FHLB using available market information and the FHLB'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., an exit price). The fair values reflect the FHLB's judgment of how a market participant would estimate the fair values.

Fair Value Hierarchy. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable the fair value measurement is.

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

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

Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for the asset or liability, which are supported by limited to no market activity and reflect the FHLB's own assumptions.

The FHLB reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. The FHLB did not have any transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy during the six months ended June 30, 2021 or 2020.

Table 14.1 presents the net carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLB. The FHLB records trading securities, available-for-sale securities, derivative assets, derivative liabilities, certain Advances and certain Consolidated Obligations at fair value on a recurring basis, and on occasion, certain mortgage loans held for portfolio on a nonrecurring basis. The FHLB records all other financial assets and liabilities at amortized cost. Refer to Table 14.2 for further details about the financial assets and liabilities held at fair value on either a recurring or nonrecurring basis.

34

Table 14.1 - Fair Value Summary (in thousands)
June 30, 2021
Fair Value
Financial InstrumentsNet Carrying ValueTotalLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral (1)
Assets:  
Cash and due from banks$135,003 $135,003 $135,003 $$$— 
Interest-bearing deposits374,147 374,147 374,147 — 
Securities purchased under agreements to resell436,500 436,500 436,500 — 
Federal funds sold6,175,000 6,175,000 6,175,000 — 
Trading securities9,327,467 9,327,467 9,327,467 — 
Available-for-sale securities1,947,871 1,947,871 1,947,871 — 
Held-to-maturity securities8,835,019 8,947,316 8,947,316 — 
Advances (2)
23,586,541 23,785,148 23,785,148 — 
Mortgage loans held for portfolio7,716,841 7,959,301 7,916,827 42,474 — 
Accrued interest receivable96,727 96,727 96,727 — 
Derivative assets216,216 216,216 4,593 211,623 
Liabilities:  
Deposits1,336,420 1,336,365 1,336,365 — 
Consolidated Obligations: 
Discount Notes (3)
21,180,119 21,179,813 21,179,813 — 
Bonds (4)
31,678,112 32,212,241 32,212,241 — 
Mandatorily redeemable capital stock13,719 13,719 13,719 — 
Accrued interest payable67,258 67,258 67,258 — 
Derivative liabilities2,389 2,389 113,824 (111,435)
(1)Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.
(2)Includes (in thousands) $26,066 of Advances recorded under the fair value option at June 30, 2021.
(3)Includes (in thousands) $2,866,877 of Consolidated Obligation Discount Notes recorded under the fair value option at June 30, 2021.
(4)Includes (in thousands) $2,295,683 of Consolidated Obligation Bonds recorded under the fair value option at June 30, 2021.

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December 31, 2020
Fair Value
Financial InstrumentsNet Carrying ValueTotalLevel 1Level 2Level 3
Netting Adjustments and Cash Collateral (1)
Assets:  
Cash and due from banks$2,984,073 $2,984,073 $2,984,073 $$$— 
Interest-bearing deposits555,104 555,104 555,104 — 
Securities purchased under agreements to resell1,818,268 1,818,268 1,818,268 — 
Federal funds sold4,240,000 4,240,000 4,240,000 — 
Trading securities10,488,124 10,488,124 10,488,124 — 
Available-for-sale securities291,587 291,587 291,587 — 
Held-to-maturity securities9,648,171 9,792,136 9,792,136 — 
Advances (2)
25,362,003 25,573,785 25,573,785 — 
Mortgage loans held for portfolio9,548,506 9,861,802 9,798,019 63,783 — 
Accrued interest receivable113,701 113,701 113,701 — 
Derivative assets215,888 215,888 2,732 213,156 
Liabilities:  
Deposits1,327,202 1,327,267 1,327,267 — 
Consolidated Obligations:  
Discount Notes27,500,244 27,501,296 27,501,296 — 
Bonds (3)
31,996,311 32,785,647 32,785,647 — 
Mandatorily redeemable capital stock19,454 19,454 19,454 — 
Accrued interest payable77,521 77,521 77,521 — 
Derivative liabilities3,813 3,813 165,737 (161,924)
(1)Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.
(2)Includes (in thousands) $27,202 of Advances recorded under the fair value option at December 31, 2020.
(3)Includes (in thousands) $2,262,388 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2020.

Summary of Valuation Methodologies and Primary Inputs.

The valuation methodologies and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis in the Statement of Condition are disclosed in Note 15 - Fair Value Disclosures in the FHLB's 2020 Annual Report on Form 10-K. There have been no significant changes in the valuation methodologies during 2021.

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Fair Value Measurements.

Table 14.2 presents the fair value of financial assets and liabilities that are recorded on a recurring or nonrecurring basis at June 30, 2021 and December 31, 2020, by level within the fair value hierarchy. The FHLB records nonrecurring fair value adjustments to reflect partial write-downs on certain mortgage loans.

Table 14.2 - Fair Value Measurements (in thousands)
Fair Value Measurements at June 30, 2021
 Total  Level 1Level 2Level 3
Netting Adjustments and Cash Collateral (1)
Recurring fair value measurements - Assets     
Trading securities:     
U.S. Treasury obligations$7,536,087 $$7,536,087 $$— 
GSE obligations1,791,111 1,791,111 — 
U.S. obligation single-family MBS269 269 — 
Total trading securities9,327,467 9,327,467 — 
Available-for-sale securities:     
U.S. Treasury obligations1,663,680 1,663,680 — 
GSE obligations138,163 138,163 — 
GSE multi-family MBS146,028 146,028 — 
Total available-for-sale securities1,947,871 1,947,871 — 
Advances26,066 26,066 — 
Derivative assets:     
Interest rate related214,016 2,393 211,623 
Mortgage delivery commitments2,200 2,200 — 
Total derivative assets216,216 4,593 211,623 
Total assets at fair value$11,517,620 $$11,305,997 $$211,623 
Recurring fair value measurements - Liabilities     
Consolidated Obligations:
Discount Notes$2,866,877 $$2,866,877 $$— 
Bonds2,295,683 2,295,683 — 
Total Consolidated Obligations5,162,560 5,162,560 — 
Derivative liabilities:     
Interest rate related2,383 113,818 (111,435)
Mortgage delivery commitments— 
Total derivative liabilities2,389 113,824 (111,435)
Total liabilities at fair value$5,164,949 $$5,276,384 $$(111,435)
(1)Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.


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Fair Value Measurements at December 31, 2020
 Total  Level 1Level 2Level 3
Netting Adjustments and Cash Collateral (1)
Recurring fair value measurements - Assets     
Trading securities:     
U.S. Treasury obligations$8,362,211 $$8,362,211 $$— 
GSE obligations2,125,580 2,125,580 — 
U.S. obligation single-family MBS333 333 — 
Total trading securities10,488,124 10,488,124 — 
Available-for-sale securities:     
GSE obligations142,402 142,402 — 
GSE multi-family MBS149,185 149,185 — 
Total available-for-sale securities291,587 291,587 — 
Advances27,202 27,202 — 
Derivative assets:     
Interest rate related214,832 1,676 213,156 
Mortgage delivery commitments1,056 1,056 — 
Total derivative assets215,888 2,732 213,156 
Total assets at fair value$11,022,801 $$10,809,645 $$213,156 
Recurring fair value measurements - Liabilities     
Consolidated Obligation Bonds$2,262,388 $$2,262,388 $$— 
Derivative liabilities:     
Interest rate related3,813 165,737 (161,924)
Total derivative liabilities3,813 165,737 (161,924)
Total liabilities at fair value$2,266,201 $$2,428,125 $$(161,924)
Nonrecurring fair value measurements - Assets (2)
Mortgage loans held for portfolio$108 $$$108 
(1)Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.
(2)The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2020.

Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Obligations carried at fair value are recognized based solely on the contractual amount of interest due or unpaid. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense.

