EDGAR 10-K Filing

Company CIK: 1325814
Filing Year: 2021
Filename: 1325814_10-K_2021_0001325814-21-000022.json

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
OVERVIEW
The Federal Home Loan Bank of Des Moines (the Bank, we, us, or our) is a federally chartered corporation, that is exempt from all federal, state, and local taxation (except real property taxes and certain employer payroll taxes) and is one of 11 district FHLBanks. The FHLBanks are government-sponsored enterprises (GSEs) and were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act) in order to serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank is regulated by the Federal Housing Finance Agency (Finance Agency).
We are a cooperative, meaning we are owned by our customers, whom we call members. As a condition of membership, all members must purchase and maintain capital stock to support business activities with us. In return, we provide a readily available source of funding and liquidity to our 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. 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 that they can meet the housing, business, and economic development needs of the communities they serve. Our operating model balances the trade-off between attractively priced products, reasonable returns on capital stock, maintaining an adequate level of capital to meet regulatory capital requirements, and maintaining adequate retained earnings to preserve the par value of member-owned capital stock.
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 outstanding with us. 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 our members. In addition, we maintain a portfolio of investments, all of which we believe are investment quality at the time of purchase. 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.
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. 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. 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 ensure liquidity is available to our members and 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 2020 2019 2018
Commercial banks 952 967 1,004
Savings institutions 38 46 45
Credit unions 256 250 243
Non-captive insurance companies 67 63 61
Captive insurance companies 5 6 6
CDFIs 6 6 6
Total 1,324 1,338 1,365
The following table summarizes our membership by asset size:
December 31,
Membership Asset Size1
2020 2019 2018
Depository institutions2
Less than $100 million 20 % 23 % 25 %
$100 million to $500 million 48 49 49
Greater than $500 million 26 22 20
Insurance companies
Less than $100 million 1 1 1
$100 million to $500 million 1 1 1
Greater than $500 million 4 4 4
Total 100 % 100 % 100 %
1 Membership asset size is based on September 30, 2020 financial information received from members.
2 Depository institutions consist of commercial banks, savings institutions, credit unions, and CDFIs.
Our membership level decreased during 2020 primarily due to member consolidations, partially offset by new members. At December 31, 2020, approximately 68 percent of our members were Community Financial Institutions (CFIs). For 2020, 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 $1.224 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.
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 LIBOR, SOFR, or Prime Rate.
•Callable Advances. These advances may be prepaid by borrowers on pertinent dates (call dates) without incurring a prepayment fee 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 certain variable rate callable advances, we retain the flexibility to adjust the spread relative to our cost of funds on each rate reset date. 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, 2020, 2019, and 2018, advances represented 57, 66, and 72 percent of our total average assets and generated 61, 67, and 70 percent of our total interest income. 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.
COLLATERAL
We are required by regulation to obtain sufficient collateral to fully secure our advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products). The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal or market value, as applicable, of the collateral.
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.
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 they are 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) Government National Mortgage Association (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. For additional details on our standby letters of credit, refer to “Item 8. Financial Statements and Supplementary Data - Note 14 - Commitments and Contingencies.”
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). For the years ended December 31, 2020, 2019, and 2018, mortgage loans represented eight, six, and five percent of our total average assets and generated 16, eight, and eight percent of our total interest income.
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.
MPF Provider
The FHLBank of Chicago (in this capacity, the MPF Provider) 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. Throughout the servicing process, the master servicer monitors the PFI’s compliance with certain MPF program requirements and makes periodic reports to the MPF Provider.
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.
MPF Loan Types
We currently offer MPF closed loan products in which we purchase loans acquired or originated 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 Federal National Mortgage Association (Fannie Mae). 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. 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. Beginning in the second quarter of 2020, we stopped offering the MPF Direct product. Under these off-balance sheet products, we receive a small fee for our continued management of the PFI relationship.
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 on 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.
MPF Loan Volume
Our member base for MPF loans is primarily a diverse mix of commercial 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, 2020, 2019, and 2018, we purchased $2.3 billion, $3.0 billion, and $1.6 billion of MPF loan products (excluding MPF Xtra, MPF Government MBS, and MPF Direct). In addition, our members delivered $6.2 billion, $1.4 billion, and $1.0 billion of MPF Xtra, MPF Government MBS, and MPF Direct loans during the years ended December 31, 2020, 2019, and 2018.
Per Finance Agency regulation, we are subject to housing goals if we exceed $2.5 billion in loan purchases in a calendar year (excluding MPF Xtra, MPF Government MBS, and MPF Direct). In 2019, our MPF loan purchases exceeded this threshold, making us subject to a housing goals evaluation. The Finance Agency determined that it would not require us to submit a housing plan.
In June 2020, the Finance Agency published a final rule amending the existing Federal Home Loan Bank Housing Goals regulation. The amendments replaced existing FHLBank housing goals with a more streamlined set of goals. The new housing goals take effect in 2021 and will be phased in over a three year period. For additional information, 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. MPP loans are conforming conventional or government-insured fixed rate mortgage loans secured by one-to-four family residential properties. 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 $181 million outstanding at December 31, 2020 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.
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.
In 2020, in light of COVID-19, our servicers began granting a forbearance period to borrowers who requested forbearance based on COVID-19 related difficulties. In addition to the loan modification plans noted above, we began offering payment deferrals as an additional post-forbearance repayment option. The payment deferral plan offers borrowers who are not able to immediately repay the forbearance amount the option of moving the forbearance period monthly payments to a lump sum payment due at the loan’s contractual maturity date.
For additional discussion on our mortgage loans and their related credit risk, refer to “Item 8. Financial Statements and Supplementary Data - Note 6 - Mortgage Loans Held for Portfolio” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk - Mortgage Loans.”
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 obligations. Our long-term investments may include, but are not limited to, U.S. Treasury obligations, other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. Our long-term investments generally provide higher spreads than our short-term investments. For the years ended December 31, 2020, 2019, and 2018, investments represented 34, 27, and 23 percent of our total average assets and generated 23, 26, and 23 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.
The Finance Agency further limits our investments in MBS by requiring that the balance 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 and typically allows the Bank to terminate the agreement upon the occurrence of a default event of the issuer. If purchased, the bonds would generally be classified as available-for-sale (AFS) securities on our Statements of Condition. For additional details on our standby bond purchase agreements, refer to “Item 8. Financial Statements and Supplementary Data - Note 14 - 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, 2021, 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 consolidated obligations were given a long-term AAA rating with a negative outlook by Fitch Ratings at February 28, 2021.
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.”
BONDS
Bonds are generally issued to satisfy our short-, 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 SOFR or LIBOR. To meet the specific needs of investors, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and/or 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.
DISCOUNT NOTES
Discount notes are generally issued to satisfy our short-term funding needs. They have maturities of up to one year 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 consolidated obligations, 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.”
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 7 - 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 on our Statements of Condition. Effective October 1, 2020, each member is also required to purchase and hold activity-based stock in an amount equal to 0.10 percent of its standby letters of credit. This requirement applied to any new, renewed or modified standby letters of credit issued on or after October 1, 2020. 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) when a member provides written notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Dividends on mandatorily redeemable capital stock are classified as interest expense on the Statements of Income.
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, 2020 and 2019, our actual retained earnings exceeded our retained earnings target.
We entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. Under the JCE Agreement, we are required to allocate 20 percent of our quarterly net income to a separate restricted retained earnings account until the balance of that account, calculated as of the last day of each calendar quarter, equals at least one percent of our average balance of outstanding consolidated obligations for the calendar quarter. These restricted retained earnings are not available to pay dividends.
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.
For additional information on our capital stock, retained earnings, and dividends, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Capital.”
HUMAN CAPITAL RESOURCES
Our human capital is a significant contributor to the success of our strategic business objectives. In managing our human capital, we focus on our workforce profile and the various programs and philosophies described below.
Workforce Profile
Our workforce is primarily comprised of corporate employees, with our principal operations in one location. As of December 31, 2020, we had 384 employees, 382 full-time and two part-time. As of December 31, 2020, approximately 46 percent of our workforce is female, 54 percent male, 81 percent non-minority and 19 percent minority, based on employees that chose to self-identify. We strive to both develop talent from within the organization and supplement with external hires. We believe that developing talent internally results in institutional strength and continuity and promotes loyalty and commitment in our employee base, which furthers our success, while adding new employees contributes to new ideas, continuous improvement, and our goals of a diverse and inclusive workforce. As of December 31, 2020, the average tenure of our employees was seven years. There are no collective bargaining agreements with our employees.
Total Rewards
We seek to attract, develop, retain, and engage talented employees to create and implement strategies that are critical to our long-term success and ensuring we bring value for our members. We effect this objective through a combination of development programs, benefits and employee wellness programs, and recognizing and rewarding performance. Specifically, our programs include:
•Cash compensation - includes competitive salary, other cash subsidies, and performance-based incentives;
•Benefits - health insurance, life and accidental death and dismemberment insurance, supplemental life insurance, 401(k) retirement savings plans with employer match and healthcare concierge;
•Wellness program - fitness reimbursement, employee assistance program, interactive education sessions, online wellness portal, on-site gym, wellness incentive program and ergonomic work environment;
•Time away from work - including time off for vacation, illness, holidays, and volunteer opportunities;
•Culture - Diversity and Inclusion Council, Wellness Council, Community Relations Council, business resource groups, community involvement, as well as various cultural and inclusion initiatives;
•Work/Life balance - short-term disability, parental and military leave, bereavement, jury duty, and court appearances, as well as flexible scheduling and remote working options;
•Development programs and training - leadership development, mentoring program, employee engagement, educational assistance programs, online learning portal, professional competency exam reimbursement, internal education and development opportunities, fee reimbursement for external education, professional organization memberships, and development programs, including goals for developmental activities as part of performance management; and
•Management succession planning - our Board of Directors and leadership actively engage in management succession planning, with a defined plan for executive leadership roles.
Our Performance Management framework includes performance planning and goal-setting, ongoing coaching and feedback, and a mid-year and annual performance review. Overall annual performance ratings are calibrated and merit and incentive payments are differentiated for our highest performers.
We are committed to the health, safety and wellness of our employees. In response to COVID-19, we have implemented significant operating environment changes, safety protocols and procedures that we determined were in the best interest of our employees and members, and which comply with government regulations. This includes having approximately 85 percent of our employees work remotely, while implementing additional safety measures for employees continuing critical on-site work. In addition, employees have been provided up to 80 hours of pandemic time off through the first quarter of 2021, to recover or care for someone recovering from COVID-19 or to take care of dependents because of COVID-19 related closures.
Diversity, Equity and Inclusion Program
Diversity, equity and inclusion is a strategic business priority for the Bank. It is an integral part of who we are as a company, how we operate, how we see our future, and how we interact with each other, our members, suppliers and broker-dealers. As an organization, we are committed to integrating and promoting diversity and inclusion as a key aspect of our culture and in all relevant business functions, financial transactions and activities, especially those in service to our members, suppliers, and broker-dealers.
Our chief diversity and inclusion officer is a member of the executive team, reports to the President and Chief Executive Officer (CEO) and serves as a liaison to the Board of Directors. We recognize that diversity increases capacity for innovation and creativity and that inclusion allows us to leverage the unique perspectives of all employees and strengthens our retention efforts. We operationalize our commitment through the development and execution of a three-year diversity and inclusion strategic plan that includes quantifiable metrics to measure our success and we report regularly on our performance to management and the Board of Directors. We offer a range of opportunities for our employees to connect and grow personally and professionally through our Diversity and Inclusion Council, business resource groups, internal training, and community involvement. We consider learning an important component of our diversity and inclusion strategy and regularly offer educational opportunities to our employees and evaluate inclusive behaviors as part of our annual goal setting, performance management, and succession planning processes. We also incorporate diversity and inclusion as a key component of our incentive plan framework to ensure organizational focus and accountability.
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 or reciprocal 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 our profitability.
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, Federal Home Loan Mortgage Corporation (Freddie Mac), other financial institutions, and private investors for acquisition of 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 and certain employer payroll taxes).
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 10 - Affordable Housing Program.”
OVERSIGHT, AUDITS, AND EXAMINATIONS
Our business is subject to extensive regulation and supervision. The laws and regulations to which we are subject cover all key aspects of our business, including, but not limited to, our product and service offerings, pricing, competitive position and strategic plan, relationships with members and third parties, capital structure, liquidity, and information security. Our primary regulatory oversight is summarized below.
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 FHLBanks 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 an 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 receives 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.
For further discussion on the potential impacts of legislative and regulatory developments, refer to “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Legislative and Regulatory Developments.”
AVAILABLE INFORMATION
We are required to file with the Securities and Exchange Commission (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 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 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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ITEM 1A. RISK FACTORS
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.
BUSINESS AND REGULATORY RISK
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. In addition, new or modified legislation enacted by Congress or regulatory requirements applied or imposed by the Finance Agency could affect the composition of our membership and the extent to which members engage in business with us. There continues to be uncertainties surrounding our legislative and regulatory environment, and new or modified legislation enacted by Congress or regulations adopted or guidance issued by the Finance Agency or other financial services regulators. For example, given our status as a GSE, regulatory reform related to the conservatorship of Fannie Mae and Freddie Mac may have a negative impact on GSEs, including the FHLBank System, should such regulatory reform fail to adequately capture the differences in operating models between the FHLBank System and other GSEs. Additionally, the Financial Accounting Standards Board (FASB) or 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 our Capital Plan, which could adversely impact our financial condition and results of operations.
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 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 or reciprocal 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 our profitability. The availability of alternative funding sources for our members could also change their perception of the value of FHLBank membership. 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 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 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, 2020 and 2019, advances outstanding to our top five borrowers totaled $15.5 billion and $39.3 billion, representing 34 and 49 percent of our total advances outstanding. At December 31, 2020, we did not have any individual borrowers in excess of 10 percent of total advances. At December 31, 2019, our single largest borrower, Wells Fargo, accounted for 32 percent of total advances outstanding, and accounted for 29 percent of total interest income. Wells Fargo decreased its advance borrowings by $25.5 billion during 2020 as they paid off their remaining advance balances. We do not expect significant new advances to this member in the near future. 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, impacting us or our members, enacted by Congress or regulations or other directives adopted by the Finance Agency or other financial services regulators. If we continue to experience additional decreases 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.
REPLACEMENT OF THE LIBOR BENCHMARK INTEREST RATE COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS
On November 30, 2020, U.S. and United Kingdom (UK) regulators and LIBOR’s administrator made a series of announcements regarding the end of LIBOR. Collectively, these announcements proposed a prolonged wind-down for use of LIBOR. They call for no new LIBOR contracts after the end of 2021, while giving legacy contracts sufficient time to wind-down. If adopted, these proposed plans would cease the major LIBOR tenors in mid-2023 (overnight, 1-month, 3-month, 6-month, 12-month), and two less used LIBOR settings at the end of 2021 (1 week, 2-month).
