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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

For the fiscal year ended December 31, 2018
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 
Commission File Number: 000-51999
 
FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
42-6000149
(I.R.S. employer identification number)
 
 
 
 
 
 
 
909 Locust Street
Des Moines, IA
(Address of principal executive offices)
 


50309
(Zip code)
 
Registrant’s telephone number, including area code: (515) 412-2100
 

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class B Stock, par value $100
Name of Each Exchange on Which Registered: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes x No

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. x Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
Non-accelerated filer x
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2018, the aggregate par value of the stock held by current and former members of the registrant was $5,793,449,900. At February 28, 2019, 55,126,595 shares of stock were outstanding.

Table of Contents


Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such as believes, projects, expects, anticipates, estimates, intends, strategy, plan, could, should, may, and will or their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These risks and uncertainties include, but are not limited to, the following:
 
•
political or economic events, including legislative, regulatory, monetary, judicial, or other developments that affect us, our members, our counterparties, and/or our investors in the consolidated obligations of the 11 Federal Home Loan Banks (FHLBanks);

•
the ability to meet capital and other regulatory requirements;

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

•
the ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we face, including but not limited to, cyberattacks and other business interruptions;

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

•
general economic and market conditions that could impact the volume of business we do with our members, including, but not limited to, the timing and volatility of market activity, inflation/deflation, employment rates, housing prices, the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments, and the condition of the capital markets on our consolidated obligations;

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

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

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

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

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

•
the ability to attract and retain key personnel;

•
significant business interruptions resulting from third party failures;

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

•
member consolidations and failures;

•
increases in delinquency or loss estimates on mortgage loans; and

•
replacement of the LIBOR benchmark interest rate.


3
Table of Contents

These forward-looking statements apply only as of the date they are made, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. A detailed discussion of the more important risks and uncertainties that could cause actual results and events to differ from such forward-looking statements is included under “Item 1A. Risk Factors.”

PART I

ITEM 1. BUSINESS
OVERVIEW
The Federal Home Loan Bank of Des Moines (the Bank, we, us, or our) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation (except real property taxes) and is one of 11 district FHLBanks. The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBanks’ Office of Finance (Office of Finance), effective July 30, 2008. The Finance Agency’s mission is to ensure that the Enterprises and FHLBanks operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.
We are a cooperative. This means we are owned by our customers, whom we call members. Our members include commercial banks, savings institutions, credit unions, insurance companies, and community development financial institutions (CDFIs) in our district of Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. While not considered members, we also conduct certain business activities with state and local housing associates meeting certain statutory criteria.
BUSINESS MODEL
Our mission is to be a reliable provider of funding, liquidity, and services for our members so they can meet the housing, business, and economic development needs of the communities they serve. We strive to achieve our mission within an operating principle that balances the trade-off between attractively priced products, reasonable returns on capital stock, maintaining an adequate level of capital to meet regulatory capital requirements, and maintaining adequate retained earnings to preserve par value of member-owned capital stock.
We are capitalized primarily through the purchase of capital stock by our members. As a condition of membership, all of our members must purchase and maintain membership capital stock based on a percentage of their total assets as of the preceding December 31st subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with us. Member demand for our products expands and contracts with economic and market conditions. Our self-capitalizing capital structure, which allows us to repurchase or require additional capital stock based on member activity, provides us with the flexibility to effectively and efficiently meet the changing needs of our membership. While eligible to borrow, housing associates are not members and, as such, are not permitted to purchase capital stock.
Our capital stock is not publicly traded. It is purchased and redeemed by members or repurchased by us at a par value of $100 per share. Our current and former members own all of our outstanding capital stock. Former members own capital stock (included in mandatorily redeemable capital stock) to support business transactions still carried in our Statements of Condition. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by our Board of Directors.
Our primary business activities are providing collateralized loans, known as advances, to members and housing associates and acquiring residential mortgage loans from or through our members. In addition, we invest in investment quality securities. Our primary source of funding and liquidity is the issuance of debt securities, referred to as consolidated obligations, in the capital markets. Consolidated obligations are the joint and several obligations of all FHLBanks and are backed only by the financial resources of the FHLBanks. A critical component to the success of our operations is the ability to issue consolidated obligations regularly in the capital markets under a wide range of maturities, structures, and amounts, and at relatively favorable spreads to market interest rates.

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Our net income is primarily attributable to the difference between the interest income we earn on our advances, mortgage loans, and investments, and the interest expense we pay on our consolidated obligations and member deposits, as well as components of other income (loss) (e.g., gains and losses on derivatives and hedging activities and gains and losses on trading securities). A portion of our annual net income is used to fund our Affordable Housing Program (AHP), which provides grants and subsidized advances to members to support housing for very low to moderate income households. By regulation, we are required to contribute to the AHP the greater of 10 percent of our annual income subject to assessment, or our prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million for each year. In addition to the required AHP assessment, our Board may elect to make voluntary contributions to the AHP. For purposes of the AHP assessment, income subject to assessment is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. For additional details on our AHP, refer to the “Affordable Housing Program Assessments” section of Item 1.
We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, model, information security, compliance, and strategic risk, as well as capital adequacy. Our primary risk management objective is to manage our assets and liabilities in ways that protect the par redemption value of our capital stock. For additional information on our risk management practices, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”

MEMBERSHIP
Our membership includes commercial banks, savings institutions, credit unions, insurance companies, and CDFIs. The majority of depository institutions in our district that are eligible for membership are currently members.
The following table summarizes our membership by type of institution:
 
 
December 31,
Institutional Entity
 
2018
 
2017
 
2016
Commercial banks
 
1,004

 
1,045

 
1,061

Savings institutions
 
45

 
50

 
57

Credit unions
 
243

 
237

 
231

Non-captive insurance companies
 
61

 
60

 
56

Captive insurance companies
 
6

 
6

 
12

Community development financial institutions
 
6

 
6

 
5

Total
 
1,365


1,404


1,422


The following table summarizes our membership by asset size:
 
 
December 31,
Membership Asset Size1
 
2018
 
2017
 
2016
Depository institutions2
 
 
 
 
 
 
Less than $100 million
 
25
%
 
27
%
 
30
%
$100 million to $500 million
 
49

 
48

 
46

Greater than $500 million
 
20

 
20

 
19

Insurance companies
 
 
 
 
 
 
Less than $100 million
 
1

 
1

 
1

$100 million to $500 million
 
1

 
1

 
1

Greater than $500 million
 
4

 
3

 
3

Total
 
100
%
 
100
%
 
100
%

1
Membership asset size is based on September 30, 2018 financial information received from members.

2
Depository institutions consist of commercial banks, savings institutions, credit unions, and community development financial institutions.

Our membership level decreased during 2018 due to 44 member consolidations, nine out-of-district or non-member consolidations, two dissolved charters, and two charters relocated out-of-district, partially offset by the addition of 18 new members. At December 31, 2018, approximately 71 percent of our members were Community Financial Institutions (CFIs). For 2018, CFIs were defined under the FHLBank Act to include all Federal Deposit Insurance Corporation (FDIC) insured institutions with average total assets over the previous three-year period of less than $1.173 billion. In addition to collateral types eligible for all members, CFIs may also pledge collateral consisting of secured small business, small agri-business, or small farm loans.

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BUSINESS SEGMENTS
We manage our operations as one business segment. Management and our Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance.
PRODUCTS AND SERVICES
Advances
We carry out our mission primarily through lending funds, which we call advances, to our members and eligible housing associates (collectively, borrowers). Our advance products are designed to provide liquidity and help borrowers meet the credit needs of their communities while competing effectively in their markets. Borrowers generally use our advance products as sources of wholesale funding and general asset-liability management.
Our advance products include the following:

•
Overnight Advances. These advances have a maturity of one business day and are renewed automatically until the borrower pays off the advance. Interest rates are set daily.

•
Fixed Rate Advances. These advances are available over a variety of terms in amortizing and non-amortizing structures. Using an amortizing advance, a borrower makes predetermined principal and interest payments at scheduled intervals throughout the term of the advance. Forward starting advances are a type of fixed rate non-amortizing advance with settlement dates up to two years in the future, allowing members to lock in an interest rate at the outset, while delaying the receipt of funding and principal and interest payments. Delayed amortizing advances are a type of fixed rate advance with a feature that delays commencement of the repayment of the principal up to five years, allowing members control over the principal cash flows and the repayment of the advance. Certain long-term fixed rate and amortizing advances contain a symmetrical prepayment feature. This feature allows borrowers to prepay an advance and potentially realize a gain if interest rates rise to a level greater than those existing when the advance was originated.

•
Variable Rate Advances. These advances have interest rates that reset periodically to a specified interest rate index such as London Interbank Offered Rate (LIBOR), Secured Overnight Financing Rate (SOFR), Prime Rate, or FHLBank debt yields. Capped LIBOR advances are a type of variable rate advance in which the interest rate cannot exceed a specified maximum interest rate.

•
Callable Advances. These advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Callable advances can be either fixed or variable in nature. Variable rate callable advances may reset at different frequencies ranging from one to six months and are callable at each rate reset date. For these types of callable advances, we have the ability to adjust interest rates (including spread) at reset dates. Fixed rate callable advances may have different call schedules based on member specifications, and principal balances may be amortizing in nature.

•
Putable Advances. These advances may, at our discretion, be terminated on predetermined dates prior to the stated maturity of the advances, requiring the borrower to repay the advance. Should an advance be terminated, replacement funding at the prevailing market rates and terms will be offered, based on our available advance products and subject to our normal credit and collateral requirements.

•
Community Investment Advances. These advances are below-market rate funds used by borrowers in both affordable housing projects and community development. Interest rates on these advances represent our cost of funds plus a mark-up to cover our administrative expenses.
For the years ended December 31, 2018, 2017, and 2016, advances represented 72, 71, and 69 percent of our total average assets and generated 70, 65, and 57 percent of our total interest income, and were generally funded with discount notes and consolidated obligation bonds that are fixed rate, floating rate indexed to LIBOR or SOFR, or swapped to a LIBOR index. For additional information on our advances, including our top five borrowers, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Advances.” In addition, refer to “Item 1A. Risk Factors” for a discussion on our exposure to customer concentration risk.

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COLLATERAL
We are required by regulation to obtain sufficient collateral to fully secure our advances and other credit products. The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts to the unpaid principal or market value, if available, of the collateral. Eligible collateral includes (i) fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including mortgage-backed securities (MBS) issued or guaranteed by Fannie Mae, Freddie Mac, or Government National Mortgage Association (Ginnie Mae) and Federal Family Education Loan Program (FFELP) guaranteed student loans, (iii) cash deposited with us, and (iv) other real estate-related collateral acceptable to us, such as second lien mortgages, home equity lines of credit, municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and we can perfect a security interest in such collateral. CFIs may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each member’s capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.
Borrowers may pledge collateral to us by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with us or our custodians. We perfect our security interest in all pledged collateral by filing Uniform Commercial Code financing statements or by taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to us by our members, or any affiliates of our members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.
Under a blanket pledge agreement, we are granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, we do not initially take delivery of collateral from blanket agreement borrowers. In the event of deterioration in the financial condition of a blanket pledge agreement borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, we generally require collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), we generally take control of collateral through the delivery of cash, securities, or loans to us or our custodians.
For additional information on our collateral requirements, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Advances.”
HOUSING ASSOCIATES
The FHLBank Act permits us to provide advances to eligible housing associates. Housing associates are eligible if approved mortgagees under Title II of the National Housing Act that meet certain criteria, including: (i) chartered under law and have succession, (ii) subject to inspection and supervision by some governmental agency, and (iii) lend their own funds as their principal activity in the mortgage field. The same regulatory lending requirements that apply to our members generally apply to housing associates. Because housing associates are not members, they are not subject to certain provisions of the FHLBank Act applicable to members and cannot own our capital stock. In addition, they may only pledge certain types of collateral including, but not limited to: (i) Federal Housing Administration (FHA) mortgages, (ii) Ginnie Mae securities backed by FHA mortgages, (iii) certain residential mortgage loans, and (iv) cash deposited with us.
PREPAYMENT FEES
We generally charge a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make us financially indifferent to the prepayment of the advance. For certain advances with symmetrical prepayment features, we may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid.
Standby Letters of Credit
We may issue standby letters of credit on behalf of our members to support certain obligations of the members to third-party beneficiaries. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. All standby letters of credit are subject to the same collateralization and borrowing limits that apply to advances and are fully collateralized at the time of issuance.

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Mortgage Loans
We invest in mortgage loans through the Mortgage Partnership Finance (MPF) program, a secondary mortgage market structure developed by the FHLBank of Chicago to help fulfill the housing mission of the FHLBanks. Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago. We also acquired mortgage loans purchased under the Mortgage Purchase Program (MPP).
MPF
Under the MPF program, we purchase eligible mortgage loans (MPF loans) from members or housing associates called participating financial institutions (PFIs). We may also acquire MPF loans through participations with other FHLBanks. MPF loans are conforming conventional or government-insured fixed rate mortgage loans secured by one-to-four family residential properties with maturities ranging from five to 30 years. For the years ended December 31, 2018, 2017, and 2016, MPF loans represented 5, 4, and 4 percent of our total average assets and generated 7, 10, and 14 percent of our total interest income.
MPF Provider
The FHLBank of Chicago serves as the MPF Provider for the MPF program. In its role as MPF Provider, the FHLBank of Chicago provides the infrastructure and operational support for the MPF program and is responsible for publishing and maintaining the MPF Guides, which detail the requirements PFIs must follow in originating, selling, and servicing MPF loans. In exchange for providing these services, the MPF Provider receives a fee from each of the FHLBanks participating in the MPF program. The MPF Provider has engaged Wells Fargo Bank N.A. (Wells Fargo) as the master servicer for the MPF program.
Participating Financial Institutions
Our members and eligible housing associates must apply to become a PFI. In order to do MPF business with us, each member or eligible housing associate must meet certain eligibility standards and sign a PFI Agreement. The PFI Agreement provides the terms and conditions for the sale of MPF loans, including the servicing of MPF loans.
PFIs may either retain the servicing of MPF loans or sell the servicing to an approved third-party provider. If a PFI chooses to retain the servicing, it receives a servicing fee to manage the servicing activities. If a PFI chooses to sell the servicing rights to an approved third-party provider, the servicing is transferred concurrently with the sale of the MPF loans and a servicing fee is paid to the third-party provider. Throughout the servicing process, the master servicer monitors the PFI’s compliance with MPF program requirements and makes periodic reports to the MPF Provider.
MPF Loan Types
We currently offer MPF closed loan products in which we purchase loans acquired or closed by the PFI. In addition, we offer certain off-balance sheet loan products. MPF Xtra is an off-balance sheet loan product in which we assign 100 percent of our interest in PFI master commitments to the FHLBank of Chicago. The FHLBank of Chicago then purchases mortgage loans from our PFIs and sells MPF Xtra loans to Fannie Mae. MPF Direct is an off-balance sheet jumbo loan product in which mortgage loans are sold from our PFIs to a real estate investment trust. MPF Government MBS is an off-balance sheet loan product where our PFIs sell government loans directly to the FHLBank of Chicago where they are pooled and securitized into Ginnie Mae MBS securities. We receive a small fee for our continued management of the PFI relationship under MPF Xtra, MPF Direct, and MPF Government MBS.
The PFI performs all traditional retail loan origination functions on our MPF loan products. We are responsible for managing the interest rate risk and liquidity risk associated with the MPF loans we purchase and carry in our Statements of Condition. In order to limit our credit risk exposure to approximately that of an investor in an investment grade MBS, we require a credit risk sharing arrangement with the PFI on all MPF loans at the time of purchase.
For additional discussion on our mortgage loans and their related credit risk, refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Mortgage Loans.”

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MPF Loan Volume
Over the years, our member base for MPF loans has evolved from large-volume loan purchases from a small number of large PFIs to purchasing the majority of our MPF loans from a diverse base of banks and credit unions. Our ability to price MPF loans, coupled with the low interest rate environment, has allowed us to serve the liquidity needs of a broad range of members and maintain relatively stable mortgage loan volumes. During the years ended December 31, 2018, 2017, and 2016, we purchased $1.6 billion, $1.2 billion, and $1.5 billion of MPF loan products (excluding MPF Xtra, MPF Direct, and MPF Government MBS). In addition, our members delivered $1.0 billion, $1.1 billion, and $1.4 billion of MPF Xtra, MPF Direct, and MPF Government MBS loans during the years ended December 31, 2018, 2017, and 2016.
If we exceed $2.5 billion in MPF loan purchases in a calendar year (excluding MPF Xtra, MPF Direct, and MPF Government MBS), we may become subject to housing goals as specified by the Finance Agency. For additional discussion on a proposed rule on housing goals, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”
MPP
Under the MPP, we acquired single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, the MPP includes a risk sharing arrangement under which we manage the interest rate risk and liquidity risk of MPP loans, while the members retain the primary credit risk.
MPP loans are conforming conventional or government-insured fixed rate mortgage loans secured by one-to-four family residential properties with maturities ranging from five to 30 years. MPP PFIs were responsible for all traditional retail loan origination functions related to MPP loans. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to us.
All MPP loans acquired were originated prior to 2006. We currently do not purchase mortgage loans under this program and we expect that the $271 million outstanding at December 31, 2018, will continue to decrease as the remaining MPP loans are paid off. We do not service the acquired MPP loans nor do we own any servicing rights. We have engaged Bank of New York Mellon as the MPP master servicer. For the year ended December 31, 2018, MPP loans represented less than one percent of our total average assets and generated one percent of our total interest income.
For additional information on our mortgage loans, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Risk Management — Credit Risk — Mortgage Loans” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Mortgage Loans.”
LOAN MODIFICATION PLANS

We offer loan modification plans for our MPF and MPP PFIs. Under these plans, we generally permit the recapitalization of past due amounts up to the original loan amount and/or reduce the interest rate for a specified period of time. No other terms of the original loan, including contractual maturity, are generally modified.
Investments
We maintain an investment portfolio primarily to provide investment income and liquidity. Our investment portfolio consists of both short- and long-term investments. Our short-term investments may include, but are not limited to, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, certificates of deposit, commercial paper, and U.S. treasury bill obligations. Our long-term investments may include, but are not limited to, U.S. obligations, government-sponsored enterprise (GSE) and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. Our long-term investments generally provide higher spreads than our short-term investments. For the years ended December 31, 2018, 2017, and 2016, investments represented 23, 24, and 26 percent of our total average assets and generated 23, 25, and 27 percent of our total interest income.
We do not have any subsidiaries. We also have no equity positions in any partnerships, corporations, or off-balance sheet special purpose entities. In an effort to reduce credit risk, our risk management policies prohibit new purchases of private-label MBS. In addition, Finance Agency regulations limit the type of investments we may purchase.

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The Finance Agency further limits our investments in MBS by requiring that the total book value of our MBS not exceed three times regulatory capital at the time of purchase. For details on our compliance with this regulatory requirement, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Investments.” For additional discussion on our investments and their related credit risk, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Investments.”
Standby Bond Purchase Agreements
We currently hold standby bond purchase agreements with state housing associates within our district whereby, for a fee, we agree to serve as a standby liquidity provider if required, to purchase and hold the housing associate’s bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which we would be required to purchase the bonds. If purchased, the bonds would be classified as available-for-sale (AFS) securities in our Statements of Condition. For additional details on our standby bond purchase agreements, refer to “Item 8. Financial Statements and Supplementary Data — Note 18 — Commitments and Contingencies.”
Deposits
We accept deposits from our members and eligible housing associates. We offer several types of deposit programs, including demand, overnight, and term deposits. Deposit programs provide us funding while providing members a low-risk interest-earning asset.
Consolidated Obligations
Our primary source of funding and liquidity is the issuance of debt securities, referred to as consolidated obligations, in the capital markets. Consolidated obligations (bonds and discount notes) are the joint and several obligations of all FHLBanks and are backed only by the financial resources of the FHLBanks. They are not obligations of the U.S. Government, and the U.S. Government does not guarantee them. At February 28, 2019, Standard & Poor’s Ratings Services (S&P) and Moody’s Investors Service, Inc. (Moody’s) rated the consolidated obligations AA+/A-1+ and Aaa/P-1, both with a stable outlook.
The Office of Finance issues all consolidated obligations on behalf of the FHLBanks. It is also responsible for servicing all outstanding debt, coordinating transfers of debt between the FHLBanks, serving as a source of information for the FHLBanks on capital market developments, managing the FHLBank System’s relationship with the rating agencies with respect to consolidated obligations, and preparing and making available the FHLBank System’s Combined Financial Reports.
Although we are primarily responsible for the portion of consolidated obligations issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority.
To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank otherwise responsible for the payment. However, if the Finance Agency determines that an FHLBank is unable to satisfy its obligations, then it may allocate the outstanding liability among the remaining FHLBanks on a pro-rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that it may determine.

The Finance Agency also requires each FHLBank to maintain unpledged qualifying assets, as defined by regulation, in an amount at least equal to the amount of that FHLBank’s participation in the total consolidated obligations outstanding. For details on our compliance with this regulatory requirement, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity Requirements.”


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BONDS
Bonds are generally issued to satisfy our intermediate- and long-term funding needs. They may have maturities ranging up to 30 years, although there is no statutory or regulatory limitation as to their maturity. Bonds are issued with either fixed or variable rate payment terms that use a variety of indices for interest rate resets such as LIBOR or SOFR. To meet the specific needs of certain investors, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and call features. When bonds are issued on our behalf, we may concurrently enter into a derivative agreement to effectively convert the fixed rate payment stream to variable or to offset the embedded features in the bond.
Depending on the amount and type of funding needed, bonds may be issued through negotiated or competitively bid transactions with approved underwriters or selling group members (i.e., TAP Issue Program, auction, and Global Debt Program), or through debt transfers between FHLBanks.
The TAP Issue Program is used to issue fixed rate, non-callable bonds with standard maturities of two, three, five, seven, or ten years. The goal of the TAP Issue Program is to aggregate frequent smaller bond issues into a larger bond issue that may have greater market liquidity.
An auction process is used to issue fixed rate, callable bonds. Auction structures are determined by the FHLBanks in consultation with the Office of Finance and the securities dealer community. We may receive zero to 100 percent of the proceeds of the bonds issued via the callable auction depending on (i) the amounts and costs for the bonds bid by underwriters, (ii) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the obligations, and (iii) the guidelines for allocation of bond proceeds among multiple participating FHLBanks administered by the Office of Finance.
The Global Debt Program allows the FHLBanks to diversify their funding sources to include overseas investors. Global Debt Program bonds may be issued in maturities ranging up to 30 years and can be customized with different terms and currencies. The FHLBanks approve the terms of the individual issues under the Global Debt Program.
For additional information on our bonds, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Consolidated Obligations” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”
DISCOUNT NOTES
Discount notes are generally issued to satisfy our short-term funding needs. They have maturities of up to 365/366 days and are offered daily through a discount note selling group and other authorized underwriters. Discount notes are generally sold at a discount and mature at par.
On a daily basis, we may request that specific amounts of discount notes with specific maturity dates be offered by the Office of Finance for sale through certain securities dealers. We may receive zero to 100 percent of the proceeds of the discount notes issued via this sales process depending on (i) the time of the request, (ii) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the discount notes, and (iii) the amount of orders for the discount notes submitted by dealers.
Twice weekly, we may request that specific amounts of discount notes with fixed maturities of four to 26 weeks be offered by the Office of Finance through competitive auctions conducted with securities dealers in the discount note selling group. One or more of the FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. We may receive zero to 100 percent of the proceeds of the discount notes issued through a competitive auction depending on the amounts of the discount notes bid by underwriters and the guidelines for allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.
For additional information on our discount notes, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Consolidated Obligations” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

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Derivatives
We use derivatives to manage interest rate risk. Finance Agency regulations and our risk management policies establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.
The goal of our interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. One key way we manage interest rate risk is to acquire and maintain a portfolio of assets and liabilities which, together with their associated derivatives, are matched with respect to the expected repricings.
We can use interest rate swaps, swaptions, interest rate caps and floors, options, and future/forward contracts as part of our interest rate risk management strategies. These derivatives can be used as either a fair value hedge of a financial instrument or firm commitment or an economic hedge to manage certain defined risks. We use economic hedges primarily to (i) manage mismatches between the coupon features of our assets and liabilities, (ii) offset prepayment risk in certain assets, (iii) mitigate the income statement volatility that occurs when financial instruments are recorded at fair value and hedge accounting is not permitted by accounting guidance, or (iv) to reduce exposure to reset risk.
Additional information on our derivatives can be found in “Item 8. Financial Statements and Supplementary Data — Note 11 — Derivatives and Hedging Activities” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Derivatives.”
CAPITAL AND DIVIDENDS
Capital Stock
Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We generally issue a single class of capital stock (Class B capital stock) and have two subclasses of Class B capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding in our Statements of Condition. All capital stock issued is subject to a notice of redemption period of five years.

The capital stock requirements established in our Capital Plan are designed so that we can remain adequately capitalized as member activity changes. Our Board of Directors may make adjustments to the capital stock requirements within ranges established in our Capital Plan.
 
Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under our Capital Plan, we, at our discretion and upon 15 days’ written notice, may repurchase excess membership capital stock. We, at our discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock.

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income.
For additional information on our capital, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital.”
Retained Earnings
Our risk management policies include a target level of retained earnings based on the amount we believe necessary to help protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to achieve our targeted level of retained earnings. At December 31, 2018, our actual retained earnings exceeded our retained earnings target.

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We entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of each FHLBank over time. Under the JCE Agreement, each FHLBank is required to allocate 20 percent of its quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in our Statements of Condition. At December 31, 2018 and 2017, our restricted retained earnings account totaled $427 million and $335 million. One percent of our average balance of outstanding consolidated obligations for the three months ended September 30, 2018 was $1.4 billion.
Dividends
Our Board of Directors may declare and pay different dividends for each subclass of capital stock. Dividend payments may be made in the form of cash and/or additional shares of capital stock. Historically, we have only paid cash dividends. By regulation, we may only pay dividends from current earnings or unrestricted retained earnings. We are prohibited from paying a dividend in the form of additional shares of capital stock if, after the issuance, the outstanding excess capital stock would be greater than one percent of our total assets. Our Board of Directors may not declare or pay dividends if it would result in our non-compliance with regulatory capital requirements.
Our current philosophy is to pay a membership capital stock dividend similar to a reference rate of interest, such as average-three month LIBOR over time, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. Our dividend rates seek to strike a balance between providing reasonable returns to members while preserving our financial position, flexibility, and ability to serve as a long-term liquidity provider. Our actual dividend is determined quarterly by our Board of Directors, based on policies, regulatory requirements, actual performance, and other considerations.
For additional information on our dividends, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Dividends.”
COMPETITION
Advances
One of our primary businesses is to make advances to members and housing associates. Demand for our advances is affected by, among other things, the cost of other available sources of funding for our borrowers. We compete with other suppliers of secured and unsecured wholesale funding including, but not limited to, investment banks, commercial banks, other GSEs, and U.S. Government agencies. We may compete with other FHLBanks to the extent that member institutions have affiliated institutions located outside of our district. Furthermore, our members may have access to brokered deposits and resale agreements, each of which represent competitive alternatives to our advances. Many of our competitors are not subject to the same body of regulation that we are, which may enable them to offer products and terms that we cannot. Efforts to effectively compete with other suppliers of wholesale funding by changing the pricing of our advances may result in a decrease in the profitability of our advance business.
Mortgage Loans
The purchase of mortgage loans through the MPF program is subject to competition on the basis of prices paid for mortgage loans, customer service, and ancillary services, such as automated underwriting and loan servicing options. We compete primarily with other GSEs, such as Fannie Mae, Freddie Mac, other financial institutions, and private investors for acquisition of conventional fixed rate mortgage loans.
Consolidated Obligations
Our primary source of funds is through the issuance of consolidated obligations. We compete with the U.S. Government, Fannie Mae, Freddie Mac, and other GSEs as well as corporate, sovereign, and supranational entities for raising funds through the issuance of debt in the national and global markets.
TAXATION
Under the FHLBank Act, we are exempt from all federal, state, and local taxation except real property taxes.

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AFFORDABLE HOUSING PROGRAM ASSESSMENTS
The FHLBank Act requires each FHLBank to establish and fund an AHP, which provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low to moderate income households. Annually, the FHLBanks must set aside for the AHP the greater of 10 percent of their annual income subject to assessment, or their prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million. In addition to the required AHP assessment, our Board may elect to make voluntary contributions to the AHP. For purposes of the AHP assessment, income subject to assessment is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency. We accrue the AHP assessment monthly based on our income subject to assessment and reduce our AHP liability as program funds are distributed. For additional information on our AHP, refer to “Item 8. Financial Statements and Supplementary Data — Note 14 — Affordable Housing Program.”
OVERSIGHT, AUDITS, AND EXAMINATIONS
The Finance Agency supervises and regulates the FHLBanks and the Office of Finance. The Finance Agency has a statutory responsibility and corresponding authority to ensure that the FHLBanks operate in a safe and sound manner. Consistent with that duty, the Finance Agency has an additional responsibility to ensure the FHLBanks carry out their housing and community development finance mission. In order to carry out those responsibilities, the Finance Agency establishes regulations governing the FHLBanks, conducts ongoing off-site monitoring and supervisory reviews, performs annual on-site examinations and periodic interim on-site reviews, and requires the FHLBanks to submit monthly and quarterly information regarding their financial condition, results of operations, and risk metrics.

The Comptroller General of the United States (the “Comptroller General”) has authority under the FHLBank Act to audit or examine the Finance Agency and the Bank and to decide the extent to which they fairly and effectively fulfill the purposes of the FHLBank Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of a FHLBank’s financial statements conducted by an independent registered public accounting firm. If the Comptroller General conducts such a review, then he or she must report the results and provide his or her recommendations to Congress, the Office of Management and Budget, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of the financial statements of any FHLBank.

As required by federal regulation, we have an internal audit department and an audit committee of our Board. An independent public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) audits our annual financial statements. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, must adhere to PCAOB and Government Auditing Standards, as issued by the Comptroller General, when conducting our audits. Our Board, our senior management, and the Finance Agency receive these audit reports. We also submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include audited financial statements, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements.
AVAILABLE INFORMATION
We are required to file with the SEC an annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The SEC maintains a website containing these reports and other information regarding our electronic filings located at www.sec.gov.
We also make our annual reports, quarterly reports, current reports, and amendments to all such reports filed with or furnished to the SEC available, free of charge, on our internet website at www.fhlbdm.com as soon as reasonably practicable after such reports are available. Annual and quarterly reports for the FHLBanks on a combined basis are also available, free of charge, at the website of the Office of Finance as soon as reasonably practicable after such reports are available. The internet website address to obtain these reports is www.fhlb-of.com.
Information contained in the previously mentioned websites, or that can be accessed through those websites, is not incorporated by reference into this annual report on Form 10-K and does not constitute a part of this or any report filed with the SEC.

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PERSONNEL
As of February 28, 2019, we employed 365 full-time and seven part-time employees. Our employees are not covered by a collective bargaining agreement.

ITEM 1A. RISK FACTORS

The following discussion summarizes some of the more important risks we face. This discussion is not exhaustive, and there may be other risks we face, which are not described below. The risks described below, if realized, could negatively affect our business operations, financial condition, and future results of operations and, among other things, could result in our inability to pay dividends on our capital stock or repurchase capital stock.
WE ARE SUBJECT TO A COMPLEX BODY OF LAWS AND REGULATIONS THAT COULD CHANGE IN A MANNER DETRIMENTAL TO OUR BUSINESS OPERATIONS
The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and as such, are governed by federal laws and regulations adopted and applied by the Finance Agency. From time to time, Congress may amend the FHLBank Act or other statutes in ways that affect the rights and obligations of the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. There continues to be uncertainties surrounding our legislative and regulatory environment, and new or modified legislation enacted by Congress or regulations adopted by the Finance Agency or other financial services regulators. Additionally, the Financial Accounting Standards Board or the SEC may amend financial accounting and reporting standards for the policies that govern our accounting practices. These changes in laws and regulations could adversely impact our ability to conduct business or the cost of doing business.

For a discussion of new and proposed legislative and regulatory developments that could affect us, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”
FAILURE TO MEET MINIMUM CAPITAL AND OTHER REGULATORY REQUIREMENTS COULD ADVERSELY AFFECT OUR ABILITY TO REDEEM OR REPURCHASE CAPITAL STOCK, PAY DIVIDENDS, AND ATTRACT NEW MEMBERS
We are regulated by the Finance Agency and if we fail to meet regulatory requirements, we could be subject to corrective action that could adversely impact our financial condition and results of operations.
For example, we are required to maintain capital to meet specific minimum requirements, as defined by the Finance Agency. Historically, our capital has exceeded all capital requirements and we have maintained adequate capital and leverage ratios. If we fail to meet any of these requirements or if our Board of Directors or the Finance Agency determines that we have incurred, or are likely to incur, losses resulting in, or losses that are expected to result in, a charge against capital, we would not be able to redeem or repurchase any capital stock while such charges are continuing or expected to continue. In addition, failure to meet our capital requirements could result in the Finance Agency’s imposition of restrictions pertaining to dividend payments, lending, investing, or other business activities. Additionally, the Finance Agency could require that we call upon our members to purchase additional capital stock to meet our minimum regulatory capital requirements. Members may be unable or unwilling to satisfy such calls for additional capital, which could lead to a member’s involuntary termination of membership as a result of noncompliance with the Bank’s Capital Plan, which could adversely impact our financial condition and results of operations.

WE COULD BE ADVERSELY AFFECTED BY OUR INABILITY TO ACCESS THE CAPITAL MARKETS

Our primary source of funds is through the issuance of consolidated obligations in the capital markets. Our ability to obtain funds through the issuance of consolidated obligations depends in part on our real and perceived relationship to the U.S. Government, prevailing market conditions in the capital markets, and rating agency actions, all of which are beyond our control. In addition, changes to the regulatory environment that affect bank counterparties and debt underwriters could adversely affect our ability to access the capital markets and the cost of that funding. We cannot make any assurance that we will be able to obtain funding on terms acceptable to us, if at all. If we cannot access funding when needed, our ability to support and continue business operations, including our ability to refund maturing debt and compliance with regulatory liquidity requirements, could be adversely impacted, which would thereby adversely impact our financial condition and results of operations. Although our debt issuances have historically kept pace with the funding needs of our members and eligible housing associates, there can be no assurance that this will continue.

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FAILURES OR INTERRUPTIONS IN INTERNAL CONTROLS, INFORMATION SYSTEMS, AND OTHER OPERATING TECHNOLOGIES COULD HARM OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS, REPUTATION, AND RELATIONS WITH MEMBERS
Control failures, including failures in our controls over financial reporting, or business interruptions with members, could result from human error, fraud, breakdowns in information and computer systems, lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse, or repair the negative effects of such failures or interruptions.
Moreover, we rely heavily upon information systems and other operating technologies to conduct and manage our business. To the extent that our technology fails to keep up with our changing environment, we may be unable to conduct and manage our business effectively. In addition, any technical failures or interruptions in any of these systems or other operating technologies, including any “cyberattacks” or other breaches of technical security, could jeopardize the confidentiality or integrity of our information, or otherwise cause interruptions in our operations. Although we have implemented a disaster recovery and business continuity plan, we can make no assurance that it will be able to prevent, timely and adequately address, or mitigate the negative effects of any technical failure or interruption. Any technical failure or interruption could harm our member relations, risk management, and profitability, and could adversely impact our financial condition and results of operations.
We identified control deficiencies in our internal control over financial reporting related to our information technology general controls (ITGCs). Specifically, these control deficiencies were in the areas of user access and information technology (IT) change management. These control deficiencies were evaluated, individually and in the aggregate, and identified as material weaknesses in our internal controls, which are described more fully in “Item 9A. Controls and Procedures”. These control deficiencies could result in a misstatement of any of our financial statement accounts and disclosures that could in turn result in a material misstatement of the annual or interim final statements that would not be prevented or detected. In addition, other control deficiencies of this nature may be identified in the future.
Management is taking steps to remediate the identified material weaknesses and strengthen our internal control over financial reporting. However, if we are unable to correct the material weakness or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected. This failure could cause our members to lose confidence in our reported financial information, subject us to government enforcement actions, and generally, materially, and adversely impact our business and financial condition.
WE ARE JOINTLY AND SEVERALLY LIABLE FOR THE CONSOLIDATED OBLIGATIONS OF OTHER FHLBANKS AND MAY BE REQUIRED TO PROVIDE FINANCIAL ASSISTANCE TO OTHER FHLBANKS
Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of the 11 FHLBanks and are backed only by the financial resources of the FHLBanks. They are not obligations of the U.S. Government, and the U.S. Government does not guarantee them. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. Furthermore, if the Finance Agency determines that an FHLBank is unable to satisfy its obligations, it may allocate the outstanding liability among the remaining FHLBanks on a pro-rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that it may determine. Accordingly, we could incur liability beyond our primary obligation under consolidated obligations, which could negatively affect our financial condition and results of operations. Moreover, we may not pay dividends to, or redeem or repurchase capital stock from, any of our members if timely payment of principal and interest on all FHLBank consolidated obligations has not been made. Accordingly, our ability to pay dividends or to redeem or repurchase capital stock may be affected not only by our financial condition, but by the financial condition of the other FHLBanks.
Due to our relationship with other FHLBanks, we could also be impacted by events other than the default on a consolidated obligation. Events that impact other FHLBanks include, but are not limited to, member failures, capital deficiencies, and other-than-temporary impairment (OTTI) charges. These events may cause the Finance Agency, at its discretion, to require any FHLBank to either provide capital to or buy assets of any other FHLBank. If we are called upon by the Finance Agency to do either of these items, it may negatively impact our financial condition.

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CHANGES IN ECONOMIC CONDITIONS OR FEDERAL FISCAL AND MONETARY POLICY COULD ADVERSELY IMPACT OUR BUSINESS
We operate with narrow margins and our net income is sensitive to changes in market conditions that can impact the interest we earn and pay and introduce volatility in other income (loss). These conditions include, but are not limited to, the following:
•
changes in interest rates;
•
fluctuations in both debt and equity capital markets;
•
conditions in the financial, credit, mortgage, and housing markets;
•
the willingness and ability of financial institutions to expand lending;
•
and the strength of the U.S. economy and the local economies in which we conduct business.
Our financial condition, results of operations, and ability to pay dividends could be negatively affected by changes in one or more of these conditions.
Additionally, our business and results of operations may be affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve, which regulates the supply of money and credit in the U.S. The Federal Reserve’s policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, which could adversely affect our financial condition, results of operations, and ability to pay dividends.
WE COULD BE ADVERSELY AFFECTED BY INEFFECTIVE USE OF HEDGING STRATEGIES OR OUR INABILITY TO ENTER INTO DERIVATIVE INSTRUMENTS ON ACCEPTABLE TERMS
We use derivatives to manage interest rate risk. Our effective use of derivative instruments depends upon management’s ability to determine the appropriate hedging strategies and positions in light of our assets and liabilities as well as prevailing and anticipated market conditions. In addition, the effectiveness of our hedging strategies depends upon our ability to enter into derivatives with acceptable counterparties, on terms desirable to us, and in quantities necessary to hedge our corresponding assets and liabilities. If we are unable to manage our hedging positions properly, or are unable to enter into derivative instruments on desirable terms, we may incur higher funding costs and be unable to effectively manage our interest rate risk and other risks, which could negatively affect our financial condition and results of operation.
EXPOSURE TO OPTION RISK IN OUR FINANCIAL ASSETS AND LIABILITIES COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
Our mortgage assets provide homeowners the option to prepay their mortgages prior to maturity. The effect of changes in interest rates can exacerbate prepayment or extension risk, which is the risk that mortgage assets will be refinanced by the mortgagor in low interest rate environments or will remain outstanding longer than expected at below-market yields when interest rates increase. Our advances, consolidated obligations, and derivatives may provide us, the borrower, the issuer, or the counterparty with the option to call or put the asset or liability. These options leave us susceptible to unpredictable cash flows associated with our financial assets and liabilities. The exercise of the option and the prepayment or extension risk is dependent upon general market conditions and could have an adverse effect on our financial condition and results of operations.
ACTUAL OR PERCEIVED CHANGES IN THE FHLBANK’S CREDIT RATINGS AS WELL AS THE U.S. GOVERNMENT’S CREDIT RATING COULD ADVERSELY AFFECT OUR BUSINESS
Our consolidated obligations are currently rated AA+/A-1+ by S&P and Aaa/P-1 by Moody’s, both with a stable outlook. These ratings are subject to reduction or withdrawal at any time by an Nationally Recognized Statistical Rating Organization (NRSRO), and the FHLBank System may not be able to maintain these credit ratings. Adverse rating agency actions on the FHLBank System or U.S. Government may reduce investor confidence and negatively affect our cost of funds and ability to issue consolidated obligations on acceptable terms, which could adversely impact our financial condition and results of operations.

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Certain products and transactions that we offer or use may be impacted by rating downgrades. Demand for certain Bank products, including, but not limited to, standby letters of credit and standby bond purchase agreements, is influenced by our credit rating. A reduction in our credit rating could weaken or eliminate demand for such products, and our financial condition and results of operations could be adversely affected. For certain uncleared derivative contracts, we are required to deliver additional collateral on derivatives in a net liability position to counterparties if there is a deterioration in our credit rating. For cleared derivatives, the Derivative Clearing Organization (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. We were not required to post additional initial margin by our clearing agents at December 31, 2018.

WE FACE COMPETITION FOR ADVANCES, MORTGAGE LOANS, AND FUNDING
Our primary business activities are providing advances to members and housing associates and acquiring residential mortgage loans from or through our members. Demand for our advances is affected by, among other things, the cost of other available sources of funding for our borrowers. We may from time to time compete with other suppliers of secured and unsecured wholesale funding including, but not limited to, investment banks, commercial banks, other GSEs, and U.S. Government agencies. We may compete with other FHLBanks to the extent that member institutions have affiliated institutions located outside of our district. Furthermore, our members may have access to brokered deposits and resale agreements, each of which represent competitive alternatives to our advances. Many of our competitors are not subject to the same body of regulation that we are, which may enable them to offer products and terms that we cannot. Efforts to effectively compete with other suppliers of wholesale funding by changing the pricing of our advances may result in a decrease in the profitability of our advance business. A decrease in the demand for advances or a decrease in the profitability on advances could negatively affect our financial condition and results of operations.
The purchase of mortgage loans through the MPF program is subject to competition on the basis of prices paid for mortgage loans, customer service, and ancillary services, such as automated underwriting and loan servicing options. We compete primarily with other GSEs, such as Fannie Mae, Freddie Mac, other financial institutions, and private investors for acquisition of conventional fixed rate mortgage loans. Increased competition could result in a reduction in the amount of mortgage loans we are able to purchase, which could negatively affect our financial condition and results of operations.
We also compete with the U.S. Government, Fannie Mae, Freddie Mac, and other GSEs as well as corporate, sovereign, and supranational entities for raising funds through the issuance of debt in the national and global markets. In the absence of increased demand, increased supply of competing debt products may result in higher debt costs or lesser amounts of debt issued at the same cost. An increase in funding costs would negatively affect our financial condition and results of operations.
WE COULD BE ADVERSELY AFFECTED BY OUR EXPOSURE TO CREDIT RISK
We are exposed to credit risk based on the deterioration in the creditworthiness of the obligor or the credit quality of a security instrument. We assume unsecured and secured credit risk exposure in that a borrower or counterparty could default and we may suffer a loss if we are not able to fully recover amounts owed to us in a timely manner.
We attempt to mitigate unsecured credit risk by limiting the terms of unsecured investments and the borrowing capacity of our counterparties. We attempt to mitigate secured credit risk through collateral requirements and credit analysis of our borrowers and counterparties. We require collateral on advances, standby letters of credit, certain mortgage loan credit enhancements provided by PFIs, certain investments, and derivatives. All advances, standby letters of credit, and applicable mortgage loan credit enhancements are required to be fully collateralized. We evaluate the types of collateral pledged by our borrowers and counterparties and assign a borrowing capacity to the collateral, generally based on a percentage of its unpaid principal balance or estimated market value, if available. We generally have the ability to call for additional or substitute collateral during the life of an obligation to ensure we are fully collateralized. Notwithstanding these mitigating factors, we may suffer losses that could adversely impact our financial condition and results of operations.
If a borrower or counterparty fails, we have the right to take ownership of the collateral covering the obligation. However, if the liquidation value of the collateral is less than the value of the outstanding obligation, we may incur losses that could adversely affect our financial condition and results of operations. If we are unable to secure the obligations of borrowers and counterparties, our lending, investing, and hedging activities could decrease, which would negatively impact our financial condition and results of operations.

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WE COULD BE ADVERSELY AFFECTED BY OUR EXPOSURE TO CUSTOMER CONCENTRATION RISK
We are subject to customer concentration risk as a result of our reliance on a relatively small number of member institutions for a large portion of our total advances and resulting interest income. At December 31, 2018 and 2017, advances outstanding to our top five borrowers totaled $64.2 billion and $60.4 billion, representing 60 and 59 percent of our total advances outstanding. At December 31, 2018 and 2017, our single largest borrower accounted for 47 and 45 percent of total advances outstanding. Our largest depository institution member increased its advance borrowings by $3.8 billion during 2018. Advance balances with these and our other members could change due to factors such as a change in member demand or borrowing capacity, relocation of members out of our district, or members with affiliated institutions located outside of our district choosing to do business with another FHLBank. In addition, advance balances could change as a result of new or modified legislation enacted by Congress or regulations or other directives adopted by the Finance Agency or other financial services regulators. If, for any reason, we were to lose, or experience a decrease in the amount of business with our top five borrowers, our financial condition and results of operations could be negatively affected. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Advances” for additional information on our top five borrowers.
THE INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY IMPACT OUR BUSINESS
We rely heavily upon our employees in order to successfully execute our business and strategies. The success of our business mission depends, in large part, on our ability to attract and retain certain key personnel with required talents and skills. Should we be unable to hire key personnel with the needed talents or skills, retain key personnel due to factors including, but not limited to, insufficient training, unclear responsibilities and priorities, or rapid and concurrent changes in process and controls, or fail to develop and execute a succession plan, our business operations could be adversely impacted.
RELIANCE ON THIRD PARTIES COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS
As part of our business, we rely on third parties for certain services essential to ongoing operations, including but not limited to, IT infrastructure and software services, and could be adversely impacted by disruptions in those services.
We participate in the MPF program with the FHLBank of Chicago. In its role as MPF Program administrator, the FHLBank of Chicago provides the infrastructure and operational support for the MPF program and is responsible for publishing and maintaining the MPF Guides, which detail the requirements PFIs must follow in originating, selling, and servicing MPF loans. If the FHLBank of Chicago changes its MPF Program administrator role, ceases to operate the MPF program, or experiences a failure or interruption in its information systems and other technology, our mortgage purchase business could be adversely affected, and we could experience a related decrease in our net interest margin and profitability. In the same way, we could be adversely affected if any of the FHLBank of Chicago’s third-party vendors supporting the operation of the MPF program were to experience operational or technical difficulties.
We also rely on the Office of Finance for, among other things, the issuance of consolidated obligations, servicing of all outstanding debt, and managing the FHLBank System’s relationship with the rating agencies with respect to consolidated obligations. A disruption in any of these services could affect our ability to access funding, and could negatively impact our business operations, financial condition, and results of operations.

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THE IMPACT OF FINANCIAL MODELS AND THE UNDERLYING ASSUMPTIONS USED TO VALUE FINANCIAL INSTRUMENTS AND COLLATERAL MAY HAVE AN ADVERSE IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The degree of management judgment involved in determining the fair value of financial instruments or collateral is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments and collateral that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. We utilize external and internal pricing models to determine the fair value of certain financial instruments and collateral. For prices obtained externally, as per our established procedure, we review the prices and compare them to other vendors for reasonableness. In addition, on an annual basis, we conduct reviews of our pricing vendors to confirm and further augment our understanding of the vendors’ pricing processes, methodologies, and control procedures for investment securities. For prices determined by internal pricing models, the underlying assumptions are based on management’s best estimates for discount rates, prepayments, market volatility, and other factors. The assumptions used in both external and internal pricing models could have a significant effect on the reported fair values of assets and liabilities or collateral, the related income and expense, and the expected future behavior of assets and liabilities or collateral. While models we use to value financial instruments and collateral are subject to periodic validation by independent parties, rapid changes in market conditions could impact the value of our financial instruments and collateral. The use of different models and assumptions, as well as changes in market conditions, could impact our financial condition and results of operations as well as the amount of collateral we require from borrowers and counterparties.
The information provided by our internal financial models is also used in making business decisions relating to strategies, initiatives, transactions, and products. We have adopted controls, procedures, and policies to monitor and manage assumptions used in our internal models. However, models are inherently imperfect predictors of actual results because they are based on assumptions about future performance or activities. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different. If the results are not reliable due to inaccurate assumptions, we could make poor business decisions, including asset and liability management, or other decisions, which could result in an adverse financial impact.
MEMBER CONSOLIDATIONS AND FAILURES COULD ADVERSELY AFFECT OUR BUSINESS
Member consolidations and failures could reduce the number of current and potential members in our district. During 2018, our membership level declined due primarily to 44 member consolidations. If the number of member consolidations and/or failures were to accelerate, we could experience a reduction in the level of our members’ advance and other business activities. This loss of business could negatively impact our business operations, financial condition, and results of operations.
INCREASES IN DELINQUENCY OR LOSS ESTIMATES ON OUR MPF AND MPP LOANS MAY HAVE AN ADVERSE IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condition of the U.S. housing market can have a significant impact on the Bank. If economic conditions weaken and result in increased unemployment and a decline in home prices, we could see an increase in loan delinquencies or loss estimates and decide to increase our allowance for credit losses on mortgage loans. In addition, to the extent that mortgage insurance providers fail to fulfill their obligations to pay us for claims, we could bear additional losses on certain mortgage loans with outstanding mortgage insurance coverage. As a result, our financial condition and results of operations could be adversely impacted.