The FHLB has elected the fair value option for certain financial instruments that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value elections were made primarily in an effort to mitigate the potential income statement volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value.

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Table 14.3 presents net gains (losses) recognized in earnings related to financial assets and liabilities in which the fair value option was elected during the three and six months ended June 30, 2021 and 2020.

Table 14.3 – Fair Value Option - Financial Assets and Liabilities (in thousands)
Three Months Ended June 30,Six Months Ended June 30,
Net Gains (Losses) from Changes in Fair Value Recognized in Earnings2021202020212020
Advances$165 $31 $(1,135)$178 
Consolidated Discount Notes55 13,864 50 (162)
Consolidated Bonds2,382 11,846 7,592 (25,105)
Total net gains (losses)$2,602 $25,741 $6,507 $(25,089)

For instruments recorded under the fair value option, the related contractual interest income, contractual interest expense and the discount amortization on Discount Notes are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net gains (losses) on financial instruments held under fair value option” in the Statements of Income, except for changes in fair value related to instrument specific credit risk, which are recorded in accumulated other comprehensive income in the Statement of Condition. The FHLB has determined that none of the remaining changes in fair value were related to instrument-specific credit risk for the six months ended June 30, 2021 or 2020. In determining that there has been 0 change in instrument-specific credit risk period to period, the FHLB primarily considered the following factors:

The FHLB is a federally chartered GSE, and as a result of this status, the FHLB’s Consolidated Obligations have historically received the same credit ratings as the government bond credit rating of the United States, even though they are not obligations of the United States and are not guaranteed by the United States.

The FHLB is jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks.

The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Advances and Consolidated Obligations for which the fair value option has been elected.

Table 14.4 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)
June 30, 2021December 31, 2020
Aggregate Unpaid Principal BalanceAggregate Fair ValueAggregate Fair Value Over/(Under) Aggregate Unpaid Principal BalanceAggregate Unpaid Principal BalanceAggregate Fair ValueAggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance
Advances$26,500 $26,066 $(434)$26,500 $27,202 $702 
Consolidated Discount Notes2,867,100 2,866,877 (223)
Consolidated Bonds2,291,000 2,295,683 4,683 2,241,000 2,262,388 21,388 

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Note 15 - Commitments and Contingencies

Off-Balance Sheet Commitments. Table 15.1 represents off-balance sheet commitments at June 30, 2021 and December 31, 2020. The FHLB has deemed it unnecessary to record any liabilities for credit losses on these commitments at June 30, 2021 and December 31, 2020.

Table 15.1 - Off-Balance Sheet Commitments (in thousands)
June 30, 2021December 31, 2020
Notional AmountExpire within one yearExpire after one yearTotalExpire within one yearExpire after one yearTotal
Standby Letters of Credit$33,932,607 $1,233,417 $35,166,024 $27,741,220 $1,071,029 $28,812,249 
Commitments for standby bond purchases15,905 14,600 30,505 35,030 35,030 
Commitments to fund additional Advances63 63 
Commitments to purchase mortgage loans513,208 513,208 137,352 137,352 
Unsettled Consolidated Bonds, principal amount (1)
500,000 500,000 
Unsettled Consolidated Discount Notes, principal amount (1)
100,000 100,000 321,551 321,551 
(1)Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations.

The carrying value of guarantees related to Standby Letters of Credit are recorded in other liabilities and were (in thousands) $7,396 and $8,675 at June 30, 2021 and December 31, 2020.

Legal Proceedings. From time to time, the FHLB is subject to legal proceedings arising in the normal course of business. The FHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount could be reasonably estimated. After consultation with legal counsel, management does not anticipate that ultimate liability, if any, arising out of any matters will have a material effect on the FHLB's financial condition or results of operations.


Note 16 - Transactions with Other FHLBanks

The FHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLB loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at June 30, 2021 or December 31, 2020. The following table details the average daily balance of lending and borrowing between the FHLB and other FHLBanks for the six months ended June 30, 2021 and 2020.

Table 16.1 - Lending and Borrowing Between the FHLB and Other FHLBanks (in thousands)
Average Daily Balances for the Six Months Ended June 30,
 2021 2020
Loans to other FHLBanks$ $9,890 

In addition, the FHLB may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issuing new debt for which the FHLB is the primary obligor. The FHLB then becomes the primary obligor on the transferred debt. There were 0 Consolidated Obligations transferred to the FHLB during the six months ended June 30, 2021 or 2020. The FHLB had 0 Consolidated Obligations transferred to other FHLBanks during these periods.

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Note 17 - Transactions with Stockholders

As a cooperative, the FHLB's capital stock is owned by its members, by former members that retain the stock as provided in the FHLB's Capital Plan and by nonmember institutions that have acquired members and must retain the stock to support Advances or other activities with the FHLB. All Advances are issued to members and all mortgage loans held for portfolio are purchased from members. The FHLB also maintains demand deposit accounts for members, primarily to facilitate settlement activities that are directly related to Advances and mortgage loan purchases. Additionally, the FHLB may enter into interest rate swaps with its stockholders. The FHLB may not invest in any equity securities issued by its stockholders and it has not purchased any MBS securitized by, or other direct long-term investments in, its stockholders.

For financial statement purposes, the FHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLB capital stock outstanding. Federal statute prescribes the voting rights of members in the election of both Member and Independent directors. For Member directorships, the Finance Agency designates the number of Member directorships in a given year and an eligible voting member may vote only for candidates seeking election in its respective state. For Independent directors, the FHLB's Board of Directors nominates candidates to be placed on the ballot in an at-large election. For both Member and Independent director elections, a member is entitled to vote one share of required capital stock, subject to a statutory limitation, for each applicable directorship. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLB's capital stock that were required to be held by all members in that state as of the record date for voting. Nonmember stockholders are not eligible to vote in director elections. Due to these statutory limitations, no member owned more than 10 percent of the voting interests of the FHLB at June 30, 2021 or December 31, 2020.

All transactions with stockholders are entered into in the ordinary course of business. Finance Agency regulations require the FHLB to offer the same pricing for Advances and other services to all members regardless of asset or transaction size, charter type, or geographic location. However, the FHLB may, in pricing its Advances, distinguish among members based upon its assessment of the credit and other risks to the FHLB of lending to any particular member or upon other reasonable criteria that may be applied equally to all members. The FHLB's policies and procedures require that such standards and criteria be applied consistently and without discrimination to all members applying for Advances.

Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLB provides products and services to members whose officers or directors serve as directors of the FHLB (Directors' Financial Institutions). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLB had no MBS or derivatives transactions with Directors' Financial Institutions at June 30, 2021 or December 31, 2020.
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Table 17.1 - Transactions with Directors' Financial Institutions (dollars in millions)
 June 30, 2021December 31, 2020
 Balance
% of Total (1)
Balance
% of Total (1)
Advances$6,137 26.3 %$7,048 28.2 %
MPP162 2.2 159 1.7 
Regulatory capital stock647 23.7 467 17.6 
(1)Percentage of total principal (Advances), unpaid principal balance (MPP), and regulatory capital stock.

Concentrations. The following table shows regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of mortgage loans held for portfolio of stockholders holding five percent or more of regulatory capital stock and includes any known affiliates that are members of the FHLB.

Table 17.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock (dollars in millions)
Regulatory Capital StockAdvanceMPP Unpaid
June 30, 2021Balance% of Total PrincipalPrincipal Balance
U.S. Bank, N.A.$437 16 %$3,272 $11 
Third Federal Savings & Loan Association163 3,141 34 
Nationwide Life Insurance Company138 2,607 
Regulatory Capital StockAdvanceMPP Unpaid
December 31, 2020Balance% of TotalPrincipalPrincipal Balance
U.S. Bank, N.A.$288 11 %$4,273 $13 
JPMorgan Chase Bank, N.A.163 
Third Federal Savings & Loan Association137 3,443 42 

Nonmember Affiliates. The FHLB has relationships with 3 nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLB had no investments in or borrowings to any of these nonmember affiliates at June 30, 2021 or December 31, 2020. The FHLB has executed standby bond purchase agreements with the Ohio Housing Finance Agency whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. During the first six months of 2021 and 2020, the FHLB was not required to purchase any bonds under these agreements.



Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (the FHLB). These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:

the effects of economic, financial, credit, market, and member conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members' mergers and consolidations, deposit flows, liquidity needs, and loan demand;

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political, national, or world events, including acts of war, civil unrest, terrorism, natural disasters, climate change, pandemics, including the current COVID-19 pandemic, or other catastrophic events, and legislative, regulatory, government, judicial or other developments that could affect us, our members, our counterparties, other Federal Home Loan Banks (FHLBanks) and other government-sponsored enterprises (GSEs), and/or investors in the Federal Home Loan Bank System's (FHLBank System) unsecured debt securities, which are called Consolidated Obligations or Obligations;

competitive forces, including those related to other sources of funding available to members, to purchases of mortgage loans, and to our issuance of Consolidated Obligations;

the financial results and actions of other FHLBanks that could affect our ability, in relation to the FHLBank System's joint and several liability for Consolidated Obligations, to access the capital markets on favorable terms or preserve our profitability, or could alter the regulations and legislation to which we are subject;

changes in ratings assigned to FHLBank System Obligations or the FHLB that could raise our funding cost;

changes in investor demand for Obligations;

the volatility of market prices, interest rates, credit quality, and other indices that could affect the value of investments and collateral we hold as security for member obligations and/or for counterparty obligations;

uncertainties relating to the phasing out of the London InterBank Offered Rate (LIBOR) that could impact our mortgage-backed securities (MBS) investments, Advances, Consolidated Obligations, derivatives, and collateral;

the ability to attract and retain skilled management and other key employees;

the ability to develop, secure and support technology and information systems that effectively manage the risks we face (including cybersecurity risks);

the risk of loss arising from failures or interruptions in our ongoing business operations, internal controls, information systems or other operating technologies;

the ability to successfully manage new products and services; and

the risk of loss arising from litigation filed against us or one or more other FHLBanks.

We do not undertake any obligation to update any forward-looking statements made in this document.

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EXECUTIVE OVERVIEW

The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the periods indicated.
(Dollars in millions)June 30, 2021March 31, 2021December 31, 2020September 30, 2020June 30, 2020
STATEMENT OF CONDITION DATA AT PERIOD END:
Total assets$58,872 $60,634 $65,296 $74,077 $90,645 
Advances23,587 24,365 25,362 27,101 48,913 
Mortgage loans held for portfolio7,717 8,599 9,549 10,671 11,704 
Investments (1)
27,096 24,209 27,041 34,514 29,533 
Consolidated Obligations:
Discount Notes21,180 26,873 27,500 26,668 44,324 
Bonds31,678 27,798 31,997 41,432 39,339 
Total Consolidated Obligations52,858 54,671 59,497 68,100 83,663 
Mandatorily redeemable capital stock14 15 19 17 19 
Capital:
Capital stock - putable2,718 2,748 2,641 2,935 3,813 
Retained earnings1,297 1,309 1,304 1,282 1,247 
Accumulated other comprehensive loss(2)(12)(15)(12)(16)
Total capital4,013 4,045 3,930 4,205 5,044 
STATEMENT OF INCOME DATA FOR THE QUARTER:
Net interest income$66 $76 $81 $93 $149 
Non-interest income (loss)(42)(32)(15)(7)(15)
Non-interest expense24 23 22 22 24 
Affordable Housing Program assessments— 11 
Net income$— $19 $40 $57 $99 
FINANCIAL RATIOS FOR THE QUARTER:
Weighted average dividend rate (2)
2.00 %2.00 %2.00 %2.00 %2.50 %
Return on average equity0.03 1.96 3.93 4.70 7.12 
Return on average assets— 0.12 0.23 0.26 0.37 
Net interest margin (3)
0.43 0.49 0.48 0.43 0.58 
Average equity to average assets6.59 6.13 5.97 5.61 5.22 
Regulatory capital ratio (4)
6.84 6.72 6.07 5.72 5.60 
Operating expense to average assets (5)
0.112 0.121 0.104 0.079 0.063 
(1)Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.
(2)Weighted average dividend rates are dividends paid divided by the average number of shares of capital stock eligible for dividends.
(3)Net interest margin is net interest income as a percentage of average earning assets.
(4)Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets.
(5)Operating expenses comprise compensation and benefits and other operating expenses, which are included in non-interest expense.

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Recent Developments

COVID-19 Pandemic
The global outbreak of COVID-19 has impacted communities and businesses worldwide, including those in the Fifth District. The effects of COVID-19 continue to evolve, and the full impact and duration of the virus are unknown. Throughout the COVID-19 pandemic, we have continued to fulfill our mission of providing robust access to a key source of readily available and competitively priced wholesale funding to member financial institutions and supporting our commitment to affordable housing and community investment, while maintaining strong capital and liquidity positions. We continue to monitor the progression of COVID-19 and are committed to assisting members and their communities as impacts related to the pandemic continue to unfold.

Financial Condition

Mission Asset Activity
Mission Assets, which we define as Advances, Letters of Credit, and total MPP are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor our balance sheet concentration of Mission Asset Activity. One measure we use to assess mission achievement is our Primary Mission Asset ratio, which measures the sum of average Advances and mortgage loans as a percentage of average Consolidated Obligations (adjusted for certain high-quality liquid assets, as permitted by regulation). In the first six months of 2021, the Primary Mission Asset ratio averaged 69 percent, slightly below the Finance Agency's preferred ratio of 70 percent. In assessing overall mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued for the benefit of members.

The following table summarizes our Mission Asset Activity.
 Ending BalancesAverage Balances
June 30,December 31,Six Months Ended June 30,Year Ended December 31,
(In millions)202120202020 202120202020
Mission Asset Activity:
Advances (principal)$23,378 $48,407 $25,007 $24,836 $52,515 $42,917 
MPP:  
Mortgage loans held for portfolio (principal)7,531 11,424 9,316 8,393 11,584 10,995 
Mandatory Delivery Contracts (notional)513 133 137 141 539 338 
Total MPP8,044 11,557 9,453 8,534 12,123 11,333 
Letters of Credit (notional)35,166 22,381 28,812 33,630 17,102 20,141 
Total Mission Asset Activity$66,588 $82,345 $63,272 $67,000 $81,740 $74,391 

At June 30, 2021, 60 percent of members held Mission Asset Activity, which was relatively stable compared to prior periods. The balance of Mission Asset Activity was $66.6 billion at June 30, 2021, an increase of $3.3 billion (five percent) from year-end 2020, which was driven by higher Letters of Credit balances. The increase in Letters of Credit was primarily due to members using them to secure elevated levels of public unit deposits. We normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued. Advance principal balances decreased $1.6 billion (seven percent) from year-end 2020. Advance balances have remained low in the first six months of 2021 due to increased liquidity in the financial markets and increased deposit levels at member institutions.

Average principal Advance balances for the six months ended June 30, 2021 decreased $27.7 billion (53 percent) compared to the same period of 2020. Advance balances in the first quarter of 2020 were significantly higher as members sought additional liquidity during the onset of the COVID-19 pandemic. However, most of these Advances matured or prepaid by the end of 2020 and as noted above, the demand for Advances has remained low. Advance balances are often volatile due to members' ability to quickly, normally on the same day, increase or decrease their amount of Advances. We believe providing members flexibility in their funding levels helps support their asset-liability management needs and is a key benefit of membership.