As noted throughout this report, many of our advances, investments, consolidated obligation bonds, derivatives, and related collateral are indexed to LIBOR. Some of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. We are preparing for a transition away from LIBOR and plan to utilize SOFR as the dominant replacement rate on an ongoing basis. We have developed a transition plan that will change with market developments and member needs and addresses considerations such as LIBOR exposure, member products, fallback language, operational preparedness, and balance sheet management. As of June 30, 2020, we ceased all LIBOR indexed transactions with maturities beyond December 31, 2021.
The market transition away from LIBOR and towards SOFR is expected to be gradual and complicated. There are several risks associated with the transition. As the market transitions, we may experience decreased flexibility in our access to funding, higher funding costs, or lower overall demand or increased costs for our advances; which may, in turn, negatively impact our business operations, financial condition, and results of operations.
There is no assurance that LIBOR will continue to be accepted, by the markets generally, or by any issuers, investors, or counterparties. During the market transition away from LIBOR, the rate may experience increased volatility or become less representative. In addition, the overnight Treasury repurchase market upon which SOFR is based has historically experienced periodic disruptions. Further disruptions in the future could result in unexpected fluctuations in SOFR.
Furthermore, while we have a detailed transition plan, there are complexities associated with the changes to our processes and information technology systems that may not be anticipated and could impact our transition. Any of these risks, if realized, could adversely impact our business, financial condition, and results of operations. For a summary of our LIBOR exposure, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview.”
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 2020, we experienced a net decline in members of 14, due primarily to 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.
MARKET AND LIQUIDITY RISK
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, debt underwriters, and investors 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. For example, previous money market fund reform resulted in a significant increase in demand for U.S. government and agency debt, including our short-term consolidated obligations. While this increased demand benefited our ability to access short-term funding at attractive costs, there could be a scenario in which regulatory change may cause a decrease in demand that could lead to significant investor outflows and unfavorable market conditions due to our concentration in money market investors. Any further change in regulatory requirements governing money market funds, including any reversal of money market fund reforms, could negatively impact our short term funding costs and strategies.
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.
CHANGES IN ECONOMIC CONDITIONS OR FEDERAL FISCAL AND MONETARY POLICY, INCLUDING CHANGES RELATED TO A RECENT WIDESPREAD HEALTH EMERGENCY, 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 net income. These conditions include, but are not limited to, the following:
•volatility in interest rates, including the potential for negative interest rates;
•fluctuations in both debt and equity capital markets;
•changes in the fair value of our assets;
•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. For example, the Federal Open Market Committee (FOMC) reduced the target range for the federal funds rate, to near zero levels, in response to COVID-19 and the potential negative impact on the U.S. economy. U.S. Treasury yields have declined in 2020, with the U.S. 10-year Treasury yields reaching a record low. Further, demand for advances decreased significantly as a number of emergency actions taken by the Federal Reserve helped facilitate liquidity and support stability in the fixed-income markets and as members experienced substantial deposit growth. A prolonged economic downturn may lead to further actions in an effort to stabilize market conditions. Responses to those actions and the resulting impact on demand for advances could adversely affect our financial condition, results of operations, and ability to pay dividends. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Conditions in Financial Markets” for additional information on recent market activity.
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.
CREDIT RISK
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. As a result of economic uncertainties caused by COVID-19, we may be subject to increased risk of counterparty defaults and credit losses. Due to the recent turmoil in the financial markets associated with COVID-19, some financial institutions have experienced financial difficulties. Our risk of credit losses may be exacerbated by a downturn in the housing markets, including higher delinquencies from increased unemployment and the effect of mortgage forbearance and other relief, as well as financial difficulties or failures of mortgage servicers. In addition, increased risk of credit losses may be the result of a decrease in the value of collateral securing our advances or mortgage loans.
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 or does not meet its obligations to us, we have the right to liquidate or 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, this could negatively impact our financial condition and results of operations.
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 and capital deficiencies. 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.
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, and are rated AAA with a negative outlook by Fitch Ratings. These ratings are subject to reduction or withdrawal at any time by a nationally recognized statistical rating organization (NRSRO), and the FHLBank System may not be able to maintain these credit ratings. For example, in August 2020, Fitch Ratings affirmed the long-term U.S. sovereign AAA rating, but revised the outlook to “negative” from “stable.” Following this action, Fitch Ratings also affirmed our long-term AAA rating and revised the outlook to “negative” from “stable.” 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.
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, 2020.
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. Uncertainties surrounding COVID-19, including the impact of mortgage forbearance, may heighten these risks. 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.
OPERATIONAL RISK
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, natural or man-made disasters, or widespread health emergencies. We have experienced material weaknesses in our internal control over financial reporting in the past, and could experience a material weakness of this nature in the future. 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.
The shelter-in-place, stay-at-home, or similar orders, travel restrictions, and business shutdowns as a result of COVID-19 have led to substantial changes in normal business practices (such as the implementation of widespread work-from-home arrangements) for us as well as many of our members, vendors, and regulator. Although we are operating effectively under these current working arrangements, any breakdown or disruption in our information and computer systems, cybersecurity, operating processes, member relations, or vendor services as a result of these working arrangements could have an adverse impact on our financial condition and results of operations.
The extent to which COVID-19 impacts our business, financial condition, and results of operations will depend on many factors that are highly uncertain and difficult to predict, including, but not limited to, the duration, spread and severity of COVID-19, the availability and public acceptance of an approved vaccine, additional actions taken to contain COVID-19, and how quickly and to what extent normal economic and operating conditions can resume.
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.
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. In addition, we utilize professional and contractual services to support critical strategic initiatives. The success or timing of those initiatives could be adversely impacted if services are not performed or executed as expected.
We participate in the MPF program with the FHLBank of Chicago. 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. If the FHLBank of Chicago changes its MPF Provider 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.
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. For example, as a result of COVID-19 and its economic impact, there is currently unprecedented uncertainty in the financial markets, which is affecting our financial valuation model inputs and assumptions and may have an adverse effect on our model outputs. 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.
GENERAL RISK FACTORS
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. If we are unable to hire or retain key personnel with the needed talents or skills, lack a diverse and inclusive working environment, or fail to develop and execute a succession plan, our business operations could be adversely impacted.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Our headquarters is located at 909 Locust Street, Des Moines, Iowa. We currently occupy 94,000 of the approximate 226,000 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 for employees serving our members in the western states within our district, 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. to support government relations, which is shared with two other FHLBanks.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
Refer to “Item 8. Financial Statements and Supplementary Data - Note 14 - Commitments and Contingencies” for information regarding legal proceedings.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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, 2021, we had 1,319 current members that held 33.8 million shares of capital stock and 15 former members that held 0.3 million shares of mandatorily redeemable capital stock.
We paid the following quarterly cash dividends during 2020 and 2019 (dollars in millions):
Quarter Declared and Paid1
Amount2
Annualized Rate3
Activity-Based Stock Rate Membership Stock Rate
First Quarter $ 59 5.14 % 5.75 % 3.25 %
Second Quarter 53 4.88 5.50 3.00
Third Quarter 49 4.76 5.50 3.00
Fourth Quarter 42 4.67 5.50 3.00
Quarter Declared and Paid1
Amount2
Annualized Rate3
Activity-Based Stock Rate Membership Stock Rate
First Quarter $ 70 5.25 % 5.75 % 3.25 %
Second Quarter 68 5.25 5.75 3.25
Third Quarter 69 5.24 5.75 3.25
Fourth Quarter 62 5.18 5.75 3.25
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 2020 and 2019. 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.”

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial data for the periods indicated (dollars in millions):
December 31,
Statements of Condition 2020 2019 2018 2017 2016
Cash and due from banks $ 978 $ 1,029 $ 119 $ 503 $ 223
Investments1
31,497 38,465 31,777 34,452 41,218
Advances 46,530 80,360 106,323 102,613 131,601
Mortgage loans held for portfolio, net2
8,242 9,334 7,835 7,096 6,913
Total assets 87,691 129,603 146,515 145,099 180,605
Consolidated obligations
Discount notes 27,345 29,531 42,879 36,682 80,947
Bonds 52,254 91,553 93,772 98,893 89,898
Total consolidated obligations3
79,599 121,084 136,651 135,575 170,845
Mandatorily redeemable capital stock 52 206 255 385 664
Total liabilities 81,951 122,877 138,967 138,078 173,204
Capital stock - Class B putable 3,341 4,517 5,414 5,068 5,917
Additional capital from merger - - - - 52
Retained earnings 2,351 2,165 2,050 1,839 1,450
Accumulated other comprehensive income (loss) 48 44 84 114 (18)
Total capital 5,740 6,726 7,548 7,021 7,401
Regulatory capital ratio4
6.55 5.31 5.27 5.03 4.48
For the Years Ended December 31,
Statements of Income 2020 2019 2018 2017 2016
Net interest income5
$ 472 $ 576 $ 635 $ 650 $ 449
Provision (reversal) for credit losses on mortgage loans 1 - - - 3
Other income (loss)5,6
121 20 20 52 396
Other expense7
189 168 142 124 118
AHP assessments 41 44 53 60 75
Net income 362 384 460 518 649
Selected Financial Ratios5,8
Net interest spread9
0.38 % 0.29 % 0.32 % 0.34 % 0.24 %
Net interest margin10
0.45 0.42 0.43 0.39 0.28
Return on average equity 5.88 5.38 6.21 7.01 10.09
Return on average capital stock 9.33 7.75 8.67 9.20 12.43
Return on average assets 0.34 0.27 0.31 0.31 0.40
Average equity to average assets 5.73 5.10 4.98 4.41 3.92
Dividend payout ratio11
56.10 70.01 54.04 35.01 21.83
1 Investments include interest-bearing deposits, securities purchased under agreements to resell, federal funds sold, trading securities, AFS securities, and held-to-maturity (HTM) securities.
2 Includes an allowance for credit losses of $1 million, $1 million, $1 million, $2 million, and $2 million at December 31, 2020, 2019, 2018, 2017, and 2016.
3 The total par value of outstanding consolidated obligations of the 11 FHLBanks was $746.8 billion, $1,025.9 billion, $1,031.6 billion, $1,034.2 billion, and $989.3 billion at December 31, 2020, 2019, 2018, 2017, and 2016.
4 Represents period-end regulatory capital expressed as a percentage of period-end total assets. Regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock) and retained earnings. At December 31, 2016, regulatory capital also included additional capital from merger, which was depleted by the first quarter dividend payment in May of 2017.
5 Beginning January 1, 2019, the net fair value gains and losses of derivatives and hedged items designated in fair value hedge relationships are reported in net interest income. Prior to January 1, 2019, these amounts were reported in other income (loss).
6 Other income (loss) includes, among other things, net gains (losses) on investment securities, net gains (losses) on derivatives and hedging activities, and gains on litigation settlements, net. During 2020, 2017, and 2016, other income (loss) was impacted by net gains on litigation settlements. We did not record any litigation settlements during 2019 or 2018.
7 Other expense includes, among other things, compensation and benefits, professional fees, and contractual services.
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 on our Statements of Income.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the year-over-year comparison of changes in our financial condition and results of operations as of and for the years ended December 31, 2020 and December 31, 2019. Discussion of 2018 items and the year-over-year comparison of changes in our financial condition and results of operations as of and for the years ended December 31, 2019 and December 31, 2018 can be found in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 11, 2020.
Our MD&A is organized as follows:
CONTENTS
Forward-Looking Information
Executive Overview
Conditions in the Financial Markets
Results of Operations
Net Income
Net Interest Income
Other Income (Loss)
Hedging Activities
Other Expense
Statements of Condition
Financial Highlights
Advances
Mortgage Loans
Investments
Consolidated Obligations
Mandatorily Redeemable Capital Stock
Capital
Derivatives
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Legislative and Regulatory Developments
Off-Balance Sheet Arrangements
Contractual Obligations
Risk Management
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 that they can meet the housing, business, and economic development needs of the communities they serve. Our operating model balances the trade-off between attractively priced products, reasonable returns on capital stock, maintaining an adequate level of capital to meet regulatory capital requirements, and maintaining adequate retained earnings to preserve the par value of member-owned capital stock. Our members include commercial banks, savings institutions, credit unions, insurance companies, and CDFIs.
Financial Results
In 2020, we reported net income of $362 million compared to $384 million in 2019. Our net income, calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), was driven by net interest income, other income (loss), and other expense.
Net interest income totaled $472 million in 2020 compared to $576 million in 2019. Our net interest margin was 0.45 percent during 2020 compared to 0.42 percent during 2019. The $104 million decline in net interest income was primarily impacted by the lower interest rate environment and lower average advance balances, partially offset by an increase in advance prepayment fee income of $66 million compared to the same period in 2019.
During 2020, we recorded other income (loss) of $121 million compared to $20 million in 2019. Other income (loss) was primarily impacted by net gains on litigation settlements of $120 million in 2020 as a result of settlements with defendants in our private-label MBS litigation. We did not record any litigation settlements during 2019. Other factors impacting other income (loss) included net gains (losses) on trading securities and net gains (losses) on derivatives and hedging activities.
Other expense totaled $189 million for 2020 compared to $168 million for 2019. The increase in other expense was primarily due to increased pension costs as a result of us making a discretionary contribution of $32 million at the end of the year, offset in part by lower professional fees and other operating expenses.
Our total assets decreased to $87.7 billion at December 31, 2020, from $129.6 billion at December 31, 2019 driven by a decrease in advances and investments. Advances at December 31, 2020 decreased by $33.8 billion from advances at December 31, 2019 due primarily to a decrease in borrowings of $25.5 billion by Wells Fargo Bank, N.A. We experienced decreased demand for advances across the majority of our other institution types, driven primarily by increased liquidity in the financial markets and higher member deposit levels. Investments decreased $7.0 billion from December 31, 2019 due primarily to a decline in money market investments of $9.7 billion, as liquidity management was impacted by lower advance demand and other economic impacts of COVID-19.
Our total liabilities decreased to $82.0 billion at December 31, 2020, from $122.9 billion at December 31, 2019, primarily driven by a decrease in the amount of consolidated obligations needed to fund our assets.
Total capital decreased to $5.7 billion at December 31, 2020 from $6.7 billion at December 31, 2019, primarily due to a decrease in capital stock resulting from a decline in member activity. Our regulatory capital ratio increased to 6.55 percent at December 31, 2020, from 5.31 percent at December 31, 2019, 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, but not limited to, net asset prepayment fee income, mandatorily redeemable capital stock interest expense, discretionary pension contributions, and net gains on litigation settlements. The resulting non-GAAP measure, referred to as our adjusted earnings, reflects both adjusted net interest income and adjusted net income.
Because our business model is primarily one of holding assets and liabilities to maturity, management believes that the adjusted earnings measure is helpful in understanding our operating results and provides a meaningful period-to-period comparison of our economic performance in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility on financial instruments recorded at fair value or transactions that are considered to be unpredictable or not routine. As a result, management uses the adjusted earnings measure to assess performance under our incentive compensation plans. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. While these non-GAAP measures can be used to assist in understanding the components of our earnings, they should not be considered a substitute for results reported under GAAP.
The adjusted net income methodology is calculated on a post Affordable Housing Program (AHP) assessment basis. Management believes AHP assessments are a fundamental component of our business and believes this assessment should be included in our adjusted net income calculation. In addition, this treatment aligns the adjusted net income results to our strategic business plan, which is calculated on a post AHP assessment basis.