POSSIBLE REPLACEMENT OF THE LIBOR BENCHMARK INTEREST RATE COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS

In July 2017, the United Kingdom’s Financial Conduct Authority (FCA), a regulator of financial services firms and financial markets in the U.K., stated that they will plan for a phase out of regulatory oversight of LIBOR interest rates indices. The FCA has indicated they will support the LIBOR indices through 2021, to allow for an orderly transition to an alternative reference rate. The Alternative Reference Rates Committee has proposed the SOFR as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in April 2018. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. During 2018, certain market participants began moving more aggressively towards the utilization of SOFR as a possible LIBOR replacement through the issuance of debt securities indexed to SOFR. As noted throughout this report, many of our assets and liabilities, including derivative assets and derivative liabilities, and related collateral are indexed to LIBOR. A portion of these assets and liabilities and related collateral have maturity dates that extend beyond 2021.

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We are evaluating the potential impact of the replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated, including the development of term and credit adjustments to accommodate differences between LIBOR and SOFR. Introduction of an alternative rate also may introduce additional basis risk for market participants as an alternative index is utilized along with LIBOR. There can be no guarantee that SOFR will become widely used and that alternatives may or may not be developed with additional complications. We are not able to predict whether LIBOR will cease to be available after 2021; however, the potential elimination of LIBOR and transition to SOFR or an alternative benchmark may have an adverse impact on our business, financial condition, and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

On October 9, 2018, we moved to our new headquarters located at 909 Locust Street, Des Moines, Iowa which we purchased on April 20, 2017. We currently occupy 94,000 of the approximate 226,000 finished square feet of office space, and have leased or are in the process of leasing the remaining space. We also lease 8,200 square feet of office space at 901 5th Avenue, Seattle, Washington, an off-site back-up facility with approximately 3,500 square feet in Urbandale, Iowa, and approximately 3,000 square feet of office space in Washington, D.C., which is shared with two other FHLBanks.

ITEM 3. LEGAL PROCEEDINGS

As a result of the merger with the Federal Home Loan Bank of Seattle in 2015 (Seattle Bank) (the Merger), we have been involved in certain legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairments of certain private-label MBS. The private-label MBS litigation is described below. After consultation with legal counsel, other than the private-label MBS litigation, we do not believe any legal proceedings to which we are a party could have a material impact on our financial condition, results of operations, or cash flows.

Private-Label MBS Litigation

As the Seattle Bank previously reported, in December of 2009, it filed 11 complaints in the Superior Court of Washington for King County relating to private-label MBS that it purchased from various dealers and financial institutions in an aggregate original principal amount of approximately $4 billion. The Seattle Bank’s complaints under Washington State law requested rescission of its purchases of the securities and repurchases of the securities by the defendants for the original purchase prices plus eight percent per annum (plus related costs), minus distributions on the securities received by the Seattle Bank. The Seattle Bank asserted that the defendants made untrue statements and omitted important information in connection with their sales of the securities to the Seattle Bank.

Of the 11 cases initially filed, one has been dismissed, two have been settled in part and dismissed in part, and eight have been settled. We appealed the one complete dismissal and two partial dismissals covering the claims related to five certificates across three different cases. The appellate court affirmed the dismissal of the claims related to four certificates in December 2017 and affirmed the dismissal of the remaining certificate in May 2018. In January 2018, we filed petitions for discretionary review of the appellate court’s rulings in December related to four of the certificates with the Washington Supreme Court. On May 3, 2018, the Court granted those petitions. The aggregate consideration paid for these four certificates is $567 million. Oral arguments were heard on October 9, 2018 and we are currently awaiting the Court’s decision. In June 2018, we filed a petition for discretionary review of the appellate court’s ruling in May on the fifth certificate. The aggregate consideration paid for that one certificate is $200 million. The Washington Supreme Court has not yet acted on that petition.

Litigation Settlement Gains

Litigation settlement gains are considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.

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We record legal expenses related to litigation settlements as incurred in other expenses in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. We incur and recognize these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement. 
During 2018, we did not record any net gains on litigation settlements. During 2017 and 2016, we recognized $21 million and $376 million in net gains on litigation settlements.
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


22
Table of Contents

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We are a cooperative. This means we are owned by our customers, whom we call members. Our current and former members own all of our outstanding capital stock. Our capital stock is not publicly traded and has a par value of $100 per share. All shares are issued, redeemed, or repurchased by us at the stated par value. Our capital stock may be redeemed with a five year notice from the member or voluntarily repurchased by us at par value, subject to certain limitations set forth in our Capital Plan. At February 28, 2019, we had 1,359 current members that held 54.8 million shares of capital stock and 16 former members that held 0.3 million shares of mandatorily redeemable capital stock.
We paid the following quarterly cash dividends during 2018 and 2017 (dollars in millions):
 
 
2018
Quarter Declared and Paid1
 
Amount2
 
Annualized Rate3
 
Activity-Based Stock Rate
 
Membership Stock Rate
First Quarter
 
$
53

 
4.03
%
 
4.50
%
 
2.00
%
Second Quarter
 
56

 
4.28

 
4.75

 
2.25

Third Quarter
 
71

 
5.28

 
5.75

 
3.25

Fourth Quarter
 
69

 
5.26

 
5.75

 
3.25

 
 
2017
Quarter Declared and Paid1
 
Amount2
 
Annualized Rate3
 
Activity-Based Stock Rate
 
Membership Stock Rate
First Quarter
 
$
43

 
3.05
%
 
3.50
%
 
0.75
%
Second Quarter
 
45

 
3.10

 
3.50

 
1.00

Third Quarter
 
42

 
3.06

 
3.50

 
1.00

Fourth Quarter
 
51

 
3.56

 
4.00

 
1.50


1
Represents cash dividends declared and paid in the quarter noted. Dividend payments are based on average capital stock outstanding during the prior quarter.

2
Amounts exclude cash dividends paid on mandatorily redeemable capital stock for each quarter of 2018 and 2017. For financial reporting purposes, these dividends were classified as interest expense.

3
Reflects the annualized rate on our average capital stock outstanding during the prior quarter regardless of its classification for financial reporting purposes as either capital stock or mandatorily redeemable capital stock.
For additional information on our dividends, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Dividends.”


23
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ITEM 6. SELECTED FINANCIAL DATA

The following tables present selected financial data for the periods indicated (dollars in millions):
 
December 31,
Statements of Condition1
2018
 
2017
 
2016
 
2015
 
2014
Cash and due from banks
$
119

 
$
503

 
$
223

 
$
982

 
$
495

Investments2
31,777

 
34,452

 
41,218

 
40,167

 
23,079

Advances
106,323

 
102,613

 
131,601

 
89,173

 
65,168

Mortgage loans held for portfolio, net3
7,835

 
7,096

 
6,913

 
6,755

 
6,562

Total assets
146,515

 
145,099

 
180,605

 
137,374

 
95,524

Consolidated obligations
 
 
 
 
 
 
 
 
 
Discount notes
42,879

 
36,682

 
80,947

 
98,990

 
57,773

Bonds
93,772

 
98,893

 
89,898

 
31,208

 
32,362

Total consolidated obligations4
136,651

 
135,575

 
170,845

 
130,198

 
90,135

Mandatorily redeemable capital stock
255

 
385

 
664

 
103

 
24

Total liabilities
138,967

 
138,078

 
173,204

 
131,749

 
91,212

Capital stock — Class B putable
5,414

 
5,068

 
5,917

 
4,714

 
3,469

Additional capital from merger
—

 
—

 
52

 
194

 
—

Retained earnings
2,050

 
1,839

 
1,450

 
801

 
720

Accumulated other comprehensive income (loss)
84

 
114

 
(18
)
 
(84
)
 
123

Total capital
7,548

 
7,021

 
7,401

 
5,625

 
4,312

Regulatory capital ratio5
5.27

 
5.03

 
4.48

 
4.23

 
4.41

 
For the Years Ended December 31,
Statements of Income1
2018
 
2017
 
2016
 
2015
 
2014
Net interest income
$
635

 
$
650

 
$
449

 
$
317

 
$
251

Provision (reversal) for credit losses on mortgage loans
—

 
—

 
3

 
2

 
(2
)
Other income (loss)6
20

 
52

 
396

 
(30
)
 
(51
)
Other expense7
142

 
124

 
118

 
137

 
67

AHP assessments
53

 
60

 
75

 
15

 
14

AHP voluntary contributions
—

 
—

 
—

 
2

 
—

Net income
460

 
518

 
649

 
131

 
121

Selected Financial Ratios8,1
 
 
 
 
 
 
 
 
 
Net interest spread9
0.32
%
 
0.34
%
 
0.24
%
 
0.25
%
 
0.28
%
Net interest margin10
0.43

 
0.39

 
0.28

 
0.28

 
0.30

Return on average equity
6.21

 
7.01

 
10.09

 
2.74

 
3.17

Return on average capital stock
8.67

 
9.20

 
12.43

 
3.42

 
4.04

Return on average assets
0.31

 
0.31

 
0.40

 
0.12

 
0.14

Average equity to average assets
4.98

 
4.41

 
3.92

 
4.21

 
4.56

Dividend payout ratio11
54.04

 
35.01

 
21.83

 
78.99

 
65.16


1
The Bank merged with the Seattle Bank on May 31, 2015, and as a result, financial results for the periods after the Merger are not directly comparable to results for periods prior to the Merger.

2
Investments include interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, AFS securities, and held-to-maturity (HTM) securities.

3
Includes an allowance for credit losses of $1 million, $2 million, $2 million, $1 million, and $5 million at December 31, 2018, 2017, 2016, 2015, and 2014.

4
The total par value of outstanding consolidated obligations of the 11 FHLBanks was $1,031.6 billion, $1,034.2 billion, $989.3 billion, $905.2 billion, and $847.2 billion at December 31, 2018, 2017, 2016, 2015, and 2014.

5
Represents period-end regulatory capital expressed as a percentage of period-end total assets. Regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock) and retained earnings. At December 31, 2016 and 2015 regulatory capital also included additional capital from merger. The additional capital from merger balance was depleted by the first quarter dividend payment in May of 2017.

6
Other income (loss) includes, among other things, net gains (losses) on investment securities, net gains (losses) on derivatives and hedging activities, net gains (losses) on the extinguishment of debt, and gains on litigation settlements, net. During 2017, 2016, and 2015, other income (loss) was impacted by net gains on litigation settlements. The Bank did not record any litigation settlements during 2018 or 2014.

7
Other expense includes, among other things, compensation and benefits, professional fees, contractual services, merger related expenses, and gains and losses on real estate owned (REO).

8
Amounts used to calculate selected financial ratios are based on numbers in actuals. Accordingly, recalculations using numbers in millions may not produce the same results.

9
Represents yield on total interest-earning assets minus cost of total interest-bearing liabilities.

10
Represents net interest income expressed as a percentage of average interest-earning assets.

11
Represents dividends declared and paid in the stated period expressed as a percentage of net income in the stated period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense in our Statements of Income.

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Table of Contents

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

Our Management’s Discussion and Analysis (MD&A) is designed to provide information that will help the reader develop a better understanding of our financial statements, changes in our financial statements from year to year, and the primary factors driving those changes. Our MD&A is organized as follows:
CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Table of Contents

FORWARD-LOOKING INFORMATION

Statements contained in this annual report on Form 10-K, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such as believes, projects, expects, anticipates, estimates, intends, strategy, plan, could, should, may, and will or their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. A detailed discussion of risks and uncertainties is included under “Item 1A. Risk Factors.”

EXECUTIVE OVERVIEW

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

Financial Results

In 2018, we reported net income of $460 million compared to $518 million in 2017. The decrease in our net income, calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), was driven by lower other income primarily due to net gains on litigation settlements of $21 million recorded in 2017. Net income was also impacted by lower net interest income and an increase in other expense.

Net interest income totaled $635 million in 2018 compared to $650 million in 2017. Our net interest margin was 0.43 percent during 2018 and 0.39 percent during 2017. The $15 million decline in net interest income was primarily due to lower average advance volumes offset in part by higher net interest margin. The increase in net interest margin was attributable to the higher interest rate environment offset in part by lower asset liability spreads due to increased costs on our interest-bearing liabilities.

During 2018, we recorded other income of $20 million compared to other income of $52 million in 2017, a decline of $32 million. During 2017, other income (loss) was primarily impacted by net gains on litigation settlements of $21 million as a result of settlements with certain defendants in our private-label MBS litigation. Other factors impacting other income (loss) included net gains (losses) on trading securities and net gains (losses) on derivatives and hedging activities, as described below.

We recorded net losses on trading securities of $15 million in 2018 compared to net gains of $1 million in 2017. These changes in fair value were primarily due to the impact of changes in interest rates and credit spreads on our fixed rate trading securities. We recorded net gains of $19 million in 2018 on our derivatives and hedging activities through other income (loss) compared to net gains of $12 million in 2017. The fair value changes were primarily driven by changes in interest rates. These changes impacted our fair value hedge relationships and fair value changes on interest rate swaps that we utilized to economically hedge our investment securities portfolio.

Other expense totaled $142 million for 2018 compared to $124 million for 2017. The $18 million increase in other expense was primarily due to an increase in compensation and benefits in 2018 of $10 million, driven by increased employee headcount and post-retirement benefit expenses.

Our total assets increased to $146.5 billion at December 31, 2018, from $145.1 billion at December 31, 2017 driven by an increase in advances, partially offset by a decrease in investment securities. Advances at December 31, 2018 increased by $3.7 billion from advances at December 31, 2017 due primarily to an increase in borrowings by large depository institution members, partially offset by a decrease in borrowings from a captive insurance company member. Investments decreased $2.7 billion from December 31, 2017 due primarily to paydowns of certain mortgage backed securities in 2018.

Our total liabilities increased to $139.0 billion at December 31, 2018, from $138.1 billion at December 31, 2017 driven by an increase in the amount of consolidated obligations needed to fund our assets.


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Table of Contents

Total capital increased to $7.5 billion at December 31, 2018, from $7.0 billion at December 31, 2017, primarily due to an increase in capital stock resulting from an increase in member activity. In addition, retained earnings increased due to net income, partially offset by dividends paid. Our regulatory capital ratio increased to 5.27 percent at December 31, 2018, from 5.03 percent at December 31, 2017, and was above the required regulatory minimum at each period end. Regulatory capital includes all capital stock, mandatorily redeemable capital stock, and retained earnings.

Adjusted Earnings

As part of evaluating our financial performance, we adjust GAAP net interest income and GAAP net income before assessments for the impact of (i) market adjustments relating to derivative and hedging activities and instruments held at fair value, (ii) realized gains (losses) on investment securities, and (iii) other non-routine and unpredictable items, including net asset prepayment fee income, mandatorily redeemable capital stock interest expense, and net gains on litigation settlements. The resulting non-GAAP measure, referred to as our adjusted earnings, reflects both adjusted net interest income and adjusted net income.

Because our business model is primarily one of holding assets and liabilities to maturity, management believes that the adjusted earnings measure is helpful in understanding our operating results and provides a meaningful period-to-period comparison of our economic performance in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility on financial instruments recorded at fair value or transactions that are considered to be unpredictable or not routine. As a result, management uses the adjusted earnings measure to assess performance under our incentive compensation plans. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. While these non-GAAP measures can be used to assist in understanding the components of our earnings, they should not be considered a substitute for results reported under GAAP.

Effective January 1, 2017, we revised our adjusted net income methodology to calculate adjusted net income on a post Affordable Housing Program (AHP) assessment basis. Management believes AHP assessments are a fundamental component of our business and believes this assessment should be included in our adjusted net income calculation. In addition, this treatment aligns the adjusted net income results to our strategic business plan which is calculated on a post AHP assessment basis.

As indicated in the tables that follow, our adjusted net interest income and adjusted net income decreased during 2018 when compared to 2017. The decline was driven by lower adjusted net interest income due primarily to lower average advance volumes offset in part by higher net interest margin as previously noted.

The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
GAAP net interest income
 
$
635

 
$
650

 
$
449

Exclude:
 
 
 
 
 
 
Prepayment fees on advances, net1
 
8

 
2

 
7

Prepayment fees on investments, net2
 
12

 
2

 
2

Mandatorily redeemable capital stock interest expense
 
(18
)
 
(17
)
 
(21
)
Total adjustments
 
2

 
(13
)
 
(12
)
Include items reclassified from other income (loss):
 
 
 
 
 
 
Net interest expense on economic hedges
 
(3
)
 
(12
)
 
(18
)
Adjusted net interest income
 
$
630

 
$
651

 
$
443

Adjusted net interest margin
 
0.42
%
 
0.39
%
 
0.27
%

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

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


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The following table summarizes the reconciliation between GAAP net income before assessments and adjusted net income (dollars in millions):
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
GAAP net income before assessments
 
$
513

 
$
578

 
$
724

Exclude:
 
 
 
 
 
 
Prepayment fees on advances, net1
 
8

 
2

 
7

Prepayment fees on investments, net2
 
12

 
2

 
2

Mandatorily redeemable capital stock interest expense
 
(18
)
 
(17
)
 
(21
)
Net gains (losses) on trading securities
 
(15
)
 
1

 
3

Net gains (losses) on derivatives and hedging activities
 
19

 
12

 
7

Gains on litigation settlements, net
 
—

 
21

 
376

Include:
 
 
 
 
 
 
Net interest expense on economic hedges
 
(3
)
 
(12
)
 
(18
)
Adjusted net income before assessments
 
504

 
545

 
332

Adjusted AHP Assessments3
 
50

 
55

 
33

Adjusted net income
 
$
454

 
$
490

 
$
299


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

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

3
Adjusted AHP assessments for this non-GAAP measure are calculated as 10 percent of adjusted net income before assessments. For additional discussion on AHP assessments, refer to “Item 8. Financial Statements and Supplementary Data — Note 14 — Affordable Housing Program.”

For additional discussion on items impacting our GAAP earnings, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

CONDITIONS IN THE FINANCIAL MARKETS

Economy and Financial Markets

Economic and market data received prior to the Federal Open Market Committee (FOMC or Committee) meeting in December of 2018 indicated that the labor market has continued to strengthen and economic activity had been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth in business fixed investments has moderated from its rapid pace earlier in 2018. Overall inflation and inflation for items other than food and energy remain near two percent. Indicators of longer-term inflation expectations are little changed.

In its December 19, 2018 statement, the FOMC stated it seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s two percent objective over the medium term. The FOMC sees risks to the economic outlook as nearly balanced, but continues to monitor global economic and financial developments and assess their implications for the economic outlook.

Mortgage Markets

The housing market started to show signs of leveling off in construction and sales during the second half of 2018. Prices continued to increase during 2018, but some areas experienced slower growth rates as wage growth has occurred at a lower rate. Inventories remain limited, and demand remains relatively strong.

Mortgage rates increased on average in 2018, resulting in the housing market becoming increasingly driven by purchase activity versus refinance activity. The increase in mortgage rates has also contributed to affordability issues, and slowing in home price appreciation.



28
Table of Contents

Interest Rates

The following table shows information on key market interest rates1:
 
Fourth Quarter 2018
3-Month
Average
 
Fourth Quarter 2017
3-Month
Average
 
2018
12-Month
Average
 
2017
12-Month
Average
 
2018
Ending Rate
 
2017
Ending Rate
Federal funds
2.22
%
 
1.20
%
 
1.83
%
 
1.00
%
 
2.40
%
 
1.33
%
Three-month LIBOR
2.63

 
1.47

 
2.31

 
1.26

 
2.81

 
1.69

2-year U.S. Treasury
2.80

 
1.69

 
2.52

 
1.39

 
2.49

 
1.89

10-year U.S. Treasury
3.04

 
2.37

 
2.91

 
2.33

 
2.69

 
2.41

30-year residential mortgage note
4.79

 
3.91

 
4.54

 
3.99

 
4.55

 
3.99


1
Source is Bloomberg.

The Federal Reserve’s key target interest rate, the Federal funds rate, increased throughout most of 2018. In its December 19, 2018 statement, the FOMC decided to raise the target range for the Federal funds rate to 2.25 to 2.50 percent. In determining the timing and size of future adjustments to the target range for the Federal funds rate, the FOMC will assess realized and expected economic conditions relative to its objectives of maximum employment and its two percent inflation rate. The assessment will take into account measures of labor market conditions, indicators of inflation pressures, inflation expectations, and financial and international developments.

The 10-year U.S. Treasury yields and mortgage rates were higher on average during 2018 when compared to 2017. Interest rates increased as the FOMC raised their target rate throughout 2018, and economic data remained strong.

Funding Spreads

The following table reflects our funding spreads to LIBOR (basis points)1:
 
Fourth Quarter 2018
3-Month
Average
 
Fourth Quarter 2017
3-Month
Average
 
2018
12-Month
Average
 
2017
12-Month
Average
 
 2018
Ending Spread
 
 2017
Ending Spread
3-month
(25.4
)
 
(22.3
)
 
(32.1
)
 
(28.6
)
 
(33.2
)
 
(28.9
)
2-year
(9.3
)
 
(12.5
)
 
(13.4
)
 
(15.8
)
 
(8.9
)
 
(10.9
)
5-year
3.5

 
1.6

 
(0.3
)
 
2.1

 
11.8

 
4.1

10-year
33.3

 
35.2

 
30.5

 
43.4

 
45.4

 
37.9


1
Source is the Office of Finance.

As a result of our credit quality and GSE status, we generally have ready access to funding at relatively competitive interest rates. During 2018, our funding spreads were mixed relative to LIBOR. Short-term funding spreads improved when compared to spreads at December 31, 2017. Funding spreads on long-term debt deteriorated year-over-year. During 2018, we utilized fixed term and floating rate, callable, and step-up consolidated obligation bonds in addition to consolidated obligation discount notes to capture attractive funding, to match the repricing structures on floating rate assets and meet liquidity requirements.


29
Table of Contents

RESULTS OF OPERATIONS

Net Income

The following table presents comparative highlights of our net income for the years ended December 31, 2018, 2017, and 2016 (dollars in millions). See further discussion of these items in the sections that follow.
 
 
 
 
 
2018 vs. 2017
 
 
 
2017 vs. 2016
 
2018
 
2017
 
$ Change
 
% Change
 
2016
 
$ Change
 
% Change
Net interest income
$
635

 
$
650

 
$
(15
)
 
(2
)%
 
$
449

 
$
201

 
45
 %
Provision (reversal) for credit losses on mortgage loans
—

 
—

 
—

 
—

 
3

 
(3
)
 
(100
)
Other income (loss)
20

 
52

 
(32
)
 
(62
)
 
396

 
(344
)
 
(87
)
Other expense
142

 
124

 
18

 
15

 
118

 
6

 
5

AHP assessments
53

 
60

 
(7
)
 
(12
)
 
75

 
(15
)
 
(20
)
Net income
$
460

 
$
518

 
$
(58
)
 
(11
)%
 
$
649

 
$
(131
)
 
(20
)%


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Table of Contents

Net Interest Income

Our net interest income is impacted by changes in average interest-earning asset and interest-bearing liability balances, and the related yields and costs. The following table presents average balances and rates of major asset and liability categories (dollars in millions):    
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
Average
Balance1
 
Yield/Cost
 
Interest
Income/
Expense
 
Average
Balance1
 
Yield/Cost
 
Interest
Income/
Expense
 
Average
Balance1
 
Yield/Cost
 
Interest
Income/
Expense
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
125

 
0.97
%
 
$
1

 
$
246

 
0.78
%
 
$
2

 
$
852

 
0.37
%
 
$
3

Securities purchased under agreements to resell
3,921

 
1.87

 
73

 
4,703

 
0.89

 
42

 
5,257

 
0.36

 
19

Federal funds sold
5,838

 
1.84

 
107

 
7,052

 
1.03

 
72

 
5,089

 
0.40

 
21

Mortgage-backed securities2,3
17,448

 
2.51

 
439

 
19,924

 
1.67

 
333

 
19,772

 
1.15

 
226

    Other investments2,3,4
6,325

 
2.89

 
183

 
8,485

 
1.87

 
159

 
12,031

 
1.21

 
146

Advances3
106,294

 
2.30

 
2,443

 
119,234

 
1.33

 
1,589

 
114,047

 
0.77

 
876

Mortgage loans5
7,364

 
3.42

 
252

 
6,965

 
3.38

 
236

 
6,729

 
3.46

 
233

Loans to other FHLBanks
4

 
1.60

 
—

 
2

 
0.73

 
—

 
1

 
0.51

 
—

Total interest-earning assets
147,319

 
2.37

 
3,498

 
166,611

 
1.46

 
2,433

 
163,778

 
0.93

 
1,524

Non-interest-earning assets
1,183

 
—

 
—

 
1,105

 
—

 
—

 
544

 
—

 
—

Total assets
$
148,502

 
2.36
%
 
$
3,498

 
$
167,716

 
1.45
%
 
$
2,433

 
$
164,322

 
0.93
%
 
$
1,524

Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
929

 
1.48
%
 
$
14

 
$
938

 
0.59
%
 
$
6

 
$
970

 
0.08
%
 
$
1

Consolidated obligations
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Discount notes
38,986

 
1.89

 
736

 
61,953

 
0.84

 
521

 
93,282

 
0.44

 
414

Bonds3
99,676

 
2.10

 
2,095

 
95,808

 
1.29

 
1,239

 
61,476

 
1.04

 
639

Other interest-bearing liabilities6
342

 
5.41

 
18

 
475

 
3.57

 
17

 
636

 
3.32

 
21

Total interest-bearing liabilities
139,933

 
2.05

 
2,863

 
159,174

 
1.12

 
1,783

 
156,364

 
0.69

 
1,075

Non-interest-bearing liabilities
1,168

 
—

 
—

 
1,147

 
—

 
—

 
1,522

 
—

 
—

Total liabilities
141,101

 
2.03

 
2,863

 
160,321

 
1.11

 
1,783

 
157,886

 
0.68

 
1,075

Capital
7,401

 
—

 
—

 
7,395

 
—

 
—

 
6,436

 
—

 
—

Total liabilities and capital
$
148,502

 
1.93
%
 
$
2,863

 
$
167,716

 
1.06
%
 
$
1,783

 
$
164,322

 
0.65
%
 
$
1,075

Net interest income and spread7
 
 
0.32
%
 
$
635

 
 
 
0.34
%
 
$
650

 
 
 
0.24
%
 
$
449

Net interest margin8
 
 
0.43
%
 
 
 
 
 
0.39
%
 
 
 
 
 
0.28
%
 
 
Average interest-earning assets to interest-bearing liabilities
 
 
105.28
%
 
 
 
 
 
104.67
%
 
 
 
 
 
104.74
%
 
 

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

2
The average balance of AFS securities is reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.

3
Average balances reflect the impact of fair value hedging adjustments and/or fair value option adjustments.

4
Other investments primarily include U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and Private Export Funding Corporation (PEFCO) bonds.

5
Non-accrual loans are included in the average balance used to determine the average yield.

6
Other interest-bearing liabilities consists of mandatorily redeemable capital stock and borrowings from other FHLBanks.

7
Represents yield on total interest-earning assets minus cost of total interest-bearing liabilities.

8
Represents net interest income expressed as a percentage of average interest-earning assets.



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Table of Contents

The following table presents changes in interest income and interest expense. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, are allocated to the volume and rate categories based on the proportion of the absolute value of the volume and rate changes (dollars in millions).
 
2018 vs. 2017
 
2017 vs. 2016
 
Total Increase
(Decrease) Due to
 
Total Increase
(Decrease)
 
Total Increase
(Decrease) Due to
 
Total Increase
(Decrease)
 
Volume
 
Rate
 
 
Volume
 
Rate
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
(1
)
 
$
—

 
$
(1
)
 
$
(3
)
 
$
2

 
(1
)
Securities purchased under agreements to resell
(8
)
 
39

 
31

 
(2
)
 
25

 
23

Federal funds sold
(14
)
 
49

 
35

 
10

 
41

 
51

Mortgage-backed securities
(45
)
 
151

 
106

 
2

 
105

 
107

Other investments
(47
)
 
71

 
24

 
(51
)
 
64

 
13

Advances
(189
)
 
1,043

 
854

 
42

 
671

 
713

Mortgage loans
13

 
3

 
16

 
8

 
(5
)
 
3

Total interest income
(291
)
 
1,356

 
1,065

 
6

 
903

 
909

Interest expense
 
 
 
 
 
 
 
 
 
 
 
Deposits
—

 
8

 
8

 
—

 
5

 
5

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Discount notes
(248
)
 
463

 
215

 
(172
)
 
279

 
107

Bonds
52

 
804

 
856

 
419

 
181

 
600

Other interest-bearing liabilities
(6
)
 
7

 
1

 
(6
)
 
2

 
(4
)
Total interest expense
(202
)
 
1,282

 
1,080

 
241

 
467

 
708

Net interest income
$
(89
)
 
$
74

 
$
(15
)
 
$
(235
)
 
$
436

 
$
201

    
NET INTEREST INCOME

The $15 million decline in net interest income when compared to 2017 was primarily due to lower average advance volumes offset in part by higher net interest margin. The increase in net interest margin was attributable to the higher interest rate environment offset in part by lower asset liability spreads due to increased costs on our interest-bearing liabilities. During 2018, our net interest spread was 0.32 percent compared to 0.34 percent and 0.24 percent for the same periods in 2017 and 2016. The primary components of our interest income and interest expense are discussed below.

Advances

The lower average advance volumes contributed to the decline in net interest income as noted above. Interest income on advances increased during 2018 when compared to 2017, due primarily to the higher interest rate environment, partially offset by lower average advance balances. Interest income on advances increased during 2017 when compared to 2016, due primarily to pricing changes made on certain variable rates callable advance products and the higher interest rate environment.

Bonds

Interest expense on bonds increased during 2018 when compared to 2017 due primarily to the higher interest rate environment and higher average bond balances. Interest expense on bonds increased during 2017 when compared to 2016 due to higher average bond balances and the higher interest rate environment. The increase in average bond balances in 2017 was due to our increased utilization of bonds in place of discount notes in response to changes in our advance products outstanding and to manage the difference between our asset and liability maturities.

Discount Notes

Interest expense on discount notes increased during 2018 when compared to 2017 and during 2017 when compared to 2016 primarily due to the higher interest rate environment, partially offset by lower average discount note balances. The decrease in average discount note balances was primarily due to our use of bonds in place of discount notes in response to changes in our advance products outstanding and to manage the difference between our asset and liability maturities.

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Table of Contents

Investments

Interest income on investments increased during 2018 when compared to 2017 due primarily to the higher interest rate environment, partially offset by lower average balances of all investments types. Interest income on investments increased during 2017 when compared to 2016 due primarily to the higher interest rate environment, partially offset by lower average balances of other investments.

Other Income (Loss)

The following table summarizes the components of other income (loss) (dollars in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Net gains (losses) on trading securities
$
(15
)
 
$
1

 
$
3

Net gains (losses) on derivatives and hedging activities
19

 
12

 
7

Gains on litigation settlements, net
—

 
21

 
376

Other, net
16

 
18

 
10

Total other income (loss)
$
20

 
$
52

 
$
396

    
Other income (loss) can be volatile from period to period depending on the type of activity recorded. During 2018, we recorded other income of $20 million compared to other income of $52 million and $396 million in 2017 and 2016. Other income (loss) was impacted by net gains on litigation settlements of $21 million and $376 million during 2017 and 2016 as a result of settlements with certain defendants in our private-label MBS litigation. We did not record any net gains on litigation settlements during 2018. Other factors impacting other income (loss) include net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities, as described below.

During 2018, we recorded net losses on trading securities of $15 million compared to net gains of $1 million and $3 million in 2017 and 2016. These changes in fair value were primarily due to the impact of changes in interest rates and credit spreads on our fixed rate trading securities. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

During 2018, we recorded net gains of $19 million on our derivatives and hedging activities compared to net gains of $12 million and $7 million in 2017 and 2016. The fair value changes were primarily driven by changes in interest rates. These changes impacted our fair value hedge relationships and fair value changes on interest rate swaps used to economically hedge our investment securities portfolio. Accounting rules require all derivatives to be recorded at fair value and therefore we may be subject to income statement volatility. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Hedging Activities” for additional discussion on our derivatives and hedging activities, including the net impact of economic hedge relationships.






33
Table of Contents

Hedging Activities

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

If a hedging activity qualifies for hedge accounting treatment (fair value hedge), we include the periodic cash flow components of the derivative related to interest income or expense in the relevant income statement caption consistent with the hedged asset or liability. We also record the amortization of fair value hedging adjustments from terminated hedges and the amortization of the financing element of our off market derivatives in interest income or expense or other income (loss). Changes in the fair value of both the derivative and the hedged item are recorded as a component of other income (loss) in “Net gains (losses) on derivatives and hedging activities.”

If a hedging activity does not qualify for hedge accounting treatment (economic hedge), we record the derivative’s components of interest income and expense, together with the effect of changes in fair value as a component of other income (loss) in “Net gains (losses) on derivatives and hedging activities”; however, there is no fair value adjustment for the corresponding asset or liability being hedged unless changes in the fair value of the asset or liability are normally marked to fair value through earnings (i.e., trading securities and fair value option instruments).

The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Year Ended December 31, 2018
Net Effect of
Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Other
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
8

 
$
11

 
$
(1
)
 
$
(9
)
 
$
—

 
$
9

Net interest settlements
 
46

 
(29
)
 
—

 
(210
)
 
—

 
(193
)
Total impact to net interest income
 
54

 
(18
)
 
(1
)
 
(219
)
 
—

 
(184
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on fair value hedges
 
—

 
1

 
—

 
2

 
—

 
3

Net gains (losses) on economic hedges
 
—

 
13

 
—

 
—

 
—

 
13

Price alignment amount on derivatives2
 
—

 
—

 
—

 
—

 
3

 
3

Total net gains (losses) on derivatives and hedging activities
 
—

 
14

 
—

 
2

 
3

 
19

Net gains (losses) on trading securities3
 
—

 
(15
)
 
—

 
—

 
—

 
(15
)
Total impact to other income (loss)
 
—

 
(1
)
 
—

 
2

 
3

 
4

Total net effect of hedging activities4
 
$
54

 
$
(19
)
 
$
(1
)
 
$
(217
)
 
$
3

 
$
(180
)

1
Represents the amortization/accretion of fair value hedging adjustments on closed hedge relationships and the amortization of the financing element of off-market derivatives.

2
Includes the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.

3
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

4
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.


34
Table of Contents

The following tables categorize the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Year Ended December 31, 2017
Net Effect of
Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Other
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
14

 
$
3

 
$
(2
)
 
$
(7
)
 
$
—

 
$
8

Net interest settlements
 
(87
)
 
(100
)
 
—

 
18

 
—

 
(169
)
Total impact to net interest income
 
(73
)
 
(97
)
 
(2
)
 
11

 
—

 
(161
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on fair value hedges
 
2

 
14

 
—

 
(5
)
 
—

 
11

Net gains (losses) on economic hedges
 
—

 
(2
)
 
—

 
—

 
—

 
(2
)
Price alignment amount on derivatives2
 
—

 
—

 
—

 
—

 
3

 
3

Total net gains (losses) on derivatives and hedging activities
 
2

 
12

 
—

 
(5
)
 
3

 
12

Net gains (losses) on trading securities3
 
—

 
2

 
—

 
—

 
—

 
2

Total impact to other income (loss)
 
2

 
14

 
—

 
(5
)
 
3

 
14

Total net effect of hedging activities4
 
$
(71
)
 
$
(83
)
 
$
(2
)
 
$
6

 
$
3

 
$
(147
)

 
 
For the Year Ended December 31, 2016
Net Effect of
Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
21

 
$
3

 
$
(2
)
 
$
1

 
$
23

Net interest settlements
 
(173
)
 
(149
)
 
—

 
87

 
(235
)
Total impact to net interest income
 
(152
)
 
(146
)
 
(2
)
 
88

 
(212
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on fair value hedges
 
5

 
19

 
—

 
(11
)
 
13

Net gains (losses) on economic hedges
 
—

 
(6
)
 
—

 
—

 
(6
)
Total net gains (losses) on derivatives and hedging activities
 
5

 
13

 
—

 
(11
)
 
7

Net gains (losses) on trading securities3
 
—

 
(1
)
 
—

 
—

 
(1
)
Total impact to other income (loss)
 
5

 
12

 
—

 
(11
)
 
6

Total net effect of hedging activities4
 
$
(147
)
 
$
(134
)
 
$
(2
)
 
$
77

 
$
(206
)

1
Represents the amortization/accretion of fair value hedging adjustments on closed hedge relationships and the amortization of the financing element of off-market derivatives.

2
Effective January 3, 2017, net gains and losses on derivatives include the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract.

3
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

4
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.


NET AMORTIZATION/ACCRETION

Amortization/accretion varies from period to period depending on our hedge relationship termination activities and the maturity, call, or prepayment of assets or liabilities previously in hedge relationships. In addition, amortization is impacted by the financing element of our off market derivatives.

NET INTEREST SETTLEMENTS

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

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Table of Contents

NET GAINS (LOSSES) ON FAIR VALUE HEDGES

Gains (losses) on fair value hedges are driven by hedge ineffectiveness. Hedge ineffectiveness occurs when changes in the fair value of the derivative and the related hedged item do not perfectly offset each other. The factors that affect hedge ineffectiveness include changes in the benchmark interest rate, volatility, and the divergence in valuation curves used to value our assets, liabilities, and derivatives.

NET GAINS (LOSSES) ON ECONOMIC HEDGES

We utilize economic derivatives to manage certain risks in our Statements of Condition. Gains and losses on economic derivatives are driven by changes in interest rates and volatility and include interest settlements. Interest settlements represent the interest component on economic derivatives. These amounts vary from period to period depending on our hedging activities and interest rates. The following discussion highlights key items impacting gains and losses on economic investment derivatives.

Investments
 
We utilize interest rate swaps to economically hedge a portion of our trading securities against changes in fair value. Gains and losses on these economic derivatives are due primarily to changes in interest rates. Gains and losses on our trading securities are due primarily to changes in interest rates and credit spreads.

The following table summarizes gains and losses on these economic derivatives as well as the related trading securities (dollars in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Gains (losses) on interest rate swaps economically hedging our investments
$
16

 
$
10

 
$
12

Interest settlements
(3
)
 
(12
)
 
(18
)
Net gains (losses) on investment derivatives
13

 
(2
)
 
(6
)
Net gains (losses) on related trading securities
(15
)
 
2

 
(1
)
Net gains (losses) on economic investment hedge relationships
$
(2
)
 
$
—

 
$
(7
)

Other Expense
The following table shows the components of other expense (dollars in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Compensation and benefits
$
62

 
$
52

 
$
53

Contractual services
12

 
11

 
10

Professional fees
19

 
19

 
12

Other operating expenses
26

 
21

 
19

Total operating expenses
119

 
103

 
94

Federal Housing Finance Agency
9

 
10

 
8

Office of Finance
7

 
7

 
7

Other, net
7

 
4

 
9

Total other expense
$
142

 
$
124

 
$
118


Other expense increased $18 million during 2018 when compared to 2017 and increased $6 million during 2017 when compared to 2016. The increase in 2018 was driven primarily by an increase in compensation and benefits of $10 million, due primarily to increased employee headcount and post-retirement benefit expenses. The increase in other expense in 2017 when compared to 2016 was primarily due to an increase in professional fees as a result of hiring external resources to assist with improving our internal control environment.


36
Table of Contents

Affordable Housing Program Assessments

Annually, we must set aside for the AHP the greater of 10 percent of our annual income subject to assessment, or our prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million for each year. For purposes of the required AHP assessment, income subject to assessments is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency.

We accrue the AHP assessment on a monthly basis and reduce our AHP liability as program funds are distributed. We recorded AHP assessments of $53 million for 2018 compared to $60 million and $75 million for 2017 and 2016. The decrease in AHP assessments during 2018 and 2017 was due to a decrease in net income for those periods.

STATEMENTS OF CONDITION

Financial Highlights

Our total assets increased to $146.5 billion at December 31, 2018, from $145.1 billion at December 31, 2017. Our total liabilities increased to $139.0 billion at December 31, 2018, from $138.1 billion at December 31, 2017. Total capital increased to $7.5 billion at December 31, 2018, from $7.0 billion at December 31, 2017. See further discussion of changes in our financial condition in the appropriate sections that follow.

Cash and Due from Banks

At December 31, 2018, our total cash balance was $119 million compared to $503 million at December 31, 2017. Our cash balance is influenced by our liquidity needs, member advance activity, market conditions, and the availability of attractive investment opportunities.

Advances

The following table summarizes our advances by type of institution (dollars in millions):
 
December 31,
 
2018
 
2017
Commercial banks
$
75,561

 
$
68,299

Savings institutions

1,318

 
2,323

Credit unions
5,801

 
4,043

Non-captive insurance companies
18,604

 
19,831

Captive insurance companies
4,453

 
7,634

Community development financial institutions
4

 
3

Total member advances
105,741

 
102,133

Housing associates
58

 
23

Non-member borrowers
614

 
522

Total par value
$
106,413

 
$
102,678


Our total advance par value increased $3.7 billion or four percent at December 31, 2018, when compared to December 31, 2017. The increase was primarily due to an increase in borrowings by large depository institution members, partially offset by a decrease in borrowings from a captive insurance company member.


37
Table of Contents

As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance company members ineligible for FHLBank membership. In accordance with the final rule, captive insurance company members that were admitted as members after September 12, 2014 (the date the Finance Agency proposed this rule) had their membership terminated on February 17, 2017. Captive insurance company members that were admitted as members prior to September 12, 2014, will have their memberships terminated no later than February 19, 2021. The magnitude of the impact of the final rule will depend, in part, on our size and profitability at the time of membership termination or maturity of the related advances. As of December 31, 2018, we had six captive insurance company members with advances outstanding of $4.5 billion, which represented four percent of our total advances outstanding. One captive insurance company member was included in our five largest member borrowers at December 31, 2018, as shown in the top five member borrowers table within this “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Advances.”

The following table summarizes our advances by product type (dollars in millions):
 
December 31, 2018
 
December 31, 2017
 
Amount
 
% of Total
 
Amount
 
% of Total
Variable rate
$
66,561

 
62
 
$
65,711

 
64
Fixed rate
38,039

 
36
 
35,308

 
34
Amortizing
1,813

 
2
 
1,659

 
2
Total par value
106,413

 
100
 
102,678

 
100
Premiums
38

 
 
 
53

 
 
Discounts
(8
)
 
 
 
(12
)
 
 
Fair value hedging adjustments
(120
)
 
 
 
(106
)
 
 
Total advances
$
106,323

 
 
 
$
102,613

 
 

Fair value hedging adjustments changed $14 million at December 31, 2018, when compared to December 31, 2017 due to the impact of interest rates on our cumulative fair value adjustments on advances in hedge relationships.

INTEREST RATE PAYMENT TERMS

The following table summarizes advances by interest rate payment and redemption terms (dollars in millions):
 
December 31,
 
2018
 
2017
Fixed rate
 
 
 
Due in one year or less
$
23,716

 
$
22,459

Due after one year
16,136

 
14,508

Total fixed rate
39,852

 
36,967

Variable rate
 
 
 
Due in one year or less
26,847

 
22,851

Due after one year
39,714

 
42,860

Total variable rate
66,561

 
65,711

Total par value
$
106,413

 
$
102,678


At December 31, 2018 and 2017, 33 and 26 percent of our advances were variable rate callable advances. Callable advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Interest rates on our variable rate callable advances reset at each call date to be consistent with either the underlying LIBOR index or our current offering rate in line with our underlying cost of funds. In addition, we retain the flexibility to adjust the spread relative to our cost of funds for a material percentage of these variable rate advances on each reset date. We generally fund our variable rate callable advances with either discount notes, LIBOR indexed debt, or debt swapped to a LIBOR index. For additional discussion on our funding strategies, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”


38
Table of Contents

At December 31, 2018 and 2017, advances outstanding to our five largest member borrowers totaled $64.2 billion and $60.4 billion, representing 60 percent and 59 percent of our total advances outstanding. The following table summarizes advances outstanding to our five largest member borrowers at December 31, 2018 (dollars in millions):
 
Amount
 
% of Total Advances
Wells Fargo Bank, National Association
$
49,575

 
47
Zions Bancorporation, National Association
4,500

 
4
Truman Insurance Company1
3,588

 
3
Principal Life Insurance Company
3,500

 
3
Transamerica Life Insurance Company2
3,085

 
3
Total par value
$
64,248

 
60

1
Represents a captive insurance company member whose membership will terminate within five years of the Finance Agency’s final rule on membership that became effective February 19, 2016.

2
Excludes $1.4 billion of outstanding advances with Transamerica Premier Life Insurance Company, an affiliate of Transamerica Life Insurance Company.

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

The FHLBank Act requires that we obtain sufficient collateral on advances to protect against losses. We have never experienced a credit loss on an advance to a member or eligible housing associate. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no probable credit losses on our advances as of December 31, 2018 and 2017. Accordingly, we have not recorded any allowance for credit losses on our advances. See additional discussion regarding our collateral requirements in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Advances.”

Mortgage Loans

The following table summarizes information on our mortgage loans held for portfolio (dollars in millions):
 
December 31, 2018
 
December 31, 2017
Fixed rate conventional loans
$
7,231

 
$
6,472

Fixed rate government-insured loans
503

 
529

Total unpaid principal balance
7,734

 
7,001

Premiums
105

 
98

Discounts
(5
)
 
(6
)
Basis adjustments from mortgage loan purchase commitments
2

 
5

Total mortgage loans held for portfolio
7,836

 
7,098

Allowance for credit losses
(1
)
 
(2
)
Total mortgage loans held for portfolio, net
$
7,835

 
$
7,096


Our total mortgage loans increased $0.7 billion or 10 percent at December 31, 2018, when compared to December 31, 2017 due to MPF loan purchases exceeding principal paydowns.

We manage our credit risk exposure on mortgage loans by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs, and (iv) establishing an allowance for credit losses to reflect management’s estimate of probable credit losses inherent in the portfolio.

For additional discussion on our mortgage loan credit risk, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Mortgage Loans.”


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Investments

The following table summarizes the carrying value of our investments (dollars in millions):
 
December 31, 2018
 
December 31, 2017
 
Amount
 
% of Total
 
Amount
 
% of Total
Short-term investments1
 
 
 
 
 
 
 
Interest-bearing deposits
$
1

 
—
 
$
1

 
—
Securities purchased under agreements to resell
4,700

 
15
 
4,600

 
13
Federal funds sold
4,150

 
13
 
4,250

 
12
Total short-term investments
8,851

 
28
 
8,851

 
25
Long-term investments2
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
GSE single-family
2,988

 
9
 
3,740

 
11
GSE multifamily
9,444

 
30
 
10,983

 
32
U.S. obligations single-family3
4,492

 
14
 
3,741

 
11
U.S. obligations commercial3
1

 
—
 
2

 
—
Private-label residential
10

 
—
 
12

 
—
Total mortgage-backed securities
16,935

 
53
 
18,478

 
54
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations3
2,761

 
9
 
3,296

 
10
GSE and Tennessee Valley Authority obligations
1,484

 
5
 
1,889

 
5
State or local housing agency obligations
1,205

 
4
 
1,388

 
4
Other
541

 
1
 
550

 
2
Total non-mortgage-backed securities
5,991

 
19
 
7,123

 
21
Total long-term investments
22,926

 
72
 
25,601

 
75
Total investments
$
31,777

 
100
 
$
34,452

 
100

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

2
Long-term investments have original maturities of greater than one year.

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

INTEREST RATE PAYMENT TERMS

The following tables summarize the interest rate payment terms of investment securities (dollars in millions):
 
December 31,
 
2018
 
2017
Trading securities at fair value
 
 
 
Fixed rate
$
915

 
$
977

Variable rate
—

 
200

Total trading securities
$
915

 
$
1,177

 
 
 
 
AFS at amortized cost
 
 
 
Fixed rate
$
7,161

 
$
8,245

Variable rate
11,771

 
12,433

Total AFS
$
18,932

 
$
20,678

 
 
 
 
HTM at amortized cost
 
 
 
Fixed rate
$
1,034

 
$
1,194

Variable rate
1,958

 
2,434

Total HTM
$
2,992

 
$
3,628


Our investments decreased $2.7 billion or eight percent at December 31, 2018, when compared to December 31, 2017. The decrease was due primarily to paydowns of certain MBS in 2018.

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The Finance Agency limits our investments in MBS by requiring that the total book value of our MBS not exceed three times regulatory capital at the time of purchase. At December 31, 2018, our ratio of MBS to regulatory capital was 2.19 compared to 2.52 at December 31, 2017.

We evaluate AFS and HTM securities in an unrealized loss position for OTTI on at least a quarterly basis. As part of our OTTI evaluation, we consider our intent to sell each debt security and whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If either of these conditions is met, we will recognize an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, we perform analyses to determine if any of these securities are other-than-temporarily impaired. At December 31, 2018 and 2017, we did not consider any of our securities to be other-than-temporarily impaired. Refer to “Item 8. Financial Statements and Supplementary Data — Note 7 — Other-Than-Temporary Impairment” for additional information on our OTTI analysis performed at December 31, 2018.

Consolidated Obligations

Consolidated obligations, which include bonds and discount notes, are the primary source of funds to support our advances, mortgage loans, and investments. At December 31, 2018 and 2017, the carrying value of consolidated obligations for which we are primarily liable totaled $136.7 billion and $135.6 billion.

DISCOUNT NOTES

The following table summarizes our discount notes, all of which are due within one year (dollars in millions):
 
December 31,
 
2018
 
2017
Par value
$
43,052

 
$
36,740

Discounts and concession fees1
(173
)
 
(58
)
Total
$
42,879

 
$
36,682


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

Our discount notes increased $6.2 billion or 17 percent at December 31, 2018, when compared to December 31, 2017. As a result of changes in our advance product mix and a change in our funding strategy, we increased our utilization of shorter-term discount notes during 2018.

BONDS

The following table summarizes information on our bonds (dollars in millions):
 
December 31,
 
2018
 
2017
Total par value
$
94,024

 
$
99,184

Premiums
152

 
193

Discounts and concession fees1
(48
)
 
(60
)
Fair value hedging adjustments
(356
)
 
(424
)
Total bonds
$
93,772

 
$
98,893


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

Our bonds decreased $5.1 billion or five percent at December 31, 2018, when compared to December 31, 2017. The decrease was driven by our increased use of discount notes in place of bonds in response to changes in our advance product mix and changes to our funding strategy. Fair value hedging adjustments changed $68 million at December 31, 2018 when compared to December 31, 2017, due to the impact of interest rates on our cumulative fair value adjustments on bonds in hedge relationships.