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We believe that reduced demand for Advances from many of our members will, or is likely to, continue in the near future. Our business is designed to support significant changes in asset levels without having to undergo material changes in staffing, operations, risk practices, or general resource needs. A key reason for this scalability is that our Capital Plan provides for additional capital when Advances grow and the opportunity for us to retire capital when Advances decline, thereby acting, along with our efficient operating expenses, to preserve competitive profitability.

The MPP principal balance fell $1.8 billion (19 percent) from year-end 2020. During the first six months of 2021, we purchased $0.4 billion of mortgage loans, while principal reductions of $2.2 billion reflected the continuing high levels of mortgage loan refinance activity. We have not yet been able to fully replace the prepaid mortgage loans with suitable alternatives that provide an acceptable risk/return tradeoff.

Based on earnings in the first six months of 2021, we accrued $2 million for the Affordable Housing Program (AHP) pool of funds to be available to members in 2022. In addition to the required AHP assessment, we provided voluntary sponsorship of two other housing programs. These programs provided funds to cover accessibility and emergency repairs for special needs and elderly homeowners and funds for the replacement or repair of homes damaged or destroyed by natural disasters within the Fifth District.

Investments
The balance of investments at June 30, 2021 was $27.1 billion, an increase of $0.1 billion from year-end 2020. At June 30, 2021, investments included $8.9 billion of MBS and $18.2 billion of other investments, which consisted primarily of highly-rated short-term instruments and longer-term U.S. Treasury and GSE obligations held for liquidity. All of our MBS held at June 30, 2021 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency. MBS balances declined compared to year end due to elevated levels of prepayments of the underlying mortgages as a result of the low interest rate environment. Due to regulatory limitations regarding the purchase of MBS that reference LIBOR, we have not been able to replace the prepaid MBS with suitable alternatives that we believe provide an acceptable risk/return tradeoff.

Investments averaged $28.2 billion in the first six months of 2021, a decrease of $5.5 billion (16 percent) from the average balance during the same period of 2020. The decrease in average investments reflected lower liquidity investments needed in light of the reduced Advance demand and lower MBS due to the reasons noted above. Liquidity investments can vary significantly on a daily basis during times of volatility in Advance balances. We maintained a robust amount of asset liquidity throughout the first six months of 2021 across a variety of liquidity measures, as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."

Capital
Capital adequacy surpassed all minimum regulatory capital requirements in the first six months of 2021. The GAAP capital-to-assets ratio at June 30, 2021 was 6.82 percent, while the regulatory capital-to-assets ratio was 6.84 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP. GAAP and regulatory capital both increased $0.1 billion in the first six months of 2021. Retained earnings totaled $1.3 billion at June 30, 2021, a decrease of less than one percent from year-end 2020.
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Results of Operations

Overall Results
Our earnings over time reflect the combination of a stable business model and conservative management of risk. Key factors that can cause significant periodic volatility in our profitability are changes in the level of interest rates, changes in spreads between benchmark interest rates and our short-term funding costs, recognition of net amortization due to accelerated prepayments of mortgage assets, and fair value adjustments related to the use of derivatives and the associated hedged items. The table below summarizes our results of operations.
 Three Months Ended June 30,Six Months Ended June 30,Year Ended December 31,
(Dollars in millions)20212020202120202020
Net income$— $99 $19 $179 $276 
Affordable Housing Program assessments— 11 20 31 
Return on average equity (ROE)0.03 %7.12 %0.97 %7.04 %5.78 %
Return on average assets— 0.37 0.06 0.36 0.31 
Weighted average dividend rate2.00 2.50 2.00 2.50 2.23 
Average short-term interest rates (1)
0.11 0.33 0.13 0.86 0.51 
ROE spread to average short-term interest rates(0.08)6.79 0.84 6.18 5.27 
Dividend rate spread to average short-term interest rates1.89 2.17 1.87 1.64 1.72 
(1)     Average short-term interest rates consist of 3-month LIBOR and the Federal funds effective rate.

Net income decreased $99 million in the three-month comparison period and $160 million in the six-month comparison period. The decline in profitability in the three months ended June 30, 2021 compared to the same period of 2020 was primarily driven by:
Advances. Average Advance balances declined 59 percent. Although Advances grew significantly during the onset of the COVID-19 pandemic as members sought additional liquidity, balances subsequently fell in 2020 and have remained low due to increased liquidity in the financial markets and increased deposit levels at member institutions. Additionally, Advance prepayment fees were lower due to a higher amount of member prepayments of Advances in the first half of 2020 as interest rates declined.
Mortgage Assets. The spreads earned on mortgage assets declined due to the accelerated payoff of higher-yielding mortgages at a faster pace than the associated debt funding them. The historically low long-term interest rates led to prepayments occurring faster than the purchases of new mortgage assets, which also resulted in the average balances of mortgage assets declining 30 percent.
Fair Value Adjustments. Unrealized losses on derivatives and instruments held at fair value were higher in the second quarter of 2021 in response to changes in interest rates.

The decline in profitability in the first six months of 2021 compared to the same period of 2020 was primarily driven by the Advances and mortgage assets factors noted for the three-months comparison as well as the following:

Sales of Swaptions. We sold interest rate swaptions in the first quarter of 2020 in response to changes in interest rates, which resulted in net realized gains of approximately $69 million before assessments. We did not sell any interest rate swaptions in the first six months of 2021. We use swaptions to hedge market risk exposure associated with holding fixed-rate mortgage assets and may sell them to offset the risk incurred due to changes in interest rates.
In June 2021, we paid stockholders a quarterly dividend at a 2.00 percent annualized rate on their capital investment in our company, which is 1.89 percentage points above second quarter average short-term interest rates.

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Effect of Interest Rate Environment
Trends in market interest rates and the resulting shapes of the market yield curves strongly influence the results of operations and profitability because of how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).
Six Months Ended June 30,
Quarter 2 2021Quarter 1 202120212020Year 2020
 EndingAverageEndingAverageAverageAverageEndingAverage
Federal funds effective0.08 %0.07 %0.06 %0.08 %0.07 %0.66 %0.09 %0.37 %
Secured Overnight Financing Rate (SOFR)0.05 0.02 0.01 0.04 0.03 0.65 0.09 0.37 
3-month LIBOR0.15 0.16 0.19 0.20 0.18 1.07 0.24 0.65 
2-year LIBOR0.33 0.27 0.29 0.22 0.25 0.75 0.20 0.49 
10-year LIBOR1.44 1.57 1.78 1.35 1.46 1.01 0.93 0.88 
2-year U.S. Treasury0.25 0.17 0.16 0.13 0.15 0.65 0.12 0.39 
10-year U.S. Treasury1.47 1.58 1.74 1.31 1.45 1.03 0.92 0.89 
15-year mortgage current coupon (1)
1.23 1.26 1.39 1.05 1.15 1.52 0.71 1.21 
30-year mortgage current coupon (1)
1.83 1.87 2.04 1.68 1.77 1.99 1.34 1.69 
(1)     Current coupon rate of Fannie Mae par MBS indications.

The target overnight Federal funds rate was in the range of zero to 0.25 percent at June 30, 2021, unchanged from March 31, 2021. The low interest rate environment reflects the evolving risks to economic activity lingering from the COVID-19 pandemic.

Average short-term rates were approximately 60 to 90 basis points lower in the first six months of 2021 compared to the same period of 2020 and average mortgage rates decreased by approximately 20 to 35 basis points during that same period. The decline in interest rates negatively impacted income in the first six months of 2021 primarily because of lower earnings generated from investing capital and increased mortgage asset prepayments.

Business Outlook and Risk Management

Other than the updates noted below, our major business strategies, outlook for our business, and risk profiles and management have not changed substantially since our 2020 Annual Report on Form 10-K. “Quantitative and Qualitative Disclosures About Risk Management” provides details on current risk exposures.

Regulatory and Legislative Risk and Significant Developments
Significant regulatory and legislative actions and developments for the period covered by this Report not previously disclosed are summarized below.