As indicated in the tables that follow, our adjusted net interest income and adjusted net income decreased during 2020 when compared to 2019. The decline was driven by lower adjusted net interest income due primarily to lower average advance balances and the lower interest rate environment.
The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):
For the Years Ended December 31,
2020 2019
GAAP net interest income $ 472 $ 576
Exclude:
Prepayment fees on advances, net1
75 10
Prepayment fees on investments, net2
(2) 6
Mandatorily redeemable capital stock interest expense (5) (12)
Market value adjustments on fair value hedges3
11 5
Total adjustments 79 9
Include items reclassified from other income (loss):
Net interest expense on economic hedges (14) (1)
Adjusted net interest income $ 379 $ 566
Adjusted net interest margin 0.36 % 0.41 %
1 Prepayment fees on advances, net includes basis adjustment amortization and premium and/or discount amortization.
2 Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.
3 Represents,gains (losses) on derivatives and hedged items in qualifying hedging relationships. Amounts do not include the amortization of the financing element of off-market derivatives.
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,
2020 2019
GAAP net income before assessments
403 $ 428
Exclude:
Prepayment fees on advances, net1
75 10
Prepayment fees on investments, net2
(2) 6
Mandatorily redeemable capital stock interest expense (5) (12)
Market value adjustments on fair value hedges3
11 5
Net gains (losses) on trading securities 17 28
Net gains (losses) on derivatives and hedging activities (48) (35)
Discretionary pension contributions (32) -
Gains on litigation settlements, net 120 -
Include:
Net interest expense on economic hedges (14) (1)
Adjusted net income before assessments 253 425
Adjusted AHP Assessments4
25 43
Adjusted net income $ 228 $ 382
1 Prepayment fees on advances, net includes basis adjustment amortization and premium and/or discount amortization.
2 Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.
3 Represents gains (losses) on derivatives and hedged items in qualifying hedging relationships. Amounts do not include the amortization of the financing element of off-market derivatives.
4 Adjusted AHP assessments for this non-GAAP measure are calculated as 10 percent of adjusted net income before assessments. For additional discussion on AHP assessments, refer to “Item 8. Financial Statements and Supplementary Data - Note 10 - 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.”
COVID-19
The effects of COVID-19 and the response to the virus continue to impact financial markets and overall economic conditions. In keeping with our mission to be a reliable provider of liquidity in all economic environments, we remain dedicated to meeting the needs of members through these challenging and unusual times. We have implemented certain relief measures to help members serve customers affected by COVID-19, such as accommodating forbearance and modifications to pledged loan collateral, allowing electronic signatures on loan documentation in specific circumstances, and adding payment deferment as another viable post-forbearance repayment option for participating financial institution (PFI) servicers to assist impacted borrowers.
We also temporarily expanded our Community Investment Advance (CIA) product and allowed Paycheck Protection Program (PPP) eligible members to demonstrate CIA program qualifications using PPP loans. This temporary expansion expired on December 31, 2020. In addition, we have made collateral policy changes and clarifications including accepting PPP loans guaranteed by the Small Business Administration (SBA) as eligible collateral.
We remain focused on both the health and safety of our employees. The majority of our employees continue to work remotely, with a limited number of employees voluntarily working from our headquarters. We have not experienced and do not expect to experience any impairment of our ability to meet the needs of members.
The effects of COVID-19 are rapidly evolving, and the full impact and duration of the virus are unknown. As a result of measures taken to address the impact of the COVID-19 shutdown, interest rates have declined significantly and our financial statements have been adversely impacted. Further, demand for advances decreased significantly as a number of emergency actions taken by the Federal Reserve helped facilitate liquidity and support stability in the fixed-income markets and as members experienced substantial deposit growth. The extent of the impact to our future performance will depend upon how long the current conditions persist. For additional information, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Conditions in the Financial Markets - Economy and Financial Markets” and “Item 1A. Risk Factors.”
Replacement of the LIBOR Benchmark Interest Rate
In July 2017, the UK’s Financial Conduct Authority, which regulates LIBOR, announced that after 2021 it will no longer compel banks to submit rates for the calculation of LIBOR. In response, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee to identify a set of alternative reference interest rates for possible use as market benchmarks. This committee proposed SOFR as its recommended alternative to U.S. dollar LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates in the second quarter of 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a measure of the cost of borrowing cash overnight collateralized by Treasury securities.
On September 27, 2019, the Finance Agency issued a Supervisory Letter to all FHLBanks providing LIBOR transition guidance. The Supervisory Letter stated that by March 31, 2020, the FHLBanks should no longer enter into new financial assets, liabilities, and derivatives that reference LIBOR and mature after December 31, 2021 for all product types other than investments. For investments, the Supervisory Letter indicated the FHLBanks, by December 31, 2019, should stop purchasing investments that reference LIBOR and mature after December 31, 2021. We ceased purchasing investments that reference LIBOR in 2018. As a result of market volatility triggered in part by COVID-19, on March 16, 2020, the Finance Agency extended from March 31, 2020 to June 30, 2020 the FHLBanks’ ability to enter into new instruments referencing LIBOR that mature after December 31, 2021. As of June 30, 2020, we ceased execution of new LIBOR indexed transactions with maturities beyond December 31, 2021.
On November 30, 2020, U.S. and UK regulators and LIBOR’s administrator made a series of announcements regarding the end of LIBOR. Collectively, these announcements proposed a prolonged wind-down for use of LIBOR. They call for no new LIBOR contracts after the end of 2021, while giving legacy contracts sufficient time to wind-down. If adopted, these proposed plans would cease the major LIBOR tenors in mid-2023 (overnight, 1-month, 3-month, 6-month, 12-month), and two less used LIBOR settings at the end of 2021 (1 week, 2-month).
As noted throughout this report, many of our advances, investments, consolidated obligation bonds, derivatives, and related collateral are indexed to LIBOR. Some of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. We are preparing for a transition away from LIBOR and plan to utilize SOFR as the dominant replacement rate on an ongoing basis. We have developed a transition plan that will change with market developments and member needs and addresses considerations such as LIBOR exposure, member products, fallback language, operational preparedness, and balance sheet management.
In assessing our current exposure to LIBOR, we have developed an inventory of financial instruments impacted and identified contracts that may require adding or adjusting the fallback language. We have added or adjusted fallback language to our advance agreements with members and added fallback language to our consolidated obligation agreements. We continue to monitor the market-wide efforts to address fallback language related to derivatives and investment securities as well as fallback language for new activities and issuances of financial instruments. We are in the process of ensuring we are operationally ready, including updating our processes and information technology systems to support the transition from LIBOR to an alternative reference rate.
Market activity in SOFR-indexed financial instruments continues to increase and we continue to offer SOFR-indexed advances and issue SOFR-indexed debt. In 2020, we also began utilizing interest rate swaps based on the federal funds or SOFR OIS rates as an alternative to using LIBOR when entering into new derivative transactions.
For additional information on regulatory action related to LIBOR, including our adherence to fallback protocol for certain derivative agreements, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Legislative and Regulatory Developments.”
The following tables summarize our variable rate advances, investments, consolidated obligation bonds and derivatives by interest-rate index at December 31, 2020 and 2019 (in millions):
December 31, 2020
LIBOR SOFR OIS Federal Funds
OIS Other Total
Advances, principal amount $ 1,157 $ 175 $ - $ 11,267 $ 12,599
Investment securities
Non-mortgage-backed securities, principal amount 1,819 - - - 1,819
Mortgage-backed securities, principal amount 7,726 - - - 7,726
Total investment securities 9,545 - - - 9,545
Consolidated obligation bonds, principal amount 4,940 7,983 - - 12,923
Total variable rate financial instruments amount $ 15,642 $ 8,158 $ - $ 11,267 $ 35,067
Derivatives
Pay leg, notional amount $ 10,412 $ - $ 76 $ - $ 10,488
Receive leg, notional amount 15,761 5 9,115 - 24,881
December 31, 2019
LIBOR SOFR
OIS Other Total
Advances, principal amount $ 22,919 $ 500 $ 17,605 $ 41,024
Investment securities
Non-mortgage-backed securities, principal amount 2,120 - - 2,120
Mortgage-backed securities, principal amount 9,345 - 1 9,346
Total investment securities 11,465 - 1 11,466
Consolidated obligation bonds, principal amount 48,970 3,967 - 52,937
Total variable rate financial instruments amount $ 83,354 $ 4,467 $ 17,606 $ 105,427
Derivatives
Pay leg, notional amount $ 17,473 $ - $ - $ 17,473
Receive leg, notional amount 21,249 - - 21,249
The following tables present our exposure to LIBOR-indexed advances, investments, consolidated obligation bonds and derivatives at December 31, 2020 and 2019 (in millions):
December 31, 2020
Due in 2021 Thereafter Total
Assets Indexed to LIBOR
Advances, principal amount by redemption term $ 293 $ 864 $ 1,157
Investment securities, by contractual maturity1
Non-mortgage-backed securities, principal amount - 1,819 1,819
Mortgage-backed securities, principal amount 12 7,714 7,726
Derivatives, receive leg
Cleared, notional amount 2,304 8,578 10,882
Uncleared, notional amount 482 4,397 4,879
Total Principal/Notional Amount $ 3,091 $ 23,372 $ 26,463
Liabilities Indexed to LIBOR
Consolidated obligation bonds, principal amount by contractual maturity $ 4,940 $ - $ 4,940
Derivatives, pay leg
Cleared, notional amount 8,837 1,004 9,841
Uncleared, notional amount 168 403 571
Total Principal/Notional Amount $ 13,945 $ 1,407 $ 15,352
December 31, 2019
Due in 2020 Due in 2021 Thereafter Total
Assets Indexed to LIBOR
Advances, principal amount by redemption term $ 10,445 $ 11,886 $ 588 $ 22,919
Investment securities, by contractual maturity1
Non-mortgage-backed securities, principal amount 8 - 2,112 2,120
Mortgage-backed securities, principal amount - 12 9,333 9,345
Derivatives, receive leg
Cleared, notional amount 3,425 2,763 9,445 15,633
Uncleared, notional amount 157 514 4,945 5,616
Total Principal/Notional Amount $ 14,035 $ 15,175 $ 26,423 $ 55,633
Liabilities Indexed to LIBOR
Consolidated obligation bonds, principal amount by contractual maturity $ 44,780 $ 4,190 $ - $ 48,970
Derivatives, pay leg
Cleared, notional amount 6,882 8,837 1,004 16,723
Uncleared, notional amount 179 168 403 750
Total Principal/Notional Amount $ 51,841 $ 13,195 $ 1,407 $ 66,443
1 MBS are presented by contractual maturity, however, their expected maturities will likely differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees.
For a summary of our risks on the replacement of the LIBOR benchmark interest rate, refer to “Item 1A. Risk Factors.”
CONDITIONS IN THE FINANCIAL MARKETS
Economy and Financial Markets
The COVID-19 outbreak continues to cause tremendous human and economic hardship across the U.S. Economic activity and employment have continued to recover but remain well below their levels at the beginning of 2020. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.
The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In its December 16, 2020 statement, the Federal Open Market Committee (FOMC or Committee) stated that it decided to keep the target range for the federal funds rate at zero to 0.25 percent. The Committee stated that it expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to two percent and is on track to moderately exceed two percent for some time. The Committee stated that the assessment will take into account a wide range of information, including readings on public health, labor market conditions, indicators of inflation pressures, inflation expectations, and financial and international developments.
As the spread of COVID-19 increased and the economic impact continued to be negative, the Federal Reserve and Congress implemented a multitude of programs to help stabilize market conditions. The Federal Reserve indicated that it will continue to increase its holdings of U.S. Treasuries and agency MBS, until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Mortgage Markets
Beginning in March 2020, the impact of COVID-19 significantly affected the U.S. housing markets and resulted in declines in interest rates, home inventory, and home sales. In the second half of 2020, the housing market began to show signs of recovery. Home sales increased in the fourth quarter of 2020 to levels above the fourth quarter of 2019 and housing inventory remained low, resulting in higher home prices. During 2020, mortgage rates continued to decline, on average, and refinancing activity remained the primary driver of mortgage activity.
The federal government programs to assist homeowners affected by the pandemic, including temporary mortgage payment forbearance and a temporary moratorium on foreclosures and evictions, remained in place during the fourth quarter of 2020. Forbearances and delinquencies of mortgage loans stabilized and began to trend down in the second half of 2020, consistent with a decline in the rate of unemployment. The federal government programs are set to expire on June 30, 2021, which could result in an increase in delinquencies and foreclosures.
Interest Rates
The following table shows information on key market interest rates1:
Fourth Quarter 2020
3-Month
Average Fourth Quarter 2019
3-Month
Average 2020
12-Month
Average 2019
12-Month
Average 2020
Ending Rate 2019
Ending Rate
Federal funds 0.09 % 1.65 % 0.36 % 2.16 % 0.09 % 1.55 %
Three-month LIBOR 0.22 1.93 0.64 2.33 0.24 1.91
SOFR 0.09 1.67 0.35 2.21 0.07 1.55
2-year U.S. Treasury 0.15 1.59 0.38 1.97 0.12 1.57
10-year U.S. Treasury 0.86 1.79 0.88 2.14 0.92 1.92
30-year residential mortgage note 2.77 3.70 3.12 3.94 2.67 3.74
1 Source: Bloomberg.
In March 2020, the FOMC lowered the Federal Reserve’s key target interest rate, the federal funds rate, to a range of zero to 0.25 percent and maintained that range throughout 2020, compared to a range of 1.50 to 1.75 percent for 2019.
The U.S. Treasury yields have declined to historically low levels and mortgage rates were lower on average during 2020 when compared to 2019. The global concerns related to COVID-19 and the impact on economic activity have led to lower interest rates. As interest rates declined, our net income was negatively impacted.
Funding Spreads
The following table reflects our funding spreads to LIBOR (basis points)1:
Fourth Quarter 2020
3-Month
Average Fourth Quarter 2019
3-Month
Average 2020
12-Month
Average 2019
12-Month
Average 2020
Ending Spread 2019
Ending Spread
3-month (12.1) (30.5) (26.2) (21.1) (13.7) (32.7)
2-year (5.4) 0.9 (0.9) (0.3) (6.0) (7.4)
5-year 4.0 11.1 13.3 9.7 (0.9) 2.4
10-year 25.2 32.4 43.0 38.3 17.6 28.7
1 Source: The Office of Finance.
The following table reflects our funding spreads to U.S. Treasuries (basis points)1:
Fourth Quarter 2020
3-Month
Average Fourth Quarter 2019
3-Month
Average 2020
12-Month
Average 2019
12-Month
Average 2020
Ending Spread 2019
Ending Spread
3-month 1.7 4.7 3.6 5.0 2.3 5.1
2-year 2.5 4.1 7.7 5.4 1.0 3.6
5-year 10.5 8.7 18.4 10.1 5.3 5.2
10-year 26.6 25.1 42.7 34.0 18.5 26.0
1 Source: 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 2020, our short-term funding spreads to LIBOR, on average, were generally more favorable when compared to 2019. As such, we utilized short-term discount notes in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements. During 2020, our long-term funding spreads to LIBOR, on average, generally deteriorated when compared to 2019. Our funding spreads were mixed relative to U.S. Treasuries when compared to the same periods in the prior year.