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INTEREST RATE PAYMENT TERMS
 
The following table summarizes our bonds by interest rate payment terms (dollars in millions):
 
December 31,
 
2018
 
2017
Fixed rate
$
39,849

 
$
39,789

Simple variable rate
53,630

 
58,900

Step-up
420

 
370

Step-down
125

 
125

Total par value
$
94,024

 
$
99,184


For additional information on our bonds, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

Mandatorily Redeemable Capital Stock

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.

Our total mandatorily redeemable capital stock balance decreased $130 million at December 31, 2018, when compared to December 31, 2017 due in part to the repurchase of $113 million in capital stock outstanding to a captive insurance company member during 2018. At December 31, 2018 and December 31, 2017, our mandatorily redeemable capital stock totaled $255 million and $385 million.

Capital

The following table summarizes information on our capital (dollars in millions):
 
December 31,
 
2018
 
2017
Capital stock
$
5,414

 
$
5,068

Retained earnings
2,050

 
1,839

Accumulated other comprehensive income (loss)
84

 
114

Total capital
$
7,548

 
$
7,021


Our capital increased $0.5 billion or eight percent at December 31, 2018, when compared to December 31, 2017. The increase was primarily due to an increase in capital stock resulting from an increase in member activity. In addition, retained earnings increased due to net income, partially offset by dividends paid. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital” for additional information on our capital.


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Derivatives

We use derivatives to manage interest rate risk. The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor our overall exposure to credit and market risk.

The following table categorizes the notional amount of our derivatives by type (dollars in millions):
 
December 31,
 
2018
 
2017
Interest rate swaps
 
 
 
Noncallable
$
46,671

 
$
51,502

Callable by counterparty
1,773

 
1,853

Callable by the Bank
193

 
172

Total interest rate swaps
48,637

 
53,527

Forward settlement agreements (TBAs)
98

 
66

Mortgage loan purchase commitments
101

 
72

Total notional amount
$
48,836

 
$
53,665

    
The notional amount of our derivative contracts decreased at December 31, 2018, when compared to December 31, 2017. During 2018, we reduced our use of swapped consolidated obligation bonds in response to market conditions, and increased our utilization of discount notes and LIBOR indexed debt to capture attractive funding, match repricing structures on advances, and provide additional liquidity. For additional discussion regarding our use of derivatives, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Derivatives.”


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LIQUIDITY AND CAPITAL RESOURCES

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

Liquidity

SOURCES OF LIQUIDITY

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

Our primary source of liquidity is proceeds from the issuance of consolidated obligations (bonds and discount notes) in the capital markets. During 2018, proceeds from the issuance of bonds and discount notes were $46.8 billion and $161.9 billion compared to $67.6 billion and $191.0 billion for the same period in 2017. We continued to issue term fixed and floating rate, callable, and step-up rate consolidated obligation bonds as well as shorter-term discount notes to capture attractive funding, match repricing structures on advances, and provide additional liquidity.

We maintained continual access to funding and issued debt to meet the needs of our members, which generally favored the issuance of shorter-term debt. Access to debt markets has been reliable because investors, driven by increased liquidity preferences, including the effects of recent money market fund reform and our government affiliation, have sought the FHLBanks’ debt as an asset of choice, which has led to advantageous funding opportunities. However, due to the short-term maturity of the debt, we may be exposed to additional risks associated with refinancing and our ability to access the capital markets.

We are focused on maintaining an adequate liquidity balance and a funding balance between our financial assets and financial liabilities and work collectively with the other FHLBanks to manage the system-wide liquidity and funding needs. We monitor our debt refinancing risk and liquidity position primarily by tracking the maturities of financial assets and financial liabilities. In managing and monitoring the amounts of assets that require refunding, we consider contractual maturities of our financial assets, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments). External factors, including member borrowing needs, supply and demand in the debt markets, and other factors may affect liquidity balances and the funding balances between financial assets and financial liabilities. Refer to “Item 8. Financial Statements” for additional information regarding the contractual maturities or redemption terms of our financial assets and liabilities.

Our ability to raise funds in the capital markets as well as our cost of borrowing may be affected by our credit ratings. As of February 28, 2019, our consolidated obligations were rated AA+/A-1+ by Standard and Poor’s and Aaa/P-1 by Moody’s and both ratings had a stable outlook. For further discussion of how credit rating changes and our ability to access the capital markets may impact us in the future, refer to “Item 1A. Risk Factors.”

Although we are primarily liable for the portion of consolidated obligations that are issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations issued by the FHLBank System. At December 31, 2018 and 2017, the total par value of outstanding consolidated obligations for which we are primarily liable was $137.1 billion and $135.9 billion. At December 31, 2018 and 2017, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which we are jointly and severally liable was approximately $894.5 billion and $898.3 billion.

The Office of Finance and FHLBanks have contingency plans in place that prioritize the allocation of proceeds from the issuance of consolidated obligations during periods of financial distress if consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand. In the event of significant market disruptions or local disasters, our President or his designee is authorized to establish interim borrowing relationships with other FHLBanks. To provide further access to funding, the FHLBank Act also authorizes the U.S. Treasury to directly purchase new issue consolidated obligations of the GSEs, including FHLBanks, up to an aggregate principal amount of $4.0 billion. As of February 28, 2019, no purchases had been made by the U.S. Treasury under this authorization.


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USES OF LIQUIDITY

We use our available liquidity, including proceeds from the issuance of consolidated obligations, primarily to repay consolidated obligations, fund advances, and purchase investments. During 2018, repayments of consolidated obligations totaled $207.8 billion compared to $293.7 billion in 2017.

During 2018, advance disbursements totaled $305.2 billion compared to $266.4 billion in 2017. Advance disbursements will vary from period to period depending on member needs. During 2018, investment purchases (excluding overnight investments) totaled $98.7 billion compared to $97.8 billion during 2017. Investment purchases during each period were primarily driven by the purchase of money market investments, including secured resale agreements in an effort to manage our liquidity position.

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

LIQUIDITY REQUIREMENTS

Finance Agency regulations mandate three liquidity requirements. First, we are required to maintain contingent liquidity sufficient to meet our liquidity needs, which shall, at a minimum, cover five calendar days of inability to access the consolidated obligation debt markets. The following table shows our compliance with this requirement (dollars in billions):
 
December 31,
 
2018
 
2017
Unencumbered marketable assets maturing within one year
$
9.1

 
$
9.7

Advances maturing in seven days or less
3.2

 
5.3

Unencumbered assets available for repurchase agreement borrowings
20.4

 
22.4

Total contingent liquidity
32.7

 
37.4

Liquidity needs for five calendar days
8.7

 
11.0

Excess contingent liquidity
$
24.0

 
$
26.4



Second, we are required to have available at all times an amount greater than or equal to members’ current deposits invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. The following table shows our compliance with this requirement (dollars in billions):
 
December 31,
 
2018
 
2017
Advances with maturities not exceeding five years
$
102.6

 
$
97.3

Deposits1
1.1

 
1.1

Excess liquidity2
$
101.5

 
$
96.2


1 Amount does not reflect the effect of derivative master netting arrangements with counterparties and/or clearing agents.


Third, we are required to maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to the amount of our participation in total consolidated obligations outstanding. The following table shows our compliance with this requirement (dollars in billions):
 
December 31,
 
2018
 
2017
Qualifying assets free of lien or pledge
$
146.4

 
$
144.9

Consolidated obligations outstanding
136.7

 
135.6

Excess liquidity
$
9.7

 
$
9.3

At December 31, 2018 and 2017, we were in compliance with all three of the Finance Agency liquidity requirements.

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In addition to the liquidity measures previously discussed, the Finance Agency has provided us with guidance to maintain sufficient liquidity in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario (roll-off scenario) assumes that we cannot access the capital markets to issue debt for a period of 10 to 20 days with initial guidance set at 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario (renew scenario) assumes that we cannot access the capital markets to issue debt for a period of three to seven days with initial guidance set at five days and that during that time we will automatically renew maturing and called advances for all members except very large, highly-rated members. This guidance is designed to protect against temporary disruptions in the debt markets that could lead to a reduction in market liquidity and thus the inability for us to provide advances to our members. At December 31, 2018 and 2017, we were in compliance with this liquidity guidance.
During 2018, the Finance Agency finalized a new Advisory Bulletin on FHLBank liquidity (the Liquidity Guidance AB) and other guidance which specifies appropriate funding gap limits to address the risks associated with a FHLBank having too large a mismatch between the contractual maturities of its assets and liabilities. The Liquidity Guidance AB provides funding gap limits within the range of negative 10 percent to negative 20 percent for a three-month horizon and negative 25 percent to negative 35 percent for a one-year horizon. Initial guidance was set at negative 15 percent for the three-month horizon and negative 30 percent for the one-year horizon. At December 31, 2018, we adhered to this liquidity guidance. For a discussion of this Liquidity Guidance AB, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”

Capital

CAPITAL REQUIREMENTS

We are subject to three regulatory capital requirements. First, the FHLBank Act requires that we maintain at all times permanent capital greater than or equal to the sum of our credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement. Second, the FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes all Class B capital stock (including mandatorily redeemable capital stock) and retained earnings. It does not include accumulated other comprehensive income (loss) (AOCI). Third, the FHLBank Act imposes a five percent minimum leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. At December 31, 2018 and December 31, 2017, we did not hold any nonpermanent capital. At December 31, 2018 and 2017, we were in compliance with all three of the Finance Agency’s regulatory capital requirements. Refer to “Item 8. Financial Statements and Supplementary Data — Note 15 — Capital” for additional information.

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

The capital stock requirements established in our Capital Plan are designed so that we can remain adequately capitalized as member activity changes. Our Board of Directors may make adjustments to the capital stock requirements within ranges established in our Capital Plan.

Because membership is voluntary, a member can provide a notice of withdrawal from membership at any time. If a member provides a notice of withdrawal from membership, we will not repurchase or redeem any membership stock until five years from the date of receipt of a notice of withdrawal. If a member that withdraws from membership owns any activity-based capital stock, we will redeem the required activity-based capital stock consistent with the level of activity outstanding.
A member may cancel any pending notice of redemption before the completion of the five-year redemption period by providing a written notice of cancellation. We charge a cancellation fee equal to a percentage of the par value of the shares of capital stock subject to redemption. This fee is currently set at a range of one to five percent depending on when we receive notice of cancellation from the member. Our Board of Directors retains the right to change the cancellation fee at any time. We will provide at least 15 days’ written notice to each member of any adjustment or amendment to our cancellation fee.

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We cannot repurchase or redeem any membership or activity-based capital stock if the repurchase or redemption would cause a member to be out of compliance with its required investment. In addition, there are statutory and regulatory restrictions on our obligation or right to redeem outstanding capital stock.
First, in no case may we redeem any capital stock if, following such redemption, we would fail to satisfy our minimum regulatory capital requirements. By law, all member holdings of our capital stock immediately become nonredeemable if we become undercapitalized.
Second, we are precluded by regulation from redeeming any capital stock without the prior approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we incurred or are likely to incur losses resulting in or likely to result in a charge against capital.
Third, we cannot redeem shares of capital stock from any member if the principal or interest on any consolidated obligation of the FHLBank System is not paid in full when due, or under certain circumstances if (i) we project, at any time, that we will fail to comply with statutory or regulatory liquidity requirements, or will be unable to timely and fully meet all of our current obligations, (ii) we actually fail to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of our current obligations, or enter or negotiate to enter into an agreement with one or more other FHLBanks to obtain financial assistance to meet our current obligations, or (iii) the Finance Agency determines that we will cease to be in compliance with statutory or regulatory liquidity requirements, or will lack the capacity to timely or fully meet all of our current obligations.
If we are liquidated, after payment in full to our creditors, our stockholders will be entitled to receive the par value of their capital stock as well as any retained earnings, in an amount proportional to the stockholder’s share of the total shares of capital stock. In the event of a merger or consolidation, our Board of Directors shall determine the rights and preferences of our stockholders, subject to applicable Finance Agency regulations, as well as any terms and conditions imposed by the Finance Agency.
The following table summarizes our regulatory capital stock by type of member (dollars in millions):
 
December 31,
 
2018
 
2017
Commercial banks
$
3,829

 
$
3,508

Savings institutions
104

 
145

Credit unions
495

 
393

Non-captive insurance companies
775

 
681

Captive insurance companies
210

 
341

Community development financial institutions
1

 
—

Total GAAP capital stock
5,414

 
5,068

Mandatorily redeemable capital stock
255

 
385

Total regulatory capital stock
$
5,669

 
$
5,453


The increase in regulatory capital stock held at December 31, 2018 when compared to December 31, 2017 was primarily due to an increase in GAAP activity-based capital stock resulting from an increase in member activity.

Mandatorily Redeemable Capital Stock

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.
Shares meeting this definition are reclassified to a liability at fair value. The fair value of mandatorily redeemable capital stock is generally par value as all shares are issued, redeemed, or repurchased by us at the stated par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to a liability (if applicable), until such amount is paid. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income.
If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.

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For GAAP purposes, mandatorily redeemable capital stock is not included as a component of capital. For determining compliance with our regulatory capital requirements, the Finance Agency requires that such outstanding capital stock be considered capital.
At December 31, 2018 and 2017, we had $255 million and $385 million of mandatorily redeemable capital stock. The decrease was due in part to the repurchase of $113 million in capital stock outstanding to a captive insurance company member during 2018. For additional information on our mandatorily redeemable capital stock, refer to “Item 8. Financial Statements and Supplementary Data — Note 15 — Capital.”

RETAINED EARNINGS
Our risk management policies include a target level of retained earnings based on the amount we believe necessary to help protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to achieve our targeted level of retained earnings. At December 31, 2018, our actual retained earnings exceeded our retained earnings target.
Under the JCE Agreement, as amended, we are required to allocate 20 percent of our quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of our average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in our Statements of Condition. At December 31, 2018 and 2017, our restricted retained earnings account totaled $427 million and $335 million. One percent of our average balance of outstanding consolidated obligations for the three months ended September 30, 2018 was $1.4 billion.

DIVIDENDS

Our Board of Directors may declare and pay different dividends for each subclass of capital stock. Dividend payments may be made in the form of cash and/or additional shares of capital stock. Historically, we have only paid cash dividends. By regulation, we may only pay dividends from current earnings or unrestricted retained earnings. We are prohibited from paying a dividend in the form of additional shares of capital stock if, after the issuance, the outstanding excess capital stock would be greater than one percent of our total assets. Our Board of Directors may not declare or pay dividends if it would result in our non-compliance with regulatory capital requirements.

Our current philosophy is to pay a membership capital stock dividend similar to a reference rate of interest, such as average-three month LIBOR over time, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. Our dividend rates seek to strike a balance between providing reasonable returns to members while preserving our financial position, flexibility, and ability to serve as a long-term liquidity provider. Our actual dividend is determined quarterly by our Board of Directors, based on policies, regulatory requirements, actual performance, and other considerations.

The following table summarizes dividend-related information (dollars in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Aggregate cash dividends paid1
$
249

 
$
181

 
$
142

Effective combined annualized dividend rate paid on capital stock2
4.71
%
 
3.19
%
 
2.94
%
Annualized dividend rate paid on membership capital stock
2.69
%
 
1.06
%
 
0.63
%
Annualized dividend rate paid on activity-based capital stock
5.19
%
 
3.63
%
 
3.50
%
Average three-month LIBOR
2.31
%
 
1.26
%
 
0.75
%

1
Includes aggregate cash dividends paid during the period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense in the Bank’s Statements of Income.

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


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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others to our financial results. Given the assumptions and judgment used, we have identified the following accounting policies as critical to understanding our financial condition and results of operations:

•
fair value measurements;

•
derivatives and hedging activities; and

•
allowance for credit losses.

We evaluate our critical accounting policies and estimates on an ongoing basis. While management believes our estimates and assumptions are reasonable based on historical experience and other factors, actual results could differ from those estimates and differences could be material to the financial statements.

Fair Value Measurements

We record trading securities, AFS securities, derivative assets and liabilities, and certain other assets at fair value in our Statements of Condition on a recurring basis and on occasion, certain impaired mortgage loans held for portfolio on a non-recurring basis. Fair value is a market-based measurement and is defined as the price received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, we are required to consider factors specific to the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom we would transact in that market.

Fair values play an important role in our valuation of certain assets, liabilities, and hedging transactions. Fair value is first determined based on quoted market prices or market-based prices, where available. If quoted market prices or market-based prices are not available, fair values are determined based on external or internal pricing models that use (i) discounted cash flows using market estimates of interest rates and volatility, (ii) dealer prices, or (iii) prices of similar instruments.
For prices obtained externally, as per our established policy, we review these prices and compare them to other vendors for reasonableness. In addition, on an annual basis, we conduct reviews of our pricing vendors to confirm and further augment our understanding of the vendors’ pricing processes, methodologies, and control procedures for investment securities. For internal pricing models, the underlying assumptions are based on management’s best estimates for discount rates, prepayments, market volatility, and other factors. The assumptions used in both external and internal pricing models could have a significant effect on the reported fair values of assets and liabilities, including the related income and expense. The use of different assumptions, as well as changes in market conditions, could result in materially different values.
We categorize our financial instruments carried at fair value into a three-level hierarchy. The hierarchy is based upon the transparency (observable or unobservable) of inputs used to value the asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. At December 31, 2018 and 2017, we did not carry any financial assets or liabilities, measured on a recurring basis, at fair value in our Statements of Condition based on unobservable inputs.

Refer to “Item 8. Financial Statements and Supplementary Data — Note 17 — Fair Value” for additional discussion on our fair value measurements.


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Derivatives and Hedging Activities
All derivatives are recognized in the Statements of Condition at their fair values and reported as either derivative assets or derivative liabilities, net of cash collateral and accrued interest received from or pledged to clearing agents and/or counterparties. The fair values of derivatives are netted by clearing agent and/or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as a derivative asset and, if negative, they are classified as a derivative liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.

We transact most of our derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., a clearing agent) with a Derivative Clearing Organization (cleared derivatives). We utilize one Derivative Clearing Organization (Clearinghouse), CME Clearing, for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin payments, and the clearing agent in turn notifies the Bank. The Clearinghouse determines initial margin requirements which are considered cash collateral. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, which are a component of the derivative fair value, rather than cash collateral.

Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Bank is not a derivative dealer and does not trade derivatives for short-term profit.

We document at inception all relationships between derivatives designated as hedging instruments and hedged items, our risk management objectives and strategies for undertaking various hedge transactions, and our method of assessing effectiveness for all derivatives qualifying for hedge accounting. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities in the Statements of Condition and firm commitments.
Derivative Designations. Derivative instruments are designated by the Bank as:
•
a fair value hedge of an associated financial instrument or firm commitment (fair value hedge); or
•
an economic hedge to manage certain defined risks in the Bank’s Statements of Condition (economic hedge). These hedges are primarily used to: (i) manage mismatches between the coupon features of the Bank’s assets and liabilities, (ii) offset prepayment risk in certain assets, (iii) mitigate the income statement volatility that occurs when financial instruments are recorded at fair value and hedge accounting is not permitted by accounting guidance, or (iv) to reduce exposure to reset risk.
FAIR VALUE HEDGES
If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the fair value hedging relationship and an expectation to be highly effective, they qualify for fair value hedge accounting and the changes in fair value of derivatives along with the offsetting changes in fair value of the hedged items attributable to the hedged risk are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.” The amount by which the change in fair value of the derivative differs from the change in fair value of the hedged item is known as hedge ineffectiveness. Two approaches to fair value hedge accounting include:
•
Long-haul hedge accounting. The application of long-haul hedge accounting requires us to formally assess (both at the hedge’s inception and at least quarterly) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value of hedged items due to benchmark interest rate changes and whether those derivatives are expected to remain highly effective in future periods. The Bank uses regression analyses to assess the effectiveness of its long-haul hedges.
•
Short-cut hedge accounting. Transactions that meet certain criteria qualify for short-cut hedge accounting in which an assumption can be made that the change in fair value of a hedged item due to changes in the benchmark interest rate exactly offsets the change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the interest rate swap is considered to be highly effective at achieving offsetting changes in fair value of the hedged asset or liability.


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Derivatives are typically executed at the same time as the hedged item, and we designate the hedged item in a fair value hedge relationship at the trade date. In many hedging relationships, we may designate the fair value hedging relationship upon our commitment to disburse an advance or trade a consolidated obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. We then record the changes in fair value of the derivative and the hedged item beginning on the trade date.

Beginning January 1, 2019, we adopted new hedge accounting guidance, which prospectively impacts the income statement presentation of gains (losses) on fair value hedges. In particular, changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are now recorded in net interest income in the same line as the earnings effect of the hedged item.

ECONOMIC HEDGES
An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify or was not designated for fair value hedge accounting, but is an acceptable hedging strategy under our risk management program. Changes in the fair value of derivatives that are designated as economic hedges are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities” with no offsetting fair value adjustments for the underlying assets, liabilities, or firm commitments, unless changes in the fair value of the assets or liabilities are normally marked to fair value through earnings (e.g., trading securities and fair value option instruments).
ACCRUED INTEREST RECEIVABLES AND PAYABLES
The net settlements of interest receivables and payables related to derivatives designated as fair value hedges are recognized as adjustments to the interest income or interest expense of the designated hedged item. The net settlements of interest receivables and payables related to derivatives designated as economic hedges are recognized in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”
DISCONTINUANCE OF HEDGE ACCOUNTING
We discontinue fair value hedge accounting prospectively when either (i) we determine that the derivative is no longer effective in offsetting changes in the fair value of a hedged item due to changes in the benchmark interest rate, (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised, (iii) a hedged firm commitment no longer meets the definition of a firm commitment, or (iv) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When fair value hedge accounting is discontinued, we either terminate the derivative or continue to carry the derivative in the Statements of Condition at its fair value. For any remaining hedged item, we cease to adjust the hedged item for changes in fair value and amortize the cumulative basis adjustment on the hedged item into earnings over the remaining contractual life of the hedged item using a level-yield methodology.

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

EMBEDDED DERIVATIVES

We may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the debt, advance, or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. If we determine that the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as an economic derivative instrument. However, if we elect to carry the entire contract (the host contract and the embedded derivative) at fair value in the Statements of Condition, changes in fair value of the entire contract will be reported in current period earnings.

Refer to “Item 8. Financial Statements and Supplementary Data — Note 11 — Derivatives and Hedging Activities” for additional discussion on our derivatives.


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Allowance for Credit Losses

We have an allowance for credit losses methodology for each of our financing receivable portfolio segments: advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, MPF and MPP conventional mortgage loans held for portfolio, and term securities purchased under agreements to resell. The following discussion highlights those methodologies that we consider critical to our financial results. For a complete discussion of our allowance methodologies, refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses.”

CREDIT PRODUCTS

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

We are required by regulation to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal balance or market value, if available, of the collateral. Eligible collateral includes (i) fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and FFELP guaranteed student loans, (iii) cash deposited with us, and (iv) other real estate-related collateral acceptable to us, such as second lien mortgages, home equity lines of credit, municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and we can perfect a security interest in such collateral. In addition, CFIs may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each member’s capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Using a risk-based approach and taking into consideration each borrower’s financial strength, we consider the types and level of collateral to be the primary indicator of credit quality on our credit products. At December 31, 2018 and 2017, we had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of our outstanding extensions of credit.

We have never experienced a credit loss on our credit products. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on our credit products, management has determined that there were no probable credit losses on our credit products as of December 31, 2018 and 2017. Accordingly, we have not recorded any allowance for credit losses.

GOVERNMENT-INSURED MORTGAGE LOANS

We invest in government-insured fixed rate mortgage loans in both the MPF and MPP portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, we only have credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance. Management views this risk as remote and has never experienced a credit loss on its government-insured mortgage loans. As a result, we did not establish an allowance for credit losses for our government-insured mortgage loans at December 31, 2018 and 2017. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.


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CONVENTIONAL MORTGAGE LOANS

Our management of credit risk in the MPF and MPP programs involves several layers of legal loss protection that are defined in agreements among us and our participating PFIs. These loss layers vary depending on the product alternatives selected and credit profile of the loans. Our loss protection consists of the following loss layers, in order of priority:

•
Homeowner Equity.

•
Primary Mortgage Insurance (PMI). At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value, whichever is less and as applicable to the specific loan.

•
First Loss Account (FLA). For each MPF master commitment, our potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the FLA.

•
Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation at the time an MPF mortgage loan is purchased to absorb certain losses in excess of the FLA in order to limit our loss exposure to approximately that of an investor in an investment grade MBS. PFIs pledge collateral to secure this obligation.

ALLOWANCE METHODOLOGY

We utilize an allowance for credit losses to reserve for estimated losses in our conventional MPF and MPP mortgage loan portfolios at the balance sheet date. The measurement of our MPF and MPP allowance for credit losses is determined by the following:

•
reviewing similar conventional mortgage loans for impairment on a collective basis. This evaluation is primarily based on the following factors: (i) current loan delinquencies, (ii) loans migrating to collateral-dependent status, and (iii) actual historical loss severities.

•reviewing conventional mortgage loans for impairment on an individual basis; and

•estimating additional credit losses in the conventional mortgage loan portfolio. These losses result from other factors
that may not be captured in the methodology previously described at the balance sheet date, which include but are not limited to certain quantifiable economic factors, such as unemployment rates and home prices impacting housing markets.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Final Rule on FHLBank Capital Requirements

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


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FDIC Final Rule on Reciprocal Deposits

On February 4, 2018, the FDIC issued a final rule, effective March 6, 2019, related to the treatment of “reciprocal deposits” that implements Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act. The final rule exempts, for certain insured depository institutions (depositories), certain reciprocal deposits, deposits acquired by a depository from a network of participating depositories that enables depositors to receive FDIC insurance coverage for the entire amount of their deposits, from being subject to FDIC restrictions on brokered deposits. Under the rule, well-capitalized and well-rated depositories are not required to treat reciprocal deposits as brokered deposits up to the lesser of twenty percent of their total liabilities or $5 billion. Reciprocal deposits held by depositories that are not well-capitalized and well-rated may also be excluded from brokered deposit treatment in certain circumstances.
We continue to evaluate the potential impact of the final rule, but currently do not expect the rule to materially affect our financial condition or results of operations. The rule could, however, enhance depositories’ liquidity by increasing the attractiveness of deposits that exceed FDIC insurance limits. This could affect the demand for certain advance products.
Final Rule on Golden Parachute and Indemnification Payments

On December 20, 2018, the Finance Agency published a final rule, effective January 22, 2019, on golden parachute and indemnification payments (Golden Parachute Rule) to better align the Golden Parachute Rule with areas of the Finance Agency’s supervisory concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards the Finance Agency would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLBank or the Office of Finance to an entity-affiliated party when such entity is in a troubled condition, in conservatorship or receivership, or insolvent. The final rule amendments:
•
focus the standards on payments to and agreements with executive officers, broad-based plans covering large numbers of employees (such as severance plans), and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoing; and
•
revise and clarify definitions, exemptions and procedures to implement the Finance Agency’s supervisory approach.
We do not expect this rule to materially impact our financial condition or results of operations.

Final Rule Amending AHP Regulations

On November 28, 2018, the Finance Agency published a final rule, effective December 28, 2018, that amends the operating requirements of the FHLBanks’ AHP. The final rule retains a scoring criteria method for awarding competitive AHP subsidies, but allows us to create multiple pools of competitive funds in order to target specific affordable housing needs in our district. The final rule amendments also:
•
revise the scoring criteria to create different and new scoring priorities;
•
remove the retention agreement requirement on owner-occupied units using the subsidy solely for rehabilitation;
•
increase the per-household set-aside grant amount to $22,000 with an annual housing price inflation adjustment (up from the current fixed limit of $15,000);
•
clarify the requirements for remediating AHP noncompliance;
•
prohibit our Board of Directors from delegating approval of AHP strategic policy decisions to a committee; and
•
further align AHP monitoring with certain federal government funding programs.
The majority of the rule’s provisions take effect January 1, 2021, while the removal of the owner-occupied retention agreement requirements takes effect January 1, 2020. We do not expect this rule to materially affect our financial condition or results of operations.

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Finance Agency Proposed Rule on Housing Goals

On November 2, 2018, the Finance Agency published a proposed rule that would amend the existing Federal Home Loan Bank Housing Goals regulation. The proposed amendments are intended to replace existing FHLBank housing goals with a more streamlined set of goals. While the existing housing goals are established retrospectively, the proposed rule would establish the levels of annual housing goals in advance, thereby eliminating uncertainty about housing goals from year-to-year. If adopted as proposed, the proposed amendments would:
•
eliminate the $2.5 billion Acquired Member Assets (AMA) mortgage purchase volume threshold that triggers the application of housing goals;
•
establish the target level for the new prospective AMA mortgage purchase housing goal at 20 percent of total AMA mortgage purchases that are for very low-income families, low-income families, or families in low-income areas, and require that at least 75 percent of all mortgage purchases that count toward the goal be for borrowers with incomes at or below 80 percent of the area median income;
•
establish a goal that 50 percent of AMA program users meet the definition of “small members” whose assets do not exceed the “community financial institution” asset cap, which under Finance Agency regulations is currently $1.199 billion; and
•
allow the FHLBanks to request FHFA approval of alternative target percentages for mortgage purchase housing goals and small member participation goals.
We submitted a joint comment letter with the other FHLBanks on the proposed rule on January 29, 2019. We continue to evaluate the proposed rule but do not expect this rule, if adopted as proposed, to materially affect our financial condition or results of operations.
OCC, FRB, FDIC, Farm Credit Administration and Finance Agency Final Rule on Margin and Capital Requirements for Covered Swap Entities

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

On October 4, 2018, the Finance Agency published a final rule, effective November 5, 2018, establishing standards for identifying when an indemnification payment by an FHLBank or the Office of Finance to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the Finance Agency is prohibited or permissible. The rule generally prohibits these payments except in the following circumstances:
•
premiums for any commercial insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the Finance Agency or a civil money penalty imposed by the Finance Agency;
•
expenses of defending an action, subject to an agreement to repay those expenses in certain instances; and
•
amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016 (the date the rule was proposed).



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The rule also outlines the process the board of directors must undergo prior to making a permitted payment related to expenses of defending an action. We do not expect the rule to materially impact our financial condition or results of operations.
Advisory Bulletin 2018-07 Federal Home Loan Bank Liquidity Guidance

On August 23, 2018, the Finance Agency issued the Liquidity Guidance AB that communicates the Finance Agency’s expectations with respect to the maintenance of sufficient liquidity to enable us to provide advances and letters of credit for members. The Liquidity Guidance AB rescinds the 2009 liquidity guidance previously issued by the Finance Agency. Contemporaneously with the issuance of the Liquidity Guidance AB, the Finance Agency issued guidance that identifies initial thresholds for measures of liquidity within the established ranges set forth in the Liquidity Guidance AB.
The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit (SLOCs). In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.
With respect to base case liquidity, the Finance Agency revised previous guidance that required us to assume a 5-day period without access to capital markets due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, we are required to hold positive cash flow assuming no access to capital markets and assuming renewal of all maturing advances for a period of between ten to thirty calendar days. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to SLOCs, the guidance states that we should maintain a liquidity reserve of between one percent and 20 percent of our outstanding SLOC commitments.
With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10 to -20 percent) and one-year (-25 to -35 percent) maturity horizons. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short-term debt funding.
The Liquidity Guidance AB also addresses liquidity stress testing, contingency funding plans, and an adjustment to our core mission achievement calculation. Portions of the Liquidity Guidance AB were implemented on December 31, 2018, with further implementation to take place on March 31, 2019 and full implementation on December 31, 2019. The Liquidity Guidance AB may require us to hold an additional amount of liquid assets to meet the new guidance, which could reduce our ability to invest in higher-yielding assets. Further, our cost of funding may increase if we were required to achieve the appropriate funding gap with longer-term funding. We do not expect the changes to have a material effect on our financial condition or results of operations.
Adoption of Single-Counterparty Credit Limits for Bank Holding Companies and Foreign Banking Organizations by Board of Governors of the Federal Reserve System

On August 6, 2018, the Board of Governors of the Federal Reserve System published a final rule, effective October 5, 2018, establishing single-counterparty credit limits applicable to bank holding companies and foreign banking organizations with total consolidated assets of $250 billion or more, including global systemically important bank holding companies (GSIBs) in the United States. These entities are considered to be covered companies under the rule. The FHLBanks are themselves exempt from the limits and reporting requirements contained in this rule. However, credit exposure to individual FHLBanks must be monitored, and reported on as required, by any entity that is a covered company under this rule.
Under the final rule, a covered company and its subsidiaries may not have aggregate net credit exposure to an FHLBank and, if applicable, (in certain cases) economically interdependent entities in excess of 25 percent of the company’s tier 1 capital. Such credit exposure does not include advances from an FHLBank, but generally includes collateral pledged to an FHLBank in excess of a covered company’s outstanding advances. Also included towards a covered company’s net credit exposure is its investment in FHLBank capital stock and debt instruments, deposits with an FHLBank, FHLBank-issued letters of credit where a covered company is the named beneficiary, and other obligations to an FHLBank, including repurchase or reverse repurchase transactions net of collateral that create a credit exposure to an FHLBank. Intra-day exposures are exempt from the final rule.
With respect to the FHLBanks’ consolidated obligations held by a covered company, the company must monitor, and report on as required, its credit exposure for such obligations. It is not clear if the Federal Reserve will require consolidated obligations to be aggregated with other exposures to an FHLBank or the FHLBank System.

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The final rule gives major covered companies (i.e., the GSIBs) until January 1, 2020 to comply, and all other covered companies will have until July 1, 2020 to comply. We do not expect the rule to materially affect our financial condition or results of operations.
OFF-BALANCE SHEET ARRANGEMENTS
Our significant off-balance sheet arrangements consist of the following:

•
joint and several liability for consolidated obligations issued on behalf of the other FHLBanks;
 
•
standby letters of credit;

•
standby bond purchase agreements;

•
commitments to purchase mortgage loans;

•
commitments to issue consolidated obligations; and

•
commitments to fund advances.
 
For a complete discussion of our off-balance sheet arrangements, refer to “Item 8 — Financial Statements and Supplementary Data — Note 18 — Commitments and Contingencies.”


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CONTRACTUAL OBLIGATIONS
The following table shows our contractual obligations due by payment period at December 31, 2018 (dollars in millions):
 
 
Payments Due by Period
 
 
< 1 Year
 
1 to 3 Years
 
>3 to 5 Years
 
>5 Years
 
Total
Bonds1
 
$
53,247

 
$
31,804

 
$
4,105

 
$
4,868

 
$
94,024

Operating leases
 
1

 
2

 
1

 
—

 
4

Mandatorily redeemable capital stock
 
2

 
1

 
28

 
224

 
255

Commitments to purchase mortgage loans
 
101

 
—

 
—

 
—

 
101

Pension and postretirement contributions2
 
2

 
2

 
2

 
4

 
10

Total
 
$
53,353

 
$
31,809

 
$
4,136

 
$
5,096

 
$
94,394


1
Excludes contractual interest payments related to bonds. Total is based on contractual maturities; the actual timing of payments could be impacted by factors affecting redemptions.

2
Represents the future funding contribution for our qualified defined benefit multiemployer plan and the scheduled benefit payments for our nonqualified defined benefit plans.

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

VALUATION MODELS

We use sophisticated risk management systems to evaluate our financial position and risk exposure. These systems employ various mathematical models and valuation techniques to measure interest rate risk. For example, we use valuation techniques designed to model explicit and embedded options and other cash flow uncertainties across a number of hypothetical interest rate environments. The techniques used to model options rely on:
•
understanding the contractual and behavioral features of each instrument;
•
using appropriate market data, such as yield curves and implied volatilities; and
•
using appropriate option valuation models and prepayment estimates or forecasts to describe the evolution of interest rates over time and the expected cash flows of financial instruments in response.
The method for calculating fair value is dependent on the instrument type. Option-free instruments, such as plain vanilla interest rate swaps, bonds, and advances require an assessment of the future course of interest rates. Once the course of interest rates has been specified and the expected cash flows determined, future cash flows are discounted to compute the fair value. Options and option-embedded instruments, such as cancelable interest rate swaps, swaptions, interest rate caps and floors, callable bonds, and mortgage-related instruments, are typically evaluated using an interest rate tree (lattice) or Monte Carlo simulations that generate a large number of possible interest rate scenarios.
Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different. Our risk computations require the use of instantaneous shifts in assumptions, such as interest rates, spreads, volatilities, and prepayment speeds. These computations may differ from our actual interest rate risk exposure because they do not take into account any portfolio re-balancing and hedging actions that are required to maintain risk exposures within our policies and guidelines. We have adopted controls, procedures, and policies to monitor and manage assumptions used in these models which are regularly validated.

Market Risk

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

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

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


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The MVCS calculation uses market prices which are computed using interest rates, spreads, and volatilities, and assumes a run-off balance sheet. The timing and variability of balance sheet cash flows are calculated by an internal model. To ensure the accuracy of the MVCS calculation, we reconcile the computed market prices of complex instruments, such as derivatives and mortgage assets, to market observed prices or dealers’ quotes.

Interest rate risk stress tests of MVCS involve instantaneous parallel and non-parallel changes in interest rates. The resulting percentage change in MVCS from the base case value is an indication of longer-term repricing risk and option risk embedded in the balance sheet.

In an effort to protect MVCS from large interest rate swings, we manage the interest rate risk of our balance sheet by using hedging transactions, such as issuing consolidated obligation bonds, including floating rate, simple bullet, callable, or other structured features and entering into or canceling interest rate swaps, caps, floors, and swaptions.

We monitor and manage to the MVCS policy limits in an effort to ensure the stability of the Bank’s value. Our policy limits are based on declines from the base case in parallel and non-parallel interest rate change scenarios. Any policy limit breach requires a prompt action to address the measure outside of the policy limit and the breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the MVCS policy limits at December 31, 2018 and 2017.

Our down 200 basis point policy limit is suspended when the 10-year swap rate is below 2.50 percent and remains so for five consecutive days. At December 31, 2018, the 10-year swap rate was 2.71 percent and the associated policy limit was in effect. At December 31, 2017, the 10-year swap rate was 2.40 and had been below 2.50 for five consecutive days, and therefore the associated policy limit was suspended.

The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous parallel changes in interest rates at December 31, 2018 and 2017:
 
Market Value of Capital Stock Assuming Parallel Changes (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2018
$
135.3

 
$
137.2

 
$
137.3

 
$
136.8

 
$
136.1

 
$
135.0

 
$
132.6

2017
$
133.7

 
$
136.0

 
$
136.4

 
$
135.8

 
$
134.7

 
$
133.2

 
$
129.9

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2018
(1.1
)%
 
0.2
%
 
0.3
%
 
—
%
 
(0.6
)%
 
(1.3
)%
 
(3.1
)%
2017
(1.5
)%
 
0.2
%
 
0.4
%
 
—
%
 
(0.8
)%
 
(1.9
)%
 
(4.4
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2018
(9.0
)%
 
(5.0
)%
 
(2.2
)%
 
—
%
 
(2.2
)%
 
(5.0
)%
 
(9.0
)%
2017
(12.0
)%
 
(5.0
)%
 
(2.2
)%
 
—
%
 
(2.2
)%
 
(5.0
)%
 
(12.0
)%


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The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous non-parallel changes in interest rates at December 31, 2018 and 2017:
 
Market Value of Capital Stock Assuming Non-Parallel Changes (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2018
$
136.1

 
$
137.0

 
$
137.1

 
$
136.8

 
$
136.2

 
$
135.2

 
$
132.6

2017
$
133.9

 
$
135.3

 
$
135.8

 
$
135.8

 
$
135.2

 
$
134.2

 
$
131.5

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2018
(0.5
)%
 
0.1
 %
 
0.2
%
 
—
%
 
(0.5
)%
 
(1.2
)%
 
(3.1
)%
2017
(1.4
)%
 
(0.3
)%
 
—
%
 
—
%
 
(0.4
)%
 
(1.2
)%
 
(3.2
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2018
(9.0
)%
 
(5.0
)%
 
(2.2
)%
 
—
%
 
(2.2
)%
 
(5.0
)%
 
(9.0
)%
2017
(13.0
)%
 
(5.5
)%
 
(2.5
)%
 
—
%
 
(2.5
)%
 
(5.5
)%
 
(13.0
)%

Our base case MVCS was 136.8 at December 31, 2018 compared to 135.8 at December 31, 2017. The change was primarily attributable to the following factors:

•
Increase in retained earnings: We recorded net income of $460 million during 2018, which was primarily driven by net interest income of $635 million. Dividend payments for 2018 totaled $249 million. The earnings in excess of dividend payments had a positive impact on the market value of assets, thereby increasing MVCS.

•
Increased shares of capital stock: Our capital stock balance increased at December 31, 2018 when compared to December 31, 2017 due primarily to an increase in member activity. As we issued this capital stock at par, which is below our current MVCS value, our MVCS was negatively impacted.

PROJECTED INCOME SENSITIVITY

We monitor the Bank’s projected 24-month income sensitivity through our review of the projected return on capital stock measure. Projected return on capital stock is computed as an annualized ratio of projected net income over a 24 month period to average projected capital stock over the same period.
We monitor and manage projected 24-month income sensitivity in an effort to limit the short-term earnings volatility of the Bank. The projected 24-month income sensitivity is based on the forward interest rates, business, and risk management assumptions.
Our primary income sensitivity policy limits specify a floor on our projected return on capital stock of no less than 50 percent of average projected 3-month LIBOR over 24 months for the up and down 100 and 200 basis point parallel interest rate shift scenarios as well as for the up and down 100 basis point non-parallel interest rate shift for each shock scenario. Any policy limit breach requires a prompt action to address the measure outside of the policy limit. The breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the projected 24-month income sensitivity policy limits at both December 31, 2018 and 2017.

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The following table shows our projected return on capital stock over the following 24 months and associated policy limits, assuming instantaneous parallel shifts in interest rates at December 31, 2018 and 2017:
 
Projected Return on Capital Stock
 
Down 200
 
Down 100
 
Base Case
 
Up 100
 
Up 200
2018
3.9
%
 
6.1
%
 
7.6
%
 
8.9
%
 
10.3
%
2017
3.8
%
 
6.0
%
 
7.6
%
 
8.8
%
 
10.0
%
 
Policy Limits
 
Down 200
 
Down 100
 
Base Case
 
Up 100
 
Up 200
2018
0.3
%
 
0.8
%
 
—
%
 
1.8
%
 
2.3
%
2017
0.1
%
 
0.6
%
 
—
%
 
1.6
%
 
2.1
%
The following table shows our projected return on capital stock over the following 24 months and associated policy limits, assuming instantaneous non-parallel shifts in interest rates at December 31, 2018 and 2017:
 
Projected Return on Capital Stock
 
Down 100
 
Base Case
 
Up 100
2018
8.1
%
 
7.6
%
 
7.0
%
2017
7.9
%
 
7.6
%
 
7.2
%
 
Policy Limits
 
Down 100
 
Base Case
 
Up 100
2018
1.5
%
 
—
%
 
1.1
%
2017
1.3
%
 
—
%
 
0.9
%
Our base case projected return on capital stock was 7.6 percent at December 31, 2018 and December 31, 2017. Base case projected return on capital stock remained stable, primarily attributable to the following offsetting factors:

•
Projected Net Income: Projected net income increased at December 31, 2018, when compared to December 31, 2017 due to higher interest rates and a higher balance of interest earning assets. Higher interest rates resulted in higher projected returns on capital. This had a positive impact on return on capital stock.

•
Projected Average Capital Stock: Projected average capital stock balances increased at December 31, 2018, when compared to December 31, 2017 as a result of increased member activity. This had a negative impact on projected return on capital stock.

DERIVATIVES
We use derivatives to manage interest rate risk. Finance Agency regulations and our risk management policies establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.
Our hedging strategies include hedges of specific assets and liabilities that qualify for fair value hedge accounting and economic hedges that are used to reduce overall market risk exposure. All hedging strategies are approved by our Asset-Liability Committee. See additional discussion regarding our derivative contracts in “Item 8. Financial Statements and Supplementary Data — Note 11 — Derivatives and Hedging Activities.”

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The following table summarizes our interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under the accounting for derivative instruments and hedging activities, and notional amount as of December 31, 2018 and 2017 (dollars in millions):
 
 
 
 
 
 
December 31,
Hedged Item / Hedging Instrument
 
Hedging Strategy
 
Hedge Accounting Designation
 
2018
 Notional Amount
 
2017
 Notional Amount
Advances
 
 
 
 
 
 
 
 
Pay-fixed, receive floating interest rate swap (without options)1,2
 
Converts the advance’s fixed rate to a variable rate index.
 
Fair Value
 
$
13,676

 
$
14,826

 
 
 
 
Economic
 
16

 
56

Pay-fixed, receive floating interest rate swap (with options)1
 
Converts the advance’s fixed rate to a variable rate index and offsets option risk in the advance.
 
Fair Value
 
476

 
569

Investments
 
 
 
 
 
 
 
 
Pay-fixed, receive floating interest rate swap3
 
Converts the investment’s fixed rate to a variable rate index.
 
Fair Value
 
6,705

 
7,408

 
 
 
 
Economic
 
882

 
928

Mortgage Loans
 
 
 
 
 
 
 
 
Mortgage loan purchase commitment
 
Exposes us to fair value risk associated with fixed rate mortgage loan purchase commitments.
 
Economic
 
101

 
72

Forward settlement agreement
 
Protects against changes in market value of fixed rate mortgage loan purchase commitments resulting from changes in interest rates.
 
Economic
 
98

 
66

Bonds
 
 
 
 
 
 
 
 
Receive-fixed or structured, pay floating interest rate swap (without options)4
 
Converts the bond’s fixed or structured rate to a variable rate index.
 
Fair Value
 
24,969

 
27,862

Receive-fixed or structured, pay floating interest rate swap (with options)4
 
Converts the bond’s fixed or structured rate to a variable rate index and offsets option risk in the bond.
 
Fair Value
 
1,490

 
1,455

Offsetting Positions
 
 
 
 
 
 
 
 
Pay-fixed, receive-float interest rate swap and receive-fixed, pay-float interest rate swap
 
Represents offsetting positions on interest rate swaps acquired from the Merger.
 
Economic
 
423

 
423

Total
 
 
 
 
 
$
48,836

 
$
53,665


1
At December 31, 2018 and 2017, the par value of fixed rate advances outstanding was $39.9 billion and $37.0 billion, of which 35 percent and 41 percent were swapped to a variable rate index.

2
Includes the notional of interest rate swaps in fair value hedge relationships for forward starting advance firm commitments of $39 million and $107 million at December 31, 2018 and 2017.

3
At December 31, 2018 and 2017, the amortized cost of fixed rate AFS securities outstanding was $7.2 billion and $8.2 billion, of which 95 and 93 percent were swapped to a variable rate index. At December 31, 2018 and 2017, the fair value of fixed rate trading securities outstanding was $915 million and $977 million and all of these trading securities were swapped to a variable rate index.

4
At December 31, 2018 and 2017, the par value of fixed rate bonds outstanding was $39.8 billion and $40.3 billion, of which 66 and 73 percent were swapped to a variable rate index.

Advances
We offer a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics, and optionality. We may use derivatives to adjust the repricing and/or option characteristics of advances in an effort to manage interest rate risk. For example, we may hedge a fixed rate advance with an interest rate swap where we pay a fixed rate coupon and receive a variable rate coupon, effectively converting the fixed rate advance to a variable rate advance. This type of hedge is typically treated as a fair value hedge. In addition, we may hedge a callable advance, which gives the borrower the option to extinguish the fixed rate advance, by entering into a cancelable interest rate swap.

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We may hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap (fair value hedge). In this case, the interest rate swap will function as the hedging instrument for both the firm commitment and the subsequent advance. We may also enter into economic derivatives in an effort to mitigate the income statement volatility that occurs when an advance or firm commitment for a forward-starting advance is recorded under the fair value option and hedge accounting is not permitted.
Investments
We primarily invest in U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, and MBS, and classify them as either trading, AFS, or HTM. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. We may fund investment securities with fixed rate long-term and callable consolidated obligations or utilize interest rate swaps, caps, floors, or swaptions to manage interest rate risk.
The prepayment options embedded in MBS can result in extensions or contractions in the expected maturities of these investments, depending on changes in and levels of interest rates, as well as other factors related to the mortgage market. The Finance Agency limits this source of interest rate risk by restricting the types of MBS we may own to those with limited average life changes under certain interest rate shock scenarios.
Mortgage Loans
We invest in fixed rate mortgage loans and certain mortgage loan purchase commitments with our PFIs that are considered derivatives. We normally hedge these commitments by selling TBA MBS for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date for an established price. Upon expiration of the mortgage loan purchase commitment, we purchase the TBA to close the hedged position.
Consolidated Obligations
We may enter into derivatives to hedge the interest rate risk associated with our consolidated obligations. For example, we may issue and hedge a fixed rate consolidated obligation with an interest rate swap where we receive a fixed rate coupon and pay a variable rate coupon, effectively converting the fixed rate consolidated obligation to a variable rate consolidated obligation. This type of hedge is typically treated as a fair value hedge. We may also issue variable interest rate consolidated obligations indexed to a variety of indices, such as LIBOR, and simultaneously execute interest rate swaps to hedge the basis risk of the variable interest rate debt. Interest rate swaps used to hedge the basis risk of variable interest rate debt do not qualify for hedge accounting. As a result, this type of hedge is treated as an economic hedge. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables us to offer a wider range of attractively priced advances to our borrowers and may allow us to reduce our funding costs. While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank serves as sole counterparty to derivative agreements associated with specific debt issues for which it is the primary obligor.
We may also enter into economic derivatives in an effort to mitigate the income statement volatility that occurs when consolidated obligations are recorded under the fair value option and hedge accounting is not permitted.
Balance Sheet
We may enter into certain economic derivatives as macro balance sheet hedges to protect against changes in interest rates, including prepayments on mortgage assets. These economic derivatives may include interest rate caps, floors, swaps, and swaptions.
Offsetting Positions
As a result of the Merger, we acquired certain offsetting interest rate swaps and classified these as economic derivatives.