Federal Reserve Board Extends Paycheck Protection Program Liquidity Facility: On June 25, 2021, the Federal Reserve Board announced a final extension of its Paycheck Protection Program Liquidity Facility (PPPLF) by an additional month to July 30, 2021. The PPPLF provides collateralized Paycheck Protection Program (PPP) loan liquidity to eligible Federal Reserve member financial institutions in order to facilitate PPP loan originations at such financial institutions. The extension allowed additional processing time for banks, community development financial institutions, and other financial institutions to pledge to the facility any PPP loans approved by the Small Business Administration (SBA) through the June 30, 2021 expiration of the PPP program.

Additional COVID-19 Presidential, Legislative and Regulatory Developments: In light of the COVID-19 pandemic, the federal government and its agencies 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 these 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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Affordable Housing and Community Investment: Legislation has been introduced in the U.S. Senate and House of Representatives that, if enacted in its proposed form, would require that the FHLBanks set aside higher percentages of their earnings for their affordable housing and community investment programs than is currently required under law. The FHLBanks are actively monitoring these proposals.

LIBOR Transition: We are planning for the replacement of LIBOR and the establishment of SOFR as the recommended alternative to LIBOR. In March 2021, the Financial Conduct Authority 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 U.S. dollar 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. The market activity in SOFR-linked financial instruments has continued to develop and we have offered SOFR-linked Consolidated Obligations and SOFR-linked Advances on an ongoing basis. In addition, we have been using SOFR-based derivatives to manage interest-rate risk and we have begun purchasing SOFR-linked MBS in the second quarter of 2021.

The following table presents our LIBOR-indexed Advances, investment securities and derivatives at June 30, 2021. At June 30, 2021, all of our variable rate Consolidated Obligations were linked to SOFR.

(In millions)Maturing on or before June 30, 2023Maturing after June 30, 2023
LIBOR-Indexed Variable Rate Financial Instruments
Advances by redemption term$2,329 $3,009 
MBS by contractual maturity (1)
— 5,224 
Total principal amount$2,329 $8,233 
Derivatives, notional amount by termination date$4,816 $4,619 
(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.

The market transition away from LIBOR towards SOFR is gradual and complicated, including the possible development of term structures and credit adjustments to accommodate differences between LIBOR and SOFR and the potential introduction of other alternative reference rates. As such, we are not currently able to predict the ultimate impact of such a transition on our business, financial condition, and results of operations.

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ANALYSIS OF FINANCIAL CONDITION

Credit Services

Credit Activity and Advance Composition
The table below shows trends in Advance balances by major programs and in the notional amount of Letters of Credit.
(Dollars in millions)June 30, 2021March 31, 2021December 31, 2020
 Balance
Percent(1)
Balance
Percent(1)
Balance
Percent(1)
Adjustable/Variable-Rate Indexed:  
LIBOR$5,338 23 %$5,433 22 %$5,611 22 %
SOFR118 — 118 118 
Other149 16 — 82 — 
Total5,605 24 5,567 23 5,811 23 
Fixed-Rate:  
Repurchase based (REPO)3,942 17 3,787 16 3,780 15 
Regular Fixed-Rate8,131 35 9,047 37 9,587 38 
Putable (2)
2,607 11 2,657 11 2,657 11 
Amortizing/Mortgage Matched1,722 1,872 2,021 
Other1,371 1,227 1,151 
Total17,773 76 18,590 77 19,196 77 
Total Advances Principal$23,378 100 %$24,157 100 %$25,007 100 %
Letters of Credit (notional)$35,166 $33,650 $28,812 
(1)As a percentage of total Advances principal.    
(2)Excludes Putable Advances where the related put options have expired or where the Advance is indexed to a variable-rate. These Advances are classified based on their current terms.

Advance principal balances at June 30, 2021 decreased seven percent compared to year-end 2020. Advance balances have remained low since the last half of 2020 as members experienced an inflow of deposits on their balance sheets, while also having access to other liquidity sources as a result of certain government actions related to the pandemic. Letters of Credit increased 22 percent primarily due to members using them to secure elevated levels of public unit deposits.

Advance Usage
In addition to analyzing Advance balances by dollar trends, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
 June 30, 2021December 31, 2020
Average Advances-to-assets for members 
Assets less than $1.0 billion (502 members)1.59 %1.99 %
Assets over $1.0 billion (126 members)1.64 2.11 
All members1.60 2.01 
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The following tables present principal balances for the five members with the largest Advance borrowings.
(Dollars in millions)
June 30, 2021 December 31, 2020
NamePrincipal Amount of AdvancesPercent of Total Principal Amount of Advances NamePrincipal Amount of AdvancesPercent of Total Principal Amount of Advances
U.S. Bank, N.A.$3,272 14 % U.S. Bank, N.A.$4,273 17 %
Third Federal Savings and Loan Association3,141 13  Third Federal Savings and Loan Association3,443 14 
Nationwide Life Insurance Company2,607 11  Nationwide Life Insurance Company2,062 
Protective Life Insurance Company2,225 10  Protective Life Insurance Company1,955 
Western-Southern Life Assurance Co.1,504  Western-Southern Life Assurance Co.1,344 
Total of Top 5$12,749 54 % Total of Top 5$13,077 52 %

Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Assets augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs. This activity may enable us to obtain more favorable funding costs, and helps us maintain competitively priced Mission Assets.

Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or MPP)

The table below shows principal purchases and reductions of loans in the MPP for the first six months of 2021. All loans acquired in the first six months of 2021 were conventional loans.
(In millions)MPP Principal
Balance at December 31, 2020$9,316 
Principal purchases420 
Principal reductions(2,205)
Balance at June 30, 2021$7,531 
We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and MBS) because the option for homeowners to change their principal payments normally represents the largest portion of our market risk exposure and can affect MPP balances. MPP principal paydowns increased in the first six months of 2021 to a 39 percent annual constant prepayment rate, compared to the 30 percent rate for all of 2020, driven by the historically low mortgage rates. Our purchases of new loans were much lower than the level of repayments during the first six months of 2021. Although MPP yields on purchases of new loans continued to offer favorable returns, the lack of volume that met our risk adjusted return criteria along with other balance sheet concentration considerations prevented us from purchasing new loans to fully replace repayments received.

Overall, MPP yields on existing portfolio balances, net of funding and hedging costs, have declined and are expected to remain at lower levels in the short-term due to the accelerated payoff of higher-yielding mortgages at a faster pace than the associated debt funding them. Despite the lower yields on existing MPP balances, the metrics of portfolio return relative to their market and credit risks continue to indicate that the MPP has generated, and can be expected to continue to generate, a profitable long-term, risk-adjusted return.

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Investments

The table below presents the ending and average balances of our investment portfolio.
Six Months EndedYear Ended
(In millions)June 30, 2021 December 31, 2020
 Ending Balance Average Balance Ending Balance Average Balance
Liquidity investments$18,155  $18,787  $17,285  $20,548 
MBS8,941  9,081  9,756  11,864 
Other investments (1)
— 320 459 
Total investments$27,096 $28,188 $27,041 $32,871 
(1)The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end.

Liquidity investments are either short-term (primarily overnight), or longer-term investments that can be easily sold and converted to cash. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis. Liquidity investment levels can vary significantly based on changes in the amount of actual Advances, anticipated demand for Advances, liquidity needs, the availability of acceptable net spreads, and the number of eligible counterparties that meet our unsecured credit risk criteria.

The balance of liquidity investments was higher at June 30, 2021 compared to year-end 2020, as we held $3.0 billion of our liquidity portfolio as deposits at the Federal Reserve at the end of 2020, which are reflected in cash and due from banks on the Statements of Condition. Also, we purchased additional longer-term U.S. Treasury obligations in the second quarter of 2021, which are held to help meet regulatory liquidity requirements. Under the regulatory requirements, liquidity includes certain high-quality liquid assets, which are defined as U.S. Treasury obligations with remaining maturities of 10 years or less held as trading securities or available-for-sale securities. The average balance of liquidity investments for the six months ended June 30, 2021 fell $1.8 billion (nine percent) from the average balance for all of 2020 due to lower liquidity investments being needed in light of the reduced Advance demand.