RESULTS OF OPERATIONS
Net Income
The following table presents comparative highlights of our net income for the years ended December 31, 2020 and 2019 (dollars in millions). See further discussion of changes in our results of operations in the sections that follow.
2020 vs. 2019
2020 2019 $ Change % Change
Net interest income $ 472 $ 576 $ (104) (18) %
Provision (reversal) for credit losses on mortgage loans 1 - 1 100
Other income (loss) 121 20 101 505
Other expense 189 168 21 13
AHP assessments 41 44 (3) (7)
Net income $ 362 $ 384 $ (22) (6) %
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 yields/costs of major asset and liability categories (dollars in millions):
For the Years Ended December 31,
2020 2019 2018
Average
Balance1
Yield/Cost Interest
Income/
Expense2
Average
Balance1
Yield/Cost Interest
Income/
Expense2
Average
Balance1
Yield/Cost Interest
Income/
Expense2
Interest-earning assets
Interest-bearing deposits $ 747 0.19 % $ 1 $ 228 1.37 % $ 3 $ 125 0.97 % $ 1
Securities purchased under agreements to resell 5,192 0.63 33 8,253 2.17 179 3,921 1.87 73
Federal funds sold 7,545 0.41 31 7,545 2.13 161 5,838 1.84 107
Mortgage-backed securities3,4
14,465 1.26 182 15,792 2.80 442 17,448 2.51 439
Other investments3,4,5
8,062 1.36 110 5,688 3.03 172 6,325 2.89 183
Advances4
60,897 1.56 950 92,866 2.65 2,466 106,294 2.30 2,443
Mortgage loans6
9,089 2.84 258 8,465 3.36 285 7,364 3.42 252
Loans to other FHLBanks 2 1.60 - 3 2.37 - 4 1.60 -
Total interest-earning assets 105,999 1.48 1,565 138,840 2.67 3,708 147,319 2.37 3,498
Non-interest-earning assets 1,284 - - 967 - - 1,183 - -
Total assets $ 107,283 1.46 % $ 1,565 $ 139,807 2.65 % $ 3,708 $ 148,502 2.36 % $ 3,498
Interest-bearing liabilities
Deposits $ 1,314 0.09 % $ 1 $ 986 1.47 % $ 14 $ 929 1.48 % $ 14
Consolidated obligations
Discount notes 27,678 0.62 172 35,527 2.30 817 38,986 1.89 736
Bonds4
70,098 1.31 915 94,803 2.41 2,289 99,676 2.10 2,095
Other interest-bearing liabilities7
101 4.92 5 224 5.45 12 342 5.41 18
Total interest-bearing liabilities 99,191 1.10 1,093 131,540 2.38 3,132 139,933 2.05 2,863
Non-interest-bearing liabilities 1,943 - - 1,141 - - 1,168 - -
Total liabilities 101,134 1.08 1,093 132,681 2.36 3,132 141,101 2.03 2,863
Capital 6,149 - - 7,126 - - 7,401 - -
Total liabilities and capital $ 107,283 1.02 % $ 1,093 $ 139,807 2.24 % $ 3,132 $ 148,502 1.93 % $ 2,863
Net interest income and spread8
0.38 % $ 472 0.29 % $ 576 0.32 % $ 635
Net interest margin9
0.45 % 0.42 % 0.43 %
Average interest-earning assets to interest-bearing liabilities 106.86 % 105.55 % 105.28 %
1 Average balances are calculated on a daily weighted average basis and do not reflect the effect of derivative master netting arrangements with counterparties and/or clearing agents.
2 Interest income and expense amounts reported for advances, mortgage-backed securities (MBS), other investments, and consolidated obligation bonds include gains (losses) on hedged items and derivatives in qualifying hedge relationships.
3 The average balance of AFS securities is reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.
4 Average balances reflect the impact of fair value hedging adjustments.
5 Other investments primarily include U.S. Treasury obligations, other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and Private Export Funding Corporation (PEFCO) bonds.
6 Non-accrual loans are included in the average balance used to determine the average yield.
7 Other interest-bearing liabilities consists of mandatorily redeemable capital stock and borrowings from other FHLBanks.
8 Represents yield on total interest-earning assets minus cost of total interest-bearing liabilities.
9 Represents net interest income expressed as a percentage of average interest-earning assets.
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).
2020 vs. 2019 2019 vs. 2018
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 $ 2 $ (4) $ (2) $ 1 $ 1 2
Securities purchased under agreements to resell (50) (96) (146) 93 13 106
Federal funds sold - (130) (130) 35 19 54
Mortgage-backed securities (34) (226) (260) (44) 47 3
Other investments 55 (117) (62) (19) 8 (11)
Advances (691) (825) (1,516) (327) 350 23
Mortgage loans 20 (47) (27) 37 (4) 33
Total interest income (698) (1,445) (2,143) (224) 434 210
Interest expense
Deposits 4 (17) (13) - - -
Consolidated obligations
Discount notes (150) (495) (645) (69) 150 81
Bonds (499) (875) (1,374) (105) 299 194
Other interest-bearing liabilities (6) (1) (7) (6) - (6)
Total interest expense (651) (1,388) (2,039) (180) 449 269
Net interest income $ (47) $ (57) $ (104) $ (44) $ (15) $ (59)
NET INTEREST SPREAD
Net interest spread equals the yield on total interest-earning assets minus the cost of total interest-bearing liabilities. During 2020, our net interest spread was 0.38 percent compared to 0.29 percent and 0.32 percent for the same periods in 2019 and 2018. Our net interest spread during 2020 was primarily impacted by increased advance prepayment fee income of $66 million compared to the same period in 2019. The primary components of our interest income and interest expense are discussed below.
NET INTEREST MARGIN
Net interest margin equals net interest income expressed as a percentage of average interest-earning assets. During 2020, our net interest margin was 0.45 percent compared to 0.42 percent and 0.43 percent for the same periods in 2019 and 2018. The increase in net interest margin during 2020 when compared to 2019 was primarily attributable to higher asset-liability spreads, offset in part by the lower interest rate environment.
Advances
Interest income on advances decreased during 2020 when compared to 2019, due primarily to the lower interest rate environment and lower average advance balances, partially offset by an increase in advance prepayment fee income. The decrease in average advance balances from prior year was primarily a result of a decline in advances from Wells Fargo Bank, N.A. and decreased demand for advances across the majority of other institution types, driven primarily by increased liquidity in the financial markets and higher member deposit levels. This decrease was partially offset by an increase in borrowings by non-captive insurance companies. We do not expect significant new advances to Wells Fargo Bank, N.A. in the near future and this trend of paydowns and decreased new borrowings by members may continue. Interest income on advances increased during 2019 when compared to 2018, due primarily to the higher interest rate environment on average, partially offset by lower average advance balances as a result of a decline in advances from Wells Fargo Bank, N.A. and captive insurance company members.
Investments
Interest income on investments decreased during 2020 when compared to 2019 due primarily to the lower interest rate environment. Interest income on investments increased during 2019 when compared to 2018 due primarily to higher average money market investment balances as a result of increased liquidity needs resulting from advance demand during 2019 and the higher interest rate environment on average. This increase was partially offset by lower average MBS and other investment balances.
Bonds
Interest expense on bonds decreased during 2020 when compared to 2019 due primarily to the lower interest rate environment and lower average bond balances, largely driven by a decrease in the amount of consolidated obligations needed to fund our assets. In addition, during 2020, we increased our usage of shorter-term discount notes relative to bonds in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements. Interest expense on bonds increased during 2019 when compared to 2018 due primarily to the higher interest rate environment on average, offset in part by lower average bond balances driven by a reduction in total assets.
Discount Notes
Interest expense on discount notes decreased during 2020 when compared to 2019 primarily due to the lower interest rate environment and lower average discount note balances driven by a decrease in the amount of consolidated obligations needed to fund our assets. Interest expense on discount notes increased during 2019 when compared to 2018 primarily due to the to the higher interest rate environment on average, partially offset by lower average discount note balances driven by a reduction in total assets.
Other Income (Loss)
The following table summarizes the components of other income (loss) (dollars in millions):
For the Years Ended
December 31,
2020 2019
Net gains (losses) on trading securities $ 17 $ 28
Net gains (losses) on derivatives and hedging activities (48) (35)
Gains on litigation settlements, net 120 -
Other, net 32 27
Total other income (loss) $ 121 $ 20
During 2020, we recorded other income (loss) of $121 million compared to $20 million during 2019. Other income (loss) was primarily impacted by net gains on litigation settlements of $120 million as a result of settlements with defendants in our private-label MBS litigation. As of December 31, 2020, all private-label litigation cases initially filed have been settled. We did not record any litigation settlements during 2019. Other factors impacting other income (loss) included net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities, as described below.
During 2020, we recorded net losses of $48 million on our derivatives and hedging activities compared to net losses of $35 million in 2019. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio. These changes were primarily driven by market volatility caused by COVID-19 and the impact it had on interest rates. Accounting rules require all derivatives to be recorded at fair value and therefore we may be subject to income statement volatility. Refer to “Item 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.
During 2020, we recorded net gains on trading securities of $17 million compared to net gains of $28 million in 2019. These changes in fair value were primarily due to the impact of changes in interest rates and credit spreads on our fixed rate trading securities which stemmed from market volatility caused by COVID-19. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).
Hedging Activities
We use derivatives to manage interest rate risk. Accounting rules affect the timing and recognition of income and expense on derivatives and therefore we may be subject to income statement volatility.
If a hedging activity qualifies for hedge accounting treatment (fair value hedge), the net interest settlements of interest receivables or payables related to the derivative are recognized as interest income or expense in the relevant income statement caption consistent with the hedged asset or liability. The net fair value gains and losses of derivatives and hedged items designated in fair value hedge relationships are also recognized as interest income or expense. Amortization of basis adjustments from terminated hedges and the amortization of the financing element of off-market derivatives are also recorded in interest income or expense.
If a hedging activity does not qualify for hedge accounting treatment (economic hedge), the net interest settlements of interest receivables or payables related to the derivative as well as the fair value gains and losses on the derivative are recorded as a component of other income (loss) in “Net gains (losses) on derivatives and hedging activities;” however, there is no fair value adjustment for the corresponding asset or liability being hedged unless changes in the fair value of the asset or liability are normally marked to fair value through earnings (i.e., trading securities and fair value option instruments).
The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
For the Year Ended December 31, 2020
Net Effect of Hedging Activities Advances Investments Mortgage
Loans Bonds Total
Net interest income:
Net amortization/accretion1
$ (44) $ (19) $ (4) $ (5) $ (72)
Net gains (losses) on derivatives and hedged items2
6 15 - (4) 17
Net interest settlements on derivatives3
(146) (106) - 120 (132)
Total impact to net interest income (184) (110) (4) 111 (187)
Other income (loss):
Net gains (losses) on economic hedges4
- (46) (2) - (48)
Net gains (losses) on trading securities5
- 17 - - 17
Total impact to other income (loss) - (29) (2) - (31)
Total net effect of hedging activities6
$ (184) $ (139) $ (6) $ 111 $ (218)
1 Represents the amortization/accretion of basis adjustments on closed hedge relationships.
2 Gains (losses) on derivatives and hedged items in qualifying fair value hedge relationships are reported in net interest income. Net gains (losses) on derivatives and hedged items also includes the amortization of the financing element of off-market derivatives.
3 Represents the interest component on derivatives that qualify for fair value hedge accounting.
4 Represents amounts recorded in “Net gains (losses) on derivatives and hedging activities” on the Statements of Income.
5 Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.
6 The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.
The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
For the Year Ended December 31, 2019
Net Effect of Hedging Activities Advances Investments Mortgage
Loans Bonds Total
Net interest income:
Net amortization/accretion1
$ (7) $ (5) $ (1) $ (3) $ (16)
Net gains (losses) on derivatives and hedged items2
6 6 - (3) 9
Net interest settlements on derivatives3
54 (10) - (163) (119)
Total impact to net interest income 53 (9) (1) (169) (126)
Other income (loss):
Net gains (losses) on derivatives and hedging activities:
Net gains (losses) on economic hedges4
- (35) - - (35)
Net gains (losses) on trading securities5
- 28 - - 28
Total impact to other income (loss) - (7) - - (7)
Total net effect of hedging activities6
$ 53 $ (16) $ (1) $ (169) $ (133)
1 Represents the amortization/accretion of basis adjustments on closed hedge relationships.
2 Gains (losses) on derivatives and hedged items in qualifying fair value hedge relationships are reported in net interest income. Net gains (losses) on derivatives and hedged items also includes the amortization of the financing element of off-market derivatives.
3 Represents the interest component on derivatives that qualify for fair value hedge accounting.
4 Represents amounts recorded in “Net gains (losses) on derivatives and hedging activities” on the Statements of Income.
5 Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.
6 The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.
NET AMORTIZATION/ACCRETION
Amortization/accretion varies from period to period depending on our hedge relationship termination activities and the maturity, call, or prepayment of assets or liabilities previously in hedge relationships. During 2020, we experienced increased amortization activity, primarily due to an increase in prepayments of advances and investments that were previously in a hedge relationship.
NET GAINS (LOSSES) ON DERIVATIVES AND HEDGED ITEMS
The net gains and losses on derivatives and hedged items are recorded in net interest income. Gains (losses) on derivatives and hedged items are primarily driven by changes in the benchmark interest rate, volatility, and the divergence in the valuation curves used to value our assets, liabilities, and derivatives. During 2020, we recorded gains of $17 million on our fair value hedge relationships compared to gains of $9 million in 2019, which stemmed from market volatility caused by COVID-19 and the impact it had on interest rates.
NET INTEREST SETTLEMENTS
Net interest settlements represent the interest component on derivatives. These amounts vary from period to period depending on our hedging activities and interest rates and are partially offset by the interest component on the related hedged item within net interest income. The hedging activity tables do not include the impact of the interest component on the related hedged item.
NET GAINS (LOSSES) ON ECONOMIC HEDGES
We utilize economic derivatives to manage certain risks on our Statements of Condition. Gains and losses on economic derivatives are driven by changes in interest rates and volatility and include interest settlements. Interest settlements represent the interest component on economic derivatives. These amounts vary from period to period depending on our hedging activities and interest rates. During 2020, we recorded net losses of $48 million on our economic derivatives. The fair value changes were primarily driven by changes in interest rates which impacted the fair value of interest rate swaps used to economically hedge our investment securities portfolio as highlighted in the table below. These changes were primarily driven by market volatility caused by COVID-19 and the impact it had on interest rates.