Capital Adequacy

An adequate capital position is necessary for providing safe and sound operations of the Bank. Our key capital adequacy measures are MVCS and regulatory capital in order to maintain capital levels in accordance with Finance Agency regulations. In addition, we monitor retained earnings. For a discussion of our key capital adequacy measure, MVCS, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Market Value of Capital Stock Sensitivity.”


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RETAINED EARNINGS TARGET LEVEL AND REGULATORY CAPITAL REQUIREMENTS

Our risk management policies include a target level of retained earnings based on the amount we believe necessary to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We are also subject to three regulatory capital requirements. For additional information on our compliance with these requirements, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

Liquidity Risk

We define liquidity risk as the risk that we will be unable to meet our obligations as they come due or meet the credit needs of our members and housing associates in a timely and cost efficient manner. To manage this risk, we maintain liquidity in accordance with Finance Agency regulations. For additional information on compliance with these requirements, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity Requirements.”

Credit Risk

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

ADVANCES

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

We are required by regulation to obtain sufficient collateral to fully secure our advances and other credit products. The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal or market value, if available, of the collateral. Eligible collateral includes (i) fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and FFELP, (iii) cash deposited with us, and (iv) other real estate-related collateral acceptable to us, such as second lien mortgages, home equity lines of credit, municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and we can perfect a security interest in such collateral. CFIs may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each borrower’s capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Borrowers may pledge collateral to us by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with us or our custodians. We perfect our security interest in all pledged collateral by filing Uniform Commercial Code financing statements or taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to us by our members, or any affiliates of our members, has priority over the claims and rights of any other party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.

Under a blanket pledge agreement, we are granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, we do not initially take delivery of collateral pledged by blanket pledge agreement borrowers. In the event of deterioration in the financial condition of a blanket pledge agreement borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, we generally require collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), we generally take control of collateral through the delivery of cash, securities, or loans to us or our custodians.


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Although management has policies and procedures in place to manage credit risk, we may be exposed to this risk if our outstanding advance value exceeds the liquidation value of our collateral. We mitigate this risk by applying collateral discounts or haircuts to the unpaid principal balance or market value, if available, of the collateral to determine the advance equivalent value of the collateral securing each borrower’s obligation. The amount of these discounts will vary based on the type of collateral and security agreement. We determine these discounts or haircuts using data based upon historical price changes, discounted cash flow analyses, and loan level modeling.
 
At December 31, 2018 and 2017, borrowers pledged $333.5 billion and $319.0 billion of collateral (net of applicable discounts) to support activity with us, including advances. At December 31, 2018 and 2017, all of our advances met the requirement to be collateralized at a minimum of 100 percent, net of applicable discounts. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate available liquidity and to borrow additional amounts in the future.

The following table shows the Bank’s total exposure, including advances, as well as the collateralization percentage of outstanding exposures by borrower type (dollars in millions):
 
December 31,
 
2018
 
2017
 
Sum of Total Exposure
 
% Collateralized
 
Sum of Total Exposure
 
% Collateralized
Commercial banks
$
84,072

 
303
%
 
$
76,589

 
313
%
Savings institutions

1,396

 
597

 
2,412

 
328

Credit unions
6,479

 
305

 
4,423

 
344

Non-captive insurance companies
18,644

 
143

 
19,907

 
136

Captive insurance companies
4,453

 
100

 
7,634

 
101

Community development financial institutions
3

 
313

 
3

 
214

Housing associates
59

 
252

 
23

 
289

Non-member borrowers
615

 
121

 
523

 
117

Total borrowers
$
115,721

 
272
%
 
$
111,514

 
268
%
 
The following table shows the amount of collateral pledged to us (net of applicable discounts) by collateral type (dollars in billions):    
 
 
December 31,
 
 
2018
 
2017
Collateral Type
 
Discount Range1
 
Amount
 
% of Total
 
Discount Range1
 
Amount
 
% of Total
Single-family loans
 
18-36%
 
$
198.4

 
59
 
18-39%
 
$
197.8

 
62
Multi-family loans
 
35-35
 
13.1

 
4
 
37-37
 
9.7

 
3
Other real estate
 
18-61
 
92.2

 
28
 
18-61
 
77.1

 
24
Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash, agency and RMBS2
 
0-31
 
19.4

 
6
 
0-32
 
22.7

 
7
CMBS3
 
13-24
 
5.7

 
2
 
13-25
 
4.2

 
2
Government-insured loans
 
11-18
 
3.6

 
1
 
9-18
 
3.9

 
1
Secured small business and agribusiness loans
 
29-29
 
1.1

 
—
 
27-27
 
3.6

 
1
Total
 
 
 
$
333.5

 
100
 
 
 
$
319.0

 
100

1
Represents the range of discounts applied to the unpaid principal balance or market value of collateral pledged. The discount range for Housing Associates is 5 percent lower than the indicated range.

2
Represents cash, agency securities, and residential mortgage-backed securities (RMBS).

3
Represents commercial mortgage-backed securities (CMBS).

Based upon our collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there were no probable credit losses on our credit products as of December 31, 2018 and 2017. Accordingly, we have not recorded any allowance for credit losses on our credit products.


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MORTGAGE LOANS

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

Through our participation in the MPF program, which represented 97 percent of our mortgage loans held for portfolio at December 31, 2018, we invest in conventional and government-insured residential mortgage loans that are acquired through or purchased from a PFI. In addition, MPF Xtra, MPF Direct, and MPF Government MBS are off-balance sheet loan products that are passed through to a third-party investor and are not maintained in our Statements of Condition.

Under the MPP, we acquired single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to us. The MPP represented three percent of our mortgage loans held for portfolio at December 31, 2018. We currently do not purchase mortgage loans under this program. All loans in this portfolio were originated prior to 2006.

The following table presents the unpaid principal balance of our mortgage loan portfolio by product type (dollars in millions):
 
 
December 31,
Product Type
 
2018
 
2017
Conventional
 
$
7,231

 
$
6,472

Government
 
503

 
529

Total mortgage loan unpaid principal balance
 
$
7,734

 
$
7,001


We manage the credit risk on mortgage loans acquired in the MPF program and MPP by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs, and (iv) establishing an allowance for credit losses to reflect management’s estimate of probable credit losses inherent in the portfolio.

Government-Insured Mortgage Loans. For our government-insured mortgage loans, our loss protection consists of the loan guarantee, the ability of the loan servicer to repurchase any government-insured loan once it reaches 90 days delinquent, and the contractual obligation of the loan servicer to liquidate a government-insured loan in full upon sale of the REO property if not repurchased previously. Therefore, we have not recorded any allowance for credit losses on government-insured mortgage loans.
Conventional Mortgage Loans. For our conventional mortgage loans, we have several layers of legal loss protection that are defined in agreements among us and our PFIs. These loss layers may vary depending on the product alternatives selected and credit profile of the loans. Loss layers may consist of (i) homeowner equity, (ii) PMI, (iii) a FLA, if applicable, and (iv) a credit enhancement obligation of the PFI, if applicable. For a detailed discussion of these loss layers, refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses.”

The following table shows conventional MPF and MPP loans by FICO® score. All percentages are calculated based on unpaid principal balances as of the applicable period end.
 
 
December 31,
 
December 31,
 
 
2018
 
2017
 
2018
 
2017
FICO® Score1
 
MPF
 
MPP
<620
 
1
%
 
1
%
 
—
%
 
—
%
620 to < 660
 
5

 
5

 
4

 
4

660 to < 700
 
12

 
13

 
20

 
20

700 to < 740
 
20

 
20

 
33

 
33

>= 740
 
62

 
61

 
43

 
43

Total
 
100
%
 
100
%
 
100
%
 
100
%
Weighted average FICO score
 
742

 
740

 
730

 
730


1
Represents the lowest original FICO® score of the borrowers and co-borrowers.

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The following table shows conventional MPF and MPP loans by loan-to-value ratio at origination. All percentages are calculated based on unpaid principal balances as of the applicable period end.

 
 
December 31,
 
December 31,
 
 
2018
 
2017
 
2018
 
2017
Loan-to-Value1
 
MPF
 
MPP
<= 60%
 
12
%
 
13
%
 
21
%
 
20
%
> 60% to 70%
 
13

 
13

 
20

 
21

> 70% to 80%
 
57

 
58

 
51

 
52

> 80% to 90%2
 
9

 
8

 
4

 
4

> 90%2
 
9

 
8

 
4

 
3

Total
 
100
%
 
100
%
 
100
%
 
100
%
Weighted average loan-to-value
 
77.1
%
 
76.5
%
 
70.0
%
 
71.0
%

1
Represents the loan-to-value at origination for the related loan.

2
These conventional loans were required to have PMI at origination.

The following table shows the five largest state concentrations of our conventional MPF portfolio, with comparable data at December 31, 2017. All percentages are calculated based on unpaid principal balances as of the applicable period end.
 
December 31,
 
2018
 
2017
Iowa
36
%
 
39
%
Missouri
21

 
21

Minnesota
16

 
16

South Dakota
9

 
8

Kansas
4

 
3

All others
14

 
13

Total
100
%
 
100
%

The following table shows the five largest state concentrations of our conventional MPP portfolio, with comparable data at December 31, 2017. All percentages are calculated based on unpaid principal balances as of the applicable period end.
 
December 31,
 
2018
 
2017
California
29
%
 
28
%
Illinois
11

 
11

New York
8

 
8

Florida
6

 
6

Massachusetts
5

 
5

All others
41

 
42

Total
100
%
 
100
%

Allowance for Credit Losses. We utilize an allowance for credit losses to reserve for estimated losses in our conventional mortgage loan portfolio at the balance sheet date. The measurement of our allowance for credit losses is determined by (i) reviewing similar conventional mortgage loans for impairment on a collective basis, (ii) reviewing conventional mortgage loans for impairment on an individual basis, and (iii) estimating additional credit losses in the conventional mortgage loan portfolio. The allowance for credit losses on our conventional mortgage loans was $1 million at December 31, 2018 and $2 million at December 31, 2017.

Refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses” for additional information on our allowance for credit losses on our MPF and MPP mortgage loans.


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Non-Accrual Loans and Delinquencies. We place a conventional mortgage loan on non-accrual status if it is determined that either the collection of interest or principal is doubtful or interest or principal is 90 days or more past due. We do not place a government-insured mortgage loan on non-accrual status due to the U.S. Government guarantee of the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. Refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses” for a summary of our non-accrual loans and mortgage loan delinquencies.

INVESTMENTS

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

Finance Agency regulations limit the type of investments we may purchase. We are prohibited from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks, unless otherwise approved by the Finance Agency. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. At December 31, 2018, we were in compliance with the above regulation and did not own any financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks, and those approved by the Finance Agency.

Finance Agency regulations also include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. These limits are based on a percentage of eligible regulatory capital and the counterparty’s overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of our total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that we may offer for extensions of unsecured credit, excluding overnight Federal funds sold, ranges from three to 15 percent based on the counterparty’s credit rating. Our total unsecured exposure to a counterparty, including overnight Federal funds sold, may not exceed twice that amount, or a total of six to 30 percent of the eligible amount of regulatory capital, based on the counterparty’s credit rating. At December 31, 2018, we were in compliance with the regulatory limits established for unsecured credit.

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

We generally limit our unsecured credit exposure to the following overnight investment types:

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

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


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At December 31, 2018, our unsecured investment exposure consisted of Federal funds sold. The following table presents our unsecured investment exposure by counterparty credit rating and domicile at December 31, 2018 (excluding accrued interest receivable) (dollars in millions):
 
 
Credit Rating1,2
Domicile of Counterparty
 
AA
 
A
 
BBB
 
Total
Domestic
 
$
—

 
$
350

 
$
370

 
$
720

U.S. branches and agency offices of foreign commercial banks
 
 
 
 
 
 
 
 
Canada
 
—

 
700

 
—

 
700

Germany
 
700

 
—

 
—

 
700

Netherlands
 
—

 
530

 
—

 
530

Australia
 
700

 
—

 
—

 
700

Norway
 
—

 
500

 
—

 
500

Finland
 
300

 
—

 
—

 
300

Total U.S. branches and agency offices of foreign commercial banks
 
1,700

 
1,730

 
—

 
3,430

Total unsecured investment exposure
 
$
1,700

 
$
2,080

 
$
370

 
$
4,150


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

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

The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
December 31, 2018
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB
 
Unrated
 
Total
Interest-bearing deposits
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1

Securities purchased under agreements to resell
—

 
200

 
250

 
500

 
—

 
3,750

 
4,700

Federal funds sold
—

 
1,700

 
2,080

 
370

 
—

 
—

 
4,150

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family
—

 
2,988

 
—

 
—

 
—

 
—

 
2,988

GSE multifamily
—

 
9,444

 
—

 
—

 
—

 
—

 
9,444

U.S. obligations single-family2
—

 
4,492

 
—

 
—

 
—

 
—

 
4,492

U.S. obligations commercial2
—

 
1

 
—

 
—

 
—

 
—

 
1

Private-label residential
—

 
4

 
—

 
5

 
1

 
—

 
10

Total mortgage-backed securities
—

 
16,929

 
—

 
5

 
1

 
—

 
16,935

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations2
—

 
2,761

 
—

 
—

 
—

 
—

 
2,761

GSE and Tennessee Valley Authority obligations
—

 
1,484

 
—

 
—

 
—

 
—

 
1,484

State or local housing agency obligations
967

 
238

 
—

 
—

 
—

 
—

 
1,205

Other
443

 
98

 
—

 
—

 
—

 
—

 
541

Total non-mortgage-backed securities
1,410

 
4,581

 
—

 
—

 
—

 
—

 
5,991

Total investments3
$
1,410

 
$
23,411

 
$
2,330

 
$
875

 
$
1

 
$
3,750

 
$
31,777


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

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

3
At December 31, 2018, 13 percent of our total investments were unsecured.

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The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
December 31, 2017
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB
 
Total
Interest-bearing deposits
$
—

 
$
1

 
$
—

 
$
—

 
$
—

 
$
1

Securities purchased under agreements to resell
1,600

 
—

 
500

 
2,500

 
—

 
4,600

Federal funds sold
—

 
600

 
2,530

 
1,120

 
—

 
4,250

Investment securities:
 
 
 
 
 
 
 
 
 
 


Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 


GSE single-family
—

 
3,740

 
—

 
—

 
—

 
3,740

GSE multifamily
—

 
10,983

 
—

 
—

 
—

 
10,983

U.S. obligations single-family2
—

 
3,741

 
—

 
—

 
—

 
3,741

U.S. obligations commercial2
—

 
2

 
—

 
—

 
—

 
2

Private-label residential
—

 
4

 
—

 
7

 
1

 
12

Total mortgage-backed securities
—

 
18,470

 
—

 
7

 
1

 
18,478

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations2
—

 
3,296

 
—

 
—

 
—

 
3,296

GSE and Tennessee Valley Authority obligations
—

 
1,889

 
—

 
—

 
—

 
1,889

State or local housing agency obligations
1,122

 
266

 
—

 
—

 
—

 
1,388

Other
451

 
99

 
—

 
—

 
—

 
550

Total non-mortgage-backed securities
1,573

 
5,550

 
—

 
—

 
—

 
7,123

Total investments3
$
3,173

 
$
24,621

 
$
3,030

 
$
3,627

 
$
1

 
$
34,452


1
Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor credit rating is not available for the investment, the issuer rating is applied. For securities purchased under agreement to resell, when neither guarantor nor the issuer rating is available, the rating of the underlying collateral is applied.

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

3
At December 31, 2017, 12 percent of our total investments were unsecured.
    
Our total investments decreased at December 31, 2018, when compared to December 31, 2017 due primarily to paydowns of MBS in 2018.

At December 31, 2018 and 2017, we did not consider any of our investments to be other-than-temporarily impaired. For more information on our evaluation of OTTI, refer to “Item 8. Financial Statements and Supplementary Data — Note 7 — Other-Than-Temporary Impairment.”

Mortgage-Backed Securities

We limit our investments in MBS to those guaranteed by the U.S. Government or issued by a GSE. Further, our risk management policies prohibit new purchases of private-label MBS. We perform ongoing analysis on these investments to determine potential credit issues. At December 31, 2018 and 2017, we owned $16.9 billion and $18.5 billion of MBS, of which approximately 99.9 percent were guaranteed by the U.S. Government or issued by GSEs and 0.1 percent were private-label MBS at each period end.

We are exposed to mortgage asset credit risk through our investments in MBS. Mortgage asset credit risk is the risk that we will not receive payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by a number of factors, including the strength and ability to guarantee the payments from the agency that created the structure, underlying loan performance, and other economic factors in the local market or nationwide.

DERIVATIVES

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


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

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

Cleared Derivatives. For cleared derivatives, the Clearinghouse is our counterparty. We are subject to risk of nonperformance by the Clearinghouse and clearing agent. The requirement that we post initial and variation margin through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. However, the use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. We do not anticipate any credit losses on our cleared derivatives.

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

The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
December 31, 2018
Credit Rating1
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty
 
Net Credit Exposure
 to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Liability positions with credit exposure
 
 
 
 
 
 
 
 
Cleared derivatives2
 
40,940

 
(13
)
 
70

 
57

Total derivative positions with credit exposure to non-member counterparties
 
40,940

 
(13
)
 
70

 
57

Member institutions3
 
100

 
1

 
—

 
1

Total
 
41,040

 
$
(12
)
 
$
70

 
$
58

Derivative positions without credit exposure
 
7,796

 
 
 
 
 
 
Total notional
 
$
48,836

 
 
 
 
 
 

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

2
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing’s parent, CME Group Inc. was rated Aa3 by Moody’s and AA- by Standard and Poor’s at December 31, 2018.

3
Represents mortgage loan purchase commitments with our member institutions.















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Table of Contents

The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
December 31, 2017
Credit Rating2
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty1
 
Net Credit Exposure
to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
   A3
 
$
5

 
$
—

 
$
—

 
$
—

Liability positions with credit exposure
 
 
 
 
 
 
 


Uncleared derivatives
 
 
 
 
 
 
 
 
A3
 
144

 
(2
)
 
2

 
—

BBB
 
194

 
(17
)
 
18

 
1

Cleared derivatives4
 
43,899

 
(9
)
 
108

 
99

Total derivative positions with credit exposure to non-member counterparties
 
44,242

 
(28
)
 
128

 
100

Member institutions3,5
 
18

 
—

 
—

 
—

Total
 
44,260

 
$
(28
)
 
$
128

 
$
100

Derivative positions without credit exposure
 
9,405

 
 
 
 
 


Total notional
 
$
53,665

 


 


 



1
To conform with current presentation, $313 million in variation margin has been allocated to the individual derivative instruments as of December 31, 2017 and included in net derivatives fair value before collateral. Previously, this amount was included in cash collateral pledged to (from) counterparty.

2
Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable.

3
Net credit exposure is less than $1 million.

4
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing’s parent, CME Group Inc. was rated Aa3 by Moody’s and AA- by Standard and Poor’s at December 31, 2017.

5
Represents mortgage loan purchase commitments with our member institutions.


Operational Risk

We define operational risk as the risk arising from inadequate or failed processes, people, and/or systems, including those emanating from external sources. All of our activities and processes generate operational risk, including legal risk. Operational risk is inherent in all of our business activities, processes, and systems. Management has established policies and procedures to reduce the likelihood of operational risk and designed our annual risk assessment process to provide ongoing identification, measurement, and monitoring of operational risk. Due to the manual nature of many of our processes, our operational risk exposure is closely monitored. As previously discussed, we identified two material weaknesses in our internal control over financial reporting resulting from control deficiencies in our ITGCs in the areas of user access and IT change management. We are actively working to remediate the identified material weaknesses and strengthen our internal control over financial reporting. As a result of the control deficiencies and our remediation efforts, our operational risk is elevated. For additional discussion of the identified material weaknesses, refer to “Item 9A. Controls and Procedures.”

Model Risk

We define model risk as the risk of adverse consequences from decisions based on incorrect and misused model outputs. Throughout the course of our day-to-day activities, we utilize external and internal pricing and financial models as important inputs into business and risk management decision-making processes.


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Information Security Risk

We define information security risk as the risk arising from unauthorized access, use, disclosure, disruption, modification, or destruction of information or information systems. Importantly, this definition includes the security of both digital and non-digital information as well as associated information systems and processes.

Information security risk includes the risk that cyber incidents could result in a failure or interruption of our business operations. We have not experienced any such disruption with a material adverse impact. However, we do rely heavily on internal and third-party information systems and other technology to conduct and manage our business and any disruptions to those items could have a material adverse impact on our financial condition and results of operations. We mitigate cybersecurity risk utilizing the concept of defense in depth, where multiple layers of security controls are implemented. Administrative, physical, and logical controls are in place for identifying, monitoring, and controlling system access, sensitive data, and system changes. In addition, we employ thorough security testing and training that includes regular third party facilitated penetration testing, as well as mandatory staff training on cyber risks. Given the importance of cybersecurity and ever-increasing sophistication of potential cyber-attacks, we expect to continue to strengthen our cyber-defenses. As a result of the control deficiencies previously discussed, our information security risk is elevated.

Compliance Risk

We define compliance risk as the risk of violations of laws, rules, regulations, regulatory and supervisory guidance, and internal policies and procedures. Our Legal and Compliance departments are responsible for coordinating with our various business units in connection with its identification, evaluation, and mitigation of our compliance risks.

Strategic Risk

We define strategic risk as the risk arising from adverse business decisions, poor implementation of business decisions, or a lack of responsiveness to changes in the industry and operating environment. We consider member concentration, legislative, and reputational risks to be components of strategic risk. From time to time, proposals are made, or legislative and regulatory changes are considered, which could affect our cost of doing business or other aspects of our business. We mitigate strategic risk through strategic business planning and monitoring of our external and internal environment. As a result of the material weaknesses previously discussed, our strategic risk has been elevated due to the reputational risk associated with material weaknesses. For additional information on some of the more important risks we face, refer to “Item 1A. Risk Factors.”

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk” and the sections referenced therein for quantitative and qualitative disclosures about market risk.


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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AUDITED FINANCIAL STATEMENTS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SUPPLEMENTARY DATA:
 
 
 
 


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Report of Independent Registered Public Accounting Firm

To the Board of Directors of the Federal Home Loan Bank of Des Moines

Opinions on the Financial Statements and Internal Control over Financial Reporting

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Bank as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO because material weaknesses in internal control over financial reporting existed as of that date related to (i) logical access to the Bank’s information technology (IT) systems and (ii) control over IT change management.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in the Report of Management on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2018 financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those financial statements.

Basis for Opinions

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

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

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








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Definition and Limitations of Internal Control over Financial Reporting

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

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

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued our report dated March 15, 2019 on our tests of the Bank’s compliance with certain provisions of laws, regulations, contracts and other matters. The purpose of that report is to describe the scope of our compliance testing and the results of that testing, and not to provide an opinion on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the Bank’s compliance.



/s/ PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 15, 2019

We have served as the Bank’s auditor since 1990.


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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in millions, except capital stock par value)


 
December 31,
 
 
2018
 
2017
ASSETS
 
 
 
 
Cash and due from banks (Note 3)
 
$
119

 
$
503

Interest-bearing deposits
 
1

 
1

Securities purchased under agreements to resell
 
4,700

 
4,600

Federal funds sold
 
4,150

 
4,250

Investment securities
 
 
 
 
Trading securities (Note 4)
 
915

 
1,177

Available-for-sale securities (Note 5)
 
19,019

 
20,796

Held-to-maturity securities (fair value of $3,021 and $3,686) (Note 6)
 
2,992

 
3,628

Total investment securities
 
22,926

 
25,601

Advances (Note 8)
 
106,323

 
102,613

Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $2 (Notes 9 and 10)
 
7,835

 
7,096

Accrued interest receivable
 
290

 
223

Derivative assets, net (Note 11)
 
58

 
100

Other assets
 
113

 
112

TOTAL ASSETS
 
$
146,515

 
$
145,099

LIABILITIES
 
 
 
 
Deposits (Note 12)
 
 
 
 
Interest-bearing
 
$
976

 
$
1,013

Non-interest-bearing
 
94

 
94

Total deposits
 
1,070

 
1,107

Consolidated obligations (Note 13)
 
 
 
 
Discount notes
 
42,879

 
36,682

Bonds
 
93,772

 
98,893

Total consolidated obligations
 
136,651

 
135,575

Borrowings from other FHLBanks
 
500

 
600

Mandatorily redeemable capital stock (Note 15)
 
255

 
385

Accrued interest payable
 
268

 
210

Affordable Housing Program payable (Note 14)
 
153

 
142

Derivative liabilities, net (Note 11)
 
9

 
6

Other liabilities
 
61

 
53

TOTAL LIABILITIES
 
138,967

 
138,078

Commitments and contingencies (Note 18)
 

 

CAPITAL (Note 15)
 
 
 
 
Capital stock - Class B putable ($100 par value); 54 and 51 issued and outstanding shares
 
5,414

 
5,068

Retained earnings
 
 
 
 
Unrestricted
 
1,623

 
1,504

Restricted
 
427

 
335

Total retained earnings
 
2,050

 
1,839

Accumulated other comprehensive income (loss)
 
84

 
114

TOTAL CAPITAL
 
7,548

 
7,021

TOTAL LIABILITIES AND CAPITAL
 
$
146,515

 
$
145,099

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

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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)

 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
INTEREST INCOME
 
 
 
 
 
 
Advances
 
2,443

 
1,589

 
876

Interest-bearing deposits
 
1

 
2

 
3

Securities purchased under agreements to resell
 
73

 
42

 
19

Federal funds sold
 
107

 
72

 
21

Trading securities
 
31

 
44

 
50

Available-for-sale securities
 
504

 
368

 
246

Held-to-maturity securities
 
87

 
80

 
76

Mortgage loans held for portfolio
 
252

 
236

 
233

Total interest income
 
3,498

 
2,433

 
1,524

INTEREST EXPENSE
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
736

 
521

 
414

Consolidated obligations - Bonds
 
2,095

 
1,239

 
639

Deposits
 
14

 
6

 
1

Mandatorily redeemable capital stock
 
18

 
17

 
21

Total interest expense
 
2,863

 
1,783

 
1,075

NET INTEREST INCOME
 
635

 
650

 
449

Provision (reversal) for credit losses on mortgage loans
 
—

 
—

 
3

NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES
 
635

 
650

 
446

OTHER INCOME (LOSS)
 
 
 
 
 
 
Net gains (losses) on trading securities
 
(15
)
 
1

 
3

Net gains (losses) on derivatives and hedging activities
 
19

 
12

 
7

Gains on litigation settlements, net
 
—

 
21

 
376

Other, net
 
16

 
18

 
10

Total other income (loss)
 
20

 
52

 
396

OTHER EXPENSE
 
 
 
 
 
 
Compensation and benefits
 
62

 
52

 
53

Contractual services
 
12

 
11

 
10

Professional fees
 
19

 
19

 
12

Other operating expenses
 
26

 
21

 
19

Federal Housing Finance Agency
 
9

 
10

 
8

Office of Finance
 
7

 
7

 
7

Other, net
 
7

 
4

 
9

Total other expense
 
142

 
124

 
118

NET INCOME BEFORE ASSESSMENTS
 
513

 
578

 
724

Affordable Housing Program assessments
 
53

 
60

 
75

NET INCOME
 
$
460

 
$
518

 
$
649

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

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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)

 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
Net income
 
$
460

 
$
518

 
$
649

Other comprehensive income (loss)
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
(31
)
 
132

 
68

Pension and postretirement benefits
 
1

 
—

 
(2
)
Total other comprehensive income (loss)
 
(30
)
 
132

 
66

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
430

 
$
650

 
$
715

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




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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in millions)

 
 
Capital Stock
 
 
 
 
 Class B (putable)
 
 
 
 
Shares
 
Par Value
 
Additional Capital from Merger
BALANCE, DECEMBER 31, 2015
 
47

 
$
4,714

 
$
194

Comprehensive income (loss)
 
—

 
—

 
—

Proceeds from issuance of capital stock
 
60

 
6,050

 
—

Repurchases/redemptions of capital stock
 
(41
)
 
(4,105
)
 
—

Net shares reclassified (to) from mandatorily redeemable capital stock
 
(7
)
 
(742
)
 
—

Cash dividends on capital stock
 
—

 
—

 
(142
)
BALANCE, DECEMBER 31, 2016
 
59

 
$
5,917

 
$
52

Comprehensive income (loss)
 
—

 
—

 
—

Proceeds from issuance of capital stock
 
56

 
5,602

 
—

Repurchases/redemptions of capital stock
 
(64
)
 
(6,407
)
 
—

Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
(44
)
 
—

Cash dividends on capital stock
 
—

 
—

 
(52
)
BALANCE, DECEMBER 31, 2017
 
51

 
$
5,068

 
$
—

Comprehensive income (loss)
 
—

 
—

 
—

Proceeds from issuance of capital stock
 
80

 
7,987

 
—

Repurchases/redemptions of capital stock
 
(76
)
 
(7,588
)
 
—

Net shares reclassified (to) from mandatorily redeemable capital stock
 
(1
)
 
(53
)
 
—

Cash dividends on capital stock
 
—

 
—

 
—

BALANCE, DECEMBER 31, 2018
 
54

 
$
5,414

 
$
—

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



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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL (continued from previous page)
(dollars and shares in millions)

 
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Capital
 
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, DECEMBER 31, 2015
 
$
700

 
$
101

 
$
801

 
$
(84
)
 
$
5,625

Comprehensive income (loss)
 
519

 
130

 
649

 
66

 
715

Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
6,050

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(4,105
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
(742
)
Cash dividends on capital stock
 
—

 
—

 
—

 
—

 
(142
)
BALANCE, DECEMBER 31, 2016
 
$
1,219

 
$
231

 
$
1,450

 
$
(18
)
 
$
7,401

Comprehensive income (loss)
 
414

 
104

 
518

 
132

 
650

Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
5,602

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(6,407
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
(44
)
Cash dividends on capital stock
 
(129
)
 
—

 
(129
)
 
—

 
(181
)
BALANCE, DECEMBER 31, 2017
 
$
1,504

 
$
335

 
$
1,839

 
$
114

 
$
7,021

Comprehensive income (loss)
 
368

 
92

 
460

 
(30
)
 
430

Proceeds from issuance of capital stock
 
—

 
—

 
—

 
—

 
7,987

Repurchases/redemptions of capital stock
 
—

 
—

 
—

 
—

 
(7,588
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 
—

 
—

 
—

 
—

 
(53
)
Cash dividends on capital stock
 
(249
)
 
—

 
(249
)
 
—

 
(249
)
BALANCE, DECEMBER 31, 2018
 
$
1,623

 
$
427

 
$
2,050

 
$
84

 
$
7,548

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


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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
OPERATING ACTIVITIES
 
 
 
 
 
 
Net income
 
$
460

 
$
518

 
$
649

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
 
 
Depreciation and amortization
 
86

 
26

 
48

Net (gains) losses on trading securities
 
15

 
(1
)
 
(3
)
Net change in derivatives and hedging activities
 
147

 
5

 
(88
)
Other adjustments
 
—

 
5

 
(5
)
Net change in:
 
 
 
 
 
 
Accrued interest receivable
 
(163
)
 
(86
)
 
(83
)
Other assets
 
4

 
(6
)
 
(3
)
Accrued interest payable
 
57

 
30

 
61

Other liabilities
 
14

 
(7
)
 
84

Total adjustments
 
160

 
(34
)
 
11

Net cash provided by (used in) operating activities
 
620

 
484

 
660

INVESTING ACTIVITIES
 
 
 
 
 
 
Net change in:
 
 
 
 
 
 
Interest-bearing deposits
 
69

 
91

 
(115
)
Securities purchased under agreements to resell
 
(100
)
 
1,325

 
850

Federal funds sold
 
100

 
845

 
(2,825
)
Loans to other FHLBanks
 
—

 
200

 
(200
)
Trading securities
 
 
 
 
 
 
Proceeds from maturities of long-term
 
247

 
1,377

 
3,093

Purchases of long-term
 
—

 
—

 
(1,597
)
Available-for-sale securities
 
 
 
 
 
 
Proceeds from sales and maturities of long-term
 
3,541

 
2,576

 
2,462

Purchases of long-term
 
(1,812
)
 
(402
)
 
(4,317
)
Held-to-maturity securities
 
 
 
 
 
 
Proceeds from maturities of long-term
 
641

 
1,014

 
1,455

Purchases of long-term
 
—

 
—

 
(64
)
Advances
 
 
 
 
 
 
Repaid
 
301,462

 
295,221

 
174,767

Originated or purchased
 
(305,197
)
 
(266,362
)
 
(217,392
)
Mortgage loans held for portfolio
 
 
 
 
 
 
Principal collected
 
903

 
1,040

 
1,317

Originated or purchased
 
(1,662
)
 
(1,245
)
 
(1,509
)
Other investing activities
 
(20
)
 
(24
)
 
5

Net cash provided by (used in) investing activities
 
(1,828
)
 
35,656

 
(44,070
)
The accompanying notes are an integral part of these financial statements.

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FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
 
 
For the Years Ended December 31,
 
 
2018
 
2017
 
2016
FINANCING ACTIVITIES
 
 
 
 
 
 
Net change in deposits
 
(5
)
 
(2
)
 
5

Borrowings from other FHLBanks
 
(100
)
 
600

 
—

Net payments on derivative contracts with financing elements
 
(1
)
 
(4
)
 
(7
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
 
 
Discount notes
 
161,907

 
191,047

 
272,871

Bonds
 
46,812

 
67,555

 
98,684

Payments for maturing and retiring consolidated obligations
 
 
 
 
 
 
Discount notes
 
(155,794
)
 
(235,329
)
 
(290,948
)
Bonds
 
(51,962
)
 
(58,418
)
 
(39,576
)
Proceeds from issuance of capital stock
 
7,987

 
5,602

 
6,050

Payments for repurchases/redemptions of capital stock
 
(7,588
)
 
(6,407
)
 
(4,105
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(183
)
 
(323
)
 
(181
)
Cash dividends paid
 
(249
)
 
(181
)
 
(142
)
Net cash provided by (used in) financing activities
 
824

 
(35,860
)
 
42,651

Net increase (decrease) in cash and due from banks
 
(384
)
 
280

 
(759
)
Cash and due from banks at beginning of the period
 
503

 
223

 
982

Cash and due from banks at end of the period
 
$
119

 
$
503

 
$
223

 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
 
 
Cash transactions:
 
 
 
 
 
 
Interest paid
 
$
2,740

 
$
1,776

 
$
1,057

Affordable Housing Program payments
 
44

 
34

 
21

Non-cash transactions:
 
 
 
 
 
 
Capitalized interest on reverse mortgage investment securities
 
95

 
60

 
29

Mortgage loan charge-offs
 
1

 
1

 
3

Transfers of mortgage loans to other assets
 
3

 
6

 
7

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
53

 
44

 
742

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

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Table of Contents

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

Background Information

The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation (except real property taxes) and is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBanks’ Office of Finance, effective July 30, 2008. The Finance Agency’s mission is to ensure that the Enterprises and FHLBanks operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.

The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank provides a readily available source of funding and liquidity to its member institutions and eligible housing associates in Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. Commercial banks, savings institutions, credit unions, insurance companies, and community development financial institutions (CDFIs) may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock.

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

The Bank’s current and former members own all of the outstanding capital stock of the Bank. Former members own capital stock (included in mandatorily redeemable capital stock) to support business transactions still carried on the Bank’s Statements of Condition. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by the Bank’s Board of Directors.




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Table of Contents

Note 1 — Summary of Significant Accounting Policies

BASIS OF PRESENTATION

The Bank prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP).

Reclassifications

Certain amounts in the Bank’s 2017 and 2016 financial statements and footnotes have been reclassified to conform to the presentation as of December 31, 2018. In particular, due to the change in current presentation, variation margin on cleared derivatives has been allocated to the individual derivative instruments. Previously, this amount was included as a component of netting adjustments and cash collateral. For additional details regarding this reclassification, refer to “Note 11 — Derivatives and Hedging Activities.”

SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant of these estimates include the fair value of derivatives and certain investment securities that are reported at fair value in the Statements of Condition, and the allowance for credit losses on mortgage loans. Actual results could significantly differ from these estimates.
Fair Value. The fair value amounts, recorded in the Bank’s Statements of Condition and presented in the footnote disclosures, have been determined by the Bank using available market information and management’s best judgment of appropriate valuation methods. Although management uses its best judgment in estimating the fair value of financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See “Note 17 — Fair Value” for more information.

Financial Instruments Meeting Netting Requirements

The Bank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that may be presented on a net basis when there is a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). The Bank has elected to offset its derivative instruments, related cash collateral, and associated accrued interest when it has met the netting requirements.

The net exposure for these financial instruments can change on a daily basis and therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in “Note 11 — Derivatives and Hedging Activities.”

At December 31, 2018 and 2017, the Bank had $5 billion in securities purchased under agreements to resell. Based on the fair value of the related collateral held, the Bank’s securities purchased under agreements to resell were fully collateralized for the periods presented. There were no offsetting liabilities related to these securities at December 31, 2018 and 2017.

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Table of Contents

Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold
Interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold provide short-term liquidity and are carried at cost. Interest-bearing deposits include deposits held with banks or counterparties that do not meet the definition of a security. The Bank treats securities purchased under agreements to resell as short-term secured investments. These secured investments are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty must either place an equivalent amount of additional securities in safekeeping in the name of the Bank or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will be decreased accordingly. Federal funds sold consist of short-term, unsecured loans generally transacted with counterparties that are considered by the Bank to be of investment quality.
Investment Securities
The Bank classifies investment securities as trading, available-for-sale (AFS), and held-to-maturity (HTM) at the date of acquisition. Purchases and sales of investment securities are recorded on a trade date basis. The Bank records interest on investment securities to interest income as earned. The Bank amortizes/accretes premiums and discounts on AFS and HTM investment securities to income using the contractual level-yield method (level-yield method). In addition, the Bank uses this method to amortize/accrete fair value hedging adjustments. The level-yield method recognizes the income effects of these adjustments over the contractual life of the securities based on the actual behavior of the underlying assets, including adjustments for actual prepayment activities, and reflects the contractual terms of the securities without regard to changes in estimated prepayments based on assumptions about future borrower behavior. The Bank computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in other income (loss).
Trading. Securities classified as trading are carried at fair value and generally entered into for liquidity purposes. In addition, the Bank classifies certain securities as trading that do not qualify for hedge accounting, primarily in an effort to mitigate the potential income statement volatility that can arise when an economic derivative is adjusted for changes in fair value but the related hedged item is not. The Bank records changes in the fair value of these securities through other income (loss) as “Net gains (losses) on trading securities.” Finance Agency regulation prohibits trading in or the speculative use of these instruments.
Available-for-Sale. Securities that are not classified as trading or HTM are classified as AFS and carried at fair value. The Bank records changes in the fair value of these securities through accumulated other comprehensive income (loss) (AOCI) as “Net unrealized gains (losses) on available-for-sale securities.” For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in the fair value of the security related to the risk being hedged together with the related change in fair value of the derivative through other income (loss) as “Net gains (losses) on derivatives and hedging activities.” The Bank records the remainder of the change in fair value through AOCI as “Net unrealized gains (losses) on available-for-sale securities.”
Held-to-Maturity. Securities that the Bank has both the ability and intent to hold to maturity are classified as HTM and carried at amortized cost, which represents the amount at which an investment is acquired, adjusted for periodic principal repayments, amortization of premiums, and accretion of discounts.
Certain changes in circumstances may cause the Bank to change its intent to hold a security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a HTM security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer’s creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, non-recurring, and unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity. In addition, the sale of a debt security that meets either of the following two conditions would not be considered inconsistent with the original classification of that security: (i) the sale occurs near enough to its maturity date (for example, within three months of maturity), or call date if exercise of the call is probable, that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security’s fair value or (ii) the sale occurs after the Bank has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on the debt security payable in equal installments (both principal and interest) over its term.

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Investment Securities - Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for other-than-temporary impairment (OTTI) on a quarterly basis. A security is considered impaired when its fair value is less than its amortized cost basis. The Bank considers an OTTI to have occurred under any of the following conditions:

•it has an intent to sell the impaired debt security;

•
it believes it is more likely than not that it will be required to sell the impaired debt security before the recovery of its amortized cost basis; or

•
it does not expect to recover the entire amortized cost basis of the impaired debt security.
Recognition of OTTI. If either of the first two conditions is met, the Bank recognizes an OTTI charge in earnings equal to the entire difference between the security’s amortized cost basis and its fair value as of the reporting date. If neither of the first two conditions is met, the Bank performs an analysis to determine if it will recover the entire amortized cost basis of the debt security, which includes a cash flow analysis for private-label mortgage-backed securities (MBS). The present value of the cash flows expected to be collected is compared to the amortized cost basis of the debt security to determine whether a credit loss exists. If there is a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security), the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors is recognized in AOCI. The credit loss on a debt security is limited to the amount of that security’s unrealized losses. The total OTTI is presented in the Statements of Income with an offset for the amount of the non-credit portion of OTTI that is recognized in AOCI, if applicable. See “Note 7 — Other-Than-Temporary Impairment” for additional information.
Variable Interest Entities
The Bank has determined its investments in private-label MBS to be variable interest entities (VIEs). These securities are classified as HTM in the Bank’s Statements of Condition. The Bank has no liabilities related to these VIEs. The maximum loss exposure for these VIEs is limited to the Bank’s investments in the VIEs.

If the Bank determines it is the primary beneficiary of a VIE, it would be required to consolidate that VIE. On a quarterly basis, the Bank performs an evaluation to determine whether it is the primary beneficiary of its VIEs. To perform this evaluation, the Bank considers whether it possesses both of the following characteristics: (i) the power to direct the VIEs activities that most significantly affect the VIEs economic performance and (ii) the obligation to absorb the VIEs losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Based on an evaluation of these characteristics, the Bank has determined that consolidation is not required for its VIEs for the periods presented. The Bank has not provided financial or other support (explicitly or implicitly) to its VIEs and does not intend to provide that support in the future.
Advances
The Bank reports advances (secured loans to members, former members, or eligible housing associates) at amortized cost, which is net of premiums, discounts, and fair value hedging adjustments unless the Bank has elected the fair value option, in which case, the advances are carried at fair value. The Bank records interest on advances to interest income as earned. The Bank amortizes/accretes premiums, discounts, and fair value hedging adjustments on advances to income using the level-yield method over the contractual life of the advances.

Prepayment Fees. The Bank charges a borrower a prepayment fee when the borrower prepays certain advances before the original maturity. For advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Prepayment fees and credits are recorded net of fair value hedging adjustments in advance interest income in the Statements of Income.


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Advance Modifications. In cases in which the Bank funds a new advance to a borrower concurrently with or within a short period of time before or after the prepayment of an existing advance, the Bank evaluates whether the new advance meets the accounting criteria to qualify as a modification of an existing advance or whether it constitutes a new advance. The Bank compares the present value of cash flows on the new advance to the present value of cash flows remaining on the existing advance. If there is at least a ten percent difference in the present value of the cash flows or if the Bank concludes the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the original contractual terms, then the advance is accounted for as a new advance and all prepayment fees or credits net of fair value hedging adjustments are recognized immediately to advance interest income in the Statements of Income. In all other instances, the advance is accounted for as a modification.

When a new advance qualifies as a modification of an existing advance, any prepayment fee, net of fair value hedging adjustments, as well as any outstanding premiums, discounts or other adjustments, on the prepaid advance are deferred, recorded in the basis of the modified advance, and amortized over the contractual life of the modified advance using a level-yield methodology to advance interest income.

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

Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if it is probable that impairment has occurred in the Bank’s portfolio as of the statement of condition date and the amount of loss can be reasonably estimated. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See “Note 10 — Allowance for Credit Losses” for details on each of the Bank’s allowance methodologies.

Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. The Bank has developed and documented a systematic methodology for determining an allowance for credit losses for credit products (advances, standby letters of credit, and other extensions of credit to borrowers), government-insured mortgage loans held for portfolio, conventional Mortgage Partnership Finance Program (MPF) and Mortgage Purchase Program (MPP) loans held for portfolio, and term securities purchased under agreements to resell. Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago.

Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent that it is needed to understand the exposure to credit risk arising from the financing receivables. The Bank assesses and measures its credit risk arising from financing receivables at the portfolio segment level. As such, it has determined that no further disaggregation of the portfolio segments identified above is needed.

Non-Accrual Loans. The Bank places a conventional mortgage loan on non-accrual status if it is determined that either the collection of interest or principal is doubtful or interest or principal is 90 days or more past due. The Bank does not place a government-insured mortgage loan on non-accrual status due to the U.S. Government guarantee or insurance on the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income and cash payments received are recorded as a reduction of principal. In addition, premiums, discounts, and basis adjustments from mortgage loan purchase commitments are not amortized while a loan is on non-accrual status. A loan on non-accrual status may be restored to accrual status when none of its contractual principal and interest is due and unpaid and the Bank expects repayment of the remaining contractual principal and interest.


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Troubled Debt Restructurings. The Bank considers a troubled debt restructuring (TDR) to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower’s financial difficulties and that concession would not have been considered otherwise. The Bank’s TDRs include loans granted under its loan modification plans and loans discharged under Chapter 7 bankruptcy that have not been reaffirmed by the borrower. The Bank does not consider government-insured mortgage loans to be TDRs due to the U.S. Government guarantee or insurance on the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. The Bank places all TDRs on non-accrual status at the time of modification.

Individually Evaluated Impaired Loans. The Bank individually evaluates all TDRs and collateral-dependent loans for impairment. The Bank generally measures impairment of TDRs based on the present value of expected future cash flows discounted at the loan’s effective interest rate. Collateral-dependent loans are loans in which repayment is expected to be provided solely by the sale of the underlying property; that is, there is no other available and reliable source of repayment. The Bank’s collateral-dependent loans include loans in process of foreclosure, loans 180 days or more past due, and bankruptcy loans and TDRs 60 days or more past due. The Bank measures impairment of collateral-dependent loans based on the estimated fair value of the underlying property, less estimated selling costs and expected proceeds from primary mortgage insurance (PMI). Interest income on impaired loans is recognized in the same manner as non-accrual loans.

Charge-Off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The Bank evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include but are not limited to, the occurrence of foreclosure or when a loan is deemed collateral-dependent. The Bank charges-off the portion of the outstanding conventional mortgage loan balance in excess of the fair value of the underlying collateral, which is determined using property values, less estimated selling costs and expected proceeds from PMI.

Loans to/from Other FHLBanks

The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates.

Derivatives
All derivatives are recognized in the Statements of Condition at their fair values and reported as either derivative assets or derivative liabilities, net of cash collateral and accrued interest received from or pledged to clearing agents and/or counterparties. The fair values of derivatives are netted by clearing agent and/or counterparty when the netting requirements have been met. If these netted amounts are positive, they are classified as a derivative asset and, if negative, they are classified as a derivative liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statements of Cash Flows unless the derivative meets the criteria to be a financing derivative.

The Bank transacts most of its derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., a clearing agent) with a Derivative Clearing Organization (cleared derivatives). The Bank utilizes one Derivative Clearing Organization (Clearinghouse), CME Clearing, for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin payments, and the clearing agent in turn notifies the Bank. The Clearinghouse determines initial margin requirements which are considered cash collateral. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, which are a component of the derivative fair value, rather than cash collateral.
The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness for all derivatives qualifying for hedge accounting. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities in the Statements of Condition and firm commitments.
Derivative Designations. Derivative instruments are designated by the Bank as:
•
a fair value hedge of an associated financial instrument or firm commitment (fair value hedge); or

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•
an economic hedge to manage certain defined risks in the Bank’s Statements of Condition (economic hedge). These hedges are primarily used to: (i) manage mismatches between the coupon features of the Bank’s assets and liabilities, (ii) offset prepayment risk in certain assets, (iii) mitigate the income statement volatility that occurs when financial instruments are recorded at fair value and hedge accounting is not permitted by accounting guidance, or (iv) to reduce exposure to reset risk.
Accounting for Fair Value Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the fair value hedging relationship and an expectation to be highly effective, they qualify for fair value hedge accounting and the changes in fair value of derivatives along with the offsetting changes in fair value of the hedged items attributable to the hedged risk are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.” The amount by which the change in fair value of the derivative differs from the change in fair value of the hedged item is known as hedge ineffectiveness. Two approaches to fair value hedge accounting include:
•
Long-haul hedge accounting. The application of long-haul hedge accounting requires the Bank to formally assess (both at the hedge’s inception and at least quarterly) whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the fair value of hedged items due to benchmark interest rate changes and whether those derivatives are expected to remain highly effective in future periods. The Bank uses regression analyses to assess the effectiveness of its long-haul hedges.
•
Short-cut hedge accounting. Transactions that meet certain criteria qualify for short-cut hedge accounting in which an assumption can be made that the change in fair value of a hedged item due to changes in the benchmark interest rate exactly offsets the change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the interest rate swap is considered to be highly effective at achieving offsetting changes in fair value of the hedged asset or liability.

Derivatives are typically executed at the same time as the hedged item, and the Bank designates the hedged item in a fair value hedge relationship at the trade date. In many hedging relationships, the Bank may designate the fair value hedging relationship upon its commitment to disburse an advance or trade a consolidated obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The Bank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.

Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify or was not designated for fair value hedge accounting, but is an acceptable hedging strategy under the Bank’s risk management program. Changes in the fair value of derivatives that are designated as economic hedges are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities” with no offsetting fair value adjustments for the underlying assets, liabilities, or firm commitments, unless changes in the fair value of the assets or liabilities are normally marked to fair value through earnings (e.g., trading securities and fair value option instruments).
Accrued Interest Receivables and Payables. The net settlements of interest receivables and payables related to derivatives designated as fair value hedges are recognized as adjustments to the interest income or interest expense of the designated hedged item. The net settlements of interest receivables and payables related to derivatives designated as economic hedges are recognized in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”
Discontinuance of Hedge Accounting. The Bank discontinues fair value hedge accounting prospectively when either (i) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item due to changes in the benchmark interest rate, (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised, (iii) a hedged firm commitment no longer meets the definition of a firm commitment, or (iv) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When fair value hedge accounting is discontinued, the Bank either terminates the derivative or continues to carry the derivative in the Statements of Condition at its fair value. For any remaining hedged item, the Bank ceases to adjust the hedged item for changes in fair value and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining contractual life of the hedged item using the level-yield method.