Our overarching strategy for balances of MBS is to keep holdings as close as possible to the regulatory maximum. Finance Agency regulations prohibit us from purchasing MBS if our investment in these securities exceeds three times regulatory capital on the day we intend to purchase the securities. The ratio of MBS to regulatory capital was 2.22 at June 30, 2021. The MBS ratio was lower than normal primarily due to the decline in MBS balances given paydowns in the low interest rate environment and the regulatory limitations regarding the purchase of investments that reference LIBOR. Given these limitations, we have not been able to replace the prepaid MBS with suitable alternatives that we believe provide an acceptable risk/return tradeoff.

The balance of MBS at June 30, 2021 consisted of $7.8 billion of securities issued by Fannie Mae or Freddie Mac (of which $5.6 billion were floating-rate securities), and $1.1 billion of securities issued by Ginnie Mae (which are primarily fixed rate).
The table below shows principal purchases and paydowns of our MBS for the first six months of 2021.
(In millions)MBS Principal
Balance at December 31, 2020$9,745 
Principal purchases729 
Principal paydowns(1,541)
Balance at June 30, 2021$8,933 

MBS principal paydowns in the first six months of 2021 equated to a 29 percent annual constant prepayment rate, an increase from the 27 percent rate experienced in 2020. The elevated prepayment rates experienced in the first six months of 2021 and all of 2020 is a result of the historically low mortgage rate environment.

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Consolidated Obligations

We fund variable-rate assets with Discount Notes (a portion of which may be swapped), adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the underlying rate reset periods embedded in these assets. The balances and composition of our Consolidated Obligations tend to fluctuate with changes in the balances and composition of our assets. In addition, changes in the amount and composition of our funding may be necessary from time to time to meet the days of positive liquidity and asset/liability maturity funding gap requirements discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."

The table below presents the ending and average balances of our participations in Consolidated Obligations.

Six Months EndedYear Ended
(In millions)June 30, 2021 December 31, 2020
 Ending Balance Average Balance Ending Balance Average Balance
Discount Notes:       
Unswapped$18,314  $25,421  $27,503  $39,478 
Swapped2,867 805 — 3,843 
Total par Discount Notes21,181 26,226 27,503 43,321 
Other items (1)
(1) (1) (3) (37)
Total Discount Notes21,180  26,225  27,500  43,284 
Bonds:       
Unswapped fixed-rate21,070  19,213  18,940  21,288 
Unswapped adjustable-rate (2)
8,000  9,324  10,639  13,394 
Swapped fixed-rate2,586  1,364  2,372  3,547 
Total par Bonds31,656  29,901  31,951  38,229 
Other items (1)
22  31  46  68 
Total Bonds31,678  29,932  31,997  38,297 
Total Consolidated Obligations (3)
$52,858  $56,157  $59,497  $81,581 
(1)Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments.
(2)At June 30, 2021 and December 31, 2020, all unswapped adjustable-rate Bonds were indexed to SOFR.
(3)The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $666,747 and $746,772 at June 30, 2021 and December 31, 2020, respectively.

The ending balance of Discount Notes at June 30, 2021 declined compared to year-end 2020 due in part to the lower Advance and cash balances. The average balances of Discount Notes and unswapped adjustable-rate Bonds in the first six months of 2021 were significantly lower compared to the averages for all of 2020 due to the growth in short-term and variable-rate Advances in the first quarter of 2020 as members sought additional liquidity during the onset of the COVID-19 pandemic. However, most of these Advances matured or prepaid by the end of 2020 and the demand for Advances has remained low.

The average balance of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, declined in the first six months of 2021 compared to the average balance in 2020 due to terminating higher coupon fixed-rate Bonds with embedded options as interest rates fell.
Deposits

Total deposits with us are normally a relatively minor source of low-cost funding. Total interest-bearing deposits at June 30, 2021 were $1.3 billion, similar to the balance at year-end 2020.

Derivatives Hedging Activity and Liquidity

Our use of derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" and "Non-Interest Income (Loss)" sections in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.”

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Capital Resources

The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis. We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings.
Six Months EndedYear Ended
(In millions)June 30, 2021 December 31, 2020
Period End Average Period End Average
GAAP and Regulatory Capital
GAAP Capital Stock$2,718  $2,678  $2,641  $3,567 
Mandatorily Redeemable Capital Stock14  21  19  55 
Regulatory Capital Stock2,732  2,699  2,660  3,622 
Retained Earnings1,297  1,306  1,304  1,228 
Regulatory Capital$4,029  $4,005  $3,964  $4,850 
Six Months EndedYear Ended
June 30, 2021 December 31, 2020
 Period EndAverage Period EndAverage
GAAP and Regulatory Capital-to-Assets Ratio
GAAP6.82 % 6.36 % 6.02 % 5.39 %
Regulatory (1)
6.84  6.41  6.07  5.47 
(1)    At all times, the FHLB must maintain at least a four percent minimum regulatory capital-to-assets ratio.

Our business model is structured to be able to absorb sharp changes in assets because we can execute commensurate changes in liability and capital stock balances. For example, in the first six months of 2021, we issued $1.0 billion of capital stock to members in support of short-term Advance borrowings that were subsequently repaid prior to June 30, 2021. During the same period, we repurchased $0.9 billion of capital stock in response to lower Advance balances.
See the "Capital Adequacy" section in “Quantitative and Qualitative Disclosures About Risk Management” for discussion of our retained earnings.
Membership and Stockholders

In the first six months of 2021, we added five new member stockholders and lost five member stockholders, ending the quarter at 628 member stockholders. Three of the five members lost during the first six months of 2021 were attributable to intra-district merger activity.
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RESULTS OF OPERATIONS

Components of Earnings and Return on Equity

The following table is a summary income statement for the three and six months ended June 30, 2021 and 2020. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period.

Three Months Ended June 30,Six Months Ended June 30,
(Dollars in millions)2021202020212020
 Amount
ROE (1)
Amount
ROE (1)
Amount
ROE (1)
Amount
ROE (1)
Net interest income$66 6.51 %$149 10.71 %$142 7.21 %$232 9.11 %
Non-interest income (loss):
Net gains (losses) on investment securities(15)(1.51)(11)(0.74)(154)(7.83)362 14.23 
Net gains (losses) on derivatives and hedging activities(36)(3.55)(34)(2.43)61 3.10 (328)(12.89)
Net gains (losses) on financial instruments held under fair value option0.25 26 1.84 0.33 (25)(0.99)
Other non-interest income, net0.69 0.26 13 0.68 0.26 
Total non-interest income (loss)(42)(4.12)(15)(1.07)(73)(3.72)15 0.61 
Total income24 2.39 134 9.64 69 3.49 247 9.72 
Non-interest expense24 2.35 24 1.72 48 2.41 48 1.90 
Affordable Housing Program assessments— 0.01 11 0.80 0.11 20 0.78 
Net income$— 0.03 %$99 7.12 %$19 0.97 %$179 7.04 %
(1)The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts in millions may produce nominally different results.

Details on the individual factors contributing to the level and changes in profitability are explained in the sections below.