Investments
Gains and losses on our trading securities are also due primarily to changes in interest rates and credit spreads. The following table summarizes gains and losses on these economic derivatives as well as the related trading securities (dollars in millions):
For the Years Ended
December 31,
2020 2019
Gains (losses) on interest rate swaps economically hedging our investments $ (32) $ (34)
Interest settlements (14) (1)
Net gains (losses) on investment derivatives (46) (35)
Net gains (losses) on related trading securities 17 28
Net gains (losses) on economic investment hedge relationships $ (29) $ (7)
Other Expense
The following table shows the components of other expense (dollars in millions):
For the Years Ended
December 31,
2020 2019
Compensation and benefits $ 103 $ 65
Contractual services 16 16
Professional fees 25 33
Other operating expenses 22 31
Total operating expenses 166 145
Federal Housing Finance Agency 10 10
Office of Finance 6 7
Other, net 7 6
Total other expense $ 189 $ 168
Other expense increased $21 million during 2020 when compared to 2019, driven primarily by an increase in compensation and benefits. The increase in compensation and benefits was primarily due to increased pension costs as a result of us making a discretionary contribution of $32 million at the end of the year. We did not make a discretionary pension contribution in 2019. This increase was offset in part by a decline in other operating expenses and professional fees. Other operating expenses decreased due to lower depreciation expense on core system projects and fewer employee travel costs in light of COVID-19. Professional fees declined as a result of fewer external resources to assist with our technology and operational initiatives during the year.
STATEMENTS OF CONDITION
Financial Highlights
Our total assets decreased to $87.7 billion at December 31, 2020, from $129.6 billion at December 31, 2019. Our total liabilities decreased to $82.0 billion at December 31, 2020, from $122.9 billion at December 31, 2019. Total capital decreased to $5.7 billion at December 31, 2020, from $6.7 billion at December 31, 2019. See further discussion of changes in our financial condition in the sections that follow.
Advances
The following table summarizes our advances by type of institution (dollars in millions):
December 31,
2020 2019
Commercial banks $ 14,267 $ 47,835
Savings institutions 702 1,376
Credit unions 4,787 5,976
Non-captive insurance companies 26,074 20,821
Captive insurance companies - 3,798
Community development financial institutions 20 14
Total member advances 45,850 79,820
Housing associates 50 100
Non-member borrowers 188 265
Total par value $ 46,088 $ 80,185
Our total advance par value decreased $34.1 billion or 43 percent at December 31, 2020, when compared to December 31, 2019. The decrease was primarily due to a decrease in borrowings of $25.5 billion by Wells Fargo Bank, N.A., as they paid off their remaining advance balances during 2020. Wells Fargo Bank, N.A. had our largest concentration of advances outstanding at December 31, 2019. We do not expect significant new advances to Wells Fargo Bank, N.A. in the near future and this trend of paydowns and decreased new borrowings by members may continue. In 2020, we experienced decreased demand for advances across the majority of our other institution types, driven primarily by increased liquidity in the financial markets and higher member deposit levels.
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. Captive insurance company members that were admitted as members prior to September 12, 2014, had their memberships terminated February 19, 2021. As of December 31, 2020, while we had five captive insurance company members, none had advances outstanding.
The following table summarizes our advances by product type (dollars in millions):
December 31, 2020 December 31, 2019
Amount % of Total Amount % of Total
Variable rate $ 12,599 27 $ 41,024 51
Fixed rate 31,546 69 37,007 46
Amortizing 1,943 4 2,154 3
Total par value 46,088 100 80,185 100
Premiums 18 25
Discounts (3) (6)
Fair value hedging adjustments 427 156
Total advances $ 46,530 $ 80,360
Fair value hedging adjustments changed $271 million at December 31, 2020 when compared to December 31, 2019 due to the impact of interest rates on our cumulative fair value adjustments on advances in hedge relationships.
INTEREST RATE PAYMENT TERMS
The following table summarizes advances by interest rate payment and redemption terms (dollars in millions):
December 31,
2020 2019
Fixed rate
Due in one year or less $ 11,394 $ 18,422
Due after one year 22,095 20,739
Total fixed rate 33,489 39,161
Variable rate
Due in one year or less 1,107 17,010
Due after one year 11,492 24,014
Total variable rate 12,599 41,024
Total par value $ 46,088 $ 80,185
At December 31, 2020 and 2019, 25 and 31 percent of our advances were variable rate callable advances. Callable advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Interest rates on our variable rate callable advances reset at each call date to be consistent with either the underlying index or our current offering rate in line with our underlying cost of funds. We generally fund our variable rate callable advances with either discount notes or short-term floating rate debt. For additional discussion on our funding strategies, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Liquidity - Sources of Liquidity.”
At December 31, 2020 and 2019, advances outstanding to our five largest member borrowers totaled $15.5 billion and $39.3 billion, representing 34 percent and 49 percent of our total advances outstanding. The following table summarizes advances outstanding to our five largest member borrowers at December 31, 2020 (dollars in millions):
Amount % of Total Advances
Principal Life Insurance Company $ 4,250 9
EquiTrust Life Insurance Company 3,100 7
Midland National Life Insurance Company1
3,073 7
Washington Federal Bank, National Association 2,600 6
Transamerica Life Insurance Company 2,515 5
Total par value $ 15,538 34
1 Excludes $1.5 billion of advances with North American Company for Life and Health Insurance, an affiliate of Midland National Life Insurance Company.
We evaluate advances for credit losses on a quarterly basis and have never experienced a credit loss on our advances. In December 2020, we declared a member bank in default under its contractual terms and individually assessed the related advances for expected credit losses as of December 31, 2020, concluding no allowance for credit losses was necessary in light of the advances being well-secured with underlying collateral. All other advances were evaluated on a collective basis as of December 31, 2020 and, based upon our collateral and lending policies, the collateral held as security, and the repayment history on advances, we determined there were no expected credit losses on those advances.
We consider an advance past due for financial reporting purposes if a default of contractual principal or interest exists for a period of 30 days or more. In light of the above event, as of February 28, 2021, we have advances outstanding with a par value of $365 million that are considered past due. For additional discussion on our advance credit risk, refer to “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,
2020 2019
Fixed rate conventional loans $ 7,646 $ 8,712
Fixed rate government-insured loans 481 496
Total unpaid principal balance 8,127 9,208
Premiums 107 125
Discounts (3) (4)
Basis adjustments from mortgage loan purchase commitments 12 6
Total mortgage loans held for portfolio 8,243 9,335
Allowance for credit losses (1) (1)
Total mortgage loans held for portfolio, net $ 8,242 $ 9,334
Our total mortgage loans decreased $1.1 billion or 12 percent at December 31, 2020, when compared to December 31, 2019. The decrease was primarily due to principal paydowns exceeding loan purchases as a result of increased refinancing activity driven by lower rates.
We evaluate mortgage loans for credit losses on a quarterly basis. At both December 31, 2020 and 2019, our allowance for credit losses totaled $1 million. 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.”
Investments
The following table summarizes the carrying value of our investments (dollars in millions):
December 31, 2020 December 31, 2019
Amount % of Total Amount % of Total
Short-term investments1
Interest-bearing deposits $ 401 1 $ 1 -
Securities purchased under agreements to resell 4,800 15 13,950 36
Federal funds sold 3,695 12 4,605 12
U.S. Treasury obligations2
3,211 10 - -
Total short-term investments 12,107 38 18,556 48
Long-term investments3
Mortgage-backed securities
GSE single-family 1,671 5 2,401 6
GSE multifamily 8,613 28 8,134 21
U.S. obligations single-family2
3,547 11 4,064 11
U.S. obligations commercial2
- - 1 -
Private-label residential 6 - 7 -
Total mortgage-backed securities 13,837 44 14,607 38
Non-mortgage-backed securities
U.S. Treasury obligations2
858 3 - -
Other U.S. obligations2
1,786 6 2,277 6
GSE and Tennessee Valley Authority obligations 1,465 4 1,504 4
State or local housing agency obligations 896 3 977 3
Other 548 2 544 1
Total non-mortgage-backed securities 5,553 18 5,302 14
Total long-term investments 19,390 62 19,909 52
Total investments $ 31,497 100 $ 38,465 100
1 Short-term investments have original maturities equal to or less than one year.
2 Represents investment securities backed by the full faith and credit of the U.S. Government.
3 Long-term investments have original maturities of greater than one year.
INTEREST RATE PAYMENT TERMS
The following tables summarize the interest rate payment terms of investment securities (dollars in millions):
December 31,
2020 2019
Trading securities at fair value
Fixed rate $ 4,875 $ 888
Total trading securities $ 4,875 $ 888
AFS at amortized cost
Fixed rate $ 7,420 $ 6,608
Variable rate 8,438 9,995
Total AFS $ 15,858 $ 16,603
HTM at amortized cost
Fixed rate $ 710 $ 900
Variable rate 1,106 1,470
Total HTM $ 1,816 $ 2,370
Our investments decreased $7.0 billion or 18 percent at December 31, 2020, when compared to December 31, 2019. The decrease was due primarily to a decline in money market investments of $9.7 billion, as liquidity management was impacted by lower advance demand and other economic impacts of COVID-19.
The Finance Agency limits our investments in MBS by requiring that the balance of our MBS not exceed three times regulatory capital at the time of purchase. At December 31, 2020, our ratio of MBS to regulatory capital was 2.40 compared to 2.12 at December 31, 2019.
We evaluate investments for credit losses on a quarterly basis. For additional discussion on our investment credit risk. refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Credit Risk - Investments.”
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, 2020 and 2019, the carrying value of consolidated obligations for which we are primarily liable totaled $79.6 billion and $121.1 billion.
DISCOUNT NOTES
The following table summarizes our discount notes, all of which are due within one year (dollars in millions):
December 31,
2020 2019
Par value $ 27,350 $ 29,592
Discounts and concession fees1
(5) (61)
Total $ 27,345 $ 29,531
1 Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation discount notes.
Our discount notes decreased $2.2 billion or seven percent at December 31, 2020, when compared to December 31, 2019. The decrease was primarily driven by a reduction in total assets.
BONDS
The following table summarizes information on our bonds (dollars in millions):
December 31,
2020 2019
Total par value $ 51,930 $ 91,373
Premiums 199 217
Discounts and concession fees1
(26) (38)
Fair value hedging adjustments 151 1
Total bonds $ 52,254 $ 91,553
1 Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation bonds.
Our bonds decreased $39.3 billion or 43 percent at December 31, 2020, when compared to December 31, 2019. The decrease was primarily driven by a reduction in total assets. In addition, we increased our usage of shorter-term discount notes relative to bonds in an effort to capture attractive funding, match the repricing structures on floating rate assets, and meet our liquidity requirements. Fair value hedging adjustments changed $150 million at December 31, 2020 when compared to December 31, 2019, due to the impact of interest rates on our cumulative fair value adjustments on bonds in hedge relationships.
INTEREST RATE PAYMENT TERMS
Bonds are issued with fixed or variable rate payment terms that use a variety of indices for interest rate resets such as SOFR or LIBOR. With respect to interest payments, fixed rate 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 us to call the bonds at our 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 us to call the bonds at our option on the step-down dates.
The following table summarizes our bonds by interest rate payment terms (dollars in millions):
December 31,
2020 2019
Fixed rate $ 38,952 $ 38,316
Simple variable rate 12,923 52,937
Step-up 55 120
Total par value $ 51,930 $ 91,373
For additional information on our consolidated obligations, 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.
At December 31, 2020 and 2019, our mandatorily redeemable capital stock totaled $52 million and $206 million. Our total mandatorily redeemable capital stock balance decreased $154 million at December 31, 2020, when compared to December 31, 2019 due primarily to the repurchase of capital stock outstanding to captive insurance company members during 2020, driven by repayment of their advance balances.
Capital
The following table summarizes information on our capital (dollars in millions):
December 31,
2020 2019
Capital stock $ 3,341 $ 4,517
Retained earnings 2,351 2,165
Accumulated other comprehensive income (loss) 48 44
Total capital $ 5,740 $ 6,726
Our capital decreased $1.0 billion or 15 percent at December 31, 2020, when compared to December 31, 2019. The decrease was primarily due to a decrease in capital stock resulting from a decline in member activity. 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.
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,
2020 2019
Interest rate swaps
Noncallable $ 33,848 $ 37,017
Callable by counterparty 1,383 1,495
Callable by the Bank 138 210
Total interest rate swaps 35,369 38,722
Forward settlement agreements (TBAs) 169 122
Mortgage loan purchase commitments 177 127
Total notional amount $ 35,715 $ 38,971
The notional amount of our derivative contracts decreased at December 31, 2020, when compared to December 31, 2019. The decrease was driven by advance prepayments and a reduction in overall assets and liabilities. Consistent with the move to an alternative benchmark rate other than LIBOR, we started using interest rate swaps based on the federal funds or SOFR OIS rates to hedge our balance sheet during 2020. 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.”
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 2020, proceeds from the issuance of bonds and discount notes were $42.5 billion and $178.9 billion compared to $66.7 billion and $121.2 billion in 2019. We continued to focus on issuing shorter-term discount notes in an effort to capture attractive funding, match repricing structures on advances, and provide additional liquidity.
As the COVID-19 outbreak developed during 2020, the capital markets became more volatile. Despite the increased market volatility, we were operationally prepared, maintained continual access to funding, and issued debt to meet the needs of our members. Access to debt markets has been reliable because investors, driven by increased liquidity preference and our government affiliation, have sought the FHLBanks’ debt as an asset of choice. However, due to the short-term maturity of the debt, we may be exposed to additional risks associated with refinancing and our ability to access the capital markets.
We are focused on maintaining an adequate liquidity balance and a funding balance between our financial assets and financial liabilities and work collectively with the other FHLBanks to manage the system-wide liquidity and funding needs. We monitor our debt refinancing risk and liquidity position primarily by tracking the maturities of financial assets and financial liabilities. In managing and monitoring the amounts of assets that require refunding, we consider contractual maturities of our financial assets and liabilities, as well as certain assumptions regarding expected cash flows (i.e. estimated prepayments). External factors, including member borrowing needs, supply and demand in the debt markets, and other factors may affect liquidity balances and the funding balances between financial assets and financial liabilities. Refer to “Item 8. Financial Statements” for additional information regarding the contractual maturities or redemption terms of certain 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, 2021, our consolidated obligations were rated AA+/A-1+ by Standard and Poor’s and Aaa/P-1 by Moody’s and both ratings had a stable outlook. In August 2020, Fitch Ratings affirmed the long-term U.S. sovereign AAA rating, but revised the outlook to “negative” from “stable.” Following this action, Fitch Ratings also affirmed our long-term AAA rating and revised the outlook to “negative” from “stable.” At February 28, 2021, our consolidated obligations remained rated AAA with a negative outlook by Fitch Ratings. 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, 2020 and 2019, the total par value of outstanding consolidated obligations for which we are primarily liable was $79.3 billion and $121.0 billion. At December 31, 2020 and 2019, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which we are jointly and severally liable was $667.5 billion and $904.9 billion.
The Office of Finance and FHLBanks have contingency plans in place that prioritize the allocation of proceeds from the issuance of consolidated obligations during periods of financial distress if consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand. In the event of significant market disruptions or local disasters, our President or designee is authorized to establish interim borrowing relationships with other FHLBanks. To provide further access to funding, the FHLBank Act also authorizes the U.S. Treasury to directly purchase new issue consolidated obligations of the GSEs, including FHLBanks, up to an aggregate principal amount of $4.0 billion. As of February 28, 2021, no purchases had been made by the U.S. Treasury under this authorization.