When fair value hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative in the Statements of Condition at its fair value, removing from the Statements of Condition any hedged item that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.


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Embedded Derivatives. The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the debt, advance, or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. If the Bank determines that the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as an economic derivative instrument. However, if the Bank elects to carry the entire contract (the host contract and the embedded derivative) at fair value in the Statements of Condition, changes in fair value of the entire contract will be reported in current period earnings.
Premises, Software, and Equipment
Premises, software, and equipment are included in other assets on the Statement of Condition. The Bank records premises, software, and equipment at cost less accumulated depreciation and amortization and computes depreciation and amortization using the straight-line method over the estimated useful lives of assets, which range from approximately three years to 40 years. Leasehold improvements, if applicable, are amortized using the straight-line method over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank may capitalize improvements and major renewals but expenses ordinary maintenance and repairs when incurred. The Bank may capitalize and amortize the cost of computer software developed or obtained for internal use over future periods. The Bank includes gains and losses on the disposal of premises, software, and equipment in other income (loss) on the Statement of Income.
At December 31, 2018 and 2017, premises, software, and equipment totaled $76 million and $52 million, which was net of accumulated depreciation and amortization of $27 million and $23 million. At December 31, 2018, 2017, and 2016, depreciation and amortization expense for premises, software, and equipment was $9 million, $6 million, and $5 million.
Consolidated Obligations
The Bank reports consolidated obligations at amortized cost, which is net of premiums, discounts, concessions, and fair value hedging adjustments unless the Bank has elected the fair value option, in which case, the consolidated obligations are carried at fair value. The Bank records interest on consolidated obligations bonds to interest expense as incurred. The Bank amortizes/accretes premiums, discounts, concessions, and fair value hedging adjustments on consolidated obligations to expense using the level-yield method over the contractual life of the consolidated obligations.
Concessions. The Bank pays concessions to dealers in connection with the issuance of certain consolidated obligations. The Office of Finance prorates the amount of the concession to each FHLBank based upon the percentage of the debt issued that is attributed to that FHLBank. Concessions paid on consolidated obligations designated under the fair value option are expensed as incurred and recorded in other expense. Concessions paid on consolidated obligations not designated under the fair value option are deferred and amortized over the contractual life of the consolidated obligations using the level-yield method. Unamortized concessions are included as a direct deduction from the carrying amount of “Consolidated obligation discount notes” or “Consolidated obligation bonds” in the Statements of Condition and the amortization of those concessions is included in consolidated obligation interest expense.
Mandatorily Redeemable Capital Stock
The Bank reclassifies capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Shares meeting this definition are reclassified to a liability at fair value. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income. The repurchase or redemption of mandatorily redeemable capital stock is transacted at par value and is reflected as a cash outflow in the financing activities section of the Statements of Cash Flows.

If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.


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Additional Capital from Merger

The Bank recognized the net assets acquired from the merger with the Federal Home Loan Bank of Seattle in 2015 (Merger) by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a capital account captioned “Additional capital from merger.” The Bank treated this additional capital from merger as a component of total capital for regulatory capital purposes. Dividends on capital stock were paid from this account following the Merger until the balance was depleted by the first quarter dividend payment in May 2017.
Restricted Retained Earnings
The Bank entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of the Bank over time. Under the JCE Agreement, each FHLBank is required to allocate 20 percent of its quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in the Statements of Condition.
Gains on Litigation Settlement, Net
Litigation settlement gains are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
The Bank records legal expenses related to litigation settlements as incurred in other expense in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement through other income (loss) in the Statements of Income. 
Finance Agency Expenses
The FHLBanks are assessed for a portion of the costs of operating the Finance Agency. Each FHLBank is required to pay their pro-rata share of the annual assessment based on the ratio between each FHLBank’s minimum required regulatory capital and the minimum required regulatory capital of all FHLBanks.
Office of Finance Expenses
The Bank is assessed for a portion of the costs of operating the Office of Finance. The Office of Finance allocates its operating and capital expenditures to the FHLBanks as follows: (i) two-thirds based on each FHLBank’s share of total consolidated obligations outstanding and (ii) one-third based upon an equal pro-rata allocation.
Affordable Housing Program Assessments
The FHLBank Act requires each FHLBank to establish and fund an Affordable Housing Program (AHP), which provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low to moderate income households. Annually, each FHLBank must set aside for the AHP the greater of 10 percent of its annual income subject to assessment, or its prorated sum required to ensure the aggregate contribution by the FHLBanks is no less than $100 million per year. For purposes of the AHP assessment, income subject to assessment is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The Bank accrues this expense monthly based on its income subject to assessment. In addition to the required AHP assessment, the Bank’s Board of Directors may elect to make voluntary contributions to the AHP. The Bank reduces its AHP liability as program funds are distributed.


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Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07)
On March 10, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance that requires an employer to disaggregate the service cost component from the other components of net periodic pension cost and net periodic postretirement benefit cost (net benefit cost). The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018 and was adopted retrospectively. The adoption of this guidance resulted in a reclassification of other net benefit costs from “Compensation and Benefits” to “Other Expense, Net” in the Bank’s Statement of Income. The adoption of this guidance did not have a material effect on the Bank’s financial condition, result of operations, or cash flows.

Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15)

On August 26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018 and was adopted retrospectively. The adoption of this guidance did not have a direct effect on the Bank’s financial condition, results of operations, or cash flows. However, the Bank did revise its previously reported supplemental interest paid disclosure to align with the clarified accounting guidance.

Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01)

On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:

•
Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in income.

•
Requires an entity to present separately in other comprehensive income (OCI) the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

•
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) in the statements of condition or the accompanying notes to the financial statements.
  
•
Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost in the statements of condition.

This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018 and was adopted using the modified retrospective approach. The adoption of this guidance affected the Bank’s fair value disclosures. However, the guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows.

Revenue from Contracts with Customers (ASU 2014-09)

On May 28, 2014, the FASB issued guidance on revenue from contracts with customers. This guidance outlines a single comprehensive model for recognizing revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, this guidance amends the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer. This guidance applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, and lease contracts. The guidance provides entities with the option of using either of the following adoption methods: a full retrospective method, retrospectively to each prior reporting period presented; or a modified retrospective method, retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application.


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On August 12, 2015, the FASB issued an amendment to defer the effective date of this guidance issued in May 2014 by one year. In 2016, the FASB issued additional amendments to clarify certain aspects of the new revenue guidance. However, these amendments did not change the core principle in the new revenue standard.

This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2018 and was adopted retrospectively. Given that the majority of the Bank’s financial instruments and other contractual rights that generate revenue are covered by other U.S. GAAP, the adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, and cash flows.

ISSUED ACCOUNTING GUIDANCE
Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16)

On October 25, 2018, the FASB issued amended guidance to include the SOFR OIS rate as a U.S. benchmark interest rate for hedge accounting purposes. Including the OIS rate based on SOFR as an eligible benchmark interest rate during the early stages of the marketplace transition will facilitate the London Inter-bank Offered Rate (LIBOR) to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies for both risk management and hedge accounting purposes. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate, and are effective prospectively for qualifying new or re-designated hedging relationships entered into on or after January 1, 2019. The Bank adopted this guidance on January 1, 2019; however, the Bank did not implement any new SOFR OIS hedge strategies. It will continue to assess opportunities to expand its eligible hedge strategies in the future.

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15)
On August 29, 2018, the FASB issued amended guidance to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by this guidance.
The amendments require a customer in a hosting arrangement that is a service contract to follow the guidance outlined in ASC Topic 350-40 to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. They require the customer to expense the capitalized implementation costs over the term of the hosting arrangement. The amendments also require the customer to present the expense in the same line item in the statement of income as the fees associated with the hosting element (service) and classify payments for capitalized implementation costs in the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Lastly, capitalized implementation costs should be presented in the statement of condition in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.
This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2020, and can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The Bank is in the process of evaluating this guidance and its anticipated effect on the Bank’s financial condition, results of operations, and cash flows has not yet been determined.
Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for defined benefit plans to improve disclosure effectiveness. This guidance becomes effective for the Bank for annual periods ending on December 31, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it may reduce certain disclosures.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance becomes effective for the Bank for interim and annual periods beginning on January 1, 2020. Early adoption is permitted. The adoption of this guidance is not expected to have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it may reduce certain disclosures.

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Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12)

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

•
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception.

•
Measurement of the hedged item in a partial-term fair value hedge of interest-rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged.

•
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk.

•
For a cash flow hedge of interest-rate risk of a variable-rate financial instrument, an entity could designate as the hedged risk the variability in cash flows attributable to the contractually specified interest-rate.

This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019. The guidance did not affect the Bank’s application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul method for its short-cut hedge strategies, which did not impact the Bank’s financial condition, results of operations or cash flows. This guidance will prospectively affect the Bank’s income statement presentation for fair value hedge relationships and will require certain new disclosures in future filings. The Bank will continue to assess opportunities enabled by the new guidance to expand its risk management strategies.

Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08)

On March 30, 2017, the FASB issued guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, this guidance requires the premium to be amortized to the earliest call date. This guidance does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019 and was adopted on a modified retrospective basis. The adoption of this guidance did not have a material effect on the Bank’s financial condition, results of operations, or cash flows.

Measurement of Credit Losses on Financial Instruments (ASU 2016-13)

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

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

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


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

This guidance is effective for the Bank for the interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. This guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for PCD assets upon adoption and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Bank does not intend to adopt the new guidance early. The Bank is in the process of evaluating the impact this guidance will have on its mortgage loans held for portfolio. The Bank has evaluated the impact of this guidance on all other in-scope financial instruments, and expects zero credit losses on its advance and credit products as well as agency and government-sponsored enterprise (GSE) debt securities, and immaterial credit losses on its remaining investment portfolio. The final effect of this guidance on the Bank’s financial condition, results of operations, and cash flows will depend upon the composition of financial assets held by the Bank at the adoption date as well as the economic conditions and forecasts at that time.

Leases (ASU 2016-02)

On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. Specifically, this guidance requires a lessee, of operating or finance leases, to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within GAAP.

This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2019 and was adopted on a modified retrospective basis. Upon adoption, the Bank recorded right-of-use assets and lease liabilities for its operating leases of $3 million on its statements of condition. The adoption of this guidance did not have a material effect on the Bank’s results of operations or cash flows.


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Note 3 — Cash and Due from Banks

Cash and due from banks includes cash on hand, cash items in the process of collection, compensating balances, and amounts due from correspondent banks and the Federal Reserve Bank.
COMPENSATING BALANCES
The Bank maintains collected cash balances with commercial banks in return for certain services. These arrangements contain no legal restrictions on the withdrawal of funds. Average collected cash balances were $63 million and $139 million for the years ended December 31, 2018 and 2017.

PASS-THROUGH DEPOSIT RESERVES

The Bank acts as a pass-through correspondent for certain member institutions required to deposit reserves with the Federal Reserve Bank of Chicago. At December 31, 2018 and 2017, pass-through deposit reserves amounted to $30 million and $26 million.

Note 4 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in millions):
 
December 31,
 
2018
 
2017
Non-mortgage-backed securities
 
 
 
U.S. obligations1
$
159

 
$
197

GSE and Tennessee Valley Authority obligations
57

 
260

Other2
266

 
272

     Total non-mortgage-backed securities
482

 
729

Mortgage-backed securities
 
 
 
GSE multifamily
433

 
448

Total fair value
$
915

 
$
1,177


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

2
Consists of taxable municipal bonds.

NET GAINS (LOSSES) ON TRADING SECURITIES

The Bank did not sell any trading securities during the years ended December 31, 2018, 2017, and 2016. During the year ended December 31, 2018, the Bank recorded net holding losses of $15 million on its trading securities compared to net holding gains of $1 million and $3 million for the same periods in 2017 and 2016.


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Note 5 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in millions):
 
December 31, 2018
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations2
$
2,597

 
$
8

 
$
(3
)
 
$
2,602

GSE and Tennessee Valley Authority obligations
1,012

 
26

 
—

 
1,038

State or local housing agency obligations
820

 
—

 
(6
)
 
814

Other3
264

 
11

 
—

 
275

Total non-mortgage-backed securities
4,693

 
45

 
(9
)
 
4,729

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
 
4,459

 
25

 
(1
)
 
4,483

GSE single-family
794

 
6

 
(4
)
 
796

GSE multifamily
8,986

 
36

 
(11
)
 
9,011

Total mortgage-backed securities
14,239

 
67

 
(16
)
 
14,290

Total
$
18,932

 
$
112

 
$
(25
)
 
$
19,019


 
December 31, 2017
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations2
$
3,096

 
$
8

 
$
(5
)
 
$
3,099

GSE and Tennessee Valley Authority obligations
1,197

 
39

 
—

 
1,236

State or local housing agency obligations
935

 
—

 
(1
)
 
934

Other3
269

 
9

 
—

 
278

Total non-mortgage-backed securities
5,497

 
56

 
(6
)
 
5,547

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
 
3,716

 
11

 
(1
)
 
3,726

GSE single-family
983

 
7

 
(2
)
 
988

GSE multifamily
10,482

 
57

 
(4
)
 
10,535

Total mortgage-backed securities
15,181

 
75

 
(7
)
 
15,249

Total
$
20,678

 
$
131

 
$
(13
)
 
$
20,796



1
Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments.

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

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


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UNREALIZED LOSSES

The following tables summarize AFS securities with unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations1
$
533

 
$
(1
)
 
$
311

 
$
(2
)
 
$
844

 
$
(3
)
State or local housing agency obligations
211

 
—

 
586

 
(6
)
 
797

 
(6
)
Total non-mortgage-backed securities
744

 
(1
)
 
897

 
(8
)
 
1,641

 
(9
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
646

 
(1
)
 
—

 
—

 
646

 
(1
)
GSE single-family
115

 
—

 
209

 
(4
)
 
324

 
(4
)
GSE multifamily
3,239

 
(8
)
 
718

 
(3
)
 
3,957

 
(11
)
Total mortgage-backed securities
4,000

 
(9
)
 
927

 
(7
)
 
4,927

 
(16
)
Total
$
4,744

 
$
(10
)
 
$
1,824

 
$
(15
)
 
$
6,568

 
$
(25
)

 
December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations1
$
29

 
$
—

 
$
1,783

 
$
(5
)
 
$
1,812

 
$
(5
)
State or local housing agency obligations
6

 
—

 
655

 
(1
)
 
661

 
(1
)
Total non-mortgage-backed securities
35

 
—

 
2,438

 
(6
)
 
2,473

 
(6
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
111

 
—

 
887

 
(1
)
 
998

 
(1
)
GSE single-family
222

 
(2
)
 
53

 
—

 
275

 
(2
)
GSE multifamily
224

 
(1
)
 
1,756

 
(3
)
 
1,980

 
(4
)
Total mortgage-backed securities
557

 
(3
)
 
2,696

 
(4
)
 
3,253

 
(7
)
Total
$
592

 
$
(3
)
 
$
5,134

 
$
(10
)
 
$
5,726

 
$
(13
)


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




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CONTRACTUAL MATURITY

The following table summarizes AFS securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
December 31, 2018
 
December 31, 2017
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
74

 
$
74

 
$
158

 
$
159

Due after one year through five years
 
1,314

 
1,323

 
750

 
755

Due after five years through ten years
 
2,497

 
2,506

 
3,574

 
3,583

Due after ten years
 
808

 
826

 
1,015

 
1,050

Total non-mortgage-backed securities
 
4,693

 
4,729

 
5,497

 
5,547

Mortgage-backed securities
 
14,239

 
14,290

 
15,181

 
15,249

Total
 
$
18,932

 
$
19,019

 
$
20,678

 
$
20,796



NET GAINS (LOSSES) FROM SALE OF AFS SECURITIES

During the years ended December 31, 2018 and 2017, the Bank did not sell any AFS securities. During the year ended December 31, 2016, the Bank received $287 million in proceeds from the sale of an AFS security and recognized gross gains of less than $1 million.


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Note 6 — Held-to-Maturity Securities

MAJOR SECURITY TYPES

HTM securities were as follows (dollars in millions):
 
December 31, 2018
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
389

 
$
48

 
$
(2
)
 
$
435

State or local housing agency obligations
391

 
1

 
(1
)
 
391

Total non-mortgage-backed securities
780

 
49

 
(3
)
 
826

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
9

 
—

 
—

 
9

U.S. obligations commercial2
1

 
—

 
—

 
1

GSE single-family
2,192

 
4

 
(21
)
 
2,175

Private-label residential
10

 
—

 
—

 
10

Total mortgage-backed securities
2,212

 
4

 
(21
)
 
2,195

Total
$
2,992

 
$
53

 
$
(24
)
 
$
3,021


 
December 31, 2017
 
Amortized
Cost1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
393

 
$
65

 
$
—

 
$
458

State or local housing agency obligations
454

 
2

 
(2
)
 
454

Total non-mortgage-backed securities
847

 
67

 
(2
)
 
912

Mortgage-backed securities
 
 
 
 
 
 
 
U.S. obligations single-family2
15

 
—

 
—

 
15

U.S. obligations commercial2
2

 
—

 
—

 
2

GSE single-family
2,752

 
7

 
(14
)
 
2,745

Private-label residential
12

 
—

 
—

 
12

Total mortgage-backed securities
2,781

 
7

 
(14
)
 
2,774

Total
$
3,628

 
$
74

 
$
(16
)
 
$
3,686


1
Amortized cost includes adjustments made to the cost basis of an investment for accretion or amortization.

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


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UNREALIZED LOSSES

The following tables summarize HTM securities with unrealized losses by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
December 31, 2018
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
69

 
$
(2
)
 
$
—

 
$
—

 
$
69

 
$
(2
)
State or local housing agency obligations
50

 
—

 
152

 
(1
)
 
202

 
(1
)
Total non-mortgage backed securities
119

 
(2
)
 
152

 
(1
)
 
271

 
(3
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
3

 
—

 
—

 
—

 
3

 
—

U.S. obligations commercial1
—

 
—

 
1

 
—

 
1

 
—

GSE single-family
611

 
(1
)
 
1,008

 
(20
)
 
1,619

 
(21
)
Private-label residential
—

 
—

 
6

 
—

 
6

 
—

Total mortgage-backed securities
614

 
(1
)
 
1,015

 
(20
)
 
1,629

 
(21
)
Total
$
733

 
$
(3
)
 
$
1,167

 
$
(21
)
 
$
1,900

 
$
(24
)

 
December 31, 2017
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage backed securities
 
 
 
 
 
 
 
 
 
 
 
State or local housing agency obligations
$
2

 
$
—

 
$
168

 
$
(2
)
 
$
170

 
$
(2
)
Total non-mortgage backed securities
2

 
—

 
168

 
(2
)
 
170

 
(2
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
U.S. obligations single-family1
7

 
—

 
1

 
—

 
8

 
—

U.S. obligations commercial1
1

 
—

 
1

 
—

 
2

 
—

GSE single-family
42

 
—

 
1,427

 
(14
)
 
1,469

 
(14
)
Private-label residential
—

 
—

 
8

 
—

 
8

 
—

Total mortgage-backed securities
50

 
—

 
1,437

 
(14
)
 
1,487

 
(14
)
Total
$
52

 
$
—

 
$
1,605

 
$
(16
)
 
$
1,657

 
$
(16
)


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



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CONTRACTUAL MATURITY

The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
December 31, 2018
 
December 31, 2017
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
9

 
$
9

 
$
20

 
$
20

Due after one year through five years
 
64

 
65

 
72

 
72

Due after five years through ten years
 
332

 
353

 
344

 
376

Due after ten years
 
375

 
399

 
411

 
444

Total non-mortgage-backed securities
 
780

 
826

 
847

 
912

Mortgage-backed securities
 
2,212

 
2,195

 
2,781

 
2,774

Total
 
$
2,992

 
$
3,021

 
$
3,628

 
$
3,686



Note 7 — Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. As part of its evaluation of securities for OTTI, the Bank considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to the entire difference between the security’s amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, the Bank performs analyses to determine if any of these securities are other-than-temporarily impaired. The analysis of the Bank’s AFS and HTM investment securities in an unrealized loss position at December 31, 2018 is discussed below:

•
U.S. obligations and GSE and Tennessee Valley Authority securities. The unrealized losses were due primarily to changes in interest rates, and not to a significant deterioration in the fundamental credit quality of the obligations. The strength of the issuers’ guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations. The Bank expects to recover the amortized cost bases on these securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at December 31, 2018.

•
State or local housing agency obligations. The unrealized losses were due to changes in interest rates and illiquidity in the credit markets, and not to a significant deterioration in the fundamental credit quality of the obligations. The creditworthiness of the issuers and the strength of the underlying collateral and credit enhancements were sufficient to protect the Bank from losses based on current expectations. The Bank does not intend to sell these securities nor is it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at December 31, 2018.

•
Private-label residential mortgage-backed securities. On a quarterly basis, the Bank engages other designated FHLBanks to perform cash flow analyses on its private-label MBS. As of December 31, 2018, the Bank compared the present value of cash flows expected to be collected with respect to its private-label MBS to the amortized cost bases of the securities to determine whether a credit loss existed. At December 31, 2018, the Bank’s cash flow analyses for private-label MBS did not project any credit losses. The Bank does not intend to sell its private-label MBS nor is it more likely than not that the Bank will be required to sell its private-label MBS before recovery of their amortized cost bases. As a result, the Bank did not consider any of its private-label MBS to be other-than-temporarily impaired at December 31, 2018.

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Note 8 — Advances

The Bank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics, and optionality. Fixed rate advances generally have maturities ranging from overnight to 30 years. Variable rate advances generally have maturities ranging from one year to 20 years, where the interest rates reset periodically to a specified interest rate index such as LIBOR, or other specified index.

REDEMPTION TERM

The following table summarizes the Bank’s advances outstanding by redemption term (dollars in millions):
 
 
December 31, 2018
 
December 31, 2017
Redemption Term
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
2

 
3.63
%
 
$
1

 
3.63
%
Due in one year or less
 
50,561

 
2.61

 
45,310

 
1.62

Due after one year through two years
 
23,946

 
2.61

 
17,094

 
1.79

Due after two years through three years
 
17,582

 
2.73

 
14,222

 
1.64

Due after three years through four years
 
4,091

 
2.73

 
17,561

 
1.79

Due after four years through five years
 
6,814

 
2.76

 
3,089

 
1.91

Thereafter
 
3,417

 
2.96

 
5,401

 
2.28

Total par value
 
106,413

 
2.66
%
 
102,678

 
1.73
%
Premiums
 
38

 
 
 
53

 
 
Discounts
 
(8
)
 
 
 
(12
)
 
 
Fair value hedging adjustments
 
(120
)
 
 
 
(106
)
 
 
Total
 
$
106,323

 
 
 
$
102,613

 
 

 
The following table summarizes advances by redemption term or next call date for callable advances, and by redemption term or next put date for putable advances (dollars in millions):
 
 
Redemption Term
or Next Call Date
 
Redemption Term
or Next Put Date
 
 
2018
 
2017
 
2018
 
2017
Overdrawn demand deposit accounts
 
$
2

 
$
1

 
$
2

 
$
1

Due in one year or less
 
77,931

 
69,971

 
50,617

 
45,372

Due after one year through two years
 
11,087

 
16,539

 
24,060

 
17,094

Due after two years through three years
 
10,423

 
3,809

 
17,628

 
14,222

Due after three years through four years
 
2,357

 
8,511

 
4,078

 
17,520

Due after four years through five years
 
2,444

 
1,276

 
6,722

 
3,073

Thereafter
 
2,169

 
2,571

 
3,306

 
5,396

Total par value
 
$
106,413

 
$
102,678

 
$
106,413

 
$
102,678



The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). Other advances may require a prepayment fee or credit that makes the Bank financially indifferent to the prepayment of the advance. At December 31, 2018 and 2017, the Bank had callable advances outstanding totaling $35.6 billion and $27.0 billion.

The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on predetermined exercise date. Generally these put options are exercised when interest rates increase relative to contractual rates. At December 31, 2018 and 2017, the Bank had putable advances outstanding totaling $283 million and $405 million.


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PREPAYMENT FEES

The Bank generally charges a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank financially indifferent to the prepayment of the advance. For certain advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Prepayment fees and credits are recorded net of fair value hedging adjustments in advance interest income in the Statements of Income. The Bank recorded prepayments fees on advances, net of $8 million, $2 million, and $8 million for the years ended December 31, 2018, 2017, and 2016.

CREDIT RISK EXPOSURE AND SECURITY TERMS

The Bank’s potential credit risk from advances is concentrated in commercial banks, savings institutions, and insurance companies. At December 31, 2018 and 2017, the Bank had outstanding advances of $49.6 billion and $45.8 billion to one member that individually held 10 percent or more of the Bank’s advances, which represents 47 percent and 45 percent of total outstanding advances. For information related to the Bank’s credit risk exposure on advances, refer to “Note 10 — Allowance for Credit Losses.”

Note 9 — Mortgage Loans Held for Portfolio

Mortgage loans held for portfolio includes conventional mortgage loans and government-guaranteed or -insured mortgage loans obtained through the MPF program and the MPP. The MPF program, which represented 97 percent of the Bank’s mortgage loans held for portfolio at December 31, 2018, involves investment by the Bank in single-family mortgage loans held for portfolio that are either purchased from PFIs or funded by the Bank through PFIs. MPF loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank’s MPF PFIs generally originate, service, and credit enhance mortgage loans that are sold to the Bank. MPF PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the MPF PFI to a designated mortgage service provider.

Under the MPP, the Bank acquired single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loan sold to the Bank. The MPP program represented three percent of the Bank’s mortgage loans held for portfolio at December 31, 2018. The Bank does not currently purchase mortgage loans under this program. All loans in this portfolio were originated prior to 2006.

The following table presents information on the Bank’s mortgage loans held for portfolio (dollars in millions):
 
December 31,
 
2018
 
2017
Fixed rate, long-term single-family mortgage loans
$
6,860

 
$
5,998

Fixed rate, medium-term1 single-family mortgage loans
874

 
1,003

Total unpaid principal balance
7,734

 
7,001

Premiums
105

 
98

Discounts
(5
)
 
(6
)
Basis adjustments from mortgage loan purchase commitments
2

 
5

Total mortgage loans held for portfolio
$
7,836

 
$
7,098

Allowance for credit losses
(1
)
 
(2
)
Total mortgage loans held for portfolio, net
$
7,835

 
$
7,096




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


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The following table presents the Bank’s mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):
 
December 31,
 
2018
 
2017
Conventional mortgage loans
$
7,231

 
$
6,472

Government-insured mortgage loans
503

 
529

Total unpaid principal balance
$
7,734

 
$
7,001


For information related to the Bank’s credit risk exposure on mortgage loans held for portfolio, refer to “Note 10 — Allowance for Credit Losses.”

Note 10 — Allowance for Credit Losses

The Bank has established an allowance for credit losses methodology for each of its financing receivable portfolio segments: advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, MPF and MPP conventional mortgage loans held for portfolio, and term securities purchased under agreements to resell.

CREDIT PRODUCTS

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

The Bank is required by regulation to obtain sufficient collateral to fully secure its advances and other credit products. The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts to the unpaid principal or market value, if available, of the collateral. Eligible collateral includes (i) fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Government National Mortgage Association and Federal Family Education Loan Program guaranteed student loans, (iii) cash deposited with the Bank, and (iv) other real estate-related collateral acceptable to the Bank, such as second lien mortgages, home equity lines of credit, municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such collateral. Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank has a lien on each member’s capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

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

Borrowers may pledge collateral to the Bank by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with the Bank or its custodians. The Bank perfects its security interest in all pledged collateral by filing Uniform Commercial Code financing statements or by taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to the Bank by its members, or any affiliates of its members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.

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Under a blanket pledge agreement, the Bank is granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, the Bank does not initially take delivery of collateral from blanket agreement borrowers. In the event of deterioration in the financial condition of a blanket pledge agreement borrower, the Bank has the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, the Bank generally requires collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or loans to the Bank or its custodians.

Using a risk-based approach and taking into consideration each borrower’s financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its credit products. At December 31, 2018 and 2017, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of its outstanding extensions of credit.

At December 31, 2018 and 2017, none of the Bank’s credit products were past due, on non-accrual status, or considered impaired. In addition, there were no TDRs related to credit products during the years ended December 31, 2018 and 2017.

The Bank has never experienced a credit loss on its credit products. Based upon the Bank’s collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there were no probable credit losses on its credit products as of December 31, 2018 and 2017. Accordingly, the Bank has not recorded any allowance for credit losses for its credit products.

GOVERNMENT-INSURED MORTGAGE LOANS

The Bank invests in government-insured fixed rate mortgage loans in both the MPF and MPP portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance. Management views this risk as remote and has never experienced a credit loss on its government-insured mortgage loans. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at December 31, 2018 and 2017. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

CONVENTIONAL MORTGAGE LOANS

The Bank’s management of credit risk in the MPF and MPP programs involves several layers of legal loss protection that are defined in agreements among the Bank and its participating PFIs. These loss layers may vary depending on the product alternatives selected and credit profile of the loans. The Bank’s loss protection consists of the following loss layers, in order of priority:

•
Homeowner Equity.

•
Primary Mortgage Insurance. At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value, whichever is less and as applicable to the specific loan.

•
First Loss Account (FLA). For each MPF master commitment, the Bank’s potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the FLA.

•
Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation at the time an MPF mortgage loan is purchased to absorb certain losses in excess of the FLA in order to limit the Bank’s loss exposure to that of an investor in an investment grade MBS. PFIs pledge collateral to secure this obligation.


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Allowance Methodology

The Bank utilizes an allowance for credit losses to reserve for estimated losses in its conventional MPF and MPP mortgage loan portfolios at the balance sheet date. The measurement of the Bank’s MPF and MPP allowance for credit losses is determined by the following:

•
reviewing similar conventional mortgage loans for impairment on a collective basis. This evaluation is primarily based on the following factors: (i) current loan delinquencies, (ii) loans migrating to collateral-dependent status, and (iii) actual historical loss severities;

•
reviewing conventional mortgage loans for impairment on an individual basis; and

•
estimating additional credit losses in the conventional mortgage loan portfolio. These losses result from other factors that may not be captured in the methodology previously described at the balance sheet date, which include but are not limited to certain quantifiable economic factors, such as unemployment rates and home prices impacting housing markets.

The following table summarizes the allowance for credit losses and recorded investment of the Bank’s conventional mortgage loan portfolio by impairment methodology (dollars in millions):
 
December 31,
 
2018
 
2017
Allowance for credit losses
 
 
 
Collectively evaluated for impairment
$
1

 
$
2

 
 
 
 
Recorded investment1
 
 
 
Collectively evaluated for impairment
$
7,306

 
$
6,530

Individually evaluated for impairment, without a related allowance
54

 
61

Total recorded investment
$
7,360

 
$
6,591


1
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.


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CREDIT QUALITY INDICATORS

Key credit quality indicators for mortgage loans include the migration of past due loans, loans in process of foreclosure, and non-accrual loans. The tables below summarize the Bank’s key credit quality indicators for mortgage loans (dollars in millions):
 
December 31, 2018
 
Conventional MPF/MPP
 
Government-Guaranteed or -Insured6
 
Total
Past due 30 - 59 days
$
49

 
$
17

 
$
66

Past due 60 - 89 days
14

 
5

 
19

Past due 90 - 179 days
11

 
4

 
15

Past due 180 days or more
13

 
4

 
17

Total past due mortgage loans
87

 
30

 
117

Total current mortgage loans
7,273

 
486

 
7,759

Total recorded investment of mortgage loans1
$
7,360

 
$
516

 
$
7,876

 
 
 
 
 
 
In process of foreclosure (included above)2
$
8

 
$
2

 
$
10

Serious delinquency rate3
—
%
 
2
%
 
—
%
Past due 90 days or more and still accruing interest4
$
—

 
$
8

 
$
8

Non-accrual mortgage loans5
$
36

 
$
—

 
$
36


 
December 31, 2017
 
Conventional MPF/MPP
 
Government-Guaranteed or -Insured6
 
Total
Past due 30 - 59 days
$
58

 
$
19

 
$
77

Past due 60 - 89 days
16

 
6

 
22

Past due 90 - 179 days
15

 
5

 
20

Past due 180 days or more
21

 
6

 
27

Total past due mortgage loans
110

 
36

 
146

Total current mortgage loans
6,481

 
507

 
6,988

Total recorded investment of mortgage loans1
$
6,591

 
$
543

 
$
7,134

 
 
 
 
 
 
In process of foreclosure (included above)2
$
12

 
$
2

 
$
14

Serious delinquency rate3
1
%
 
2
%
 
1
%
Past due 90 days or more and still accruing interest4
$
—

 
$
11

 
$
11

Non-accrual mortgage loans5
$
48

 
$
—

 
$
48



1
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.

2
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans depending on their payment status.

3
Represents mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment.

4
Represents government-insured mortgage loans that are 90 days or more past due.

5
Represents conventional mortgage loans that are 90 days or more past due or TDRs.

6
The bank did not record any allowance for credit losses on government-guaranteed or -insured mortgage loans at December 31, 2018 and 2017.

INDIVIDUALLY EVALUATED IMPAIRED LOANS

As previously described, the Bank evaluates certain conventional mortgage loans for impairment individually. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.


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The Bank did not recognize any interest income on impaired loans during the years ended December 31, 2018, 2017, and 2016.

During the years ended December 31, 2018, 2017, and 2016, the average recorded investment of conventional impaired loans without an allowance was $58 million, $66 million, and $70 million.


TERM SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Term securities purchased under agreements to resell are considered collateralized financing agreements and represent short-term investments. The terms of these investments are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will decrease accordingly. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement will be charged to earnings to establish an allowance for credit losses. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for its term securities purchased under agreements to resell at December 31, 2018 and 2017.

OFF-BALANCE SHEET CREDIT EXPOSURES

At December 31, 2018 and 2017, the Bank did not record a liability to reflect an allowance for credit losses for off-balance sheet credit exposures. For additional information on the Bank’s off-balance sheet credit exposures, see “Note 18 — Commitments and Contingencies.”

Note 11 — Derivatives and Hedging Activities

NATURE OF BUSINESS ACTIVITY

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

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

Derivative financial instruments are used by the Bank to achieve its financial and risk management objectives. The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the Bank uses derivatives are to:
 
•
reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

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

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

•
manage embedded options in assets and liabilities; and

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


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TYPES OF DERIVATIVES

The Bank may use the following derivative instruments:

•
Interest Rate Swaps. An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be exchanged and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional amount at a variable interest rate index for the same period of time. The variable interest rate received or paid by the Bank in most derivative transactions is the LIBOR.

•
Options. An option is an agreement between two entities that conveys the right, but not the obligation, to engage in a future transaction on some underlying security or other financial asset at an agreed upon price during a certain period of time or on a specific date. Premiums or swap fees paid to acquire options are considered the fair value of the option at inception of the hedge and are reported as derivative assets in the Statements of Condition.

•
Swaptions. A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. When used as a hedge, a swaption can protect the Bank against future interest rate changes. The Bank may enter into both payer and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.

•
Interest Rate Caps and Floors. In an interest rate cap agreement, a cash flow is generated if the price or interest rate of an underlying variable rises above a certain threshold (or “cap”) price. In an interest rate floor agreement, a cash flow is generated if the price or interest rate of an underlying variable falls below a certain threshold (or “floor”) price. Interest rate caps and floors are designed as protection against the interest rate on a variable rate asset or liability rising above or falling below a certain level.

•
Futures/Forwards Contracts. Futures and forwards contracts gives the buyer the right to buy or sell a specific type of asset at a specific time at a given price. For example, certain mortgage purchase commitments entered into by the Bank are considered derivatives. The Bank may hedge these commitments by selling “to-be-announced” (TBA) MBS for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date for an established price.

TYPES OF HEDGED ITEMS

The Bank may have the following types of hedged items:

•
Investment Securities. The Bank primarily invests in U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, and MBS, and classifies them as either trading, AFS, or HTM. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may fund investment securities with callable consolidated obligations or utilize interest rate swaps, caps, floors, or swaptions to manage interest rate risk. The Bank manages the risk arising from changing market prices of trading securities by entering into economic derivatives that generally offset the changes in fair value of the securities.

•
Advances. The Bank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics, and optionality. The Bank may use derivatives to adjust the repricing and/or option characteristics of advances in order to more closely match the characteristics of its funding liabilities. In general, whenever a borrower executes a fixed rate advance or a variable rate advance with embedded options, the Bank may simultaneously execute a derivative with terms that offset the terms and embedded options, if any, in the advance. For example, the Bank may hedge a fixed rate advance with an interest rate swap where the Bank pays a fixed rate coupon and receives a variable rate coupon, effectively converting the fixed rate advance to a variable rate advance. This type of hedge is typically treated as a fair value hedge. In addition, the Bank may hedge a callable advance, which gives the borrower the option to extinguish the fixed rate advance, by entering into a cancelable interest rate swap.

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•
Mortgage Loans. The Bank invests in fixed rate mortgage loans. The prepayment options embedded in mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in actual and estimated prepayment speeds. The Bank manages the interest rate risk associated with mortgage loans through a combination of debt issuance and derivatives. The Bank may issue both callable and noncallable debt and prepayment-linked consolidated obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The Bank may also purchase interest rate caps, floors, or swaptions to minimize the interest rate risk embedded in mortgage assets. Although these derivatives are valid economic hedges, they are not specifically linked to individual mortgage assets and, therefore, do not receive fair value hedge accounting.

•
Consolidated Obligations. The Bank may enter into derivatives to hedge the interest rate risk associated with its consolidated obligations. For example, the Bank may issue and hedge a fixed rate consolidated obligation with an interest rate swap where the Bank receives a fixed rate coupon and pays a variable rate coupon, effectively converting the fixed rate consolidated obligation to a variable rate consolidated obligation. This type of hedge is typically treated as a fair value hedge. The Bank may also issue variable interest rate consolidated obligations indexed to LIBOR, or other specified index and simultaneously execute interest rate swaps to hedge the basis risk of the variable interest rate debt. Interest rate swaps used to hedge the basis risk of variable interest rate debt do not qualify for hedge accounting. As a result, this type of hedge is treated as an economic hedge. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables the Bank to offer a wider range of attractively priced advances to its borrowers and may allow the Bank to reduce its funding costs.
  
•
Firm Commitments. Certain mortgage loan purchase commitments are considered derivatives. The Bank normally hedges these commitments by selling TBA MBS for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date for an established price. The mortgage loan purchase commitment and the TBA used in the firm commitment hedging strategy are considered economic hedges. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized over the contractual life of the mortgage loan using the level-yield method. The Bank may also hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap (fair value hedge). In this case, the interest rate swap will function as the hedging instrument for both the firm commitment and the subsequent advance and is treated as a fair value hedge.

For additional information on the Bank’s derivative and hedging accounting policy, see “Note 1 — Summary of Significant Account Policies.”

FINANCIAL STATEMENT EFFECT AND ADDITIONAL FINANCIAL INFORMATION

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


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The following table summarizes the Bank’s notional amount and fair value of derivative instruments and total derivative assets and liabilities. Total derivative assets and liabilities include the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest (dollars in millions):
 
 
December 31, 2018
 
December 31, 20171
 
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
Derivatives designated as hedging instruments (fair value hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
47,316

 
$
83

 
$
115

 
$
52,120

 
$
77

 
$
151

Derivatives not designated as hedging instruments (economic hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
1,321

 
20

 
24

 
1,407

 
20

 
37

Forward settlement agreements (TBAs)
 
98

 
—

 
—

 
66

 
—

 
—

Mortgage loan purchase commitments
 
101

 
1

 
—

 
72

 
—

 
—

Total derivatives not designated as hedging instruments
 
1,520

 
21

 
24

 
1,545

 
20

 
37

Total derivatives before netting and collateral adjustments
 
$
48,836

 
104

 
139

 
$
53,665

 
97

 
188

Netting adjustments and cash collateral2
 
 
 
(46
)
 
(130
)
 
 
 
3

 
(182
)
Total derivative assets and derivative liabilities
 
 
 
$
58

 
$
9

 
 
 
$
100

 
$
6


1
To conform with current financial statement presentation, $313 million in variation margin has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included with netting adjustments and cash collateral.

2
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. Cash collateral posted by the Bank and related accrued interest was $121 million and $191 million at December 31, 2018 and 2017. At December 31, 2018 and 2017, the Bank received cash collateral and related accrued interest from clearing agents and/or counterparties of $37 million and $6 million.

The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented in the Statements of Income (dollars in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Derivatives designated as hedging instruments (fair value hedges)
 
 
 
 
 
Interest rate swaps
$
3

 
$
11

 
$
13

Derivatives not designated as hedging instruments (economic hedges)
 
 
 
 
 
Interest rate swaps
16

 
10

 
12

Forward settlement agreements (TBAs)
2

 
(2
)
 
2

Mortgage loan purchase commitments
(2
)
 
2

 
(2
)
Net interest settlements
(3
)
 
(12
)
 
(18
)
Total net gains (losses) related to derivatives not designated as hedging instruments
13

 
(2
)
 
(6
)
Price alignment amount1
3

 
3

 
—

Net gains (losses) on derivatives and hedging activities
$
19

 
$
12

 
$
7



1    This amount represents interest on variation margin which is a component of the derivative fair value.


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The following tables summarize, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships, the net fair value hedge ineffectiveness, and the effect of those derivatives on the Bank’s net interest income (dollars in millions):
 
 
For the Year Ended December 31, 2018
Hedged Item Type
 
Net Gains (Losses) on
Derivatives
 
Net Gains (Losses) on
Hedged Items
 
Net Fair Value
Hedge
Ineffectiveness
 
Effect on
Net Interest
Income1
Available-for-sale investments
 
$
112

 
$
(111
)
 
$
1

 
$
(22
)
Advances2
 
23

 
(23
)
 
—

 
47

Consolidated obligation bonds
 
68

 
(66
)
 
2

 
(217
)
Total
 
$
203

 
$
(200
)
 
$
3

 
$
(192
)

 
 
For the Year Ended December 31, 2017
Hedged Item Type
 
Net Gains (Losses) on
Derivatives
 
Net Gains (Losses) on
Hedged Items
 
Net Fair Value
Hedge
Ineffectiveness
 
Effect on
Net Interest
Income1
Available-for-sale investments
 
$
86

 
$
(72
)
 
$
14

 
$
(93
)
Advances2
 
94

 
(92
)
 
2

 
(70
)
Consolidated obligation bonds
 
(95
)
 
90

 
(5
)
 
6

Total
 
$
85

 
$
(74
)
 
$
11

 
$
(157
)
 
 
For the Year Ended December 31, 2016
Hedged Item Type
 
Net Gains (Losses) on
Derivatives
 
Net Gains (Losses) on
Hedged Items

 
Net Fair Value
Hedge
Ineffectiveness
 
Effect on
Net Interest
Income1
Available-for-sale investments
 
$
99

 
$
(80
)
 
$
19

 
$
(142
)
Advances2
 
147

 
(142
)
 
5

 
(140
)
Consolidated obligation bonds
 
(359
)
 
348

 
(11
)
 
76

Total
 
$
(113
)
 
$
126

 
$
13

 
$
(206
)

1
Represents the net interest settlements on derivatives in fair value hedge relationships and the amortization of the financing element of off-market derivatives, both of which are included in the interest income or interest expense line item of the respective hedged item type. The amortization for off-market derivatives totaled $1 million, $13 million and $28 million for the years ended December 31, 2018, 2017, and 2016.

2
Includes net gains (losses) on fair value hedge firm commitments of forward starting advances.

MANAGING CREDIT RISK ON DERIVATIVES

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

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

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


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Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a Nationally Recognized Statistical Rating Organization, the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions, unless the collateral delivery threshold is set to zero. The aggregate fair value of all uncleared derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at December 31, 2018 was $1 million, for which the Bank was not required to post collateral in the normal course of business. If the Bank’s credit rating had been lowered from its current rating to the next lower rating, the Bank would not have been required to deliver additional collateral to its uncleared derivatives counterparties at December 31, 2018.

For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Bank utilizes one Clearinghouse, CME Clearing, for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin requirements, and the clearing agent in turn notifies the Bank.

The Clearinghouse determines initial margin requirements which are considered cash collateral. Generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agent, based on credit considerations, at December 31, 2018. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, rather than cash collateral.

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

OFFSETTING OF DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

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

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

The following table presents the fair value of derivative instruments meeting or not meeting the netting requirements and the related collateral received from or pledged to counterparties (dollars in millions):
 
 
December 31, 2018
Derivative Instruments Meeting Netting Requirements2
 
Gross Amount Recognized1
 
Gross Amounts of Netting Adjustments and Cash Collateral
 
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
 
 
 
 
 
 
  Uncleared derivatives
 
$
96

 
$
(96
)
 
$
—

  Cleared derivatives
 
7

 
50

 
57

Total
 
$
103

 
$
(46
)
 
$
57

Derivative Liabilities
 
 
 
 
 
 
  Uncleared derivatives
 
$
119

 
$
(110
)
 
$
9

  Cleared derivatives
 
20

 
(20
)
 
—

Total
 
$
139

 
$
(130
)
 
$
9



1 Represents derivative assets and derivative liabilities prior to netting adjustments and cash collateral.

2 Mortgage loan purchase commitments in a derivative asset position, not subject to enforceable netting requirements, were $1 million at December 31, 2018.

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The following table presents the fair value of derivative instruments meeting or not meeting the netting requirements, including the related collateral received from or pledged to counterparties and variation margin for daily settled contracts (dollars in millions):
 
 
December 31, 2017
Derivative Instruments Meeting Netting Requirements3
 
Gross Amount Recognized1
 
Gross Amounts of Netting Adjustments and Cash Collateral2
 
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
 
 
 
 
 
 
  Uncleared derivatives
 
$
88

 
$
(87
)
 
$
1

  Cleared derivatives
 
9

 
90

 
99

Total
 
$
97

 
$
3

 
$
100

Derivative Liabilities
 
 
 
 
 
 
  Uncleared derivatives
 
$
170

 
$
(164
)
 
$
6

  Cleared derivatives
 
18

 
(18
)
 
—

Total
 
$
188

 
$
(182
)
 
$
6



1     Represents derivative assets and derivative liabilities prior to netting adjustments and cash collateral.

2     To conform with current financial statement presentation, $313 million in variation margin has been allocated to the individual derivative instruments as of December 31, 2017.
Previously, this amount was included with gross amount of netting adjustments and cash collateral.

3 Mortgage loan purchase commitments not subject to enforceable netting requirements were less than $1 million at December 31, 2017.

Note 12 — Deposits
The Bank offers demand and overnight deposits as well as short-term interest bearing deposits to members and to qualifying non-members. Deposits classified as demand and overnight pay interest based on a daily interest rate. Short-term interest bearing deposits pay interest based on a fixed rate determined at the issuance of the deposit. Average interest rates paid on interest-bearing deposits were 1.48 percent, 0.59 percent, and 0.08 percent for the years ended December 31, 2018, 2017, and 2016.
The following table details the Bank’s interest bearing and non-interest bearing deposits (dollars in millions):
 
December 31,
 
2018
 
2017
Interest-bearing
 
 
 
Demand and overnight
$
823

 
$
745

Term
153

 
268

Non-interest-bearing
 
 
 
Demand
94

 
94

Total
$
1,070

 
$
1,107



Note 13 — Consolidated Obligations

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

Although the Bank is primarily liable for the portion of consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all FHLBank System consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority. At December 31, 2018 and 2017, the total par value of outstanding consolidated obligations of the FHLBanks was $1,031.6 billion and $1,034.2 billion.


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DISCOUNT NOTES

The following table summarizes the Bank’s discount notes (dollars in millions):
 
December 31, 2018
 
December 31, 2017
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Par value
$
43,052

 
2.34
%
 
$
36,740

 
1.20
%
Discounts and concessions1
(173
)
 
 
 
(58
)
 
 
Total
$
42,879

 
 
 
$
36,682

 
 


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


BONDS

The following table summarizes the Bank’s bonds outstanding by contractual maturity (dollars in millions):
 
 
December 31, 2018
 
December 31, 2017
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Due in one year or less
 
$
53,247

 
2.08
%
 
$
50,077

 
1.32
%
Due after one year through two years
 
22,326

 
2.50

 
32,249

 
1.43

Due after two years through three years
 
9,478

 
1.97

 
3,177

 
2.84

Due after three years through four years
 
1,881

 
2.53

 
7,422

 
1.69

Due after four years through five years
 
2,224

 
2.58

 
1,507

 
2.42

Thereafter
 
4,868

 
3.51

 
4,752

 
3.10

Total par value
 
94,024

 
2.26
%
 
99,184

 
1.54
%
Premiums
 
152

 
 
 
193

 
 
Discounts and concessions1
 
(48
)
 
 
 
(60
)
 
 
Fair value hedging adjustments
 
(356
)
 
 
 
(424
)
 
 
Total
 
$
93,772

 
 
 
$
98,893

 
 


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

The following table summarizes the Bank’s bonds outstanding by call features (dollars in millions):
 
December 31,
 
2018
 
2017
Non-callable or non-putable
$
89,549

 
$
97,196

Callable
4,475

 
1,988

Total par value
$
94,024

 
$
99,184



The following table summarizes the Bank’s bonds outstanding by year of contractual maturity or next call date (dollars in millions):
 
 
December 31,
Year of Contractual Maturity or Next Call Date
 
2018
 
2017
Due in one year or less
 
$
55,672

 
$
53,196

Due after one year through two years
 
22,696

 
31,059

Due after two years through three years
 
9,333

 
3,192

Due after three years through four years
 
1,656

 
7,032

Due after four years through five years
 
1,864

 
1,282

Thereafter
 
2,803

 
3,423

Total par value
 
$
94,024

 
$
99,184



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Bonds are issued with fixed or variable rate payment terms that use a variety of indices for interest rate resets such as LIBOR or other specified index. To meet the specific needs of certain investors, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and call features. When bonds are issued on the Bank’s behalf, it may concurrently enter into a derivative agreement to effectively convert the fixed rate payment stream to variable or to offset the embedded features in the bond.
Beyond having fixed or variable rate payment terms, bonds may also have the following broad terms regarding either principal repayment or interest payments:
•
Indexed Principal Redemption Bonds (Index Amortizing Notes). These notes repay principal according to amortization schedules that are linked to the level of a certain index and have fixed rate coupon payment terms. Usually, as market interest rates rise (fall), the average life of the index amortizing notes extends (contracts); and
•
Optional Principal Redemption Bonds (Callable Bonds). These bonds may be redeemed by the Bank in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings.
With respect to interest payments, bonds may also have the following terms:
•
Step-Up Bonds. These bonds pay interest at increasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the Bank to call the bonds at its option on the step-up dates.
•
Step-Down Bonds. These bonds pay interest at decreasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the Bank to call the bonds at its option on the step-down dates.