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Net Interest Income
Components of Net Interest Income
The following table shows selected components of net interest income.
Three Months Ended June 30,Six Months Ended June 30,
(Dollars in millions)2021202020212020
 Amount% of Earning AssetsAmount% of Earning AssetsAmount% of Earning AssetsAmount% of Earning Assets
Components of net interest rate spread:
Net (amortization)/accretion (1) (2)
$(28)(0.18)%$(28)(0.11)%$(56)(0.18)%$(50)(0.10)%
Prepayment fees on Advances, net (2)
0.03 13 0.05 0.02 18 0.03 
Other components of net interest rate spread82 0.54 158 0.61 178 0.58 239 0.49 
Total net interest rate spread59 0.39 143 0.55 128 0.42 207 0.42 
Earnings from funding assets with interest-free capital0.04 0.03 14 0.04 25 0.05 
Total net interest income/net interest margin (3)
$66 0.43 %$149 0.58 %$142 0.46 %$232 0.47 %
(1)Includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, premiums, discounts and concessions paid on Consolidated Obligations and other hedging basis adjustments.
(2)This component of net interest rate spread has been segregated to display its relative impact.
(3)Net interest margin is net interest income as a percentage of average total interest-earning assets.

Net Amortization/Accretion (generally referred to as "amortization"): Net amortization can become substantial and volatile with changes in interest rates. When mortgage rates decrease, premium amortization of mortgage assets generally increases, which reduces net interest income. Net amortization in the three and six months ended June 30, 2021 and 2020 was elevated due to the historically low mortgage rates, which led to accelerated prepayments of mortgage assets. The $10 million increase in amortization from mortgage assets in the six-months comparison was partially offset by a $4 million decrease in amortization on Consolidated Obligations. Amortization on Consolidated Obligations was elevated in the first three months of 2020 as we repaid higher coupon fixed-rate Bonds as interest rates fell.

Prepayment Fees on Advances: Fees for members' early repayment of certain Advances, which are included in net interest income, are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Advance prepayment fees were moderate in the six months ended June 30, 2021. The higher Advance prepayment fees in the first six months of 2020 was due to a higher amount of member prepayments of Advances as interest rates declined.

Other Components of Net Interest Rate Spread: The total other components of net interest rate spread decreased $76 million and $61 million in the three- and six-months comparisons periods, respectively. The net decreases were primarily due to the factors below.

Six-Months Comparison
Lower average Advance balances-Unfavorable: The $27.8 billion decrease in the average balance of Advances lowered net interest income by an estimated $49 million.
Lower spreads earned on mortgage assets-Unfavorable: Lower spreads on the mortgage assets portfolio decreased net interest income by an estimated $35 million. The lower spreads were driven by the decline in average long-term interest rates, which accelerated the prepayments of higher-yielding mortgages at a faster pace than the associated debt funding them.
Lower average balances of mortgage assets-Unfavorable: The $3.6 billion decrease in the average balance of mortgage-backed securities and the $3.3 billion decrease in the average balance of mortgage loans held for portfolio lowered net interest income by an estimated $27 million. Mortgage balances declined due to the acceleration of principal cash flows driven by historically low mortgage interest rates.
Higher spreads on shorter-term and floating-rate asset balances-Favorable: Higher spreads on shorter-term assets and floating-rate assets (including those that have been swapped to a floating rate) improved net interest income by an estimated $39 million as the rates on the debt funding these assets declined. However, the increase in net interest
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income was more than offset by lower non-interest income (loss) primarily due to an increase of $51 million in the net interest settlements being paid on related derivatives not receiving hedge accounting.
Unrealized gains on designated fair value hedges-Favorable: Net unrealized gains on hedged items and derivatives in qualifying fair value hedge relationships improved net interest income by $12 million.

Three-Months Comparison
Except for the unrealized gains on fair value hedges, which were losses in the three-months comparison, the same factors generally affected the other components of net interest rate spread as in the six-months comparison and by approximately the same relative magnitude.

Earnings from Capital: Earnings from capital decreased $11 million in the six months ended June 30, 2021 compared to the same period in 2020 primarily due to average short-term rates declining approximately 60 to 90 basis points as the Federal Reserve responded to the evolving risks to economic activity in the first quarter of 2020 due to the COVID-19 pandemic and has continued to keep rates low. Earnings from capital were relatively flat in the three-months comparison given average short-term rates were similar in each of the quarters.

Average Balance Sheet and Rates
The following tables provide average balances and rates for major balance sheet accounts, which determine the changes in net interest rate spreads. Interest amounts and average rates are affected by our use of derivatives and the related accounting elections we make. Interest amounts reported for Advances, MBS, Other investments and Swapped Bonds include gains (losses) on hedged items and derivatives in qualifying fair value hedge relationships.

In addition, the net interest settlements of interest receivables or payables associated with derivatives in a fair value hedge relationship are included in net interest income and interest rate spread. However, if the derivatives do not qualify for fair value hedge accounting, the related net interest settlements of interest receivables or payables are recorded in “Non-interest income (loss)” as “Net gains (losses) on derivatives and hedging activities” and therefore are excluded from the calculation of net interest rate spread. Amortization associated with some hedging-related basis adjustments is also reflected in net interest income, which affects interest rate spread.
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(Dollars in millions)Three Months EndedThree Months Ended
June 30, 2021June 30, 2020
 Average Balance Interest 
Average Rate (1)
Average Balance Interest 
Average Rate (1)
Assets:     
Advances$25,646 $37 0.57 %$62,445  $172  1.11 %
Mortgage loans held for portfolio (2)
8,111 38 1.90 11,963  74  2.49 
Federal funds sold and securities purchased under resale agreements7,748 0.07 4,154   0.08 
Interest-bearing deposits in banks (3) (4)
679 — 0.10 1,467  —  0.11 
MBS (3)
8,736 24 1.10 12,212  48  1.59 
Other investments (3)
10,350 55 2.11 12,163  68  2.26 
Loans to other FHLBanks— — — —  —  — 
Total interest-earning assets61,270 155 1.01 104,404  363  1.40 
Other assets660 3,099     
Total assets$61,930 $107,503     
Liabilities and Capital:     
Term deposits$75 — 0.21 $51  —  1.07 
Other interest bearing deposits (4)
1,423 — 0.02 1,266  —  0.02 
Discount Notes25,805 0.03 63,084  83  0.53 
Unswapped fixed-rate Bonds20,901 83 1.60 19,152  108  2.27 
Unswapped adjustable-rate Bonds7,622 0.04 12,702   0.14 
Swapped Bonds1,192 0.86 4,393  17  1.58 
Mandatorily redeemable capital stock22 — 1.99 133   2.61 
Other borrowings— — — —  —  — 
Total interest-bearing liabilities57,040 89 0.62 100,781  214  0.85 
Non-interest bearing deposits— —     
Other liabilities812 1,106     
Total capital4,078 5,616     
Total liabilities and capital$61,930 $107,503     
Net interest rate spread0.39 %   0.55 %
Net interest income and net interest margin (5)
$66 0.43 %  $149  0.58 %
Average interest-earning assets to interest-bearing liabilities107.42 %    103.60 %
(1)Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts in millions may not produce the same results.
(2)Non-accrual loans are included in average balances used to determine average rate.
(3)Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities.
(4)The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end.
(5)Net interest margin is net interest income as a percentage of average total interest-earning assets.
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(Dollars in millions)Six Months EndedSix Months Ended
June 30, 2021June 30, 2020
 Average Balance Interest 
Average Rate (1)
Average Balance Interest 
Average Rate (1)
Assets:     
Advances$25,099 $79 0.63 %$52,872  $348  1.32 %
Mortgage loans held for portfolio (2)
8,601 83 1.94 11,865  163  2.77 
Federal funds sold and securities purchased under resale agreements7,934 0.07 7,385  40  1.07 
Interest-bearing deposits in banks (3) (4) (5)
770 — 0.10 1,630   0.85 
MBS (4)
9,077 54 1.21 12,631  116  1.85 
Other investments (4)
10,398 113 2.19 12,033  137  2.29 
Loans to other FHLBanks— — — 10  —  1.22 
Total interest-earning assets61,879 332 1.08 98,426  811  1.66 
Other assets615 2,011     
Total assets$62,494 $100,437     
Liabilities and Capital:     
Term deposits$92 — 0.29 $42  —  1.38 
Other interest bearing deposits (5)
1,388 — 0.02 1,153   0.50 
Discount Notes26,225 0.06 56,391  259  0.93 
Unswapped fixed-rate Bonds19,232 171 1.79 20,312  239  2.36 
Unswapped adjustable-rate Bonds9,324 0.07 11,760  40  0.68 
Swapped Bonds1,376 1.21 4,596  37  1.64 
Mandatorily redeemable capital stock21 — 2.00 92   2.29 
Other borrowings— — — —  —  — 
Total interest-bearing liabilities57,658 190 0.66 94,346  579  1.24 
Non-interest bearing deposits—     
Other liabilities863 969     
Total capital3,973 5,117     
Total liabilities and capital$62,494 $100,437     
Net interest rate spread0.42 %   0.42 %
Net interest income and net interest margin (6)
$142 0.46 %  $232  0.47 %
Average interest-earning assets to interest-bearing liabilities107.32 %    104.32 %
(1)Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts in millions may not produce the same results.
(2)Non-accrual loans are included in average balances used to determine average rate.
(3)Includes certificates of deposit that are classified as available-for-sale securities.
(4)Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities.
(5)The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end.
(6)Net interest margin is net interest income as a percentage of average total interest-earning assets.