USES OF LIQUIDITY
We use our available liquidity, including proceeds from the issuance of consolidated obligations, primarily to repay consolidated obligations, fund advances, and purchase investments. During 2020, repayments of consolidated obligations totaled $263.0 billion compared to $203.7 billion in 2019. A portion of these payments were due to the call of certain bonds in an effort to better match our projected asset cash flows. During 2020, we called bonds with a total par value of $2.5 billion compared to $1.2 billion in 2019.
During 2020, advance disbursements totaled $146.8 billion compared to $264.6 billion in 2019. Advance disbursements will vary from period to period depending on member needs. During 2020, investment purchases (excluding overnight investments) totaled $19.6 billion compared to $147.2 billion in 2019. Investment purchases during each period were primarily driven by the purchase of money market investments, including secured resale agreements, or U.S. Treasury securities in an effort to manage our liquidity position.
We also use liquidity to purchase mortgage loans, redeem member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, pay expenses, and pay dividends.
LIQUIDITY REQUIREMENTS
We are subject to certain liquidity requirements set forth by the Finance Agency, as further outlined below. We also maintain a liquidity contingency funding plan designed to enable us to meet our obligations and the liquidity needs of our members in the event of short-term capital market disruptions, or operational disruptions at our Bank and/or the Office of Finance.
Finance Agency Advisory Bulletin on FHLBank Liquidity (the Liquidity Guidance AB) - This guidance requires us to maintain sufficient liquidity for a period of 10 to 30 calendar days. The base case scenario requires 20 days of positive daily cash balances and assumes that we cannot access the capital markets to issue debt, and during that time we will automatically renew maturing and called advances for all members, including very large highly-rated members, and we hold additional liquid assets equal to one percent of our letters of credit balances. As a result of the deterioration in financial market conditions due to COVID-19, the Finance Agency issued revised guidance in March 2020 lowering the base case liquidity requirements during the year. However, the required calendar days of positive daily cash balances returned to 20 days by December 31, 2020. At December 31, 2020 and 2019, we were in compliance with this base case liquidity guidance.
This Liquidity Guidance AB also specifies appropriate funding gap limits to address the risks associated with a FHLBank having too large a mismatch between the contractual maturities of its assets and liabilities. A funding gap measures the difference between assets and liabilities that are scheduled to mature during a specified period and is expressed as a percentage of total assets. The guidance provides funding gap limits within the range of negative 10 percent to negative 20 percent for a three-month horizon and negative 25 percent to negative 35 percent for a one-year horizon. Initial guidance, which was in effect at December 31, 2019, was set at a trailing three-month average of negative 15 percent for the three-month horizon and a trailing three-month average of negative 30 percent for the one-year horizon. In addition to the relief provided for base case liquidity noted above, on March 12, 2020, the Finance Agency also increased the funding gap ratios for the three-month and one-year time horizons during the year. The recommended funding gap maximums were reduced to negative 20 percent at the three-month horizon and negative 35 percent at the one-year horizon by December 31, 2020. At December 31, 2020 and 2019, we adhered to these funding gap requirements.
Liquidity Reserves for Deposits - 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,
2020 2019
Liquidity deposit reserves $ 46.0 $ 76.6
Deposits 1.9 1.1
Excess liquidity $ 44.1 $ 75.5
Unpledged Qualifying Assets - 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,
2020 2019
Qualifying assets free of lien or pledge $ 87.3 $ 129.4
Consolidated obligations outstanding 79.6 121.1
Excess liquidity $ 7.7 $ 8.3
Capital
CAPITAL REQUIREMENTS
We are subject to certain regulatory capital requirements. First, the FHLBank Act requires that we maintain at all times permanent capital greater than or equal to the sum of our credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement. Second, the FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes 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, 2020 and 2019, we did not hold any nonpermanent capital. At December 31, 2020 and 2019, we were in compliance with all three of the Finance Agency’s regulatory capital requirements.
In addition to the requirements previously discussed, during 2019, the Finance Agency finalized an Advisory Bulletin on capital stock (the Capital Stock AB) which required each FHLBank to maintain at all times a ratio of at least two percent of capital stock to total assets, effective February 2020. For purposes of the Capital Stock AB, capital stock includes mandatorily redeemable capital stock. The capital stock to total assets ratio is measured on a daily average basis at month end. At December 31, 2020, we were in compliance with the Capital Stock AB. Refer to “Item 8. Financial Statements and Supplementary Data - Note 11 - Capital” for additional information on our capital requirements.
CAPITAL STOCK
Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We 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. Effective October 1, 2020, we required each member to purchase and hold activity-based stock in an amount equal to 0.10 percent of its standby letters of credit. This requirement applies to any new, renewed or modified standby letters of credit issued on or after October 1, 2020. 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. To the extent membership is terminated involuntarily, we may elect to repurchase that institution’s membership stock prior to the end of the five-year redemption period. If a member withdraws or is involuntarily terminated from membership and holds activity-based capital stock, we will repurchase any such stock that is not required to support remaining business activity with the institution.
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.
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.
Regulatory Capital Stock
The following table summarizes our regulatory capital stock by type of member (dollars in millions):
December 31,
2020 2019
Commercial banks $ 1,446 $ 2,767
Savings institutions 77 113
Credit unions 514 547
Insurance companies 1,303 1,089
CDFIs 1 1
Total GAAP capital stock 3,341 4,517
Mandatorily redeemable capital stock 52 206
Total regulatory capital stock $ 3,393 $ 4,723
The decrease in regulatory capital stock held at December 31, 2020 when compared to December 31, 2019 was primarily due to a decline in member activity. For additional information on our capital stock, refer to “Item 8. Financial Statements and Supplementary Data - Note 11 - 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, 2020 and 2019, our actual retained earnings exceeded our retained earnings target.
Under the JCE Agreement, we are required to allocate 20 percent of our quarterly net income to a separate restricted retained earnings account until the balance of that account, calculated as of the last day of each calendar quarter, equals at least one percent of our average balance of outstanding consolidated obligations for the calendar quarter. The restricted retained earnings are not available to pay dividends and are presented separately on our Statements of Condition. At December 31, 2020 and 2019, our restricted retained earnings account totaled $576 million and $504 million. One percent of our average balance of outstanding consolidated obligations for the three months ended December 31, 2020 was $810 million.
During 2020, we also received a partial recovery of a prior capital distribution from the Financing Corporation in the amount of approximately $26 million, which was credited to unrestricted retained earnings. Refer to “Item 8. Financial Statements and Supplementary Data - Note 11 - Capital.”
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 SOFR, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. Prior to the second quarter of 2020 dividend, we used average three-month LIBOR as our reference rate. Beginning with the second quarter dividend, paid in the third quarter of 2020, we used SOFR as our reference rate.
Our dividend rates seek to strike a balance between providing reasonable and consistent returns to members while preserving our financial position, flexibility, and ability to serve as a long-term liquidity provider. Our actual dividend is determined quarterly by our Board of Directors, based on policies, regulatory requirements, actual performance, and other considerations that the Board determines to be appropriate.
The following table summarizes dividend-related information (dollars in millions):
For the Years Ended
December 31,
2020 2019
Aggregate cash dividends paid1
$ 203 $ 269
Effective combined annualized dividend rate paid on capital stock2
4.86 % 5.23 %
Annualized dividend rate paid on membership capital stock 3.06 % 3.25 %
Annualized dividend rate paid on activity-based capital stock 5.56 % 5.75 %
Average three-month LIBOR 0.64 % 2.33 %
Average SOFR 0.35 % 2.21 %
1 Includes aggregate cash dividends paid during the period. Amount excludes cash dividends paid on mandatorily redeemable capital stock. For financial reporting purposes, these dividends were recorded as interest expense on our Statements of Income.
2 Effective combined annualized dividend rate is paid on total capital stock, including mandatorily redeemable capital stock.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. Certain 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 fair value measurements and derivatives and hedging activities as critical to understanding our financial condition and results of operations.
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 on 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, we have control processes in place to ensure fair value measurements are appropriate and reliable. These processes include but are not limited to; challenging a price when it falls out of our tolerance parameters and identifying a stale price, significantly changed price, or other anomalies that may indicate that a price may not be accurate. 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, 2020 and 2019, we did not carry any financial assets or liabilities, measured on a recurring basis, at fair value on our Statements of Condition based on unobservable inputs.
Refer to “Item 8. Financial Statements and Supplementary Data - Note 13 - Fair Value” for additional discussion on our fair value measurements.
Derivatives and Hedging Activities
All derivatives are recognized on 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 result in a receivable to the Bank, they are classified as a derivative asset and, if classified as a payable to the clearing agent or counterparty, they are classified as a derivative liability. Cash flows associated with derivatives are reflected as cash flows from operating activities on 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.
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 on 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. At the inception of each fair value hedge transaction, we formally document the hedge relationship and our risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk will be assessed. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition and firm commitments.
Beginning January 1, 2019, we adopted new hedge accounting guidance, which impacted the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges. 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 recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness, or the amount by which the change in the fair value of the derivative differed from the change in fair value of the hedged item, was recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.” 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. If documented at the time of hedge designation, a derivative relationship no longer qualifying for short-cut hedge accounting can fallback to the long-haul accounting method.
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.
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, or (iii) 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 on 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.
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 on 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 7 - Derivatives and Hedging Activities” for additional discussion on our derivatives.
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Finance Agency Final Rule on FHLBank Housing Goals Amendments
On June 25, 2020, the Finance Agency published a final rule, effective August 24, 2020, amending the FHLBank housing goals regulation. Enforcement of the final rule will phase in over three years. The final rule replaces the four existing retrospective housing goals with a single prospective mortgage purchase housing goal target in which 20 percent of Acquired Member Asset (AMA) mortgages purchased in a year must be comprised of loans to low-income or very low-income families, or to families in low-income areas. The final rule also establishes a separate small member participation housing goal with a target level in which 50 percent of the members selling acquired member asset (AMA) loans in a calendar year must be small members. The final rule provides that an FHLBank may request Finance Agency approval of alternative target levels for either or both of the goals. The final rule also establishes that housing goals apply to each FHLBank that acquires any AMA mortgages during a year, eliminating the existing $2.5 billion volume threshold that previously triggered the application of housing goals for each FHLBank.
We do not believe these changes will have a material effect on our financial condition or results of operations.
Finance Agency Final Rule on Stress Testing
On March 24, 2020, the Finance Agency published a final rule, effective upon issuance, to amend its stress testing rule, consistent with section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCPA). The final rule (i) raises the minimum threshold for entities regulated by the Finance Agency to conduct periodic stress tests from $10 billion to $250 billion or more in total consolidated assets, (ii) removes the requirements for FHLBanks to conduct stress testing, and (iii) removes the adverse scenario from the list of required scenarios. FHLBanks are currently excluded from this regulation because no FHLBank has total consolidated assets over $250 billion, but the Finance Agency reserved its discretion to require an FHLBank with total consolidated assets below the $250 billion threshold to conduct stress testing. These amendments align the Finance Agency’s stress testing rule with rules adopted by other financial institution regulators that implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) stress testing requirements, as amended by EGRRCPA.
This rule eliminates these stress testing requirements for the Bank, unless the Finance Agency exercises its discretion to require stress testing in the future. We do not expect this rule to have a material effect on our financial condition or results of operations.
Margin and Capital Requirements for Covered Swap Entities
On July 1, 2020, the Office of the Comptroller of the Currency (OCC), the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, and the Finance Agency (collectively, Prudential Banking Regulators) jointly published a final rule, effective August 31, 2020, amending regulations that established minimum margin and capital requirements for uncleared swaps for covered swap entities under the jurisdiction of the Prudential Banking Regulators (Prudential Margin Rules). In addition to other changes, the final rule (i) allows swaps entered into by a covered swap entity prior to an applicable compliance date to retain their legacy status and not become subject to the Prudential Margin Rules in the event that the legacy swaps are amended to replace an interbank offered rate (such as LIBOR) or other discontinued rate, or due to other technical amendments, notional reductions or portfolio compression exercises, (ii) introduces a new Phase 6 compliance date for initial margin requirements for covered swap entities and their counterparties with an average daily aggregate notional amount (AANA) of uncleared swaps of at least $8 billion, and (iii) clarifies that initial margin (IM) trading documentation does not need to be executed prior to the parties becoming obligated to exchange IM.
On the same date, the Prudential Banking Regulators published an interim final rule, effective September 1, 2020, extending the IM compliance date for Phase 6 counterparties to September 1, 2022. On November 9, 2020, the Commodity Futures Trading Commission (CFTC) published a final rule extending the IM compliance date for Phase 6 counterparties to September 1, 2022, thereby aligning with the Prudential Banking Regulators.
Further, on January 5, 2021, the CFTC published a final rule, effective February 4, 2021, that primarily amends the minimum margin and capital requirements for uncleared swaps under the jurisdiction of the CFTC (CFTC Margin Rules) by requiring covered entities to use a revised AANA calculation starting on September 1, 2022. The amendments, among other things, require entities subject to the CFTC’s jurisdiction to calculate the AANA for uncleared swaps during March, April and May of the current year, based on an average of month-end dates, as opposed to the previous requirement which required the calculation of AANA during June, July and August of the prior year, based on daily calculations. Parties would continue to be expected to exchange IM based on the AANA totals as of September 1 of the current year. These amendments align with the recommendation of the Basel Committee on Banking Supervision and Board of the International Organization of Securities Commissions. Separately, on January 25, 2021, the CFTC published a final rule, effective February 24, 2021, that amends the CFTC Margin Rules to permit, among other changes, covered swap entities to maintain separate minimum transfer amounts (MTA) for IM and variation margin for each swap counterparty, provided the combined MTA does not exceed $500,000.
We do not expect these rules to have a material effect on our financial condition or results of operations.
FDIC Brokered Deposits Restrictions
On January 22, 2021, the FDIC published a final rule, effective April 1, 2021, that amends its brokered deposits regulations that apply to less than well-capitalized insured depository institutions. The FDIC stated that the amendments are intended to modernize and clarify the FDIC’s brokered deposit regulations and they establish a new framework for analyzing the deposit broker definition, which determines whether deposits placed through deposit placement arrangements qualify as brokered deposits. These deposit placement arrangements include those between insured depository institutions and third parties, such as financial technology companies, for a variety of business purposes, including access to deposits. The amendments to the FDIC’s brokered deposit regulations, among other things, clarify what it means to be engaged in the business of facilitating the placement of deposits and expand the scope of the primary purpose exception. The rule amendments are expected to have the effect of narrowing the definition of deposit broker and excluding more deposits from treatment as brokered deposits. The amendments also establish an application and reporting process with respect to the primary purpose exception for businesses that do not meet one of several bright-line tests, and they affirm the FDIC’s position that the brokering of certificates of deposit constitutes deposit brokering.
This rule may have an effect on member demand for certain advances, but we cannot predict the extent of the impact. To the extent this rule has a material impact on our advance demand, our financial condition or results of operations may be adversely affected.