Note 14 — Affordable Housing Program

The FHLBank Act requires each FHLBank to establish and fund an AHP, which provides subsidies in the form of direct grants and below-market interest rate advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low to moderate income households. Each FHLBank is required to contribute to its AHP the greater of 10 percent of its annual income subject to assessment, or its 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 assessment, income subject to assessment is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency. The Bank accrues the AHP assessment monthly based on its income subject to assessment and reduces the AHP liability as program funds are distributed.

If the Bank experienced a net loss during a quarter, but still had income subject to assessment for the year, the Bank’s obligation to the AHP would be calculated based on its year-to-date income subject to assessment. If the Bank had income subject to assessment in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, it would have no obligation to the AHP for the year, because its required annual AHP contribution is limited to its annual income subject to assessment. If the aggregate 10 percent AHP calculation previously discussed was less than $100 million for the FHLBanks, each FHLBank would be required to contribute a prorated sum to ensure that the aggregate contribution by the FHLBanks equals $100 million. The pro-ration would be made on the basis of an FHLBank’s income in relation to the income of all FHLBanks for the year, subject to the annual income limitation previously discussed. In addition to the required AHP assessment, the Bank’s Board of Directors may elect to make voluntary contributions to the AHP.

There was no shortfall, as described above, in 2018, 2017, or 2016. If an FHLBank finds that its required contributions are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its contributions. The Bank did not make any such application in 2018, 2017, or 2016.


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The following table presents a rollforward of the Bank’s AHP liability (dollars in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Balance, beginning of year
$
142

 
$
116

 
$
62

Assessments
53

 
60

 
75

Disbursements, net1
(42
)
 
(34
)
 
(21
)
Balance, end of year
$
153

 
$
142

 
$
116



1
Includes $2 million of funds reimbursed to the AHP during 2018.

Note 15 — Capital

CAPITAL STOCK

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

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

EXCESS STOCK

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under its Capital Plan, the Bank, at its discretion and upon 15 days’ written notice, may repurchase excess membership capital stock. The Bank, at its discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At December 31, 2018 and 2017, the Bank’s excess capital stock outstanding was less than $1 million.

MANDATORILY REDEEMABLE CAPITAL STOCK

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

At December 31, 2018 and 2017, the Bank’s mandatorily redeemable capital stock totaled $255 million and $385 million. If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense. The Bank recorded interest expense on mandatorily redeemable capital stock of $18 million, $17 million, and $21 million for the years ended December 31, 2018, 2017, and 2016.


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As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance companies ineligible for FHLBank membership. On the effective date of the final rule, the Bank reclassified the total outstanding capital stock held by all of the captive insurance companies that were Bank members, to mandatorily redeemable capital stock. In accordance with the final rule, on February 17, 2017, the Bank terminated the membership of all captive insurance company members that were admitted as members after September 12, 2014, (the date the Finance Agency proposed this rule) and repurchased outstanding capital stock held by captive insurance company members in the amount of $148 million. Captive insurance company members that were admitted as members prior to September 12, 2014, will also have their memberships terminated no later than February 19, 2021.

The following table summarizes changes in mandatorily redeemable capital stock (dollars in millions):
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
Balance, beginning of period
$
385

 
$
664

 
$
103

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
53

 
44

 
742

Net payments for repurchases/redemptions of mandatorily redeemable capital stock
(183
)
 
(323
)
 
(181
)
Balance, end of period
$
255

 
$
385

 
$
664



The following table summarizes the Bank’s mandatorily redeemable capital stock by year of contractual redemption (dollars in millions):
 
 
December 31,
Year of Contractual Redemption1
 
2018
 
2017
Due in one year or less
 
$
2

 
$
4

Due after one year through two years
 
—

 
2

Due after two years through three years
 
1

 
—

Due after three years through four years
 
10

 
1

Due after four years through five years
 
18

 
22

Thereafter2
 
210

 
341

Past contractual redemption date due to outstanding activity with the Bank
 
14

 
15

Total
 
$
255

 
$
385



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

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

RESTRICTED RETAINED EARNINGS

The Bank entered into a JCE Agreement with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of the Bank over time. Under the JCE Agreement, each FHLBank is required to allocate 20 percent of its quarterly net income to a separate restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends. At December 31, 2018 and 2017, the Bank’s restricted retained earnings account totaled $427 million and $335 million.


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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes changes in AOCI (dollars in millions):
 
Net unrealized gains (losses) on AFS securities (Notes 5)
 
Pension and postretirement benefits (Note 16)
 
Total AOCI
Balance, December 31, 2015
$
(82
)
 
$
(2
)
 
$
(84
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
68

 
—

 
68

Reclassification from AOCI to net income
 
 
 
 
 
Amortization - pension and postretirement
—

 
(2
)
 
(2
)
Net current period other comprehensive income (loss)
68

 
(2
)
 
66

Balance, December 31, 2016
(14
)
 
(4
)
 
(18
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
132

 
—

 
132

Net current period other comprehensive income (loss)
132

 
—

 
132

Balance, December 31, 2017
118

 
(4
)
 
114

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
(31
)
 
—

 
(31
)
Reclassification from AOCI to net income
 
 
 
 
 
Amortization - pension and postretirement
—

 
1

 
1

Net current period other comprehensive income (loss)
(31
)
 
1

 
(30
)
Balance, December 31, 2018
$
87

 
$
(3
)
 
$
84



REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to three regulatory capital requirements:

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

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

•
Leverage capital. The Bank is required to maintain a minimum five percent leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. At December 31, 2018 and 2017 the Bank did not hold any nonpermanent capital.

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

The following table shows the Bank’s compliance with the Finance Agency’s regulatory capital requirements (dollars in millions) as of December 31, 2018 and 2017:
 
December 31, 2018
 
December 31, 2017
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements
 
 
 
 
 
 
 
Risk-based capital
$
1,146

 
$
7,719

 
$
1,041

 
$
7,292

Regulatory capital
$
5,861

 
$
7,719

 
$
5,804

 
$
7,292

Leverage capital
$
7,326

 
$
11,579

 
$
7,255

 
$
10,937

Capital-to-assets ratio
4.00
%
 
5.27
%
 
4.00
%
 
5.03
%
Leverage ratio
5.00
%
 
7.90
%
 
5.00
%
 
7.54
%



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CAPITAL CLASSIFICATION DETERMINATION

The Bank is subject to the Finance Agency’s regulation on FHLBank capital classification and critical capital levels (the Capital Rule). The Capital Rule, among other things, establishes criteria for four capital classifications (adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. The Bank satisfied these requirements at December 31, 2018, and was classified as adequately capitalized. If the Bank becomes classified into a capital classification other than adequately capitalized, it will be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock.

Note 16 — Pension and Postretirement Benefit Plans
QUALIFIED DEFINED BENEFIT MULTIEMPLOYER PLAN
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan), a tax-qualified defined benefit pension plan. In August of 2016, the Bank’s Board of Directors elected to freeze the Pentegra DB Plan effective January 1, 2017. After the freeze, participants no longer accrue new benefits under the Pentegra DB Plan.
The Pentegra DB Plan is treated as a multiemployer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multiemployer plan disclosures are not applicable to the Pentegra DB Plan. Under the Pentegra DB Plan, contributions made by a 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 Bank has two defined benefit pension plans under the same multiemployer plan. Prior to the plan freeze, employees of the Des Moines Bank were eligible to participate in the Des Moines Pentegra Defined Benefit Pension Plan (Des Moines Bank DB Plan) if hired on or before December 31, 2010. Employees previously employed by the Seattle Bank were eligible to participate in the Seattle Pentegra Defined Benefit Pension Plan (Seattle Bank DB Plan) if they were hired before January 1, 2005.
The Pentegra DB Plan operates on a fiscal year from July 1 through June 30. The Pentegra DB Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. There are no collective bargaining agreements in place that require contributions to the plan.
The Pentegra DB Plan’s annual valuation process includes calculating the plan’s funded status and separately calculating the
funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra DB Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. As a result, the
market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.

The most recent Form 5500 available for the Pentegra DB Plan is for the year ended June 30, 2017. The Bank’s contributions for the plan years ended June 30, 2017 and June 30, 2016 were not more than five percent of the total contributions to the Pentegra DB Plan.


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The following table summarizes the net pension cost and funded status of the Pentegra DB Plan (dollars in millions):
 
2018
 
2017
 
2016
Net pension cost1
$
1

 
$
—

 
$
4

Pentegra DB Plan’s funded status as of July 1
109.86
%
 
111.30
%
 
104.12
%
Des Moines Bank DB Plan’s funded status as of July 1
107.53
%
 
106.65
%
 
106.67
%
Seattle Bank DB Plan’s funded status as of July 1
106.00
%
 
109.81
%
 
108.16
%

1
Represents the net pension cost charged to compensation and benefits expense in the Statements of Income for the years ended December 31, 2018, 2017, and 2016.

The Pentegra DB Plan’s funded status as of July 1, 2018 is preliminary and may further increase because plan participants are permitted to make contributions for the plan year ended June 30, 2018 through March 31, 2019. Contributions made on or before March 15, 2019, and designated for the plan year ended June 30, 2018, will be included in the final valuation as of July 1, 2018. The final funded status as of July 1, 2018 will not be available until the Form 5500 for the plan year July 1, 2018 through June 30, 2019 is filed (this Form 5500 is due to be filed no later than April 2020).

The Pentegra DB Plan’s funded status as of July 1, 2017 includes all contributions made by plan participants through March 15, 2018. The final funded status as of July 1, 2017 will not be available until the Form 5500 for the plan year July 1, 2017 through June 30, 2018 is filed (this Form 5500 is due to be filed no later than April 2019).
OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Pension Plan, the Bank has one qualified defined contribution benefit plan, the Federal Home Loan Bank of Des Moines 401(k) Savings Plan. The Bank also offers the Benefit Equalization Plan (BEP), a nonqualified retirement plan which includes both a nonqualified defined contribution plan and a nonqualified defined benefit plan. In August of 2016, the Bank’s Board of Directors elected to freeze the BEP defined benefit plan effective January 1, 2017. After the freeze, participants no longer accrue new benefits under the BEP defined benefit plan.

Note 17 — Fair Value

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

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

•
Level 1 Inputs. Quoted prices (unadjusted) for identical assets or liabilities in an active market that the Bank can access on the measurement date.

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

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

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications would be reported as transfers in/out as of the beginning of the quarter in which the changes occur. The Bank had no transfers of assets or liabilities between fair value levels during the years ended December 31, 2018, 2017, or 2016.
  

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The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at December 31, 2018 (dollars in millions). The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio on a non-recurring basis. The Bank records all other financial assets and liabilities at amortized cost. The fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.
 
 
 
 
Fair Value
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 

Cash and due from banks
 
$
119

 
$
119

 
$
—

 
$
—

 
$
—

 
$
119

Interest-bearing deposits
 
1

 
—

 
1

 
—

 
—

 
1

Securities purchased under agreements to resell
 
4,700

 
—

 
4,700

 
—

 
—

 
4,700

Federal funds sold
 
4,150

 
—

 
4,150

 
—

 
—

 
4,150

Trading securities
 
915

 
—

 
915

 
—

 
—

 
915

Available-for-sale securities
 
19,019

 
—

 
19,019

 
—

 
—

 
19,019

Held-to-maturity securities
 
2,992

 
—

 
3,011

 
10

 
—

 
3,021

Advances
 
106,323

 
—

 
106,317

 
—

 
—

 
106,317

Mortgage loans held for portfolio, net
 
7,835

 
—

 
7,749

 
57

 
—

 
7,806

Accrued interest receivable
 
290

 
—

 
290

 
—

 
—

 
290

Derivative assets, net
 
58

 
—

 
104

 
—

 
(46
)
 
58

Other assets
 
27

 
27

 
—

 
—

 
—

 
27

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,070
)
 
—

 
(1,070
)
 
—

 
—

 
(1,070
)
Borrowings from other FHLBanks
 
(500
)
 
—

 
(500
)
 
—

 
—

 
(500
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(42,879
)
 
—

 
(42,870
)
 
—

 
—

 
(42,870
)
Bonds
 
(93,772
)
 
—

 
(93,828
)
 
—

 
—

 
(93,828
)
Total consolidated obligations
 
(136,651
)
 
—

 
(136,698
)
 
—

 
—

 
(136,698
)
Mandatorily redeemable capital stock
 
(255
)
 
(255
)
 
—

 
—

 
—

 
(255
)
Accrued interest payable
 
(268
)
 
—

 
(268
)
 
—

 
—

 
(268
)
Derivative liabilities, net
 
(9
)
 
—

 
(139
)
 
—

 
130

 
(9
)

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


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The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at December 31, 2017 (dollars in millions):
 
 
 
 
Fair Value
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
503

 
$
503

 
$
—

 
$
—

 
$
—

 
$
503

Interest-bearing deposits
 
1

 
—

 
1

 
—

 
—

 
1

Securities purchased under agreements to resell
 
4,600

 
—

 
4,600

 
—

 
—

 
4,600

Federal funds sold
 
4,250

 
—

 
4,250

 
—

 
—

 
4,250

Trading securities
 
1,177

 
—

 
1,177

 
—

 
—

 
1,177

Available-for-sale securities
 
20,796

 
—

 
20,796

 
—

 
—

 
20,796

Held-to-maturity securities
 
3,628

 
—

 
3,674

 
12

 
—

 
3,686

Advances
 
102,613

 
—

 
102,708

 
—

 
—

 
102,708

Mortgage loans held for portfolio, net
 
7,096

 
—

 
7,124

 
64

 
—

 
7,188

Accrued interest receivable
 
223

 
—

 
223

 
—

 
—

 
223

Derivative assets, net
 
100

 
—

 
97

 
—

 
3

 
100

Other assets
 
28

 
28

 
—

 
—

 
—

 
28

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,107
)
 
—

 
(1,107
)
 
—

 
—

 
(1,107
)
Borrowing from other FHLBanks
 
(600
)
 
—

 
(600
)
 
—

 
—

 
(600
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(36,682
)
 
—

 
(36,674
)
 
—

 
—

 
(36,674
)
Bonds
 
(98,893
)
 
—

 
(99,150
)
 
—

 
—

 
(99,150
)
Total consolidated obligations
 
(135,575
)
 
—

 
(135,824
)
 
—

 
—

 
(135,824
)
Mandatorily redeemable capital stock
 
(385
)
 
(385
)
 
—

 
—

 
—

 
(385
)
Accrued interest payable
 
(210
)
 
—

 
(210
)
 
—

 
—

 
(210
)
Derivative liabilities, net
 
(6
)
 
—

 
(188
)
 
—

 
182

 
(6
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. To conform with current financial statement presentation, $313 million in variation margin has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included with netting adjustments and cash collateral.


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

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


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

As of December 31, 2018 and 2017, multiple prices were received for the majority of the Bank’s trading and AFS investment securities. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy.

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

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

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

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

•
Discount rate assumption. The Bank utilizes the Overnight-Index Swap (OIS) curve. 

•
Forward interest rate assumption. The Bank utilizes the LIBOR swap curve.

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

For forward settlement agreements (TBAs), the Bank utilizes TBA securities prices that are determined by coupon class and expected term until settlement. For mortgage loan purchase commitments, the Bank utilizes TBA securities prices adjusted for factors such as credit risk and servicing spreads.
 
Other Assets. These represent grantor trust assets, which are carried at estimated fair value based on quoted market prices as of the last business day of the reporting period.


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

FAIR VALUE ON A RECURRING BASIS

The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value in the Statements of Condition at December 31, 2018 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
$
—

 
$
159

 
$
—

 
$
—

 
$
159

GSE and Tennessee Valley Authority obligations
 
—

 
57

 
—

 
—

 
57

Other non-MBS
 
—

 
266

 
—

 
—

 
266

GSE multifamily MBS
 
—

 
433

 
—

 
—

 
433

Total trading securities
 
—

 
915

 
—

 
—

 
915

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
—

 
2,602

 
—

 
—

 
2,602

GSE and Tennessee Valley Authority obligations
 
—

 
1,038

 
—

 
—

 
1,038

State or local housing agency obligations
 
—

 
814

 
—

 
—

 
814

Other non-MBS
 
—

 
275

 
—

 
—

 
275

U.S. obligations single-family MBS
 
—

 
4,483

 
—

 
—

 
4,483

GSE single-family MBS
 
—

 
796


—

 
—

 
796

GSE multifamily MBS
 
—

 
9,011

 
—

 
—

 
9,011

Total available-for-sale securities
 
—

 
19,019

 
—

 
—

 
19,019

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
104

 
—

 
(46
)
 
58

Other assets
 
27

 
—

 
—

 
—

 
27

Total recurring assets at fair value
 
$
27

 
$
20,038

 
$
—

 
$
(46
)
 
$
20,019

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
(139
)
 
—

 
130

 
(9
)
Total recurring liabilities at fair value
 
$
—

 
$
(139
)
 
$
—

 
$
130

 
$
(9
)

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




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The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value in the Statements of Condition at December 31, 2017 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments and Cash Collateral1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
$
—

 
$
197

 
$
—

 
$
—

 
$
197

GSE and Tennessee Valley Authority obligations
 
—

 
260

 
—

 
—

 
260

Other non-MBS
 
—

 
272

 
—

 
—

 
272

GSE multifamily MBS
 
—

 
448

 
—

 
—

 
448

Total trading securities
 
—

 
1,177

 
—

 
—

 
1,177

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
U.S. obligations
 
—

 
3,099

 
—

 
—

 
3,099

GSE and Tennessee Valley Authority obligations
 
—

 
1,236

 
—

 
—

 
1,236

State or local housing agency obligations
 
—

 
934

 
—

 
—

 
934

Other non-MBS
 
—

 
278

 
—

 
—

 
278

U.S. obligations single-family MBS
 
—

 
3,726

 
—

 
—

 
3,726

GSE single-family MBS
 
—

 
988

 
—

 
—

 
988

GSE multifamily MBS
 
—

 
10,535

 
—

 
—

 
10,535

Total available-for-sale securities
 
—

 
20,796

 
—

 
—

 
20,796

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
97

 
—

 
3

 
100

Other assets
 
28

 
—

 
—

 
—

 
28

Total recurring assets at fair value
 
$
28

 
$
22,070

 
$
—

 
$
3

 
$
22,101

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 
—

 
(188
)
 
—

 
182

 
(6
)
Total recurring liabilities at fair value
 
$
—

 
$
(188
)
 
$
—

 
$
182

 
$
(6
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. To conform with current financial statement presentation, $313 million in variation margin has been allocated to the individual derivative instruments as of December 31, 2017. Previously, this amount was included with netting adjustments and cash collateral.


FAIR VALUE ON A NON-RECURRING BASIS

The Bank measures certain impaired mortgage loans held for portfolio at level 3 fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances. At December 31, 2018 and 2017, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $1 million and $7 million. These fair values were as of the date the fair value adjustment was recorded during the years ended December 31, 2018 and 2017.









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Note 18 — Commitments and Contingencies

Joint and Several Liability. The FHLBanks have joint and several liability for all consolidated obligations issued. Accordingly, if an FHLBank were unable to repay any consolidated obligation for which it is the primary obligor, each of the other FHLBanks could be called upon by the Finance Agency to repay all or part of such obligations. No FHLBank has ever been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. At December 31, 2018 and 2017, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable was approximately $894.5 billion and $898.3 billion.

The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):
 
December 31, 2018
 
December 31, 2017
 
Expire
within one year
 
Expire
after one year
 
Total
 
Total
Standby letters of credit1
$
8,924

 
$
170

 
$
9,094

 
$
8,594

Standby bond purchase agreements
229

 
446

 
675

 
755

Commitments to purchase mortgage loans
101

 
—

 
101

 
72

Commitments to issue bonds
60

 
—

 
60

 
—

Commitments to fund advances
40

 
10

 
50

 
1,138



1
Excludes commitments to issue standby letters of credit of $3 million and $7 million at December 31, 2018 and 2017.

Standby Letters of Credit. The Bank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed with members for a fee. If the Bank is required to make payment for a beneficiary’s draw, the member either reimburses the Bank for the amount drawn or, subject to the Bank’s discretion, the amount drawn may be converted into a collateralized advance to the member. The original terms of standby letters of credit range from less than one month to 13 years, currently no later than 2025. The carrying value of guarantees related to standby letters of credit are recorded in “Other liabilities” in the Statements of Condition and amounted to $2 million and $3 million at December 31, 2018 and 2017.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of its borrowers. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit. Based on management’s credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these standby letters of credit. All standby letters of credit are subject to the same collateralization and borrowing limits that apply to advances and are fully collateralized at the time of issuance.

Standby Bond Purchase Agreements. The Bank has entered into standby bond purchase agreements with state housing associates within its district whereby, for a fee, it agrees to serve as a standby liquidity provider if required, to purchase and hold the housing associate’s bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which the Bank would be required to purchase the bonds. At December 31, 2018, the Bank had standby bond purchase agreements with seven housing associates. The standby bond purchase commitments entered into by the Bank have original expiration periods of up to seven years, currently no later than 2024. During the years ended December 31, 2018, 2017, and 2016, the Bank was not required to purchase any bonds under these agreements.

Commitments to Purchase Mortgage Loans. The Bank enters into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not to exceed 45 days. These commitments are considered derivatives and their estimated fair value at December 31, 2018 and 2017 is reported in “Note 11 — Derivatives and Hedging Activities” as mortgage loan purchase commitments.

Commitments to Issue Bonds. At December 31, 2018, the Bank had commitments to issue $60 million of consolidated obligation bonds. At December 31, 2017, the Banks had no commitments to issue consolidated obligation bonds.


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Commitments to Fund Advances. The Bank enters into commitments that legally bind it to fund additional advances up to 24 months in the future. At December 31, 2018 and 2017, the Bank had commitments to fund advances of $50 million and $1.1 billion.

Lease Commitments. The Bank charged to operating expenses net rental costs of $2 million for the years ended December 31, 2018, 2017, and 2016. Total future minimum lease payments for premises and equipment were $4 million at December 31, 2018. Lease agreements for Bank premises generally provide for increases in the basic rentals resulting from the increases in property taxes and maintenance expenses. These increases are not expected to have a material effect on the Bank.

Other Commitments. For each MPF master commitment, the Bank’s potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the FLA. For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all MPF master commitments with a PFI credit enhancement obligation was $115 million and $104 million at December 31, 2018 and 2017.
Legal Proceedings. As a result of the Merger with the Seattle Bank in 2015, the Bank has been involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label MBS. Of the 11 cases initially filed, one has been dismissed, two have been settled in part and dismissed in part, and eight have been settled. The Bank appealed the one complete dismissal and two partial dismissals covering the claims related to five certificates across three different cases. The appellate court affirmed the dismissal of the claims related to four certificates in December 2017 and affirmed the dismissal of the remaining certificate in May 2018. In January 2018, the Bank filed petitions for discretionary review of the appellate court’s rulings in December related to four of the certificates with the Washington Supreme Court. On May 3, 2018, the Court granted those petitions. The aggregate consideration paid for these four certificates is $567 million. Oral arguments were heard on October 9, 2018 and the Bank is currently awaiting the Court’s decision. In June 2018, the Bank filed a petition for discretionary review of the appellate court’s ruling in May on the fifth certificate. The aggregate consideration paid for that one certificate is $200 million. The Washington Supreme Court has not yet acted on that petition. Other than the private-label MBS litigation, the Bank does not believe any legal proceedings to which it is a party could have a material impact on its financial condition, results of operations, or cash flows.
Litigation settlement gains are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
The Bank records legal expenses related to litigation settlements as incurred in other expense in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement.  During the year ended December 31, 2018, the Bank did not recognize net gains on litigation settlements. During the year ended December 31, 2017 and 2016, the Bank recognized $21 million and $376 million in net gains on litigation settlements.

Note 19 — Activities with Stockholders

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

TRANSACTIONS WITH DIRECTOR’S FINANCIAL INSTITUTIONS

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


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The following table summarizes the Bank’s outstanding transactions with Directors’ Financial Institutions (dollars in millions):
 
 
December 31, 2018
 
December 31, 2017
 
 
Amount
 
% of Total
 
Amount
 
% of Total
Advances
 
$
6,991

 
7
 
$
6,036

 
6
Mortgage loans
 
96

 
1
 
68

 
1
Deposits
 
12

 
1
 
39

 
4
Capital stock
 
328

 
6
 
297

 
5


BUSINESS CONCENTRATIONS

The Bank considers itself to have business concentrations with stockholders owning 10 percent or more of its total capital stock outstanding (including mandatorily redeemable capital stock). At December 31, 2018, the Bank had the following business concentrations with stockholders (dollars in millions):
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans4
 
Income2
Wells Fargo Bank, N.A.
 
$
1,994

 
35
 
$
49,575

 
$
25

 
$
1,167

Superior Guaranty Insurance Company3
 
18

 
—
 
—

 
420

 
—

Total
 
$
2,012

 
35
 
$
49,575

 
$
445

 
$
1,167


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

2
Represents interest income earned on advances during the year ended December 31, 2018. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.

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

4
PFI rights and obligations associated with MPP mortgage loans of $27 million were transferred from Wells Fargo Trust Company, N.A. (formerly Wells Fargo Bank Northwest N.A.) to Wells Fargo Bank, N.A. during the year ended December 31, 2018.

At December 31, 2017, the Bank had the following business concentrations with stockholders (dollars in millions):
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans
 
Income2
Wells Fargo Bank, N.A.
 
$
1,843

 
34
 
$
45,825

 
$
—

 
$
834

Superior Guaranty Insurance Company3
 
22

 
—
 
—

 
520

 
—

Wells Fargo Bank Northwest N.A.3
 
1

 
—
 
—

 
30

 
—

Total
 
$
1,866

 
34
 
$
45,825

 
$
550

 
$
834


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

2
Represents interest income earned on advances during the year ended December 31, 2017. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.

3
Superior Guaranty Insurance Company and Wells Fargo Bank Northwest, N.A. were affiliates of Wells Fargo Bank, N.A. at December 31, 2017.


LEASE TRANSACTIONS

On January 2, 2007, the Bank executed a 20 year lease with Wells Fargo Financial, an affiliate of our member, Wells Fargo Bank, for approximately 43,000 square feet of office space for the Bank’s headquarters. On June 22, 2017, a storm pipe broke at the Bank’s then headquarters causing significant water damage to the Bank’s office space and rendering it uninhabitable. As a result of the water damage, the estimated time to complete repairs, and the Bank’s plan to relocate its headquarters to a building in downtown Des Moines that it purchased in April of 2017, the Bank terminated its lease with Wells Fargo Financial effective September 30, 2017. The Bank paid net lease termination fees of $0.8 million to Wells Fargo Financial related to the termination. The Bank entered into a nine month lease agreement with Wells Fargo Financial effective September 30, 2017, to lease approximately 1,200 square feet of the former headquarters that was not damaged to serve general business functions. The Bank paid rent to Wells Fargo Financial in the amount of less than $1 million for the years ended December 31, 2018 and 2017 and $1.3 million for the year ended December 31, 2016.



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Note 20 — Activities with Other FHLBanks

Overnight Funds. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. The following table summarizes loan activity to other FHLBanks during the years ended December 31, 2018, 2017, and 2016 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Loans
 
Principal
Repayment
 
Ending
Balance
2018
 
 
 
 
 
 
 
 
Boston
 
$
—

 
$
800

 
$
(800
)
 
$
—

San Francisco
 
—

 
300

 
(300
)
 
—

Dallas
 
—

 
500

 
(500
)
 
—

 
 
$
—

 
$
1,600

 
$
(1,600
)
 
$
—

 
 
 
 
 
 
 
 

2017
 
 
 
 
 
 
 

Topeka
 
$
—

 
$
50

 
$
(50
)
 
$
—

San Francisco
 
200

 
—

 
(200
)
 
—

 
 
$
200

 
$
50

 
$
(250
)
 
$
—

 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
Cincinnati
 
$
—

 
$
100

 
$
(100
)
 
$
—

San Francisco
 
—

 
200

 
—

 
200

 
 
$
—

 
$
300

 
$
(100
)
 
$
200



The following table summarizes borrowing activity from other FHLBanks during the years ended December 31, 2018, 2017, and 2016 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Borrowing
 
Principal
Payment
 
Ending
Balance
2018
 
 
 
 
 
 
 
 
Atlanta
 
$
200

 
$
500

 
$
(200
)
 
$
500

Boston
 
400

 
—

 
(400
)
 
—

San Francisco
 
—

 
500

 
(500
)
 
—

 
 
$
600

 
$
1,000

 
$
(1,100
)
 
$
500

 
 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
 
Atlanta
 
$
—

 
$
200

 
$
—

 
$
200

Boston
 
—

 
400

 
—

 
400

 
 
$
—

 
$
600

 
$
—

 
$
600

 
 
 
 
 
 
 
 
 
2016
 
 
 
 
 
 
 
 
Atlanta
 
$
—

 
$
300

 
$
(300
)
 
$
—

Boston
 
—

 
100

 
(100
)
 
—

Chicago
 
—

 
200

 
(200
)
 
—

Cincinnati
 
—

 
300

 
(300
)
 
—

Indianapolis
 
—

 
300

 
(300
)
 
—

New York
 
—

 
300

 
(300
)
 
—

San Francisco
 
—

 
500

 
(500
)
 
—

 
 
$
—

 
$
2,000

 
$
(2,000
)
 
$
—



At December 31, 2018, 2017, and 2016, the interest income and expense related to these transactions was immaterial.


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Table of Contents

Advance Transfers. The Bank may purchase or sell advances from/to other FHLBanks. These transfers are accounted for in the same manner as an advance origination with a member bank. During the year ended December 31, 2017, a member of the Federal Home Loan Bank of Chicago (Chicago Bank) re-designated its charter, and concurrently transferred its Federal Home Loan Bank membership from the Chicago Bank to the Des Moines Bank. In conjunction with this transfer and at request of the member, the Bank purchased $37 million of par value advances outstanding to this member from the Chicago Bank and recorded related premiums of $1 million. There were no advance transfers during the years ended December 31, 2018 and 2016.

Note 21 — Subsequent Events

Subsequent events have been evaluated from January 1, 2019, through the time of the Form 10-K filing with the Securities and Exchange Commission. No material subsequent events requiring disclosure were identified.

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Table of Contents

SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Information

The following table presents a summary of our Statements of Condition (dollars in millions):
 
2018
Statements of Condition
December 31,
 
September 30,
 
June 30,
 
March 31,
Cash and due from banks
$
119

 
$
155

 
$
201

 
$
194

Investments1
31,777

 
35,139

 
33,019

 
33,370

Advances
106,323

 
100,787

 
109,963

 
108,253

Mortgage loans held for portfolio, net2
7,835

 
7,549

 
7,310

 
7,112

Total assets
146,515

 
144,095

 
150,981

 
149,347

Consolidated obligations
 
 
 
 
 
 
 
Discount notes
42,879

 
42,101

 
43,122

 
33,930

Bonds
93,772

 
92,998

 
98,468

 
106,204

Total consolidated obligations4
136,651

 
135,099

 
141,590

 
140,134

Mandatorily redeemable capital stock
255

 
277

 
373

 
356

Total liabilities
138,967

 
136,790

 
143,442

 
141,912

Capital stock — Class B putable
5,414

 
5,163

 
5,420

 
5,372

Retained earnings
2,050

 
2,019

 
1,977

 
1,904

Accumulated other comprehensive income (loss)
84

 
123

 
142

 
159

Total capital
7,548

 
7,305

 
7,539

 
7,435


 
2017
Statements of Condition
December 31,
 
September 30,
 
June 30,
 
March 31,
Cash and due from banks
$
503

 
$
218

 
$
964

 
$
237

Investments1
34,452

 
39,341

 
37,763

 
41,792

Advances
102,613

 
117,514

 
118,878

 
123,609

Mortgage loans held for portfolio, net3
7,096

 
7,031

 
6,953

 
6,870

Total assets
145,099

 
164,545

 
164,988

 
172,918

Consolidated obligations
 
 
 
 
 
 
 
Discount notes
36,682

 
52,976

 
66,558

 
72,549

Bonds
98,893

 
102,294

 
89,171

 
90,956

Total consolidated obligations5
135,575

 
155,270

 
155,729

 
163,505

Mandatorily redeemable capital stock
385

 
422

 
480

 
494

Total liabilities
138,078

 
157,047

 
157,592

 
165,469

Capital stock — Class B putable
5,068

 
5,624

 
5,623

 
5,803

Additional capital from merger
—

 
—

 
—

 
9

Retained earnings
1,839

 
1,774

 
1,684

 
1,590

Accumulated other comprehensive income (loss)
114

 
100

 
89

 
47

Total capital
7,021

 
7,498

 
7,396

 
7,449


1
Investments include interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, AFS securities, and HTM securities.

2
Includes an allowance for credit losses of $1 million, $1 million, $1 million, and $2 million at December 31, 2018, September 30, 2018, June 30, 2018, and March 31, 2018.

3
Includes an allowance for credit losses of $2 million at December 31, 2017, September 30, 2017, June 30, 2017, and March 31, 2017.

4
The total par value of outstanding consolidated obligations of the FHLBanks was $1,031.6 billion, $1,019.1 billion, $1,059.9 billion, and $1,019.2 billion at December 31, 2018, September 30, 2018, June 30, 2018, and March 31, 2018.

5
The total par value of outstanding consolidated obligations of the FHLBanks was $1,034.2 billion, $1,028.7 billion, $1,011.5 billion, and $959.3 billion at December 31, 2017, September 30, 2017, June 30, 2017, and March 31, 2017.



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Table of Contents

The following tables present a summary of our Statements of Income (dollars in millions):
 
For the Three Months Ended
 
2018
Statements of Income
December 31,
 
September 30,
 
June 30,
 
March 31,
Net interest income
$
155

 
$
156

 
$
167

 
$
157

Other income (loss)1
(3
)
 
7

 
8

 
8

Other expense2
41

 
36

 
32

 
33

AHP assessments
11

 
14

 
14

 
14

Net income
100

 
113

 
129

 
118

 
For the Three Months Ended
 
2017
Statements of Income
December 31,
 
September 30,
 
June 30,
 
March 31,
Net interest income
$
153

 
$
174

 
$
170

 
$
153

Provision (reversal) for credit losses on mortgage loans
(1
)
 
1

 
—

 
—

Other income (loss)1
7

 
4

 
6

 
35

Other expense2
31

 
30

 
31

 
32

AHP assessments
14

 
15

 
15

 
16

Net income
116

 
132

 
130

 
140


1
Other income (loss) includes, among other things, net gains (losses) on investment securities and net gains (losses) on derivatives and hedging activities. During the three months ended March 31, 2017, other income (loss) was impacted by net gains on litigation settlements. We did not record any litigation settlements during 2018 or the three months ended December 31, 2017, September 30, 2017 and June 30, 2017.


2
Other expense includes, among other things, compensation and benefits, professional fees, contractual services, and gains and losses on REO.







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Table of Contents

Investment Portfolio Analysis

The following table summarizes the carrying value of our investment portfolio (dollars in millions):
 
December 31,
 
2018
 
2017
 
2016
Trading securities
 
 
 
 
 
U.S. obligations1
$
159

 
$
197

 
$
216

GSE and Tennessee Valley Authority obligations
57

 
260

 
1,611

Other2
266

 
272

 
273

Mortgage-backed securities
 
 
 
 
 
GSE multifamily
433

 
448

 
453

Total trading securities
915

 
1,177

 
2,553

Available-for-sale securities
 
 
 
 
 
U.S. obligations1
2,602

 
3,099

 
3,529

GSE and Tennessee Valley Authority obligations
1,038

 
1,236

 
1,351

State or local housing agency obligations
814

 
934

 
1,009

Other2
275

 
278

 
278

Mortgage-backed securities
 
 
 
 
 
U.S. obligations single-family1
4,483

 
3,726

 
3,838

GSE single-family
796

 
988

 
1,261

GSE multifamily
9,011

 
10,535

 
11,703

Total available-for-sale securities
19,019

 
20,796

 
22,969

Held-to-maturity securities
 
 
 
 
 
GSE obligations and Tennessee Valley Authority obligations
389

 
393

 
397

State or local housing agency obligations
391

 
454

 
688

Mortgage-backed securities
 
 
 
 
 
U.S. obligations single-family1
9

 
15

 
26

U.S. obligations commercial1
1

 
2

 
4

GSE single-family
2,192

 
2,752

 
3,543

Private-label residential
10

 
12

 
16

Total held-to-maturity securities
2,992

 
3,628

 
4,674

Interest-bearing deposits
1

 
1

 
2

Securities purchased under agreements to resell
4,700

 
4,600

 
5,925

Federal funds sold
4,150

 
4,250

 
5,095

Total investments
$
31,777

 
$
34,452

 
$
41,218



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

2
Represents Private Export Funding Corporation and/or taxable municipal bonds.








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Table of Contents

The following table summarizes the carrying value and yield characteristics of our investment portfolio on the basis of remaining terms to contractual maturity at December 31, 2018 (dollars in millions):
 
Due in one year or less
 
Due after one year through five years
 
Due after five years through 10 years
 
Due after 10 years
 
Total
Trading securities
 
 
 
 
 
 
 
 
 
U.S. obligations
$
—

 
$
—

 
$
64

 
$
95

 
$
159

GSE and Tennessee Valley Authority obligations
—

 
—

 
—

 
57

 
57

Other1
12

 
132

 
73

 
49

 
266

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
GSE multifamily
—

 
356

 
77

 
—

 
433

Total trading securities
12

 
488

 
214

 
201

 
915

Yield on trading securities
4.15
%
 
2.87
%
 
3.14
%
 
4.77
%
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
U.S. obligations
29

 
543

 
2,030

 
—

 
2,602

GSE and Tennessee Valley Authority obligations
29

 
614

 
38

 
357

 
1,038

State or local housing agency obligations
16

 
127

 
251

 
420

 
814

Other1
—

 
40

 
186

 
49

 
275

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
U.S. obligations single-family
—

 
—

 
—

 
4,483

 
4,483

GSE single-family
—

 
—

 
—

 
796

 
796

GSE multifamily
21

 
3,632

 
5,358

 
—

 
9,011

Total available-for-sale securities
95

 
4,956

 
7,863

 
6,105

 
19,019

Yield on available-for-sale securities
3.35
%
 
2.84
%
 
2.84
%
 
2.91
%
 
 
Held-to-maturity securities
 
 
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
—

 
—

 
260

 
129

 
389

State or local housing agency obligations
9

 
65

 
71

 
246

 
391

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
U.S. obligations single-family
—

 
—

 
—

 
9

 
9

U.S. obligations commercial
—

 
—

 
1

 
—

 
1

GSE single-family
—

 
5

 
173

 
2,014

 
2,192

Private-label residential
—

 
—

 
4

 
6

 
10

Total held-to-maturity securities
9

 
70

 
509

 
2,404

 
2,992

Yield on held-to-maturity securities
2.69
%
 
2.69
%
 
3.52
%
 
3.04
%
 
 
Total investment securities
116

 
5,514

 
8,586

 
8,710

 
22,926

Interest-bearing deposits
1

 
—

 
—

 
—

 
1

Securities purchased under agreements to resell
4,700

 
—

 
—

 
—

 
4,700

Federal funds sold
4,150

 
—

 
—

 
—

 
4,150

Total investments
$
8,967

 
$
5,514

 
$
8,586

 
$
8,710

 
$
31,777



1
Private Export Funding Corporation and/or taxable municipal bonds.


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Table of Contents

At December 31, 2018, we had investments with a carrying value greater than 10 percent of our total capital with the following issuers (dollars in millions):
 
Carrying
Value
 
Fair
Value
Fannie Mae
$
10,272

 
$
10,263

Ginnie Mae
4,492

 
4,492

Freddie Mac
2,539

 
2,531

Export-Import Bank of the United States
2,518

 
2,518

CF Secured, LLC
1,000

 
1,000

Daiwa Capital Markets America Inc.
1,000

 
1,000

Total
$
21,821

 
$
21,804


Loan Portfolio Analysis
The following table presents supplemental information on our mortgage loans held for portfolio (dollars in millions):
 
December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
Past due 90 days or more and still accruing interest1
$
8

 
$
11

 
$
14

 
$
14

 
$
11

Non-accrual mortgage loans2
$
36

 
$
48

 
$
60

 
$
78

 
$
59

Allowance for credit losses
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
2

 
$
2

 
$
1

 
$
5

 
$
8

Charge-offs3
—

 
(1
)
 
(2
)
 
(6
)
 
(1
)
Recoveries
—

 
1

 
—

 
—

 
—

Provision (reversal) for credit losses on mortgage loans
(1
)
 
—

 
3

 
2

 
(2
)
Balance, end of year
$
1

 
$
2

 
$
2

 
$
1

 
$
5

Non-accrual mortgage loans
 
 
 
 
 
 
 
 
 
Gross interest income that would have been recorded based on original terms during the year
$
2

 
 
 
 
 
 
 
 
Interest actually recognized into net income during the year
—

 
 
 
 
 
 
 
 
Interest shortfall
$
2

 

 
 
 
 
 
 

1
Represents government-insured mortgage loans that are 90 days or more past due.

2
Represents conventional mortgage loans that are 90 days or more past due and troubled debt restructurings. For information related to the Bank’s accounting treatment of non-accrual mortgage loans and troubled debt restructurings, refer to “Note 1 — Summary of Significant Accounting Policies.”

3
The ratio of net charge-offs to average mortgage loans outstanding was one percent or less for the years ended December 31, 2018, 2017, 2016, 2015 and 2014.

Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following table summarizes our short-term borrowings for the years ended December 31, 2018, 2017, and 2016 (dollars in millions):
 
Discount Notes1
 
Bonds2
 
2018
 
2017
 
2016
 
2018
 
2017
 
2016
Outstanding at end of the period
$
42,879

 
$
36,682

 
$
80,947

 
$
3,493

 
$
12,522

 
$
35,361

Weighted-average rate at end of the period
2.34
%
 
1.20
%
 
0.49
%
 
2.25
%
 
1.23
%
 
0.65
%
Daily-average outstanding for the period
$
38,986

 
$
61,953

 
$
93,282

 
$
8,060

 
$
24,337

 
$
28,344

Weighted-average rate for the period
1.89
%
 
0.84
%
 
0.44
%
 
1.76
%
 
0.85
%
 
0.55
%
Highest outstanding at any month-end
$
43,122

 
$
80,421

 
$
110,175

 
$
12,037

 
$
39,001

 
$
38,018


1 Values are derived using the carrying value of discount notes.

2 Values are derived using the carrying value of bonds.

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Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is (i) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our President and CEO, and chief financial officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our President and CEO, and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the annual period covered by this report. Based on that evaluation, and management’s identification of material weaknesses in our internal control over financial reporting at December 31, 2018, our President and CEO, and CFO have concluded that our disclosure controls and procedures were not effective as of December 31, 2018.
Changes in Internal Control over Financial Reporting
For the quarter ended December 31, 2018, there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are made only in accordance with authorizations of management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2018, based on the framework established in “Internal Control - Integrated Framework” (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on its assessment, management determined that due to the material weaknesses described below, our internal control over financial reporting was not effective as of December 31, 2018. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

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Management has identified two material weaknesses in our internal control over financial reporting as of December 31, 2018:

1.
We did not maintain effective user access controls to ensure appropriate segregation of duties and adequate restrictions on user and privileged access to the Bank’s IT applications, programs, and data. Specifically, we identified control deficiencies related to the provisioning, internal transfer, and removal of user access. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.

2.
We did not maintain effective control over IT change management, including controls to monitor developers’ access to production and testing of program changes. These controls are necessary to ensure that IT program and data changes affecting financial IT applications and underlying accounting records are identified, tested, authorized and implemented appropriately. We identified control deficiencies related to the approval of changes, execution of quality assurance reviews, and the monitoring of unauthorized system changes. Accordingly, our management has determined these deficiencies in the aggregate constitute a material weakness.
These IT deficiencies did not result in a material misstatement to the annual and interim financial statements, however, they could result in a misstatement potentially impacting all financial statement accounts and disclosures that would not be prevented or detected on a timely basis. Also, the deficiencies could impact maintaining effective segregation of duties, as well as the effectiveness of IT-dependent controls (such as automated controls that address the risk of material misstatement to one or more assertions). In addition, these deficiencies could affect the IT controls and underlying data that support the effectiveness of system-generated data and reports.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Refer to “Item 8. Financial Statements and Supplementary Data - Report of Independent Register Public Accounting Firm” for their audit report.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
Management is committed to improving our overall system of internal control over financial reporting, including taking necessary steps to fully remediate the identified material weaknesses. The following briefly describes certain remediation actions we have taken or plan to take to address these material weaknesses:

1.
Management plans to re-evaluate IT governance and controls and update procedures related to access management. In addition, we are in the process of implementing an automated access management system to centralize the access request and approval process.

2.
Management plans to evaluate and update system monitoring activities, change management process designs, and procedures.

3.
Training will be provided to IT personnel focusing on controls related to user access and change-management over IT systems. Additionally, training will address ITGCs, policies, and the impact of IT controls on our internal control over financial reporting.
Management believes that the measures described above should be sufficient to remediate the identified material weaknesses and strengthen our internal control over financial reporting. We cannot assure you, however, that these steps will remediate such weaknesses, nor can we be certain of whether additional actions will be required or the costs of any such actions.


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ITEM 9B. OTHER INFORMATION

PricewaterhouseCoopers LLP (PwC) serves as the independent registered public accounting firm for our Bank. Securities and Exchange Commission Rule 2-01(c)(1)(ii)(A) of Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.”
PwC has advised our Bank as of December 31, 2018 and December 31, 2017 that it, along with certain PwC staff, including members of the audit engagement team, have a borrowing relationship with a Bank member (referred below as the “lender”) who owns more than 10 percent of our capital stock, which under the Loan Rule, could call into question PwC’s independence with respect to the Bank. We are providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of our Bank.
PwC advised our Audit Committee that it believes that, in light of the facts of these borrowing relationships, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement have not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:
•
the borrowings are in good standing and the lender does not have the right to take action against PwC, as borrower, in connection with the financings;

•
the debt balances outstanding are immaterial to PwC and to the lender;

•
PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and

•
the PwC audit engagement team has no involvement in PwC’s treasury function and PwC’s treasury function has no oversight or ability to influence the PwC audit engagement team.

Additionally, our Audit Committee assessed PwC’s ability to perform an objective and impartial audit, and continue to conclude that PwC has maintained objectivity and impartiality in connection with its audit of our financial statements. The conclusion is based on the unique nature and status of our Bank, and due to our ownership structure and limited voting rights of our members. In addition to the above listed considerations, the Audit Committee considered the following:
•
as of December 31, 2018 and December 31, 2017, no officer or director of the lender served on the Board of Directors of the Bank; and

•
the lender is subject to the same terms and conditions for conducting business with the Bank as any other member.

Based on the Audit Committee’s evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.


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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The Board of Directors is responsible for monitoring our compliance with Finance Agency regulations and establishing policies and programs that carry out our mission. The Board of Directors adopts, reviews, and oversees the implementation of policies governing our advance, mortgage loan, investment, and funding activities. Additionally, the Board of Directors adopts, reviews, and oversees the implementation of policies that manage our exposure to market, liquidity, credit, operational, model, information security, compliance, and strategic risk, as well as capital adequacy.
Our Board is comprised of Member Directors elected by our member institutions on a state-by-state basis and Independent Directors elected by all of our members. Our Board includes thirteen Member Directors and nine Independent Directors, two of whom serve as public interest directors. Under the FHLBank Act, the only matters submitted to shareholders for votes are (i) the annual election of our Directors and (ii) any proposed agreement to merge with one or more FHLBanks. Finance Agency regulations require all of our Directors to be elected by our members. No member of management may serve as a director of an FHLBank.
Pursuant to the passage of the Housing Act, both Member and Independent Directors serve four-year terms. If any person has been elected to three consecutive full terms as a Member or Independent Director of our Board of Directors, the individual is not eligible for election to a Member or Independent Directorship for a term which begins earlier than two years after the expiration of the last expiring four-year term.
Member Directorships are allocated by the Finance Agency to the 13 states in our district and a member institution is eligible to participate in the election for the state in which it is located. Candidates for Member Directorships are not nominated by the Board. As provided for in the FHLBank Act, Member Directors are nominated by the members eligible to participate in the election in the relevant state. A member is entitled to cast, for each applicable Member Directorship, one vote for each share of capital stock that the member is required to hold as of the record date for voting, subject to a statutory limitation. Under this limitation, the total number of votes that each member may cast is limited to the average number of shares of our capital stock that were required to be held by all members in that state as of the record date for voting.
Member Directors are required, by statute and regulation, to meet certain eligibility requirements to serve as a director. To qualify as a Member Director an individual must (i) be an officer or director of a member institution in compliance with the minimum capital requirements established by its regulator and located in the state in which there is an open directorship and (ii) be a U.S. citizen. We are not permitted to establish additional qualifications to define eligibility criteria for Member Directors or nominees. Because of the structure of FHLBank Member Director nominations and elections, we may not know what factors our member institutions considered in selecting Member Director nominees or electing Member Directors.
Independent Directors are nominated by our Board of Directors after consultation with our Advisory Council, and then voted upon by all members within our 13 state district. For each Independent Directorship, a member is entitled to cast the same number of votes as it would for a Member Directorship.
In order to be eligible to serve as an Independent Director on our Board, an individual must (i) be a U.S. citizen and (ii) maintain a principal residence in a state in our district (or own or lease a residence in the district and be employed in the district). In addition, the individual may not be an officer of any FHLBank or a director, officer, or employee of any member institution or of any recipient of our advances. By regulation, we are required to have at least two public interest Independent Directors, each of whom must have more than four years of personal experience in representing consumer or community interests in banking services, credit needs, housing, or financial consumer protection. Each Independent Director, other than a public interest Independent Director, must have knowledge of, or experience in, financial management, auditing or accounting, risk management practices, derivatives, project development, organizational management, or the law.
On an annual basis, our Board of Directors performs an assessment of the directors’ backgrounds, expertise and qualifications against the skills and qualifications it desires on the Board of Directors. Furthermore, each director annually certifies that he/she continues to meet all applicable statutory and regulatory eligibility and qualification requirements. In connection with the election or appointment of Independent Directors, the Independent Director completes an application to serve on the Board of Directors. As a result of the assessment and as of the filing date of this Form 10-K, nothing has come to the attention of the Board of Directors or management to indicate that any of the current directors do not continue to possess the necessary experience, qualifications, attributes, or skills, as described in each director’s biography.