Rates and corresponding levels of interest income and expense on our interest-bearing assets and liabilities decreased in the three and six months ended June 30, 2021 compared to the same periods in 2020 due to the decline in market interest rates.
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Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income, as shown in the following table.
(In millions)Three Months Ended
June 30, 2021 over 2020
Six Months Ended
June 30, 2021 over 2020
 
Volume (1)(3)
Rate (2)(3)
Total
Volume (1)(3)
Rate (2)(3)
Total
Increase (decrease) in interest income   
Advances$(74)$(61)$(135)$(135)$(134)$(269)
Mortgage loans held for portfolio(21)(15)(36)(38)(42)(80)
Federal funds sold and securities purchased under resale agreements— — — (40)(37)
Interest-bearing deposits in banks— — — (3)(4)(7)
MBS(12)(12)(24)(28)(34)(62)
Other investments(9)(4)(13)(18)(6)(24)
Loans to other FHLBanks— — — — — — 
Total(116)(92)(208)(219)(260)(479)
Increase (decrease) in interest expense    
Term deposits— — — — — — 
Other interest-bearing deposits— — — — (3)(3)
Discount Notes(31)(50)(81)(91)(161)(252)
Unswapped fixed-rate Bonds(34)(25)(12)(56)(68)
Unswapped adjustable-rate Bonds(1)(3)(4)(7)(29)(36)
Swapped Bonds(9)(5)(14)(21)(8)(29)
Mandatorily redeemable capital stock(1)— (1)(1)— (1)
Other borrowings— — — — — — 
Total(33)(92)(125)(132)(257)(389)
Increase (decrease) in net interest income$(83)$— $(83)$(87)$(3)$(90)
(1)Volume changes are calculated as the change in volume multiplied by the prior year rate.
(2)Rate changes are calculated as the change in rate multiplied by the prior year average balance.
(3)Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

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Effect of the Use of Derivatives on Net Interest Income
The following table shows the impact on net interest income from the effect of derivatives and hedging activities. As noted above, gains (losses) on hedged items and derivatives in qualifying fair value hedge relationships are recorded in interest income or expense. In addition, for derivatives designated as a fair value hedge, the net interest settlements of interest receivables or payables related to such derivatives are recognized as adjustments to the interest income or expense of the designated hedged item. As such, all the effects on earnings of derivatives qualifying for fair value hedge accounting are reflected in net interest income. The effect on earnings from derivatives not receiving fair value hedge accounting is provided in the “Non-Interest Income (Loss)” section below.

(In millions)Three Months Ended June 30,Six Months Ended June 30,
2021 202020212020
Advances:
Gains (losses) on designated fair value hedges$(3)$$$(11)
Net interest settlements included in net interest income(28)(19)(61)(21)
Investment securities:
Gains (losses) on designated fair value hedges(1)— — — 
Net interest settlements included in net interest income(3)(1)(4)(1)
Mortgage loans:
Amortization of derivative fair value adjustments in net interest income(4)(3)(8)(5)
Consolidated Obligation Bonds:
Net interest settlements included in net interest income— 
Increase (decrease) to net interest income$(39)$(20)$(71)$(37)

Most of our use of derivatives is to synthetically convert the fixed interest rates on certain Advances, investments and Consolidated Obligations to adjustable rates tied to an eligible benchmark rate (e.g., LIBOR, the Federal funds effective rate, or SOFR). The larger negative effect of derivatives on net interest income in the three and six months ended June 30, 2021 was primarily due to lower short-term benchmark interest rates, which resulted in higher net interest settlements being paid on certain Advances where the fixed interest rates were converted to adjustable-coupon rates. The fluctuation in earnings from the use of derivatives was acceptable because it enabled us to lower market risk exposure by matching actual cash flows between assets and liabilities more closely and efficiently than would otherwise occur.
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Non-Interest Income (Loss)

Non-interest income (loss) consists of certain realized and unrealized gains (losses) on investment securities, derivatives activities, financial instruments held under the fair value option, and other non-interest earning activities. The following tables present the net effect of derivatives and hedging activities on non-interest income (loss). The effects of derivatives and hedging activities on non-interest income relate only to derivatives not qualifying for fair value hedge accounting.

(In millions)AdvancesInvestment SecuritiesMortgage LoansBondsDiscount Notes
Balance Sheet (1)
OtherTotal
Three Months Ended June 30, 2021
Net effect of derivatives and hedging activities
Gains (losses) on derivatives not receiving hedge accounting$(1)$11 $$(2)$— $(3)$— $
Net interest settlements on derivatives not receiving hedge accounting— (47)— — — — (45)
Price alignment amount— — — — — — — — 
Net gains (losses) on derivatives and hedging activities(1)(36)— — (3)— (36)
Gains (losses) on trading securities (2)
— (15)— — — — — (15)
Gains (losses) on financial instruments held under fair value option (3)
— — — — — — 
Total net effect on non-interest income$(1)$(51)$$$— $(3)$— $(49)
Three Months Ended June 30, 2020
Net effect of derivatives and hedging activities
Gains (losses) on derivatives not receiving hedge accounting$— $18 $(7)$(3)$(13)$(2)$— $(7)
Net interest settlements on derivatives not receiving hedge accounting— (49)— 13 — — (27)
Price alignment amount— — — — — — — — 
Net gains (losses) on derivatives and hedging activities— (31)(7)— (2)— (34)
Gains (losses) on trading securities (2)
— (11)— — — — — (11)
Gains (losses) on financial instruments held under fair value option (3)
— — — 12 14 — — 26 
Total net effect on non-interest income$— $(42)$(7)$18 $14 $(2)$— $(19)
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(In millions)AdvancesInvestment SecuritiesMortgage LoansBondsDiscount Notes
Balance Sheet (1)
OtherTotal
Six Months Ended June 30, 2021
Net effect of derivatives and hedging activities
Gains (losses) on derivatives not receiving hedge accounting$$154 $$(6)$— $— $— $150 
Net interest settlements on derivatives not receiving hedge accounting— (95)— — — — (89)
Price alignment amount— — — — — — — — 
Net gains (losses) on derivatives and hedging activities59 — — — — 61 
Gains (losses) on trading securities (2)
— (154)— — — — — (154)
Gains (losses) on financial instruments held under fair value option (3)
(1)— — — — — 
Total net effect on non-interest income$— $(95)$$$— $— $— $(86)
Six Months Ended June 30, 2020
Net effect of derivatives and hedging activities
Gains (losses) on derivatives not receiving hedge accounting$(9)$(38