Finance Agency Advisory Bulletin 2020-01 Federal Home Loan Bank AMA Risk Management
On January 31, 2020, the Finance Agency released guidance on risk management of AMA. The guidance communicates the Finance Agency’s expectations with respect to an FHLBank’s funding of its members through the purchase of eligible mortgage loans and includes expectations that an FHLBank will have board-established limits on AMA portfolios and management-established thresholds to serve as monitoring tools to manage AMA-related risk exposure. The guidance provides that the board of an FHLBank should ensure that the bank serves as a liquidity source for members, and an FHLBank should ensure that its portfolio limits do not result in the FHLBank’s acquisition of mortgages from smaller members being “crowded out” by the acquisition of mortgages from larger members. The advisory bulletin contains the expectation that the board of an FHLBank should set limits on the size and growth of portfolios and on acquisitions from a single participating financial institution. In addition, the guidance provides that the board of an FHLBank should consider concentration risk in the areas of geographic area, high-balance loans, and in third-party loan originations.
We do not expect this advisory bulletin to materially affect our financial condition or results of operations.
United States Department of Treasury (Treasury) and Fannie Mae Preferred Stock Purchase Agreement Amendment
On January 14, 2021, Treasury and Fannie Mae entered into a letter agreement amending the terms of their Preferred Stock Purchase Agreement (PSPA), which could impact PFIs that participate in the MPF Program’s MPF Xtra product (where MPF loans acquired are concurrently sold to Fannie Mae). Under the PSPA, Treasury provides liquidity to Fannie Mae in exchange for senior preferred stock. Under the recent PSPA amendment, effective January 1, 2022, the Finance Agency (acting as conservator for Fannie Mae) and Treasury agreed to limit the dollar volume of loans Fannie Mae could purchase from a single seller through Fannie Mae’s cash window to $1.5 billion per year. As administrator of the MPF Program, the FHLBank of Chicago purchases MPF Xtra loans from PFIs and sells them to Fannie Mae via the cash window process. Based on volumes for the MPF Xtra product program-wide in 2020, the PSPA amendment would significantly curtail MPF Xtra cash window sales. Although this would negatively impact the volume of loans sold through the MPF Program unless a solution is developed, we do not currently expect it to have a material effect on our financial condition or results of operations.
LIBOR Transition
FINANCE AGENCY SUPERVISORY LETTER - PLANNING FOR LIBOR PHASE-OUT
On September 27, 2019, the Finance Agency issued a Supervisory Letter to the FHLBanks that the Finance Agency stated is designed to ensure the FHLBanks will be able to identify and prudently manage the risks associated with the termination of LIBOR in a safe and sound manner. The Supervisory Letter provided that the FHLBanks should, by March 31, 2020, cease entering into new LIBOR referenced financial assets, liabilities, and derivatives with maturities beyond December 31, 2021 for all product types except investments. With respect to investments, the FHLBanks were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates did not apply to collateral accepted by the FHLBanks. The Supervisory Letter also directed the FHLBanks to update their pledged collateral certification reporting requirements by March 31, 2020, in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. The FHLBanks were expected to cease entering into LIBOR-indexed financial instruments maturing after December 31, 2021, by the deadlines specified in the Supervisory Letter, subject to limited exceptions granted by the Finance Agency for LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes that do not currently have readily available alternatives. We ceased purchasing investments that reference LIBOR in 2018.
As a result of the market volatility experienced during 2020 due in part by the COVID-19 pandemic, the Finance Agency extended the FHLBanks’ authority to enter into LIBOR-based instruments that mature after December 31, 2021 from March 31, 2020 to June 30, 2020. In addition, the Finance Agency extended the requirement to update pledged collateral certification reporting requirements from March 31, 2020, to September 30, 2020. As of June 30, 2020, we ceased execution of new LIBOR indexed transactions with maturities beyond December 31, 2021.
We continue to evaluate the potential impact of the Supervisory Letter and the related subsequent guidance on our financial condition and results of operations, but we may experience decreased flexibility in our access to funding, higher funding costs, or lower overall demand or increased costs for our advances; which may, in turn, negatively impact our business operations, financial condition, and results of operations.
LIBOR TRANSITION - ISDA 2020 IBOR FALLBACKS PROTOCOL AND SUPPLEMENT TO THE 2006 ISDA DEFINITIONS
On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA), published a Supplement to the 2006 ISDA Definitions (Supplement) and the ISDA 2020 IBOR Fallbacks Protocol (Protocol). Both the Supplement and the Protocol took effect on January 25, 2021. On that date, all legacy bilateral derivative transactions subject to Protocol-covered agreements (including ISDA agreements) that incorporate certain covered ISDA definitional booklets and reference a covered Interbank Offered Rate (IBOR), including LIBOR, were effectively amended to apply the new ISDA-recommended IBOR fallbacks in the event of the relevant IBOR’s cessation. Both the Bank and our counterparty must have adhered to the Protocol in order to effectively amend legacy derivatives contracts, otherwise the parties must bilaterally amend legacy covered agreements (including ISDA agreements) to address LIBOR fallbacks. The Protocol will remain open for adherence after the effective date. As of January 25, 2021, all new derivative contracts are subject to the relevant IBOR fallbacks set forth in the Supplement.
On October 21, 2020, the Finance Agency issued a Supervisory Letter to the FHLBanks that required each FHLBank to adhere to the Protocol by December 31, 2020, and to the extent necessary, to amend any bilateral agreements regarding the adoption of the Protocol by December 15, 2020.
We adhered to the Protocol on October 22, 2020, and all of our counterparties have adhered to the Protocol. For a discussion of the potential impact of the LIBOR transition, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Executive Overview” and “Item 1A. Risk Factors.”
COVID-19 Pandemic
FINANCE AGENCY SUPERVISORY LETTER - PPP LOANS AS COLLATERAL FOR FHLBANK ADVANCES
On April 23, 2020, the Finance Agency issued a Supervisory Letter (PPP Supervisory Letter) permitting the FHLBanks to accept PPP loans as collateral for advances as “Agency Securities,” given the Small Business Administration’s (SBA) 100 percent guarantee of the unpaid principal balance. On April 20, 2020, the SBA published its third interim final rule related to PPP loans, which explicitly waived certain regulatory requirements that must be satisfied before a member could pledge PPP loans to the FHLBanks as collateral. The PPP Supervisory Letter establishes a series of conditions under which the FHLBanks may accept PPP loans as collateral, which conditions focus on the financial condition of members, collateral discounts, and pledge dollar limits.
On December 27, 2020, the President signed into law an extension of the PPP until March 31, 2021. The April 23, 2020 Supervisory Letter from the Finance Agency allowing FHLBanks to accept PPP loans as collateral remains in effect.
CORONAVIRUS AID, RELIEF, AND ECONOMIC SECURITY ACT (CARES ACT)
The CARES Act was signed into law on March 27, 2020. The $2.2 trillion package was the largest stimulus bill in U.S. history. The CARES Act is in addition to previous relief legislation passed by Congress in March 2020. The legislation provides the following:
•Assistance to business, states, and municipalities;
•Creates a loan program for small businesses, non-profits and physician practices that can be forgiven through employee retention incentives;
•Provides the Treasury Secretary authority to make loans or loan guarantees to states, municipalities, and eligible businesses and loosens some regulations imposed through the Dodd-Frank Act;
•Direct payments to eligible taxpayers and their families;
•Expands eligibility for unemployment insurance and payment amounts; and
•Includes mortgage forbearance provisions and a foreclosure moratorium.
Funding for the PPP, which was created by the CARES Act, was increased with the enactment of subsequent laws, most recently by the Consolidated Appropriations Act, 2021, on December 27, 2020. While some provisions of the CARES Act have expired, others have been extended by regulatory and legislative action. Additional phases of the CARES Act or other COVID-19 pandemic relief legislation may be enacted by Congress. We continue to evaluate the potential impact of such legislation on our business, including its continued impact to the U.S. economy, impacts to mortgages held or serviced by our members and that we accept as collateral, and the impacts on our MPF program.
ADDITIONAL COVID-19 PRESIDENTIAL, LEGISLATIVE AND REGULATORY DEVELOPMENTS
In light of the COVID-19 pandemic, President Biden (and before him, President Trump), through executive orders, governmental agencies, including the SEC, OCC, Federal Reserve, FDIC, National Credit Union Administration, CFTC and the Finance Agency, as well as state governments and agencies, have taken, and may continue to take, actions to provide various forms of relief from, and guidance regarding, the financial, operational, credit, market, and other effects of the pandemic, some of which may have a direct or indirect impact on us or our members. Many of these actions are temporary in nature. We continue to monitor these actions and guidance as they evolve and to evaluate their potential impact on us.
OFF-BALANCE SHEET ARRANGEMENTS
In the ordinary course of business, we engage in financial transactions that, in accordance with GAAP, are not recorded on our Statements of Condition or may be recorded on our Statements of Condition in amounts that are different from the full contract or notional amount of the transactions. For additional information on our off-balance sheet arrangements, refer to “Item 8 - Financial Statements and Supplementary Data - Note 14 - Commitments and Contingencies.”
CONTRACTUAL OBLIGATIONS
The following table shows our contractual obligations due by payment period at December 31, 2020 (dollars in millions):
Payments Due by Period
< 1 Year 1 to 3 Years >3 to 5 Years >5 Years Total
Bonds1
$ 29,224 $ 12,694 $ 4,606 $ 5,406 $ 51,930
Operating leases 1 1 - - 2
Mandatorily redeemable capital stock - 13 1 38 52
Commitments to purchase mortgage loans 177 - - - 177
Pension and postretirement contributions2
4 2 1 4 11
Total $ 29,406 $ 12,710 $ 4,608 $ 5,448 $ 52,172
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.
RISK MANAGEMENT
We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, model, information security, compliance, and strategic risk, as well as capital adequacy. Our primary risk management objective is to manage our assets and liabilities in ways that ensure liquidity is available to our members and protect the par redemption value of our capital stock. We periodically evaluate our risk management policies in order to respond to changes in our financial position and general market conditions.
Market Risk
We define market risk as the risk that changes in market prices may adversely affect our financial condition and performance. Interest rate risk is the principal type of market risk to which we are exposed as our cash flows, and therefore earnings and equity value, can change significantly as interest rates change. Our general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities, and derivatives, which taken together, limit our expected exposure to interest rate risk. Management regularly reviews our sensitivity to interest rate changes by monitoring our market risk measures in parallel and non-parallel interest rate changes and spread and volatility movements.
Our key 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.
The MVCS calculation uses market prices which are computed using interest rates, which allows for negative rates beginning September 30, 2020, 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 the 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 and Compliance Committee of the Board of Directors. We were in compliance with the MVCS policy limits at December 31, 2020 and 2019.
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 both December 31, 2020 and 2019, the 10-year swap rate had been below 2.50 percent 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, 2020 and 2019:
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
2020 $ 175.0 $ 170.1 $ 169.6 $ 171.0 $ 171.9 $ 172.0 $ 171.3
2019 $ 144.7 $ 145.2 $ 146.7 $ 147.2 $ 146.8 $ 145.9 $ 143.4
% Change from Base Case
Down 200 Down 100 Down 50 Base Case Up 50 Up 100 Up 200
2020 2.4 % (0.5) % (0.8) % - % 0.5 % 0.6 % 0.2 %
2019 (1.7) % (1.3) % (0.3) % - % (0.3) % (0.9) % (2.6) %
Policy Limits (declines from base case)
Down 200 Down 100 Down 50 Base Case Up 50 Up 100 Up 200
2020 and 2019 (9.0) % (5.0) % (2.2) % - % (2.2) % (5.0) % (9.0) %
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, 2020 and 2019:
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
2020 $ 171.3 $ 168.7 $ 169.6 $ 171.0 $ 172.0 $ 171.9 $ 169.7
2019 $ 143.2 $ 145.0 $ 146.3 $ 147.2 $ 147.6 $ 147.3 $ 145.8
% Change from Base Case
Down 200 Down 100 Down 50 Base Case Up 50 Up 100 Up 200
2020 0.2 % (1.3) % (0.8) % - % 0.6 % 0.5 % (0.7) %
2019 (2.8) % (1.5) % (0.6) % - % 0.2 % 0.1 % (1.0) %
Policy Limits (declines from base case)
Down 200 Down 100 Down 50 Base Case Up 50 Up 100 Up 200
2020 and 2019 (9.0) % (5.0) % (2.2) % - % (2.2) % (5.0) % (9.0) %
Our base case MVCS was $171.0 at December 31, 2020 compared to $147.2 at December 31, 2019. The change was primarily attributable to the following factors:
•Decreased shares of capital stock: Our capital stock balance decreased at December 31, 2020 when compared to December 31, 2019 due primarily to a decrease in member activity. As we repurchased this capital stock at par, which is below our current MVCS value, our MVCS was positively impacted.
•Increase in retained earnings: We recorded net income of $362 million during 2020, which included net gains on litigation settlements in the amount of $120 million. Dividend payments for 2020 totaled $203 million. The earnings in excess of dividend payments had a positive impact on the market value of our assets, thereby increasing MVCS.
PROJECTED INCOME SENSITIVITY
Projected income sensitivity is measured as the change in spread between projected 24-month return on average capital stock (ROACS) and an average projected reference rate. Effective July 1, 2020, we utilize average projected SOFR as our reference rate. Prior to July 1, 2020, we utilized average projected three-month LIBOR as our reference rate.
We monitor and manage projected 24-month income sensitivity in an effort to limit the short-term earnings volatility of the Bank. The projected 24-month income sensitivity is based on forward interest rates, which allows for negative rates beginning September 30, 2020, business, and risk management assumptions.
Our policy limits are based on 24-month projected ROACS spread to the average projected reference rate declines from base spread for the up and down 100 and 200 basis points parallel interest rate change scenarios as well as the up and down 100 basis points non-parallel interest rate change scenarios. Additionally, there is a limit on the decline from base ROACS for certain basis shock scenarios to limit basis risk exposure. Any policy limit breach requires a prompt action to address the measure outside of the policy limit.
We were in compliance with the projected 24-month income sensitivity policy limits as of December 31, 2020 and 2019.
The following table shows our 24-month projected ROACS spread to the average projected reference rate and associated policy limits, assuming instantaneous parallel shifts in interest rates at December 31, 2020 and 2019:
ROACS Spread to Reference Rate % Change from Base Case
Down 200 Down 100 Base Case Up 100 Up 200
2020 (2.3) % (1.6) % - % 2.0 % 3.4 %
2019 (2.5) % (1.3) % - % 0.1 % 0.3 %
Policy Limits
Down 200 Down 100 Base Case Up 100 Up 200
2020 and 2019 (3.0) % (2.0) % - % (2.0) % (3.0) %
The following table shows our 24-month projected ROACS spread to the average projected reference rate and associated policy limits, assuming instantaneous non-parallel shifts in interest rates at December 31, 2020 and 2019:
ROACS Spread to Reference Rate
% Change from Base Case
Down 100 Base Case Up 100
2020 (0.5) % - % 0.7 %
(0.6) % - % - %
1 The change from base case for the up 100 basis point scenario was less than 0.1 percent.
Policy Limits
Down 100 Base Case Up 100
2020 and 2019 (1.5) % - % (1.5) %
The following table shows our change from base 24-month projected ROACS for index specific shocks based on a two standard deviation of historical monthly changes in spread and associated policy limits at December 31, 2020 and 2019:
ROACS
% Change from Base Case
2020 (1.4) %
2019 (1.1) %
Policy Limits
Base Case
2020 and 2019 (2.5) %
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 new 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 7 - Derivatives and Hedging Activities.”