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Information regarding our current directors and executive officers is provided in the following sections. There are no family relationships among our directors or executive officers. The table below shows membership information for the Bank’s Board of Directors at February 28, 2019:
 
 
 
 
 
 
 
 
Expiration of
 
 
 
 
 
 
 
 
 
 
Current Term As
 
 
 
 
 
 
Member or
 
 
 
Director as of
 
Board
Director
 
Age
 
Independent
 
Director Since
 
December 31
 
Committees
J. Benson Porter (chair)
 
53
 
Member
 
June 1, 2015
 
2020
 
a, e, f,
Ellen Z. Lamale (vice chair)
 
65
 
Independent
 
January 1, 2012
 
2019
 
a, c, g
Ruth B. Bennett
 
66
 
Independent
 
June 1, 2015
 
2020
 
b, e
David P. Bobbitt
 
71
 
Member
 
June 1, 2015
 
2022
 
e, f
Karl A. Bollingberg
 
56
 
Member
 
January 1, 2019
 
2022
 
c, g
Steven L. Bumann
 
65
 
Member
 
January 1, 2015
 
2021
 
b, e
Christine H. H. Camp
 
52
 
Member
 
January 1, 2018
 
2021
 
d, g
Marianne M. Emerson *
 
71
 
Independent
 
June 1, 2015
 
2019
 
c, g
David J. Ferries
 
64
 
Member
 
June 1, 2015
 
2022
 
b, d
Chris D. Grimm
 
60
 
Member
 
January 1, 2010
 
2019
 
e, f
Teresa J. Keegan
 
56
 
Member
 
January 1, 2012
 
2019
 
a, e, g
Michelle M. Keeley
 
54
 
Independent
 
January 1, 2015
 
2022
 
a, e, f
John F. Kennedy, Sr. *
 
63
 
Independent
 
May 14, 2007
 
2020
 
a, b, c
Joe R. Kesler
 
63
 
Member
 
March 9, 2018
 
2019
 
d, f
John A. Klebba
 
62
 
Member
 
January 1, 2018
 
2021
 
b, c
James G. Livingston
 
53
 
Member
 
June 1, 2015
 
2021
 
a, b, e
Lauren M. MacVay
 
50
 
Member
 
January 1, 2018
 
2021
 
a, c, g
Michael W. McGowan
 
50
 
Independent
 
June 1, 2015
 
2019
 
c, g
Elsie M. Meeks
 
65
 
Independent
 
January 1, 2015
 
2022
 
a, b, d
Cynthia A. Parker
 
65
 
Independent
 
June 1, 2015
 
2021
 
d, f
John H. Robinson
 
68
 
Independent
 
May 14, 2007
 
2019
 
d, f
Robert A. Stuart
 
50
 
Member
 
January 1, 2017
 
2020
 
d, f

a)
Executive and Governance Committee

b)
Audit Committee

c)
Risk Committee

d)
Housing and Community Investment Committee

e)
Member and Finance Committee

f)
Human Resources and Compensation Committee (Compensation Committee)

g)
Business Operations and Technology Committee

*
Public Interest Independent Director


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The following describes the principal occupation, business experience, qualifications, and skills, among other matters of the 22 directors who currently serve on our Board of Directors. Except as otherwise indicated, each Director has been engaged in the principal occupation indicated for at least the past five years.
J. Benson Porter, the Board’s chair, has served as president and CEO of Boeing Employees’ Credit Union (BECU), a not-for-profit financial corporation in Tukwila, Washington, since April 2012. Prior to joining BECU in April 2012, he served as president and CEO of First Tech Credit Union in Palo Alto, California, from February 2007 to March 2012. He also served in several positions at Washington Mutual Bank, most recently as executive vice president and chief administrative officer, from May 1996 to February 2007. Mr. Porter has also held positions as regulatory counsel at Key Bank and as staff director for the Washington State Senate Banking Committee. He is a former director of FHLB San Francisco and is currently a member of the board of CO-OP Financial Services and the board of CU Direct. Mr. Porter was elected to the Seattle Bank’s board from the state of Washington in 2012 and served on the Seattle Bank’s board until the Merger in 2015. Mr. Porter’s knowledge of financial management and strategic planning, and his leadership and management skills, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Executive and Governance Committee.
Ellen Z. Lamale, the Board’s vice chair, retired from her position as senior vice president and chief risk officer (CRO) of The Principal Financial Group (The Principal Financial Group is a registered trademark) (Principal) in March of 2011. Prior to her retirement, she served as senior vice president and CRO of Principal since 2008. Ms. Lamale held executive positions at Principal for more than 10 years, and her responsibilities during her 34 year career at Principal included risk management, financial analysis, capital management, strategic planning, and internal audit. Ms. Lamale has served on several community boards, including West Des Moines Youth Soccer Club, Iowa United Soccer Club, Des Moines Symphony Second Strings, and Des Moines Public Library Foundation. Currently, she is a volunteer with the West Des Moines Youth Justice Initiative. Ms. Lamale’s involvement in and knowledge of accounting, auditing, finance, and risk management, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors. She currently serves as vice chair of the Executive and Governance Committee.
Ruth B. Bennett has served as principal of RB Bennett Enterprises LLC, a real estate brokerage firm in Vancouver, Washington, since 2008. From 1973 to 2007, she served in various capacities at the Bonneville Power Administration, a federal electrical utility in Portland, Oregon, including chief operating officer (COO) from 2003 to 2007. Ms. Bennett serves on the boards of Vancouver Affordable housing and Pacific Northern Environmental. She is a former board member of First Independent Bank, the regional Columbia-Willamette YMCA, and Pacific Health SW Medical Center where she was a hospital board chair for three years. Ms. Bennett was elected to the Seattle Bank’s board in 2014 and served on the Seattle Bank’s board until the Merger in 2015. Ms. Bennett’s experience in strategic planning, organizational and enterprise risk management, finance, and accounting, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors. She currently serves as vice chair of the Audit Committee.
David P. Bobbitt has served as chairman and CEO of Community 1st Bank in Post Falls, Idaho, since 2007. Mr. Bobbitt previously served as president of Sterling Savings Bank in Spokane, Washington, from 2004 to 2006. His banking career has also included positions with Idaho First National Bank and West One Bank. Mr. Bobbitt serves as chair of Pacific Coast Banking School and is on the boards of Kootenai Electric Cooperative, currently audit chair, and immediate past chairman of Coeur d’ Alene Chamber of Commerce. Mr. Bobbitt was appointed to the Seattle Bank’s board in 2012 and later elected to the Seattle Bank’s board from the state of Idaho in 2014. He served on the Seattle Bank’s board until the Merger in 2015. Mr. Bobbitt’s experience in financial and risk management and his leadership and management skills, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as the vice chair of the Compensation Committee.
Karl A. Bollingberg has served as loan participation advisor of Alerus Financial in Grand Forks, North Dakota since 2018. In his position as loan participation advisor, Mr. Bollingberg is responsible for building a specialized line of business for Alerus in North Dakota and across the upper Midwest. Prior to his current role, Mr. Bollingberg held various roles at Alerus from 1987 to 2018. Mr. Bollingberg worked for U.S. Bank, N.A. from 1985 to 1987. Mr. Bollingberg is active in a number of civic organizations including board member and past chair for the Regional Economic Development Corporation, advisory board member for the Bank of North Dakota, past chair of the Regional Airport Authority, and was campaign chairperson for the Community Violence and Intervention Center Shelter Project. Mr. Bollingberg’s involvement in and knowledge of banking and business development, as indicated by his background, support his qualifications to serve on our Board of Directors.

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Steven L. Bumann has served as CFO at BankWest, Inc. in Pierre, South Dakota, since 1995. Mr. Bumann has more than 30 years of banking experience and had held various leadership roles within the financial industry, including vice president and senior vice president roles at BankWest, Inc. He also earned his CPA while working for a local CPA firm and spent time working for the South Dakota Department of Legislative Audit. Mr. Bumann currently serves on the board of directors of the South Dakota Bankers Association and its Legislative Committee. He also serves on his local church Board of Elders, and the Board of Avera Foundation in Pierre, South Dakota. Mr. Bumann’s position as an officer of a member institution and his involvement and knowledge of accounting, auditing, and financial management, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as vice chair of the Member and Finance Committee.
Christine H. H. Camp has served as a director on the board of Central Pacific Bank in Honolulu, Hawaii since 2004. During her 14 year tenure, she has served as vice chair of the Loan Committee and currently serves as the chair of the Compensation Committee and as a member of the Audit and Governance Committees. Ms. Camp has been the president & CEO of Avalon Group, a real estate development and brokerage services firm she founded in 1999. Avalon develops residential and commercial projects in the range of $20 million to $300 million, including affordable apartment complexes in the state of Hawaii. Ms. Camp’s position as a director of a member institution and her involvement in and knowledge of financial management, as indicated by her background, support her qualifications to serve on our Board of Directors.
Marianne M. Emerson served from 2007 to 2012 as chief information officer (CIO) for the Seattle Housing Authority, a public corporation providing affordable housing to more than 25,000 low-income Seattle residents. She retired from the Seattle Housing Authority in 2012. From 1982 to 2007, she served in a number of IT positions at the Federal Reserve Board in Washington, D.C. including CIO from 2002 to 2007. She has also served as president of the Ray Solem Foundation since 2007, a foundation that donates money to organizations that creatively help immigrants become productive citizens. From 1998 to 2003, she also served as secretary of the board of directors of the FRB Federal Credit Union. Ms. Emerson was elected to the Seattle Bank’s board in 2008 and served on the Seattle Bank’s board until the Merger in 2015. Ms. Emerson’s knowledge of financial, organizational, and risk management, project development, and IT, support her qualifications to serve as a Public Interest Independent Director on our Board of Directors.
David J. Ferries is vice president and director of First Federal Bank & Trust, in Sheridan, Wyoming, a position he has held since June of 2018. Previously, he served as president and CEO of First Federal Bank & Trust since 2002. Prior to joining First Federal in 2002, he served as senior vice president of First Interstate Bank, where he held a variety of increasingly responsible positions during his service there. Mr. Ferries is a director of the Whitney Benefits Educational Foundation and the Big Sky Chapter of Risk Management Association. He has also served as a director of other national, civic, and professional organizations, including the Fannie Mae National Advisory Board, Northern Wyoming Community College Foundation, Wyoming Bankers Association, Forward Sheridan, Inc., and the Sheridan Economic and Educational Development Authority Joint Powers Board. He recently completed a multi-year appointment by the Office of the Comptroller of the Currency to the Mutual Savings Association Advisory Committee. Mr. Ferries was elected to the Seattle Bank’s board from the state of Wyoming in 2011 and served on the Seattle Bank’s board until the Merger in 2015. Mr. Ferries’ experience in strategic planning and risk management, and his leadership and management skills, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as vice chair of the Housing and Community Investment Committee.
Chris D. Grimm joined BANK, Wapello, Iowa, as its president and CEO in 2001. Prior to accepting his current role at BANK, Mr. Grimm held a number of positions unrelated to the financial services industry. Mr. Grimm’s position as an officer of a member institution and his involvement in and knowledge of financial management, as indicated by his background, support his qualifications to serve on our Board of Directors.
Teresa J. Keegan has served as executive vice president and CFO of Fidelity Bank in Edina, Minnesota since 2018. Ms. Keegan previously served as senior vice president and CFO since 2002. Ms. Keegan has over 30 years of financial management experience in the areas of finance, IT, human resources, audit, and compliance. She previously served on the board of Habitat for Humanity of Minnesota and Minnesota Bankers Association Insurance and Services, Inc. Ms. Keegan’s position as an executive officer of a member institution and her involvement in and knowledge of financial management, as indicated by her background, support her qualifications to serve on our Board of Directors. She currently serves as chair of the Member and Finance Committee.

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Michelle M. Keeley retired from her position as executive vice president of equities and fixed income investments for RiverSource Investments, LLC, a division of Ameriprise Financial Services in Minneapolis, Minnesota, in 2010. Prior to joining RiverSource, Investments, LLC, Ms. Keeley held a number of different investment and leadership positions, including managing director and senior management team member at Zurich Global Assets in New York. In addition to serving on our Board of Directors, Ms. Keeley is a director of the Bridge Builder Trust mutual funds, an Edward Jones affiliated company. Ms. Keeley also serves as a director of the Minneapolis-based non-profit organization, Graywolf Press. Ms. Keeley’s involvement in and knowledge of financial management, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors. She currently serves as chair of the Compensation Committee.
John F. Kennedy, Sr. is the president and CEO of St. Louis Equity Fund, Inc., a position he has held since June, 2015 and has served as executive vice president and CFO for the St. Louis Equity Fund, Inc. in St. Louis, Missouri from June of 2012 to June 2015. From 2007 to June 2012, he served as senior vice president and CFO. St. Louis Equity Fund, Inc. invests in affordable rental housing developments financed through corporate and bank investment in cooperation with federal, state, and local governments. Mr. Kennedy has been with the St. Louis Equity Fund, Inc. since 1998 and has more than 30 years of experience in affordable rental housing development and financing, residential homebuilding, public accounting, auditing, financial management, and representing low income individuals and families through the St. Louis Equity Fund, Inc. and the Gateway Community Development Fund, Inc., a certified CDFI. Mr. Kennedy’s involvement in and knowledge of accounting, auditing, financial management, and representing community interests in housing, as indicated by his background, support his qualifications to serve as a Public Interest Independent Director on our Board of Directors. He currently serves as chair of the Risk Committee.
Joe R. Kesler has served as a director of First Montana Bank in Missoula, Montana, and its holding company, First National Bancorp, Inc., since 2005. Mr. Kesler served as the president and CEO of First Montana Bank from 2005 to February 2018 and has over 40 years of experience in the banking industry. Mr. Kesler has served in various community leadership roles, including president of the Chamber of Commerce, director of a small business incubator, director of business development corporations, director in state banking trade associations, member of service clubs such as Rotary and leader or director for community nonprofits like symphony boards and churches. Mr. Kesler’s position as a director of a member institution and his involvement in and knowledge of accounting and financial management, as indicated by his background, support his qualifications to serve on our Board of Directors.
John A. Klebba has been the CEO and chairman of the board of Legends Bank in Linn, Missouri, and its holding company, Linn Holding Company, since April 2018. He previously served as the president, CEO, and chairman of the board of Legends Bank and its holding company, Linn Holding Company, since February 2004. He has been with the bank since 1991. Prior to that he was a partner in the Kansas City office of the law firm of Lewis Rice and Fingersh, where his practice concentrated on corporate and banking law. He is also the managing member of JHK Farm, LLC, a family-owned cow/calf operation in Osage County, Missouri. Mr. Klebba is a former member of the board of the American Bankers Association and a former chairman of the Missouri Bankers Association, and is currently the chairman of the Board of Regents of the State Technical College of Missouri, a member of the board of the Missouri Higher Education Savings Program, as well as a board member of a number of charitable organizations. Mr. Klebba’s position as an officer of a member institution and his involvement in and knowledge of financial management, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as vice chair of the Risk Committee.
James G. Livingston has served as executive vice president, senior vice president, and vice president at Zions Bancorporation, National Association, located in Salt Lake City, Utah, since 2017, 2011 and 2005, respectively. Prior to joining Zions in 2005, Mr. Livingston worked for Ziff Brothers Investments, in New York City. He has also been an assistant professor of accounting at Southern Methodist University in Dallas, Texas. Mr. Livingston was elected to the Seattle Bank’s board from the state of Utah in 2007 and served on the Seattle Bank’s board until the Merger in 2015. Mr. Livingston’s position as an officer of a member institution and his involvement and knowledge of auditing, accounting, derivatives, as well as, financial, organizational, and risk management experience, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Audit Committee.
Lauren M. MacVay is currently the CEO of True North Federal Credit Union in Juneau, Alaska, a position she has held since 2004. Ms. MacVay has 23 years of banking experience. Prior to her current role, she held various leadership and management roles after joining True North Federal Credit Union in 1995. Before relocating to Alaska and beginning her banking career, Ms. MacVay was a practicing attorney in Pennsylvania for several years. Currently, Ms. MacVay serves on the board of directors of the Alaska Credit Union League and the Juneau Economic Development Council. Ms. MacVay’s position as an officer of a member institution and her involvement in and knowledge of financial management, as indicated by her background, support her qualifications to serve on our Board of Directors. She currently serves as chair of the Business Operations and Technology Committee.

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Michael W. McGowan has served as chair and CEO of DCM Limited, a global business and information technologies consulting firm, since 2007. He is also currently a principal in two software development companies, General UI, Seattle, Washington and BuildandCapture.com, Missoula, Montana. He was the primary founder of Nova Biosource Fuels, Inc., a publicly traded renewable energy company, and continues to be involved in developing sustainable resource companies. Prior to entering the technology sector, from 1997 to 2007, Mr. McGowan worked in the banking and financial management industry as an investment advisor and trust officer. Mr. McGowan was elected to the Seattle Bank’s board in 2012 and served on the Seattle Bank’s board until the Merger in 2015. Mr. McGowan’s experience and knowledge of capital markets, IT (cybersecurity), and strategic business planning support his qualifications to serve as an Independent Director on our Board of Directors. He currently serves as vice chair of the Business Operations and Technology Committee.
Elsie M. Meeks served as state director of the United States Department of Agriculture (USDA) in South Dakota from July of 2009 to 2015. Prior to joining the USDA, Ms. Meeks was the president and CEO of First Nations Oweesta Corporation. She was active in the development and management of Lakota Funds, a small business and microenterprise development financial institution on the Pine Ridge Indian Reservation in South Dakota and has served as its board chairwoman since 2015. Ms. Meeks served on the U.S. Commission on Civil Rights, completing a six-year term. She is a recent past director of the Northwest Area Foundation based in St. Paul, Minnesota. She has served as a director or council member of several national Native American organizations and currently is chair of the Advisory Council for the Federal Reserve Bank of Minneapolis’ Center for Indian Country Development. Ms. Meek’s involvement in and knowledge of economic development and community management, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors. She currently serves as chair of the Housing and Community Investment Committee.
Cynthia A. Parker has served as president and CEO of BRIDGE Housing Corporation, one of the nation’s largest owners and developers of affordable housing, headquartered in San Francisco, California, since 2010. Previously, Ms. Parker served as regional president for Mercy Housing Inc., a nonprofit organization that develops affordable housing, from 2008 to 2010, and as senior vice president of the affordable housing and real estate group of the Seattle-Northwest Securities, an investment banking firm, between 2002 and 2008. She is currently a director of the National Affordable Housing Trust, the Housing Partnership Network, and Stewards of Affordable Housing for the Future. Ms. Parker was elected to the Seattle Bank’s board in 2008 and served on the Seattle Bank’s board until the Merger in 2015. Ms. Parker’s involvement in and experience in representing community interests in housing, and knowledge of human resources and compensation practices, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors.
John H. Robinson has served as chair of Hamilton Ventures, LLC, a consulting and investment company in Kansas City, Missouri, since 2004. Mr. Robinson is an engineer with international experience as chairman of EPCglobal Ltd in Sheffield, England, from 2003 to 2004, and executive director of Amey Plc in London, England, from 2000 to 2002. He was managing partner and vice chair of Black & Veatch, Inc. from 1989 to 2000. He serves on the board of directors of Olsson Associates, Alliance Resources MLP, and Coeur Mining. Mr. Robinson’s involvement in and knowledge of financial management, project development, and organizational management, as indicated by his background, support his qualifications to serve as an Independent Director on our Board of Directors.
Robert A. Stuart has served as president and CEO of OnPoint Community Credit Union in Portland, Oregon, since 2006. Prior to his current role, Mr. Stuart spent 15 years serving in various executive positions with Bank of America. Most recently, he served as senior vice president, consumer banking for the Portland metropolitan Oregon market. Mr. Stuart currently co-chairs the Northwest Credit Union Association Oregon Governmental Affairs Committee. He also serves on the boards of PSCU Financial Services and Oregon Wildlife Heritage Foundation. Mr. Stuart previously served on the Federal Reserve Bank of San Francisco District Community Depository Institutions Advisory Council, the board of the Community Credit Union of America, and the advisory boards of the Credit Union National Association Cabinet, Fiserv (XP) Financial Services Platform, and Filene Research Institute. Mr. Stuart’s position as an officer of a member institution and his involvement in and knowledge of auditing and accounting, as well as, financial, organizational, and risk management experience, as indicated by his background, support his qualifications to serve on our Board of Directors.


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Executive Officers
The following persons currently serve as executive officers of the Bank:
 
 
 
 
 
 
Position Held
Executive Officer
 
Age
 
Position Held
 
Since
Michael L.Wilson
 
62
 
President and Chief Executive Officer
 
April 2016
Joseph E. Amato
 
60
 
Executive Vice President and Chief Financial Officer
 
May 2016
Daniel D. Clute
 
53
 
Executive Vice President and Chief Business Officer
 
October 2012
Sunil U. Mohandas
 
59
 
Executive Vice President and Chief Risk and Compliance Officer
 
October 2017
Dusan Stojanovic
 
59
 
Executive Vice President and Chief Operating Officer
 
June 2017
Nancy L. Betz
 
60
 
Senior Vice President and Chief Human Resources and Administrative Officer/Office of Minority Women Inclusion
 
June 2017
Aaron B. Lee
 
46
 
Senior Vice President, General Counsel, and Corporate Secretary
 
March 2013
Kelly E. Rasmuson
 
56
 
Senior Vice President and Chief Audit Executive
 
June 2016
Linda N. Betz
 
57
 
Senior Vice President and Chief Information Security Officer
 
March 2018
Michael L. Wilson has been President and CEO of the Bank since April 2016. Mr. Wilson joined the Bank in June 2015 as President after the Merger. Previously Mr. Wilson was president and CEO of the Seattle Bank from 2012 until its merger into the Des Moines Bank in June 2015, and from 2006 to 2012 he was Executive Vice President and the Chief Business Officer (CBO) of the Des Moines Bank. During his prior role as CBO, Mr. Wilson was responsible for business activities that served the Bank’s members and their communities. Before joining the Des Moines Bank in 2006, Mr. Wilson was a senior executive vice president and the COO of the Federal Home Loan Bank of Boston (Boston Bank), where he worked for 12 years. In addition, he served as the Boston Bank’s executive vice president for Finance from 1997 to 1999 and senior vice president for planning and research from 1994 to 1997. Prior to his service at the Boston Bank, he was the director of the Office of Policy and Research at the Federal Housing Finance Board in Washington, D.C. Mr. Wilson currently serves on the Board of Directors of the Federal Home Loan Bank Office of Finance, the fiscal agent for the FHLBank System, and the board of the Greater Des Moines Habitat for Humanity. Mr. Wilson has a B.A. in economics and political science from the University of Wisconsin-Milwaukee and an M.S. in economics from the University of Wisconsin-Madison.
Joseph E. Amato has served as Executive Vice President and CFO since May 2016. In his role, Mr. Amato has management responsibility for accounting and financial reporting, treasury and capital markets, strategic planning, and portfolio strategy. Mr. Amato has nearly 30 years of experience in a variety of senior finance and capital market roles. Prior to joining the Bank, Mr. Amato was at Freddie Mac from 2001 until 2016, most recently serving as senior vice president, CFO investments and financial planning. At Freddie Mac, Mr. Amato also held senior roles in financial planning and analysis, finance, capital management, and equity finance. Prior to joining Freddie Mac, Mr. Amato served as CEO and co-founder of NextFinance, an e-commerce company from 2000 to 2001. From 1987 to 2000, Mr. Amato served in various capacities at Fannie Mae including vice president for financial transactions and portfolio strategy, along with roles in regulatory policy and treasury. Mr. Amato received a B.A. degree in Business Administration from the University of Maryland in 1984 and received his Masters of Business Administration (MBA) from the George Washington University, District of Columbia in 1987.
Daniel D. Clute has served as Executive Vice President and CBO since October of 2012. Mr. Clute is responsible for the Bank’s credit and mortgage sales, marketing communications, community investment, and government and external relations. He joined the Bank in August 2011 as Senior Vice President and Director of Communications and External Relations. Prior to joining the Bank, his career included senior roles in treasury, corporate finance, public affairs, and elected public service. From 2007 to 2011, he served as vice president and treasurer of Wells Fargo Financial, Inc., a unit of Wells Fargo & Company, where he was responsible for funding, treasury operations, and asset-liability management. From 2000 to 2007, Mr. Clute served in several roles at Citigroup, including as the senior finance and administrative officer for a Citi Cards operations center and the state director of public affairs for Citigroup businesses in Iowa. From 1989 to 2000, he served in several management roles at Wells Fargo Financial, Inc. in its treasury operations. Mr. Clute served as an elected member of the Iowa House of Representatives from 2007 to 2009 and prior to that was an elected member of the Clive, Iowa, City Council from 2002 to 2007. He also has a long history of non-profit board of director leadership, including president of the board of directors of Habitat for Humanity of Iowa, Inc. He was appointed by the governor of Iowa in 2012 and 2016 to serve four-year terms on the Board of Directors of the Iowa Student Loan Liquidity Corporation. Mr. Clute received his undergraduate and MBA degrees from the University of Iowa in 1988 and 1989, respectively.

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Sunil U. Mohandas is currently serving as Executive Vice President and Chief Risk and Compliance Officer (CRCO). Mr. Mohandas has responsibility for the Bank’s enterprise risk management area, including credit risk, market risk, operational risk, compliance risk, and model risk. He joined the Bank in September 2015 as Vice President and Market Risk Officer and was appointed to Executive Vice President and CRO in June 2017. In October 2017, Mr. Mohandas was appointed to CRCO. Prior to joining the Bank in September 2015, he served as senior vice president and chief risk manager at Sumitomo Mitsui Trust Bank in New York City from February 2014 until August 2015. Mr. Mohandas also held various risk management positions during his 11-year tenure with the FHLBank of Indianapolis (Indianapolis Bank) from December 2002 to January 2014, including three years as senior vice president and chief risk officer from January 2011 to January 2014. In addition, he worked at Citibank and Dai-Ichi Kangyo Bank (now Mizuho Bank), in the risk management area in New York City from April 1995 until November of 2002. Mr. Mohandas is a Chartered Financial Analyst (CFA). He has a Bachelor’s Degree of Technology in Mechanical Engineering from the Indian Institute of Technology in Bombay, India. Mr. Mohandas earned a Ph.D. in Mechanical and Aerospace Engineering from the University of Missouri.
Dusan Stojanovic has served as Executive Vice President and COO since June 2017. He has management responsibility for IT and information security, as well as member and financial operations. Mr. Stojanovic joined the Bank as the Bank’s Financial Risk Officer in March 2008. From 2009 through May 2017, Mr. Stojanovic served as CRO. Prior to joining the Bank, Mr. Stojanovic held a variety of regulatory risk management and model validation positions with the Federal Reserve Bank of Chicago from 2006 to 2008, Federal Reserve Bank of Richmond from 2005 to 2006, and Federal Reserve Bank of St. Louis from 1995 to 2003. From 2003 to 2004, Mr. Stojanovic served as the vice governor for banking supervision at the National Bank of Serbia. Mr. Stojanovic received his undergraduate degree in Economics from the University of Belgrade and his M.A. and Ph.D. degrees in Economics from Washington University in St. Louis, Missouri. He also holds the Chartered Financial Analyst (CFA) designation from the CFA institute.
Nancy L. Betz has been with the Bank since April 2004 and is currently serving as Senior Vice President and Chief Human Resources and Administrative Officer/Office of Minority and Women Inclusion, a position she has held since June 2017. Ms. Betz joined the Bank as Director of Human Resources and became Senior Vice President in September of 2007. Ms. Betz has management responsibility for the human resources department, facilities administration, diversity and inclusion, and employee communications. Prior to joining the Bank, she worked as director of human resources at Wells Fargo Home Mortgage and DuPont Pioneer. During her tenure at DuPont Pioneer, she held a variety of positions, including global human resources for the sales and marketing division and had oversight responsibilities for corporate learning and development. Her leadership responsibilities have involved aligning human capital and workforce strategies, including diversity and inclusion with the business strategy. Ms. Betz received her undergraduate degree in Business Management and an M.S. in Adult Education/Learning and Development from Drake University.
Aaron B. Lee is currently serving as Senior Vice President, General Counsel and Corporate Secretary, a position he has held since March 2013. Mr. Lee joined the Bank in August 2005 as Associate General Counsel and became General Counsel and Corporate Secretary in March of 2010. In this role, he has direct responsibility for the Legal Department. Prior to joining the Bank, Mr. Lee worked in private practice as an associate attorney with the law firm of Harris, Mericle & Wakayama PLLC in Seattle, Washington. He received his undergraduate degree from the University of Iowa and his Juris Doctor degree from DePaul University College of Law in Chicago, Illinois.
Kelly E. Rasmuson joined the Bank in September 2006 and is currently serving as Senior Vice President and Chief Audit Executive. Mr. Rasmuson joined the Bank as director of Internal Audit and became Senior Vice President in September 2007. Mr. Rasmuson has management responsibility for the Internal Audit Department. Prior to joining the Bank, Mr. Rasmuson held positions of increasing responsibility with the internal audit department at Principal Financial Group in Des Moines, Iowa from 1997 to 2006. Before moving to Iowa, he worked in a variety of positions at multiple companies in Columbus, Ohio, including audit roles with one of the large international accounting firms. Mr. Rasmuson received his undergraduate degree from the University of Northern Iowa and his MBA from Xavier University. He is also a Certified Internal Auditor and CPA.
Linda N. Betz has served as Chief Information Security Officer (CISO) since March of 2018. Ms. Betz is responsible for information security strategy, policy, and technical capabilities. Prior to joining the Bank, her career included serving as chief information security officer at Travelers Insurance from 2011 to 2018. Prior to that, Ms. Betz was the director of IT Policy and Information Security at IBM from 2004 to 2011. Ms. Betz received a B.S. in Computer Science and Mathematics from SUNY Albany in 1982. She received her M.S. in Computer Science from Marist College in 1988. She received her Ph.D. from Nova Southeastern University in Information Systems in 2016. Ms. Betz was on the board of trustees for the University of St. Joseph in West Hartford, CT from 2013 to 2018. Ms. Betz was the president of the Industry Consortium for the Advancement of Security on the Internet (ICASI) from 2009 to 2011. She is currently on the board of directors of the Financial Services Information Sharing and Analysis Center (FS-ISAC).


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Code of Ethics
We have adopted a Code of Ethics that sets forth the guiding principles and rules of conduct by which we operate and conduct our daily business with our customers, vendors, shareholders, and fellow employees. The Code of Ethics applies to all of our directors, officers, and employees. The purpose of the Code of Ethics is to promote honest and ethical conduct and compliance with the law, particularly as it relates to the maintenance of our financial books and records and the preparation of our financial statements. The Code of Ethics can be found on our website at www.fhlbdm.com. We disclose on our website any amendments to, or waivers of, the Code of Ethics. The information contained in or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC.
Audit Committee
The purpose of the Audit Committee is to assist the Board of Directors in fulfilling its review and oversight responsibilities for (i) the integrity of the Bank’s financial statements and financial reporting process and systems of internal accounting and financial reporting controls, (ii) the independence, scope of audit services, and performance of the Bank’s internal audit function as well as the appointment or replacement of the Bank’s chief audit executive, (iii) the selection and replacement, qualifications, independence, scope of audit, and performance of the Bank’s external auditor, (iv) the Bank’s compliance with laws, regulations and policies, including the Code of Ethics, (v) the procedures for complaints regarding questionable accounting, internal accounting controls, and auditing matters, and oversight of fraud investigations, and (vi) the Bank’s and Audit Committee’s compliance with the Finance Agency’s Examination Guidance for the examination of accounting practices. The Audit Committee has adopted a charter outlining its roles and responsibilities, which is available on our website at www.fhlbdm.com. The information contained in or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC. The members of our Audit Committee for 2019 are James G. Livingston (chair), Ruth B. Bennett (vice chair), Steven L. Bumann, David J. Ferries, John F. Kennedy, Sr., John A. Klebba, and Elsie M. Meeks. The Audit Committee held a total of five in-person meetings and nine telephonic meetings in 2018. As of February 28, 2019, the Audit Committee has held one in-person meeting and two telephonic meetings and is scheduled to hold four in-person meetings and eight telephonic meetings throughout the remainder of 2019. Refer to Exhibit 99.1 of this 2018 Annual Report for the Audit Committee Report.
Audit Committee Financial Expert
Our Board of Directors determined that the following members of its Audit Committee qualify as audit committee financial experts under Item 407(d)(5) of Regulation S-K: Ruth Bennett, Steven Bumann, David Ferries, John Kennedy, James Livingston, and Elsie Meeks. Refer to “Item 13. Certain Relationships and Related Transactions, and Director Independence” for details on our director independence. For information concerning the experience through which these individuals acquired the attributes required to be deemed financial experts, refer to the biographical information in this Item 10.

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ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis section provides information related to the administration of our executive compensation policies and programs. We believe we have historically taken a prudent and effective approach to executive compensation with practices aligned with the Finance Agency’s guidance on FHLBank executive compensation.

This Compensation Discussion and Analysis includes the following parts:
i.

 
 
 
 
 
ii.
 
 
 
 
 
iii.
 
 
 
 
 
iv.
 
 
 
 
 
v.
 
 
 
 
 
vi.
 
 
 
 
 
 
 
 
 
vii.
 
 
 
 
 
 
 
 
 
viii.
 
 
 
 
 
ix.
 
 
 
 
 
x.
 

Compensation Philosophy
 
Our compensation philosophy, practices, and principles are an important part of our business strategy. Our philosophy assists us in attracting, retaining, and engaging employees with the skills and talent we need to create and implement strategies necessary to demonstrate value for our members, which is critical to our long-term success. Our executive compensation practices provide a framework to ensure an appropriately balanced approach to compensation through a combination of base salary, benefits, and annual and deferred cash incentive awards. Although we refine our compensation programs as economic conditions and competitive practices change, we strive to maintain consistency in our philosophy and approach with respect to executive compensation.
 
We believe our current employees and those individuals in our potential talent pool are highly marketable and can be attracted to opportunities across a broad spectrum of U.S. financial services businesses. Our competition for talent primarily includes FHLBanks, commercial banks, and other financial services companies, such as insurance companies.
 
We have designed our executive compensation program to motivate our NEOs to achieve our objectives for delivering value to our members, as customers and as shareholders, without taking undue risk.
 
Our executive compensation program is designed to do the following: 

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i.
Attract, reward, retain, and engage experienced, highly-qualified NEOs critical to our long-term success and enhancement of our member value.
 
ii.
Link executive compensation to Bank performance while monitoring the Bank’s exposure to risk.
 
iii.
Structure our total compensation package for NEOs so that it consists of a balance of competitive annual base pay and incentive pay that defers 50 percent of the total incentive award into future periods and is earned only upon satisfaction of a long-term performance goal. Thus, a deferred payout, as measured by our MVCS, is a critical component of our compensation. It is designed to ensure that our executives, over the interim period, continue to operate the Bank in a profitable and prudent manner. This approach aligns with the principles for executive compensation required by the Finance Agency.

In 2018, we implemented our executive compensation philosophy to provide competitive compensation to our NEOs that was linked to the achievement of objectives of the Bank performance.

Elements of Executive Compensation

Our executive compensation program is comprised of the following elements: (i) base salary, (ii) an incentive plan (IP) that includes a 50 percent annual cash award and a 50 percent deferral of the incentive award, (iii) retirement benefits, (iv) health and welfare benefits, (v) the potential for payments in the event of termination, and (vi) limited perquisites. The following discussion provides more detail for each of these elements.
 
BASE SALARY
 
Base salary is a fixed component of our NEOs’ total compensation that is intended to provide a level of compensation necessary to attract and retain highly-qualified executives. The Compensation Committee reviews the level of base salaries annually and approves and recommends to the Board adjustments to base salaries for our NEOs.

Each NEO’s minimum base salary was established by their respective employment agreement with us, except for the CISO, who does not have an employment agreement with us. Our CISO’s base salary was established by the COO. For further information regarding base salary and the terms of the employment agreements, see the narrative discussion following the “Summary Compensation Table” in this Item 11.

INCENTIVE PLAN
 
In December 2017, the Compensation Committee approved the 2018 Incentive Plan (IP). In February 2018, the Compensation Committee approved the Bank-wide Goal measures. The IP includes an annual cash incentive and a deferred cash incentive. Under the IP, our NEOs are required to defer 50 percent of their total cash incentive for three years following the end of the performance plan period. The 2018 deferred opportunities are payable in 2022. The deferred awards are not finally earned until completion of the respective performance periods and are subject to the quarterly average of our MVCS in 2021 and approvals by the Compensation Committee and Board of Directors in 2022. Beginning with the 2018 deferred opportunities, we changed references from Economic Value of Capital Stock (EVCS) to MVCS in 2018 because the Bank no longer uses EVCS as a metric in any of our risk or financial management policies. We define MVCS as an estimate of the market value of assets minus the market value of liabilities (excluding mandatorily redeemable capital stock) divided by the total shares of capital stock (including mandatorily redeemable capital stock) outstanding. It represents an estimation of the “liquidation value” of one share of our capital stock if all assets and liabilities were liquidated at current market prices. We believed that tying the amount of the final awards to the level of our MVCS in 2018 ensured that our participating NEOs continued to operate the Bank in a profitable, prudent manner without taking unnecessary or excessive risk. We received a non-objection letter from the Finance Agency for our 2018 IP in February of 2018.

For additional information about our Bank-wide Goals, see “Establishment of Performance Measures for the IP” in this Item 11. For more information relating to estimated IP awards, see “Components of 2018 Non-Equity Incentive Plan Compensation” in this Item 11.


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RETIREMENT BENEFITS
 We participate in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan), a tax-qualified defined benefit pension plan. In August of 2016, our Board of Directors elected to freeze the Pentegra DB Plan effective January 1, 2017. After the freeze, participants no longer accrue new benefits under the Pentegra DB Plan.
We have two qualified defined benefit pension plans under the same multiple-employer plan as a result of the Merger with the Seattle Bank in 2015. Prior to the plan freeze, employees of the Bank were eligible to participate in the Des Moines Pentegra Defined Benefit Pension Plan (Des Moines Bank DB Plan) if hired on or before December 31, 2010. Employees previously employed by the Seattle Bank were eligible to participate in the Seattle Pentegra Defined Benefit Pension Plan (Seattle Bank DB Plan) if they were hired before January 1, 2005.
 
In addition to the DB Plans, we have one qualified defined contribution benefit plan, the Federal Home Loan Bank of Des Moines 401(k) Savings Plan (DC Plan). We also offer the Benefit Equalization Plan (BEP), a nonqualified retirement plan which includes both a nonqualified defined contribution plan and a nonqualified defined benefit plan. The BEP allows the NEOs to receive amounts they would have been entitled to receive under the DB Plans and/or the DC Plan had the plans not been subject to Internal Revenue Code contribution limitations. In August of 2016, our Board of Directors elected to freeze the BEP defined benefit plan effective January 1, 2017 in conjunction with the freeze of the DB Plans. After the freeze, participants no longer accrue new benefits under the BEP defined benefit plan.

The table below shows which retirement plans each NEO participates in:
Named Executive Officer
 
Principal Position
 
Retirement Plan
Michael L. Wilson
 
President and CEO
 
b, c, d, e
Joseph E. Amato
 
CFO
 
c, e
Dusan Stojanovic
 
COO
 
a, c, d, e
Sunil U. Mohandas
 
CRCO
 
c, e
Linda N. Betz
 
CISO
 
c, e

a) Des Moines Bank DB Plan
b) Seattle Bank DB Plan
c) DC Plan
d) BEP DB Plan
e) BEP DC Plan

HEALTH AND WELFARE BENEFITS
 
Our NEOs are eligible for the same medical, dental, life insurance, and other benefits available to our full-time employees.
 
PAYMENTS IN THE EVENT OF TERMINATION
 
The employment agreements we entered into with certain NEOs governed their compensation for 2018 and provide for payments in the event of termination based on certain triggering events. For additional details, see “Potential Payments Upon Termination or Change of Control” in this Item 11.

PERQUISITES
 
Our NEOs, except the CISO who does not have an employment agreement with us, are eligible to receive perquisites in the form of financial planning assistance. In addition, our President and CEO receives a monthly car allowance. These perquisites are provided as a convenience associated with the NEOs overall duties and responsibilities. For the value of aggregate perquisites provided to the NEOs, refer to “Components of 2018 All Other Compensation” in this Item 11.

Finance Agency Oversight - Executive Compensation
 
In addition to our internal processes, the Finance Agency has oversight authority over our executive compensation. The FHLBanks provide all compensation actions affecting their five most highly compensated officers to the Finance Agency for prior review.

Applicable rules also establish the following principles for executive compensation:
 

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i.
executive compensation must be reasonable and comparable to that offered to executives in similar positions at comparable financial institutions;
 
ii.
executive compensation should be consistent with sound risk management and preservation of the par value of the FHLBank’s capital stock;

 iii.
a significant percentage of an executive’s incentive-based compensation should be tied to longer-term performance and outcome-indicators and be deferred and made contingent upon performance over several years; and
 
iv.
the Board of Directors should promote accountability and transparency in the process of setting compensation.

We received a non-objection letter from the Finance Agency for our 2018 IP in February of 2018. Additionally, the Finance Agency reviewed and provided a non-objection letter for the 2018 base salary increases for our NEOs.

Roles and Responsibilities of the Compensation Committee and Management in Establishing Executive Compensation
 
The Compensation Committee recommends to the Board of Directors all compensation decisions for our President and CEO. The Compensation Committee, based on recommendations from our President and CEO, approves and recommends to the Board of Directors all compensation decisions for the other NEOs. Throughout the year, our President and CEO, and the Compensation Committee review, on an informal basis, the performance of our NEOs, future management changes, and other matters relating to compensation. Any employment or severance agreement for our President and CEO is also approved by the Board of Directors.

Throughout the year, the Board of Directors reviews our Bank-wide Goals and achievement levels. When final numbers for a calendar year are determined, the Compensation Committee reviews the performance results to determine the level of performance that has been achieved for purposes of making compensation decisions for our NEOs. Our Compensation Committee approves and recommends the incentive awards comprised of Bank-wide Goals to the Board of Directors for their approval.
 
Merit increases are based upon an evaluation of an NEO’s overall performance. Because of our size and the number of NEOs involved, our President and CEO recommends to the Compensation Committee merit increases for the other NEOs. The Board of Directors completes an evaluation of our President and CEO’s performance and the Compensation Committee recommends compensation for our President and CEO to the Board of Directors. The Compensation Committee and our President and CEO consider overall performance in the areas of key role responsibilities, our shared values, and strategic responsibilities established for the year, and reviews NEO compensation relative to the market, in analyzing merit increases.

Analysis Tools the Compensation Committee Uses
 
For 2018, the Compensation Committee engaged McLagan Partners to advise them on executive compensation decisions. This included an analysis of McLagan Partners’ broad-based executive compensation benchmarking survey data to evaluate and advise our Compensation Committee and Board of Directors on whether the objectives of our executive compensation program were being met. This analysis compares the compensation of our NEOs to similar positions in commercial banks, the FHLBank System, and proxy data from publicly traded banks with assets between $10 billion and $20 billion at the 50th percentile of the market data. In addition, the market data is calculated with and without the proxy data. Their analysis considers all components of the NEOs’ total compensation except benefits.
 
When using commercial bank comparisons, our NEOs are compared to divisional positions. For example, a divisional CFO role is compared to our CFO role versus the overall commercial bank CFO role which is larger and broader in scope and responsibility. When using FHLBank System comparisons, our NEOs are compared to the same position within the FHLBanks. For example, our CFO role is compared to other CFO roles in the FHLBank System. When using proxy data comparisons, our President and CEO and CFO are compared to similar roles and the remaining NEOs are compared based on their salary rank within the Bank to the market’s top paid incumbents regardless of position. This proxy data is utilized as a data reference point and not for determining compensation decisions.


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Compensation Decisions in 2018
 
How we compensate our NEOs sets the tone for how we administer pay throughout the entire Bank. For 2018, our Compensation Committee considered numerous factors (including those previously discussed) before deciding on the appropriate total compensation for our NEOs, in the context of the current business, operating, and regulatory environment, which are more fully described in the following narrative.

BASE SALARY LEVELS
 
The Compensation Committee followed its historical practice of adjusting base salaries after a review of individual performance and current compensation of our NEOs compared to survey data. The Compensation Committee determined increases in our NEOs’ base salaries between 2.6 percent and 4.3 percent for 2018 were appropriate based on (i) our NEOs’ individual performance, contributions to the Bank, length of time in position, and changes in responsibilities, if applicable, (ii) a review of the compensation data paid by other FHLBanks, and (iii) a review of the McLagan Partners’ executive compensation survey data.

For 2018, the following increases were approved for our NEOs effective January 1, 2018. These increases were reviewed by, and received non-objection from the Finance Agency:
Named Executive Officer
 
Principal Position
 
2018 Base Salary Increase from 2017
Michael L. Wilson
 
President and CEO
 
3.1
%
Joseph E. Amato
 
CFO
 
3.3
%
Dusan Stojanovic
 
COO
 
2.6
%
Sunil U. Mohandas
 
CRCO
 
4.3
%
Linda N. Betz1
 
CISO
 
N/A


1
Ms. Betz was not an employee of the Bank at the time 2018 merit increase decisions were made.
ESTABLISHMENT OF PAY TARGETS AND RANGES
 
IP pay targets established for our NEOs take into consideration total compensation practices (base salary and incentives) of the survey data reviewed. Under the IP, our NEOs are assigned target award opportunities, stated as percentages of base salary. The target award opportunities correspond to the determination made by our Compensation Committee and our President and CEO on each NEO’s level of responsibility and ability to contribute to and influence overall Bank performance.

Awards are paid to our NEOs based upon the achievement level of Bank-wide Goals as determined by the Compensation Committee. In addition, 50 percent of the incentive award for participating NEOs, is deferred for three years following the end of the performance period, and subject to our achievement of requisite MVCS levels and Compensation Committee and Board of Directors’ approvals at the time of payment.

The annual and deferred IP award opportunities for our NEOs in 2018 were a percentage of base salary as follows:
Named Executive Officer
 
Incentive
Plan
 
Threshold
 
Target
 
Maximum
Michael L. Wilson
 
Annual
 
25.0%
 
42.5%
 
50.0%
 
 
Deferred
 
25.0%
 
42.5%
 
50.0%
Joseph E. Amato
 
Annual
 
20.0%
 
30.0%
 
40.0%
 
 
Deferred
 
20.0%
 
30.0%
 
40.0%
Dusan Stojanovic
 
Annual
 
20.0%
 
30.0%
 
40.0%
 
 
Deferred
 
20.0%
 
30.0%
 
40.0%
Sunil U. Mohandas
 
Annual
 
20.0%
 
30.0%
 
40.0%
 
 
Deferred
 
20.0%
 
30.0%
 
40.0%
Linda N. Betz
 
Annual
 
10.0%
 
20.0%
 
30.0%
 
 
Deferred
 
10.0%
 
20.0%
 
30.0%



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ESTABLISHMENT OF PERFORMANCE MEASURES FOR THE IP
 
In December 2017, the Compensation Committee approved the Bank-wide Goals framework. In February 2018, the Compensation Committee approved the Bank-wide Goal measures for 2018, which are summarized below:

i.
Core Product Utilization is a measure of the usage of the Bank’s core products (advances, LOCs, and MPF/MPP/MPF Xtra) by its members.

ii.
Advance Penetration is a measure of the average advance to assets ratio of the Bank’s depository institution members.

iii.
Operational Risk Management is a measure of the effectiveness of the Bank’s efforts to improve internal operations.

iv.
Operational Excellence Projects as measured by the completion of the following projects in 2018 according to scope and timelines approved by the Operational Excellence Steering Committee or the Building Committee: Data Center Co-location, Move to 909 Locust, Operational Risk and Compliance, Information Security and Controls, and STARS - Accounts Payable.

v.
Spread between Adjusted Return on Capital Stock and average 3-month LIBOR is a measure of profitability in which GAAP net income is adjusted for certain volatile and non-recurring items as disclosed in the Bank’s SEC reporting documents on Form 10-K and Form 10-Q. For additional information on our adjusted earnings measure, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview — Adjusted Earnings.”

vi.
Market Value of Capital Stock is a measure to ensure the Bank can always repurchase or redeem capital stock at par.

vii.
Diversity and Inclusion is a measure of our progress on diversity and inclusion initiatives.

The Bank’s IP design has historically included Bank-wide Goals. This plan design has resulted in positive results for the Bank and reasonable payouts to our participating NEOs. We believe this plan design has accomplished and driven the behaviors of all employees, including our NEOs, in accordance with our Board of Directors’ expectations.
 
For 2018, NEO incentive awards are tied entirely to achievement of Bank-wide Goals. This weighting was determined by the Compensation Committee based upon the relative need for our NEOs to focus on certain strategic imperatives and/or strategies contained in our Strategic Business Plan.

When establishing the Bank-wide IP performance goals, the Compensation Committee and the Board of Directors anticipated that we would reasonably achieve the target level of performance aligned with objectives contained in our Strategic Business Plan. The maximum level provides a goal that is anticipated to be more challenging to reach, based on the previous year’s performance results and current market trends and conditions. The Bank-wide Goal incentive awards are paid based on the actual results we achieve. The weightings for each goal area are generally aligned with our Strategic Business Plan and areas of key focus, such as delivering member value and managing risk.

The 2018 to 2020 Strategic Business Plan was approved by the Board of Directors in December of 2017, and included the following strategic imperatives for which strategies and action items were developed:
 
i.
Financial Management
 
ii.
Member Focus
 
iii.
People and Culture

iv.
Operational Excellence

The Bank-wide performance goals were aligned with the focus areas of Financial Management, Member Focus, People and Culture, and Operational Excellence.


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2018 IP PERFORMANCE RESULTS
 
On a regular basis during 2018, management provided an update to the Board of Directors on the status of performance relative to Bank-wide Goals. The following table provides the 2018 IP Bank-wide Goals for our NEOs approved by the Board of Directors in January 2018 as well as our performance results for 2018:
Bank-wide Goals
 
 2018 Results
 
Threshold
 
Target
 
Maximum
Core Product Utilization (15% Weight)
 
65.9
%
 
62.5
%
 
65.6
%
 
67.2
%
Advance Penetration (15% Weight)
 
2.83
%
 
2.02
%
 
2.70
%
 
3.37
%
Operational Risk Management (20% Weight)
 
0/6

 
2/6

 
3/6

 
5/6

Operational Excellence Projects (15% Weight)
 
4/5

 
3/5

 
4/5

 
5/5

Spread between Adjusted Return on Capital Stock and average 3-month LIBOR (15% Weight)
 
5.74
%
 
4.40
%
 
5.80
%
 
6.50
%
MVCS (10% Weight)
 
$
136.3

 
$
100.0

 
$
128.2

 
N/A

Diversity and Inclusion (10% Weight)
 
3/5

 
3/5

 
4/5

 
5/5


At its March 2019 conference call meeting, the Compensation Committee determined the Bank-wide Goals achievement results for the incentive awards that would be paid out to participating NEOs for the 2018 performance year. The incentive awards were based on the incentive targets, ranges, and performance measures achieved that were established by the Board of Directors and management, as appropriate, for 2018.

The overall weighted achievement of the Bank-wide Goals was 76.69 percent of target for our President and CEO, 78.49 percent for our CFO, COO, and CRCO, and 77.73 percent for our CISO. As a result of the Bank’s performance based on achievements related to Bank-wide Goals, the Compensation Committee awarded each NEO the amounts identified in the following table, subject to the Finance Agency’s non-objection:
Named Executive Officer
 
Bank-wide Performance Award1
 
Percent of
Salary
Michael L. Wilson 
 
$
541,074

 
65
%
Joseph E. Amato
 
223,682

 
47

Dusan Stojanovic
 
188,364

 
47

Sunil U. Mohandas
 
171,882

 
47

Linda N. Betz2
 
91,928

 
31


1
The Bank-wide Performance Award consists of annual incentive (50 percent of total incentive), paid in 2019 and deferred incentive (50 percent of total incentive), paid in 2022.

2
Ms. Betz’s incentive was prorated based on her period of employment with the Bank from March 19, 2018 through December 31, 2018.



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The following table provides compensation information for our NEOs for the years ended December 31, 2018, 2017, and 2016:
Summary Compensation Table
Name and Principal Position
 
Year
 
Salary
 
Bonus
 
Non-Equity Incentive Plan Compensation1
 
Change in Pension Value and Non-Qualified Deferred Compensation Earnings2
 
All Other
Compensation3
 
Total
Michael L. Wilson
 
2018
 
$
830,000

 
$
—

 
$
541,074

 
$
—

 
$
88,360

 
$
1,459,434

President and CEO
 
2017
 
805,000

 
—

 
667,222

 
386,000

 
83,785

 
1,942,007

 
 
2016
 
720,000

 
—

 
751,012

 
982,000

 
70,610

 
2,523,622

Joseph E. Amato4
 
2018
 
475,000

 
—

 
223,682

 
—

 
50,754

 
749,436

CFO
 
2017
 
460,000

 
—

 
282,910

 
—

 
63,220

 
806,130

 
 
2016
 
300,000

 
192,500

 
181,740

 
—

 
212,482

 
886,722

Dusan Stojanovic
 
2018
 
400,000

 
—

 
188,364

 
—

 
47,614

 
635,978

COO
 
2017
 
379,167

 
—

 
233,196

 
125,000

 
42,621

 
779,984

 
 
2016
 
350,000

 
—

 
295,524

 
281,000

 
26,826

 
953,350

Sunil U. Mohandas5
 
2018
 
365,000

 
—

 
171,882

 
—

 
40,838

 
577,720

CRCO
 
2017
 
299,344

 
—

 
159,534

 
—

 
36,403

 
495,281

Linda N. Betz6
 
2018
 
295,673

 
150,000

 
91,928

 
—

 
48,204

 
585,805

CISO
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1
The components of this column for 2018 are provided in the “Components of 2018 Non-Equity Incentive Plan Compensation” table below.
2
Represents the change in value of the DB Plans and the BEP DB Plan. All earnings on non-qualified deferred compensation are at the market rate. During 2018, Mr. Wilson’s and Mr. Stojanovic’s pension values decreased by $167,000 and $82,000, respectively. In accordance with SEC disclosure requirements, this negative amount is not included in this table.
3
The components of this column for 2018 are provided in the “Components of 2018 All Other Compensation” table within this Item 11. Executive Compensation.
4
Mr. Amato’s 2016 salary, non-equity incentive, and all other compensation are based on the period of his employment with the Bank from May 2, 2016 through December 31, 2016. Mr. Amato also received a one-time bonus related to the start of his employment with the Bank.
5
Mr. Mohandas was not an NEO prior to 2017.
6
Ms. Betz’s 2018 salary, non-equity incentive, and all other compensation are based on the period of her employment with the Bank from March 19, 2018 through December 31, 2018. Ms. Betz also received a one-time bonus related to the start of her employment with the Bank.

COMPONENTS OF 2018 NON-EQUITY INCENTIVE PLAN COMPENSATION
Named Executive Officer
 
Annual Incentive
 
Deferred Incentive1
 
Total
Michael L. Wilson
 
$
270,537

 
$
270,537

 
$
541,074

Joseph E. Amato
 
111,841

 
111,841

 
223,682

Dusan Stojanovic
 
94,182

 
94,182

 
188,364

Sunil U. Mohandas
 
85,941

 
85,941

 
171,882

Linda N. Betz
 
45,964

 
45,964

 
91,928


1
The deferred incentive amounts were earned as of December 31, 2018, but will not be paid until 2022, and remain subject to modification and forfeiture under the terms of the IP. For the NEOs, the deferred incentive is 50 percent of the total incentive earned in 2018.


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COMPONENTS OF 2018 ALL OTHER COMPENSATION
 
 
Bank Contributions to Vested Defined Contribution Plans
 
 
 
 
Named Executive Officer
 
DC Plans
 
BEP DC Plan
 
Perquisites and Other Personal Benefits
 
Total
Michael L. Wilson
 
$
24,624

 
$
50,870

 
$
12,866

 
$
88,360

Joseph E. Amato
 
22,369

 
28,085

 
300

 
50,754

Dusan Stojanovic
 
26,457

 
17,691

 
3,466

 
47,614

Sunil U. Mohandas
 
17,812

 
22,638

 
388

 
40,838

Linda N. Betz
 
11,000

 
19,633

 
17,571

 
48,204


The following table provides estimated potential payouts under our IP of non-equity incentive plan awards:
2018 Grants of Plan-Based Awards
 
 
 
 
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Named Executive Officer
 
Incentive Plan
 
Threshold
 
Target
 
Maximum
Michael L. Wilson
 
Annual
 
$
207,500

 
$
352,750

 
$
415,000

 
 
Deferred
 
207,500

 
352,750

 
415,000

Joseph E. Amato
 
Annual
 
95,000

 
142,500

 
190,000

 
 
Deferred
 
95,000

 
142,500

 
190,000

Dusan Stojanovic
 
Annual
 
80,000

 
120,000

 
160,000

 
 
Deferred
 
80,000

 
120,000

 
160,000

Sunil U. Mohandas
 
Annual
 
73,000

 
109,500

 
146,000

 
 
Deferred
 
73,000

 
109,500

 
146,000

Linda N. Betz
 
Annual
 
29,567

 
59,135

 
88,702

 
 
Deferred
 
29,567

 
59,135

 
88,702


EMPLOYMENT AGREEMENTS

We have entered into employment agreements with each of our NEOs except Linda Betz. The employment agreements provide that we shall initially pay the respective NEO an annualized base salary of not less than the amount set forth in the respective agreement. In each case, base salary may only be adjusted upward from the 2018 base salary based on an annual review by the Board of Directors and may not be adjusted downward unless such downward adjustment is part of a nondiscriminatory cost reduction plan applicable to our total compensation budget.

Additionally, the respective agreements provide that each NEO is entitled to participate in the IP. Each agreement provides that the incentive targets for the IP are to be established by our Board of Directors and that the target for the IP shall not be set lower than the designated percentage of base salary set forth in the employment agreement unless as a result of Board action affecting all NEOs. The agreements further provide that each NEO is entitled to participate in all eligible retirement benefit programs offered by the Bank.

Refer to the discussion of IP under “2018 IP Performance Results” in this Item 11 for additional information on the levels of awards under the IP. Actual non-equity incentive award amounts earned for the year ended December 31, 2018 are included in the non-equity incentive plan compensation column under the “Summary Compensation Table” in this Item 11.
 
The 2018 IP provides that unless otherwise directed by the Compensation Committee, payments under the IP shall be made in a lump sum through regular payroll distribution, as soon as possible after the Board of Directors approves the payout of a particular award, but in no case more than 75 days after the end of the calendar year for which the performance or deferral period is ended.


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Under the IP, the Compensation Committee may determine a participating NEO is not eligible to receive all or any part of the deferred incentive if the respective NEO (i) has not achieved a performance level of “meets expectations” or higher evaluation of overall performance during a performance period or deferred performance period, (ii) has not achieved a “meets expectations” or higher evaluation of overall performance at the time of payout, (iii) is subject to any disciplinary action or probationary status at the time of payout, or (iv) fails to comply with regulatory requirements or standards, internal control standards, professional standards or any internal standard, or fails to perform responsibilities assigned under our Strategic Business Plan.

In addition, under the IP, the Compensation Committee may also consider a variety of other objective and subjective factors to determine the appropriate payouts such as (i) operational errors or omissions that result in material revisions to the financial results, information submitted to the Finance Agency, or data used to determine incentive payouts, (ii) whether submission of information to the SEC, Office of Finance, or Finance Agency is untimely, and (iii) whether the organization fails to make sufficient and timely progress, as determined by the Finance Agency, in the remediation of examination, monitoring, and other supervisory findings and matters requiring attention.

If one of the above occurs, the Compensation Committee shall consider the facts and circumstances and reduce incentive awards commensurate with the materiality of the exception relative to our financial and operational performance and financial reporting responsibilities.

Each employment agreement provides that we or the applicable NEO may terminate employment for any reason (other than good reason or cause) on 60 days written notice to the other party. An applicable NEO may be entitled to certain payments upon termination or change of control. For more information, see “Potential Payments Upon Termination or Change of Control” in this Item 11.

CEO COMPENSATION PAY RATIO

As required by Item 402(u) of Regulation S-K, we are providing the following information:

For fiscal 2018, our last completed fiscal year:

i.
The median of the annual total compensation of all employees of the Bank (other than Mr. Wilson), was $113,354; and
ii.
The annual total compensation of Mr. Wilson, our President and CEO was $1,459,434.

Based on this information, the ratio for 2018 of the annual total compensation of our President and CEO to the median of the annual total compensation of all employees is 13 to 1.

We identified our median employee and calculated our pay ratio in accordance with SEC rules and methods for disclosure as described below. This methodology is consistent with the methodology used for the year ended December 31, 2017.

i. We identified our employee population as of December 31, 2018, including any full-time, part-time, temporary, and seasonal employees employed on that date. This date was selected because it aligned with the calendar and fiscal year end and allowed us to identify employees in a reasonably efficient manner.

ii.To find the median of the annual total compensation of all our employees (other than our CEO), we used wages from our payroll records as reported to the Internal Revenue Service on Form W-2 for fiscal 2018. In making this determination, we annualized the compensation of full-time and part-time permanent employees who were employed on December 31, 2018, but did not work for us the entire year. No full-time equivalent adjustments were made for part-time employees.

iii.We identified our median employee using this compensation measure and methodology, which was consistently applied to all our employees included in the calculation.

iv. After identifying the median employee, we added together all of the elements of such employee’s compensation for 2018 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $113,354.

v.With respect to the annual total compensation of our President and CEO, we used the amount reported in the “Total” column of our 2018 Summary Compensation table.


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Benefits and Retirement Philosophy

We consider benefits to be an important aspect of our ability to attract and retain qualified employees and therefore we design our programs to be competitive with other financial services businesses. The following is a summary of the retirement benefits that certain NEOs were eligible to receive.

QUALIFIED DEFINED BENEFIT PLANS
 
All employees who have met the eligibility requirements participate in our DB Plans, administered by Pentegra. In 2016, our Board of Directors elected to freeze the DB Plans effective January 1, 2017. After the plan freeze, participants no longer accrue any new benefits under the Pentegra DB Plan. Our President and CEO and COO participated in our DB Plans prior to the freeze.

The pension benefits payable under the Des Moines DB Plan for the COO were determined using a pre-established formula that provides a retirement benefit payable at age 65 or normal retirement under the plan. The benefit formula is 2.25 percent per each year of the benefit service multiplied by the highest three consecutive years’ average compensation. Average compensation is defined as the total taxable compensation as reported on the IRS Form W-2 (excluding deferred award payouts). In the event of retirement prior to attainment of age 65, a reduced pension benefit is payable under the plan. Upon termination of employment prior to age 65, participants meeting the five-year vesting and age 55 early retirement eligibility criteria are entitled to an early retirement benefit. The regular form of retirement benefits provides a single life annuity or additional payment options are also available. The benefits are not subject to offset for Social Security or any other retirement benefits received.

The benefit formula under the Seattle DB Plan for our President and CEO, as amended in August 2013 by the Seattle Bank, was 2.0 percent per each year of the benefit service multiplied by the highest three consecutive years’ average compensation. Compensation is defined as base salary plus overtime, bonuses and incentive compensation, excluding the amounts earned under the former Seattle Bank Long-Term Executive Plans. The last payment under the Seattle Bank Long-Term Executive Plans was made in 2018. Early retirement benefit payments are available to vested participants at age 45. However, early retirement benefit payments will be reduced by 3.0 percent for each year the participant is under age 65 when payments commence. If a participant has a combined age and service of at least 70 years (rule of 70) with a minimum age of 50, this reduction is 1.5 percent for each year the participant is under age 65 when benefit payments commence. The Rule of 70 only applies to benefits accrued prior to August 1, 2013. Our President and CEO is eligible for the Rule of 70.

NON-QUALIFIED DEFINED BENEFIT PLANS
 
Certain NEOs participating in the BEP also participate in the BEP DB Plan. Our BEP DB Plan is an unfunded, non-qualified pension plan. In 2016, our Board of Directors elected to freeze the BEP DB Plan effective January 1, 2017. After the plan freeze, participants no longer accrue any new benefits under the BEP DB Plan. Our President and CEO and COO participated in the BEP DB Plan prior to the freeze.

In determining whether a restoration of retirement benefits is due to our participating NEOs, the BEP DB Plan previously utilized the identical benefit formulas applicable to our DB Plans; however, the BEP DB Plan did not limit the annual earnings or benefits of our participating NEOs. Rather, if the benefits payable from the DB Plans were reduced or otherwise limited, our participating NEOs’ lost benefits were payable under the terms of the BEP DB Plan. As a non-qualified plan, the benefits received from the BEP DB Plan do not receive the same tax treatment and funding protection as with our qualified plans. Payment options under the BEP DB Plan include a lump-sum distribution, annuity payments, or installment payment options.


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CURRENT ACCRUED RETIREMENT BENEFITS

The following table provides the present value of the current accrued benefits payable to our participating NEOs upon retirement at age 65 from the DB Plans and BEP DB Plan, and is calculated in accordance with the formula currently in effect for specified years-of-service and remuneration for participating in those plans. Our pension benefits do not include any reduction for a participant’s Social Security benefits. The vesting period for the pension plans is five years. See “Item 8. Financial Statements and Supplementary Data — Note 16— Pension and Postretirement Benefit Plans” for additional details.

2018 Pension Benefits Table
Named Executive Officer1
 
Plan Name
 
Number of Years
Credited Service2
 
12/31/17 Present Value of Accumulated Benefit
 
12/31/18 Present Value of Accumulated Benefit
 
Change in Present Value of Accumulated Benefit
Michael L. Wilson
 
Pentegra DB Plan
 
22.00

 
$
1,824,000

 
$
1,765,000

 
$
(59,000
)
 
 
BEP DB Plan
 
10.41

 
1,915,000

 
1,807,000

 
(108,000
)
Joseph E. Amato1
 
Pentegra DB Plan
 
—

 
—

 
—

 
—

 
 
BEP DB Plan
 
—

 
—

 
—

 
—

Dusan Stojanovic
 
Pentegra DB Plan
 
7.75

 
671,000

 
624,000

 
(47,000
)
 
 
BEP DB Plan
 
7.75

 
486,000

 
451,000

 
(35,000
)
Sunil U. Mohandas1
 
Pentegra DB Plan
 
—

 
—

 
—

 
—

 
 
BEP DB Plan
 
—

 
—

 
—

 
—

Linda N. Betz1
 
Pentegra DB Plan
 
—

 
—

 
—

 
—

 
 
BEP DB Plan
 
—

 
—

 
—

 
—


1
Only employees hired prior to January 1, 2011 were previously eligible for the DB Plans and BEP DB Plan. Mr. Amato, Mr. Mohandas, and Ms. Betz were hired after January 1, 2011 and therefore were not eligible to participate in these plans in 2018.

2
The years of credited service for Mr. Wilson include years credited for prior service earned while employed by FHLBank Boston and FHLBank Seattle.

QUALIFIED DEFINED CONTRIBUTION PLANS

All employees who have met the eligibility requirements may elect to participate in our DC Plan, a retirement savings plan qualified under the Internal Revenue Code. Employees (including NEOs) may receive a match on employee contributions at 100 percent up to six percent of eligible compensation. Employees are eligible for the match immediately and all matching contributions are immediately 100 percent vested. Prior to January 1, 2017, employees hired on or after January 1, 2011 received an additional four percent Bank contribution of eligible compensation to the Des Moines DC Plan at the end of each calendar year. This change was made as a result of changes to the Des Moines DB Plan which excluded employees hired on or after January 1, 2011 from participating in the DB Plan. Effective January 1, 2017, in conjunction with the freeze of the DB plan, all employees began receiving an additional four percent Bank contribution of eligible compensation to the DC Plan following the end of each calendar year. Vesting in the additional four percent contribution is 100 percent at the completion of three years of service.


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NON-QUALIFIED DEFINED CONTRIBUTION PLANS
 
Our NEOs are eligible to participate in the BEP DC Plan, a non-qualified defined contribution plan that is the same as the DC Plan. The BEP DC Plan ensures, among other things, that participants whose benefits under the DC Plan would otherwise be restricted by certain provisions of the Internal Revenue Code are able to make elective pre-tax deferrals and to receive a matching contribution relating to such deferrals. The investment returns credited to a participating NEO’s account are at the market rate for the NEO’s selected investment. The selections may be altered at any time. Aggregate earnings are calculated by subtracting the 2017 year-end balance from the 2018 year-end balance, less the NEO’s and Bank’s contributions. The Bank immediately matches 100 percent of NEOs’ contributions up to six percent of salary for salary and incentive deferrals (except for the deferred component of the incentive).

2018 Non-Qualified Deferred Compensation Table
Named Executive Officer
 
Executive
Contributions
In Last FY1
 
Registrant
Contributions
In Last FY2
 
Aggregate
(Losses)/Earnings
In Last FY
 
Aggregate (Withdrawals)/Distributions In Last FY
 
Aggregate
Balance
At Last FYE
Michael L. Wilson
 
$
60,621

 
$
50,870

 
$
(69,971
)
 
$
—

 
$
1,120,351

Joseph E. Amato
 
293,421

 
28,085

 
(55,514
)
 
—

 
917,858

Dusan Stojanovic
 
39,535

 
17,691

 
(69,285
)
 
—

 
891,209

Sunil U. Mohandas
 
338,206

 
22,638

 
(3,508
)
 
—

 
472,549

Linda N. Betz
 
245,411

 
19,633

 
(33,036
)
 
—

 
194,777


1
Amounts represent NEO’s contributions for 2018 which includes the base salary deferral into the BEP during 2018 as well as the amount of the 2018 incentive the NEO has deferred into the BEP in 2019. Amounts shown are included in both the “Salary” and “Non-Equity Incentive” columns of the “Summary Compensation Table” in this Item 11.

2
Amounts shown are included in the “All Other Compensation” column of the “Summary Compensation Table” in this Item 11.

Potential Payments Upon Termination or Change of Control

The following paragraphs set out the material terms relating to termination of each of our NEOs, except our CISO who does not have an employment agreement with us, and the potential compensation that would be due to each upon termination under the current employment agreements, as applicable. For purposes of the following discussion regarding potential payments upon termination or change of control, the following are the definitions of “Cause,” “Good Reason,” “Disability,” and “Change of Control.” Our CISO was subject to Bank policies during 2018, and the tables set forth the compensation payable to the CISO under such policies.

“Cause” generally means a felony conviction, a willful act of misconduct that materially impairs the Bank’s business or goodwill or causes material damage, a willful breach of certain representations in the employment agreement, a willful and continued failure to perform material duties, a willful material violation of the Bank’s Code of Ethics, or receipt by the Bank of any regulatory order that the NEO be terminated or the NEO’s authority be materially reduced.

“Good Reason” generally means a reduction in the NEO’s base salary or incentive plan bonus opportunity, unless as part of a nondiscriminatory cost reduction applicable to the Bank’s total compensation budget, a reduction in the NEO’s corporate officer title, a material change by the Bank in the geographic location in which the NEO is required to perform services or a material breach of the employment agreement, as applicable, by the Bank.

“Disability” means the NEO is receiving benefits under a disability plan sponsored by the Bank for a period of not less than three months by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve months and which has rendered the NEO incapable of performing their duties.

“Change of Control” means a merger, reorganization, or consolidation of the Bank with or into another FHLBank or other entity, a sale or transfer of all or substantially all of the business or assets of the Bank to another FHLBank or other entity, the purchase by the Bank or transfer to the Bank of all or substantially all of the business or assets of another FHLBank, or the liquidation of the Bank.


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These definitions are summaries only and each respective employment agreement between us and our NEOs, as applicable, provides the relevant definitions in full. A copy of the employment agreement for our President and CEO is filed as an exhibit to our current report on Form 8-K, filed with the SEC on June 1, 2015, and summarized further below. A copy of the employment agreement for our CFO is filed as an exhibit to our current report on Form 8-K/A, filed with the SEC on August 5, 2016. Copies of the employment agreement for our CRCO and a revised employment agreement for our COO are filed as exhibits to our current report on Form 8-K/A, filed with the SEC on January 19, 2018.

TERMINATION FOR CAUSE OR WITHOUT GOOD REASON

If an NEO’s employment is terminated by us for cause or by the NEO without good reason, the employment agreement entitles the respective NEO to the following:
 
i.
Base salary accrued through the date of termination;
 
ii.
Accrued but unpaid award(s) under any IP in an amount equal to that which the NEO would have received in the year of termination;

 iii.
Accrued and earned vacation through the date of termination; and
 
iv.
All other vested benefits under the terms of our employee benefit plans, subject to the terms of such plans.

Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2018, the total amounts payable to our NEOs are outlined in the table below:
Termination For Cause or Without Good Reason
Named Executive Officer
 
Severance Pay1
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout2
 
Total
Michael L. Wilson
 
$
—

 
$
—

 
$
—

 
$
140,462

 
$
140,462

Joseph E. Amato
 
—

 
—

 
—

 
19,487

 
19,487

Dusan Stojanovic
 
—

 
—

 
—

 
57,693

 
57,693

Sunil U. Mohandas
 
—

 
—

 
—

 
351

 
351

Linda N. Betz3
 
—

 
—

 
—

 
6,130

 
6,130


1
Termination under these circumstances would not result in severance payments from the Bank but would result in salary earned through December 31, 2018, as reflected under the “Salary” column of the “Summary Compensation Table” in this Item 11.

2
This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.

3
As of December 31, 2018, there is not an employment agreement in force between the Bank and Ms. Betz. However, like all employees, Ms. Betz is eligible to receive a payout in connection with unused vacation upon termination for cause.


TERMINATION WITHOUT CAUSE, FOR GOOD REASON, OR FOLLOWING A MERGER/CHANGE IN CONTROL

If, however, the NEO’s employment is terminated by us without cause, by the NEO for good reason, or following a merger/change in control, in addition to the payouts previously mentioned, the NEO would be entitled to severance payments equal to a multiple of the NEO’s base salary and otherwise as follows:
 
i.
Two times the annual base salary in effect on the date of termination for the President and CEO and one times the annual base salary in effect on the date of termination for the CFO, COO, CRCO, and CISO, or, in the case that the termination occurs within 24 months following a Change of Control, 2.99 times the annual base salary in effect on the date of termination for the President and CEO, two times the annual base salary in effect on the date of termination for the CFO, COO, and CRCO; and one times the annual base salary in effect on the date of termination for the CISO;

ii.
One times the participating NEO’s targeted non-deferred IP award in effect for the calendar year in which the date of termination occurs, or, in the case that the termination occurs within 24 months following a Change of Control, 2.99 times the targeted non-deferred plan award in effect for the calendar year in which the date of termination occurs for the President and CEO, two times the targeted non-deferred plan award in effect for the calendar year in which the date of termination occurs for the CFO, COO, and CRCO; and one times the targeted non-deferred plan award in effect for the calendar year in which the date of termination occurs for the CISO;
 

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iii.
The IP award for the calendar year in which the date of termination occurs and prorated for the portion of the calendar year in which the NEO was employed;
 
iv.
The accrued but unpaid IP awards covering periods prior to the one in which the NEO’s employment was terminated, calculated in accordance with the terms of the IP as if termination was due to death or disability; and
 
v.
Any benefits mandated under any applicable health care continuation laws, provided that the continuing bank will continue paying its portion of the medical and/or dental insurance premiums for the NEO for the one-year period following the date of termination.

The IP award would be paid based on the calendar year actual results for Bank-wide Goals, and would be paid at the regular time that such payments are made to all employees enrolled in the plans. The base salary amount, the IP award for the calendar year in which the date of termination occurs, and the accrued but unpaid IP awards for any performance period ending prior to the year in which the date of termination occurs would be paid in a lump sum within ten days following the NEO executing a release of claims against us, which would entitle them to the payments described. Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2018, the total amounts payable to our NEOs are outlined in the table below:

Termination Without Cause or For Good Reason
Named Executive Officer
 
Severance Pay
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout1
 
Total
Michael L. Wilson
 
$
1,660,000

 
$
270,537

 
$
1,072,228

 
$
140,462

 
$
3,143,227

Joseph E. Amato
 
475,000

 
111,841

 
344,166

 
19,487

 
950,494

Dusan Stojanovic
 
400,000

 
94,182

 
426,194

 
57,693

 
978,069

Sunil U. Mohandas
 
365,000

 
85,941

 
203,096

 
351

 
654,388

Linda N. Betz2
 
375,000

 
45,964

 
45,964

 
6,130

 
473,058


Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2018, the total amounts payable to our NEOs are outlined in the table below:

Termination Without Cause or For Good Reason Following Change in Control
Named Executive Officer
 
Severance Pay
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout1
 
Total
Michael L. Wilson
 
$
2,481,700

 
$
808,906

 
$
1,072,228

 
$
140,462

 
$
4,503,296

Joseph E. Amato
 
950,000

 
223,682

 
344,166

 
19,487

 
1,537,335

Dusan Stojanovic
 
800,000

 
188,364

 
426,194

 
57,693

 
1,472,251

Sunil U. Mohandas
 
730,000

 
171,882

 
203,096

 
351

 
1,105,329

Linda N. Betz2
 
375,000

 
45,964

 
45,964

 
6,130

 
473,058


1
This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.

2
As of December 31, 2018, there is not an employment agreement in force between the Bank and Ms. Betz.

TERMINATION FOR DEATH, DISABILITY, OR RETIREMENT

If the NEO’s employment is terminated due to death, disability, or qualifying retirement, in addition to the payouts previously mentioned under the section entitled “Termination For Cause or Without Good Reason”, the NEO is entitled to the following:
 
i.
The IP award for the calendar year in which the date of termination occurs and prorated for the portion of the calendar year in which the NEO was employed;
 
ii.
To the extent not already paid to the NEO, the accrued but unpaid IP awards covering periods prior to the one in which the NEO’s employment was terminated;
 
iii.
Other coverage continuation rights that are available to such employees upon death, disability, or retirement, as provided for under the terms of such plans.

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Payment of all accrued amounts, other than IP award amounts, shall be paid in lump sum within ten days or no later than the first payroll date on or after the NEO’s date of termination. Payment of all IP award amounts, if any, shall be paid as otherwise provided under the applicable IP.

Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2018, the total amounts payable to our NEOs are outlined in the table below:
Termination by Death, Disability, or Retirement
Named Executive Officer
 
Severance Pay
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout1
 
Total
Michael L. Wilson
 
$
—

 
$
270,537

 
$
1,072,228

 
$
140,462

 
$
1,483,227

Joseph E. Amato
 
—

 
111,841

 
344,166

 
19,487

 
475,494

Dusan Stojanovic
 
—

 
94,182

 
426,194

 
57,693

 
578,069

Sunil U. Mohandas
 
—

 
85,941

 
203,096

 
351

 
289,388

Linda N. Betz2
 
—

 
45,964

 
45,964

 
6,130

 
98,058


1
This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.
2
As of December 31, 2018, there is not an employment agreement in force between the Bank and Ms. Betz. However, like all employees, Ms. Betz is entitled to receive earned but not paid incentives upon termination for death, disability, or retirement.

Employment Agreement Between Michael L. Wilson and the Bank

The Bank entered into an employment agreement with Michael L. Wilson, effective on consummation of the Merger on May 31, 2015, in order to establish his duties and compensation and to provide for his employment as President of the Bank. In connection with the departure of Richard S. Swanson on June 30, 2016, Mr. Wilson was also appointed CEO.

The employment agreement provides that the Bank will initially pay Mr. Wilson a base salary of $720,000, subject to adjustment as described in the employment agreement.

Mr. Wilson’s incentive target will generally not be set lower than 75 percent of his base salary. Mr. Wilson will also be eligible for certain perquisites, including a car allowance in the amount of $750 per month.

Mr. Wilson’s employment agreement provides that:

•
the Bank or Mr. Wilson may terminate employment for any reason (other than Good Reason or Cause) following 60 days’ written notice to the other party;

•the Bank may terminate for Cause immediately following written notice to Mr. Wilson; and

•Mr. Wilson may terminate for Good Reason following written notice to the Bank,
 
in each case, in accordance with the procedures set forth in the employment agreement.

Amounts payable under the employment agreement are subject to reduction in the event the amounts constitute an “excess parachute payment” under Section 280G of the Internal Revenue Code.

Termination for Cause or Without Good Reason

If Mr. Wilson’s employment is terminated by the Bank for Cause or by Mr. Wilson without Good Reason, the employment agreement entitles Mr. Wilson to the benefits set forth under the heading “Termination for Cause or without Good Reason.”

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Termination Without Cause, for Good Reason, Following a Change of Control, or Within a Specified Period of Time Following the Effective Date of the Employment Agreement

If Mr. Wilson’s employment is terminated by the Bank without Cause or by Mr. Wilson for Good Reason, in addition to the payouts previously mentioned under “Termination for Cause or Without Good Reason,” the employment agreement entitles Mr. Wilson to additional amounts, including the benefits set forth under the heading “Termination without Cause, for Good Reason, or following a Merger/Change in Control.”

Termination for Death, Disability, or Retirement

If Mr. Wilson’s employment is terminated due to death, disability, or qualifying retirement, in addition to the payouts described in the section entitled “Termination for Cause or Without Good Reason,” he would also be entitled to the benefits set forth under the heading “Termination for Death, Disability or Retirement.”

Director Compensation
 
During 2018, the Board of Directors held 6 in-person board meetings and 41 in-person committee meetings. In addition, there were 5 telephonic board meetings and 43 telephonic committee meetings held throughout the year. The following table provides a summary of the number of meetings held by the Audit Committee, Compensation Committee, and Nominating Committee in 2018:
Committee
 
Number of In Person Meetings
 
Number of Telephonic Meetings
 
Total Number of Meetings Held
Audit Committee
 
5

 
9

 
14

Compensation Committee
 
5

 
4

 
9

Nominating Committee
 
—

 
5

 
5


Pursuant to our 2018 Director Fee Policy, Directors receive one quarter of the annual compensation following the end of each calendar quarter. If it is determined at the end of the calendar year that a Director has attended less than 75 percent of the meetings they were required to attend during the year, the Director will not receive the fourth quarter payment for such calendar year.

Directors are expected to attend all Board meetings and meetings of the Committees on which they serve, and to remain engaged and actively participate in all meetings. In addition to our right to withhold fourth quarter annual compensation from a Director, the Board of Directors directs the Corporate Secretary to make any other appropriate adjustments in the payments to any Director who regularly fails to attend Board meetings or meetings of Committees on which the Director serves, or who consistently demonstrates a lack of participation in or preparation for such meetings, to ensure that no Director is paid fees that do not reflect that Director’s performance of his/her duties. To assist the Board in making such determinations, the Corporate Secretary will, on a quarterly basis and prior to payment of the most recently completed quarter’s Director fees, review the attendance of each Director during the quarter and raise any attendance issues identified with the Board Chair. In the event the potential issue involves the Board Chair, the Corporate Secretary will raise such issue with the Board Vice Chair.

Directors are eligible to participate in the Bank’s Deferral Plan for Directors. Under this plan, directors may elect to defer all or a portion of their directors’ fees. Amounts deferred under this plan accrue interest and become payable to the director upon the expiration of the deferral period, which is irrevocably established by the director at the time the director elects to defer director fees. No above-market or preferential earnings are paid on any earnings under the Bank’s Deferral Plan for Directors.


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The total expenses paid on behalf of the Board of Directors for travel and other reimbursed expenses for 2018 was $439 thousand and annual compensation paid to the Board of Directors, by position, for 2018 was as follows:
Board of Director Position
 
2018
Chair
 
$
134,000

Vice Chair
 
123,500

Audit Committee Chair
 
118,500

Committee Chairs
 
113,500

Other Directors
 
103,000


The following table sets forth each Director’s compensation for the year ended December 31, 2018:
Director Compensation
Director Name
 
Fees Earned Or
Paid In Cash
J. Benson Porter (Chair)
 
$
134,000

Ellen Z. Lamale (Vice Chair)
 
123,500

Ruth B. Bennett
 
103,000

David P. Bobbitt
 
103,000

Steven L. Bumann
 
103,000

Christine H. H. Camp
 
103,000

Marianne M. Emerson
 
103,000

David J. Ferries
 
103,000

Chris D. Grimm
 
113,500

Eric A. Hardmeyer 
 
113,500

W. Douglas Hile1
 
98,750

Teresa J. Keegan
 
113,500

Michelle M. Keeley
 
113,500

John F. Kennedy, Sr.
 
113,500

Joe R. Kesler2
 
83,618

John A. Klebba
 
103,000

James G. Livingston1
 
105,583

Lauren M. MacVay
 
103,000

Mike W. McGowan
 
103,000

Elsie M. Meeks
 
113,500

Cynthia A. Parker
 
103,000

John H. Robinson
 
113,500

Robert A. Stuart
 
103,000

David F. Wilson
 
103,000


1
Mr. Hile resigned from the Board of Directors effective November 1, 2018. Prior to his resignation, Mr. Hile served as chair of the Audit Committee. For the remainder of 2018, Mr. Livingston was appointed to serve as interim Audit Committee chair.    
2
Mr. Kesler was elected to the Board of Directors effective March 9, 2018.

In October of 2018, the Compensation Committee approved the Director Fee Policy for 2019, subject to the review and comment of the Finance Agency. This policy is listed as an exhibit to this annual report on Form 10-K, incorporated by reference to our Form 8-K filed with the SEC on November 8, 2018. Refer to “Item 15. Exhibits and Financial Statement Schedules” for additional information. Under the policy, the 2019 Director compensation fees increased.

The annual aggregate fees by position are as follows:
Board of Director Position
 
2019
Chair
 
$
138,000

Vice Chair
 
127,000

Audit Committee Chair
 
122,000

Committee Chairs
 
117,000

Other Directors
 
106,000


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Compensation Committee Report
 
The Compensation Committee reviewed and discussed the 2018 Compensation Discussion and Analysis set forth in Item 11 with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K. The Compensation Committee includes the following individuals:
Compensation Committee
Michelle M. Keeley (Chair)
David P. Bobbitt (Vice Chair)
Chris D. Grimm
Joe R. Kesler
Cynthia A. Parker
J. Benson Porter
John H. Robinson
Robert A. Stuart

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table presents members (or combination of members within the same holding company) holding five percent or more of our outstanding capital stock at February 28, 2019 (shares in thousands):
Name
 
Address
 
City
 
State
 
Shares of Capital Stock
 
% of Total Capital Stock
Wells Fargo Bank, N.A.
 
101 N. Phillips Ave
 
Sioux Falls
 
SD
 
19,640

 
35.6
%
Superior Guaranty Insurance Company1
 
76 Saint Paul St.
 
Burlington
 
VT
 
172

 
0.3

 
 
 
 
 
 
 
 
19,812

 
35.9

All others
 
 
 
 
 
 
 
35,315

 
64.1

Total capital stock
 
 
 
 
 
 
 
55,127

 
100.0
%

1
Superior Guaranty Insurance Company is an affiliate of Wells Fargo Bank, N.A.


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Additionally, due to the fact that a majority of our Board of Directors is nominated and elected from our membership, these member directors are officers or directors of member institutions that own our capital stock. The following table presents total outstanding capital stock owned by those members who had an officer or director serving on our Board of Directors at February 28, 2019 (shares in thousands):
Name
 
Address
 
City
 
State
 
Shares of Capital Stock
 
% of Total Capital Stock
Zions Bancorporation, National Association
 
One South Main St.
 
Salt Lake City
 
UT
 
1,660

 
3.01
%
Boeing Employees’ Credit Union
 
12770 Gateway Dr.
 
Tukwila
 
WA
 
412

 
0.75

OnPoint Community Credit Union
 
2701 N.W. Vaughn St.
 
Portland
 
OR
 
179

 
0.32

Central Pacific Bank
 
220 South King St.
 
Honolulu
 
HI
 
127

 
0.23

Alerus Financial, National Association
 
401 Demers Avenue
 
Grand Forks
 
ND
 
62

 
0.11

BankWest, Inc.
 
420 S. Pierre St.
 
Pierre
 
SD
 
42

 
0.08

First Federal Bank & Trust
 
671 Illinois St.
 
Sheridan
 
WY
 
20

 
0.04

First Montana Bank
 
201 N Higgins Ave
 
Missoula
 
MT
 
11

 
0.02

Fidelity Bank
 
7600 Parklawn Ave
 
Edina
 
MN
 
11

 
0.02

Legends Bank
 
200 E Main St.
 
Linn
 
MO
 
6

 
0.01

BANK
 
409 Hwy 61 S
 
Wapello
 
IA
 
4

 
0.01

True North Federal Credit Union
 
2777 Postal Way
 
Juneau
 
AK
 
2

 
            *
Community 1st Bank
 
707 North Post St.
 
Post Falls
 
ID
 
1

 
            *
 
 
 
 
 
 
 
 
2,537

 
4.60

All others
 
 
 
 
 
 
 
52,590

 
95.40

Total capital stock
 
 
 
 
 
 
 
55,127

 
100.00
%

*
Amount is less than 0.01 percent.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
DIRECTOR INDEPENDENCE
General
As of the date of this annual report on Form 10-K, we have 22 directors, all of whom were elected by our member institutions. Pursuant to the passage of the Housing Act, the Finance Agency implemented regulations whereby all new or re-elected directors will be elected by our member institutions. All directors are independent of management from the standpoint they are not our employees, officers, or stockholders. Only member institutions can own our capital stock. Thus, our directors do not personally own our stock. In addition, we are required to determine whether our directors are independent under three distinct director independence standards. Finance Agency regulations and the Housing Act, which applied Section 10A(m) of the Exchange Act to the FHLBanks, provide independence criteria for directors who serve as members of our Audit Committee. Additionally, SEC rules require our Board of Directors to apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of our directors.
Finance Agency Regulations
The Finance Agency director independence standards prohibit individuals from serving as members of our Audit Committee if they have one or more “disqualifying relationships” with us or our management that would interfere with the exercise of that individual’s independent judgment. Disqualifying relationships considered by our Board are (i) employment with us at any time during the last five years, (ii) acceptance of compensation from us other than for service as a director, (iii) being a consultant, advisor, promoter, underwriter, or legal counsel for us at any time within the last five years, and (iv) being an immediate family member of an individual who is or who has been, within the past five years, one of our executive officers. The Board assesses the independence of all directors under the Finance Agency’s independence standards, regardless of whether they serve on our Audit Committee. As of February 28, 2019, all of our directors, including all members of our Audit Committee, were independent under these criteria.
Exchange Act
Section 10A(m) of the Exchange Act sets forth the independence requirements of directors serving on the Audit Committee of a reporting company. Under Section 10A(m), in order to be considered independent, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board or any other Board Committee (i) accept any consulting, advisory, or other compensation from us or (ii) be an affiliated person of the Bank. As of February 28, 2019, all of our directors, including all members of our Audit Committee, were independent under these criteria.
SEC Rules
In addition, pursuant to SEC rules, we adopted the independence standards of the New York Stock Exchange (NYSE) to determine which of our directors are independent for SEC disclosure purposes. In making an affirmative determination of the independence of each director, the Board first applied the objective measures of the NYSE independence standards to assist the Board in determining whether a particular director has a material relationship with us.
Based upon the fact that each of our Member Directors are officers or directors of member institutions, and that each such member routinely engages in transactions with us, the Board affirmatively determined none of the Member Directors on the Board meet the NYSE independence standards. In making this determination, the Board recognized a Member Director could meet the NYSE objective standards on any particular day. However, because the volume of business between a Member Director’s institution and us can change frequently, and because we generally encourage increased business with all members, the Board determined to avoid distinguishing among the Member Directors based upon the amount of business conducted with us and our respective members at a specific time, resulting in the Board’s categorical finding that no Member Director is independent under an analysis using the NYSE standards.
With regard to our Independent Directors, the Board affirmatively determined Ruth Bennett, Marianne Emerson, Michelle Keeley, John Kennedy, Ellen Lamale, Michael McGowan, Elsie Meeks, Cynthia Parker, and John Robinson are each independent in accordance with NYSE standards. In concluding our 9 Independent Directors are independent under the NYSE rules, the Board first determined all Independent Directors met the objective NYSE independence standards. In further determining none of its Independent Directors had a material relationship with us, the Board noted the Independent Directors are specifically prohibited from being an officer of the Bank or an officer or director of a member.

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Our Board has a standing Audit Committee. All Audit Committee members are independent under the Finance Agency’s independence standards and the independence standards under Section 10A(m) of the Exchange Act in accordance with the Housing Act. For the reasons described above, our Board determined none of the current Member Directors serving on the Audit Committee are independent using the NYSE independence standards. The Member Directors serving on the Audit Committee are James Livingston, Steven Bumann, David Ferries, and John Klebba. Our Board determined, however, the Independent Directors serving on the Audit Committee are independent under the NYSE independence standards. The Independent Directors serving on the Audit Committee are Ruth Bennett, John Kennedy, and Elsie Meeks.
Compensation Committee
The Board has a standing Compensation Committee. Our Board determined all members of the Compensation Committee are independent under the Finance Agency’s independence standards. For the reasons described above, our Board determined none of the current Member Directors serving on the Compensation Committee are independent using the NYSE independence standards. The Member Directors serving on the Compensation Committee are David Bobbitt, Chris Grimm, Joe Kesler, Benson Porter, and Robert Stuart. Our Board determined the Independent Directors serving on the Compensation Committee are independent under the NYSE independence standards. The Independent Directors serving on the Compensation Committee are John Robinson, Michelle Keeley, and Cynthia Parker.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The Audit Committee pre-approves all audit and permitted non-audit services performed by the Bank’s external audit firm. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee for services with fees below $10,000; however any decisions made must be presented to the Audit Committee at its next regularly scheduled meeting.
The following table sets forth the aggregate fees billed or to be billed by PwC (dollars in thousands):
 
 
For the Years Ended December 31,
 
 
2018
 
2017
Audit fees1
 
$
856

 
$
1,331

Audit-related fees2
 
85

 
105

Tax fees
 
—

 
—

All other fees
 
3

 
2

Total
 
$
944

 
$
1,438


1
Represents fees incurred in connection with the annual audit of our financial statements and internal control over financial reporting and quarterly review of our financial statements. In addition to these fees, we incurred assessments of $62 thousand and $10 thousand from the Office of Finance for audit fees on the Combined Financial Report for the years ended December 31, 2018 and 2017.

2
Represents fees related to other audit and attest services and technical accounting consultations.





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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements

The financial statements are set forth in Item 8 of this annual report on Form 10-K.

(b) Exhibits
3.1
 
3.2
 
4.1
 
10.1
 
10.2
 
10.3
 
10.4
 
10.5
 
10.6
 
10.7
 
10.8
 
10.9
 
10.10
 
10.11
 
10.12
 
31.1
 
31.2
 
32.1
 
32.2
 
99.1
 
101.INS
 
XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

1    Incorporated by reference to our Form 8-K filed with the SEC on June 1, 2015 (Commission File No. 000-51999).

2    Incorporated by reference to our Form 8-K filed with the SEC on December 17, 2018 (Commission File No. 000-51999).

3    Incorporated by reference to our Form 10-Q filed with the SEC on November 12, 2014 (Commission File 000-51999).

4    Incorporated by reference to our Form 8-K filed with the SEC on August 5, 2011 (Commission File No. 000-51999).

5    Incorporated by reference to our Form 8-K/A (Amendment No. 1) filed with the SEC on August 5, 2016 (Commission File No. 000-51999).

6    Incorporated by reference to our Form 10-K filed with the SEC on March 21, 2016 (Commission File No. 000-51999).

7    Incorporated by reference to our Form 8-K filed with the SEC on February 28, 2018 ( Commission File No. 000-51999).

8    Incorporated by reference to our Form 8-K filed with the SEC on November 8, 2018 (Commission File No. 000-51999).

9    Incorporated by reference to our Form 8-K/A filed with the SEC on January 19, 2018 (Commission File No. 000-51999).

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ITEM 16. FORM 10-K SUMMARY

Not applicable.


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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
FEDERAL HOME LOAN BANK OF DES MOINES
(Registrant)
 
March 15, 2019
By:  
/s/ Michael L. Wilson
 
 
Michael L. Wilson
 
 
President and Chief Executive Officer
 
 
 
 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
March 15, 2019

Signature
 
Title
 
 
 
Principal Executive Officer:
 
 
 
 
 
/s/ Michael L. Wilson
 
President and Chief Executive Officer
Michael L. Wilson
 
 
 
 
 
Principal Financial Officer:
 
 
 
 
 
/s/ Joseph E. Amato
 
Executive Vice President and Chief Financial Officer
Joseph E. Amato
 
 
 
 
 
Principal Accounting Officer:
 
 
 
 
 
/s/ Donna S. Stone
 
Senior Vice President and Chief Accounting Officer
Donna S. Stone
 
 
 
 
 
Directors:
 
 
 
 
 
/s/ J. Benson Porter
 
Chairman of the Board of Directors
J. Benson Porter
 
 
 
 
 
/s/ Ellen Z. Lamale
 
Vice Chairman of the Board of Directors
Ellen Z. Lamale
 
 
 
 
 
/s/ Ruth B. Bennett
 
Director
Ruth B. Bennett
 
 
 
 
 
 
 
 

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Signature
 
Title
 
 
 
 
 
 
/s/ David P. Bobbitt
 
Director
David P. Bobbitt
 
 
 
 
 
/s/ Karl A. Bollingberg
 
Director
Karl A. Bollingberg
 
 
 
 
 
/s/ Steven L. Bumann
 
Director
Steven L. Bumann
 
 
 
 
 
/s/ Christine H. H. Camp
 
Director
Christine H. H. Camp
 
 
 
 
 
/s/ Marianne M. Emerson
 
Director
Marianne M. Emerson
 
 
 
 
 
/s/ David J. Ferries
 
Director
David J. Ferries
 
 
 
 
 
/s/ Chris D. Grimm
 
Director
Chris D. Grimm
 
 
 
 
 
/s/ Teresa J. Keegan
 
Director
Teresa J. Keegan
 
 
 
 
 
/s/ Michelle M. Keeley
 
Director
Michelle M. Keeley
 
 
 
 
 
/s/ John F. Kennedy, Sr.
 
Director
John F. Kennedy, Sr.
 
 
 
 
 
/s/ Joe R. Kesler
 
Director
Joe R. Kesler
 
 
 
 
 
/s/ John A. Klebba
 
Director
John A. Klebba
 
 
 
 
 
/s/ James G. Livingston
 
Director
James G. Livingston
 
 
 
 
 
/s/ Lauren M. MacVay
 
Director
Lauren M. MacVay
 
 
 
 
 
/s/ Michael W. McGowan
 
Director
Michael W. McGowan
 
 
 
 
 
/s/ Elsie M. Meeks
 
Director
Elsie M. Meeks
 
 
 
 
 

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Signature
 
Title
 
 
 
 
 
 
/s/ Cynthia A. Parker
 
Director
Cynthia A. Parker
 
 
 
 
 
/s/ John H. Robinson
 
Director
John H. Robinson
 
 
 
 
 
/s/ Robert A. Stuart
 
Director
Robert A. Stuart
 
 
 
 
 


178