The following table summarizes our interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, hedge accounting designation, and notional amount as of December 31, 2020 and 2019 (dollars in millions):
December 31,
Hedged Item / Hedging Instrument Hedging Strategy Hedge Accounting Designation 2020
Notional Amount 2019
Notional Amount
Advances
Pay-fixed, receive floating interest rate swap (without options)1
Converts the advance’s fixed rate to a variable rate index. Fair Value $ 14,913 $ 12,703
Economic 47 11
Pay-fixed, receive floating interest rate swap (with options) Converts the advance’s fixed rate to a variable rate index and offsets option risk in the advance. Fair Value 1,517 1,605
Economic 4 -
Investments
Pay-fixed, receive floating interest rate swap Converts the investment’s fixed rate to a variable rate index. Fair Value 6,735 6,003
Economic 1,565 827
Mortgage Loans
Mortgage loan purchase commitment Protects against fair value risk associated with fixed rate mortgage loan purchase commitments. Economic 177 127
Forward settlement agreement Protects against changes in market value of fixed rate mortgage loan purchase commitments resulting from changes in interest rates. Economic 169 122
Bonds
Receive-fixed or structured, pay floating interest rate swap (without options) Converts the bond’s fixed or structured rate to a variable rate index. Fair Value 10,388 17,273
Receive-fixed or structured, pay floating interest rate swap (with options) Converts the bond’s fixed or structured rate to a variable rate index and offsets option risk in the bond. Fair Value - 100
Offsetting Positions
Pay-fixed, receive-float interest rate swap and receive-fixed, pay-float interest rate swap Represents offsetting positions on interest rate swaps. Economic 200 200
Total $ 35,715 $ 38,971
1 Includes the notional amount of interest rate swaps in fair value hedge relationships for forward starting advance firm commitments of $252 million and $522 million at December 31, 2020 and 2019.
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 prior to maturity, by entering into a cancelable interest rate swap.
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 functions 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. Treasury obligations, other 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 and simultaneously execute interest rate swaps to hedge the basis risk of the variable interest rate debt. Interest rate swaps used to hedge variable interest rate debt do not qualify for hedge accounting and 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 with the Federal Home Loan Bank of Seattle (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 maintain a targeted level of retained earnings to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend.
For a discussion of our key capital adequacy measure, MVCS, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Risk Management - Market Risk - Market Value of Capital Stock Sensitivity.”
For additional information on our compliance with regulatory capital requirements as well as our targeted retained earnings, refer to “Item 7. 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 financial obligations as they come due or meet the credit needs of our members in a timely and cost efficient manner. To manage this risk, we maintain liquidity in accordance with Finance Agency regulations. For additional information on 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, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products). The estimated value of the collateral required to secure each borrower’s credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal or market value, as applicable, of the collateral. We also have policies and procedures for validating the reasonableness of our collateral valuations. In addition, we perform collateral verifications and on-site reviews based on the risk profile of the borrower. Management believes that these policies effectively manage our credit risk from advances.
Eligible collateral includes:
•fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages;
•loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae;
• cash deposited with us; and
•other real estate-related collateral acceptable to us, such as second lien mortgages, home equity lines of credit, tax-exempt municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and we can perfect a security interest in it.
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 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 a default or a 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.
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, as applicable, 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.
As a result of recent stressed market conditions stemming from COVID-19, we are taking additional steps to monitor our credit risk on advances. These steps include increased frequency of collateral valuation and identifying, analyzing, and monitoring borrowers with higher risk profiles.
At December 31, 2020 and 2019, borrowers pledged $280.5 billion and $329.4 billion of collateral (net of applicable discounts) to support activity with us, including advances. At December 31, 2020 and 2019, 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,
2020 2019
Sum of Total Exposure % Collateralized Sum of Total Exposure % Collateralized
Commercial banks $ 22,882 795 % $ 57,455 421 %
Savings institutions 790 476 1,431 432
Credit unions 5,645 444 6,678 360
Non-captive insurance companies 26,099 143 20,846 145
Captive insurance companies1
- 112 3,798 100
CDFIs 20 114 14 170
Housing associates 50 281 100 172
Non-member borrowers 196 144 273 146
Total borrowers $ 55,682 447 % $ 90,595 339 %
1 The amount at December 31, 2020 was less than $1 million.
The following table shows the amount of collateral pledged to us (net of applicable discounts) by collateral type (dollars in billions):
December 31,
2020 2019
Collateral Type Discount Range1
Amount % of Total Discount Range1
Amount % of Total
Single-family loans 19-36% $ 115.0 41 18-32% $ 119.9 36
Multi-family loans 33 14.1 5 33 12.2 4
Other real estate 20-58 116.8 42 18-58 167.3 51
Securities
Cash, agency and RMBS2
0-27 21.1 7 0-30 18.5 6
CMBS3
15 7.5 3 12-23 6.4 2
Government-insured loans 9-17 2.5 1 9-16 1.3 -
Secured small business and agribusiness loans 28 3.5 1 28 3.8 1
Total $ 280.5 100 $ 329.4 100
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).
We evaluate advances for credit losses on a quarterly basis. We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. We have never experienced a credit loss on our advances. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no expected credit losses on our advances as of December 31, 2020. For the same reasons, we did not record any allowance for credit losses for our advances at December 31, 2019. Refer to “Item 8. Financial Statements and Supplementary Data - Note 5 - Advances” for additional information.
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.
As a result of recent deteriorating market and economic conditions stemming from COVID-19, we may be subject to increased credit risk on our mortgage loan portfolio. To assist homeowners affected by the current economic conditions, we have implemented several programs, including temporary mortgage payment forbearance and a temporary moratorium on foreclosures and evictions. The extent to which these programs will impact our mortgage portfolio and results of operations
will depend on the number of homeowners who partake in these programs in the months to come. In the second quarter of 2020, we also elected to apply the troubled debt restructuring (TDR) relief provided by the CARES Act on our conventional mortgage loan portfolio. For additional information on the CARES Act and activity, refer to “Item 8. Financial Statements and Supplementary Data - Note 6 - Mortgage Loans Held for Portfolio.”
The following table presents the unpaid principal balance of our mortgage loan portfolio by product type (dollars in millions):
December 31,
Product Type 2020 2019
Conventional $ 7,646 $ 8,712
Government 481 496
Total mortgage loan unpaid principal balance $ 8,127 $ 9,208
We manage the credit risk on mortgage loans by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, and (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs.
We evaluate mortgage loans for credit losses on a quarterly basis and establish an allowance for credit losses to reflect management’s estimate of expected credit losses inherent in the portfolio. We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020.
Conventional Mortgage Loans. We determine our allowance for credit losses on conventional loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions. Conventional mortgage loans are evaluated collectively when similar risk characteristics exists. Conventional loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis. In limited instances, we may incorporate a management adjustment in the allowance for credit losses for conventional mortgage loans due to changes in economic and business conditions or other factors that may not be fully captured in our model. At both December 31, 2020 and 2019, the allowance for credit losses on our conventional loans was $1 million.
Government-Insured Mortgage Loans. We invest in government-insured fixed rate mortgage loans 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.
We have never experienced a credit loss on our government-insured mortgage loans. At December 31, 2020 and December 31, 2019, we determined no allowance for credit losses was necessary on our government-insured mortgage loans.
Refer to “Item 8. Financial Statements and Supplementary Data - Note 6 - Mortgage Loans Held for Portfolio” for additional information on our allowance for credit losses and the payment status of our conventional mortgage loans.
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,
2020 2019 2020 2019
FICO® Score1
MPF MPP
<620 1 % 1 % - % - %
620 to < 660 5 5 5 4
660 to < 700 13 12 19 19
700 to < 740 20 20 32 33
>= 740 61 62 44 44
Total 100 % 100 % 100 % 100 %
Weighted average FICO score 746 744 730 731
1 Represents the lowest original FICO® score of the borrowers and co-borrowers.
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,
2020 2019 2020 2019
Loan-to-Value1
MPF MPP
<= 60% 13 % 11 % 21 % 21 %
> 60% to 70% 13 13 21 20
> 70% to 80% 54 56 50 51
> 80% to 90%2
10 10 4 4
> 90%2
10 10 4 4
Total 100 % 100 % 100 % 100 %
Weighted average loan-to-value 75 % 77 % 70 % 71 %
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. All percentages are calculated based on unpaid principal balances as of the applicable period end.
December 31,
2020 2019
Iowa 32 % 33 %
Missouri 22 21
Minnesota 18 17
South Dakota 8 9
Oregon 3 2
All others 17 18
Total 100 % 100 %
The following table shows the five largest state concentrations of our conventional MPP portfolio. All percentages are calculated based on unpaid principal balances as of the applicable period end.
December 31,
2020 2019
California 28 % 28 %
Illinois 11 11
New York 9 9
Florida 6 6
Massachusetts 6 6
All others 40 40
Total 100 % 100 %
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.
In light of recent market volatility stemming from COVID-19, we are taking additional steps to monitor our credit risk on investments. These steps include temporarily suspending business to Bank counterparties with increased credit risk and performing additional analysis on our unsecured portfolios. In addition, we continue to monitor market volatility and counterparty ratings, counterparty pricing, news, sovereign and counterparty research, market research and articles, and other COVID-19 analysis.
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, 2020, 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, 2020, we were in compliance with the regulatory limits established for unsecured credit.
Our short-term portfolio may include, but is not limited to, interest-bearing deposits, federal funds sold, securities purchased under agreements to resell, certificates of deposit, commercial paper, and U.S. Treasury obligations. Our long-term portfolio may include, but is not limited to, U.S. Treasury obligations, other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. We consider our long-term investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC to be of the highest credit quality and therefore those exposures are not monitored with other unsecured investments. Given the credit quality of our unsecured long-term investments, our unsecured credit risk is primarily in the short-term portfolio.
We primarily limit short-term unsecured credit exposure to the following overnight investment types:
•Interest-bearing deposits. Primarily consists of unsecured deposits that earn interest.
•Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions.
•Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.
At December 31, 2020, our unsecured short-term investment exposure consisted of overnight interest-bearing deposits and federal funds sold. The following table presents our unsecured short-term investment exposure by counterparty credit rating and domicile at December 31, 2020 (excluding accrued interest receivable) (dollars in millions):
Credit Rating1,2
Domicile of Counterparty AA A Total
Domestic $ - $ 400 $ 400
U.S. branches and agency offices of foreign commercial banks
Australia 800 - 800
Canada - 1,550 1,550
Finland 300 - 300
Germany 795 - 795
Netherlands - 250 250
Total U.S. branches and agency offices of foreign commercial banks 1,895 1,800 3,695
Total unsecured short-term investment exposure $ 1,895 $ 2,200 $ 4,095
1 Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.
2 Table excludes investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC.
The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
December 31, 2020
Credit Rating1
AAA AA A BBB Unrated2
Total
Interest-bearing deposits $ - $ 1 $ 400 $ - $ - $ 401
Securities purchased under agreements to resell - 2,400 500 - 1,900 4,800
Federal funds sold - 1,895 1,800 - - 3,695
Investment securities:
Mortgage-backed securities
GSE single-family - 1,671 - - - 1,671
GSE multifamily - 8,613 - - - 8,613
U.S. obligations single-family3
- 3,547 - - - 3,547
Private-label residential - 3 1 2 - 6
Total mortgage-backed securities - 13,834 1 2 - 13,837
Non-mortgage-backed securities
U.S. Treasury obligations3
- 4,069 - - - 4,069
Other U.S. obligations3
- 1,786 - - - 1,786
GSE and Tennessee Valley Authority obligations - 1,465 - - - 1,465
State or local housing agency obligations 700 196 - - - 896
Other 456 92 - - - 548
Total non-mortgage-backed securities 1,156 7,608 - - - 8,764
Total investments $ 1,156 $ 25,738 $ 2,701 $ 2 $ 1,900 $ 31,497
1 Represents either the lowest credit rating available for each investment based on an NRSRO, or the guarantor credit rating, if applicable. In instances where an NRSRO rating or guarantor rating is not available for the investment, the investment is classified as unrated.
2 Represents secured securities purchased under agreements to resell with no NRSRO or guarantor rating.
3 Represents investment securities backed by the full faith and credit of the U.S. Government.
The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
December 31, 2019
Credit Rating1
AAA AA A BBB BB Unrated2
Total
Interest-bearing deposits $ - $ 1 $ - $ - $ - $ - $ 1
Securities purchased under agreements to resell - 1,500 2,200 - - 10,250 13,950
Federal funds sold - 1,700 2,905 - - - 4,605
Investment securities:
Mortgage-backed securities
GSE single-family - 2,401 - - - - 2,401
GSE multifamily - 8,134 - - - - 8,134
U.S. obligations single-family3
- 4,064 - - - - 4,064
U.S. obligations commercial3
- 1 - - - - 1
Private-label residential - 4 1 1 1 - 7
Total mortgage-backed securities - 14,604 1 1 1 - 14,607
Non-mortgage-backed securities
Other U.S. obligations3
- 2,277 - - - - 2,277
GSE and Tennessee Valley Authority obligations - 1,504 - - - - 1,504
State or local housing agency obligations 769 208 - - - - 977
Other 445 99 - - - - 544
Total non-mortgage-backed securities 1,214 4,088 - - - - 5,302
Total investments $ 1,214 $ 21,893 $ 5,106 $ 1 $ 1 $ 10,250 $ 38,465
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 investment is classified as unrated.
2 Represents secured securities purchased under agreements to resell with no NRSRO or guarantor rating.
3 Represents investment securities backed by the full faith and credit of the U.S. Government.
We evaluate investments for credit losses on a quarterly basis. We adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. At December 31, 2020, we determined no allowance for credit losses was necessary on our investments. Refer to “Item 8. Financial Statements and Supplementary Data - Note 4 - Investments” for additional information our allowance for credit losses.
Mortgage-Backed Securities
We are exposed to mortgage asset credit risk through our investments in MBS. Mortgage asset credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by a number of factors, including the strength and ability to guarantee the payments from the agency that created the structure, underlying loan performance, and other economic factors in the local market or nationwide. We limit our purchases of MBS to those guaranteed by the U.S. Government or issued by a GSE. Our risk management policies prohibit new purchases of private-label MBS. We perform ongoing analysis on these investments to determine potential credit issues.
DERIVATIVES
We execute most of our derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).
We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in our policies and Finance Agency regulations.
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, 2020
Credit Rating1
Notional Amount Net Derivatives
Fair Value Before Collateral Cash Collateral Pledged
To (From) Counterparty Net Credit Exposure
to Counterparties
Non-member counterparties:
Asset positions with credit exposure
Uncleared derivatives
BBB2
$ 29 $ 1 $ (1) $ -
Liability positions with credit exposure
Uncleared derivatives
A2
1,141 (35) 35 -
BBB2
966 (34) 34 -
Cleared derivatives3
29,094 (8) 234 226
Total derivative positions with credit exposure to non-member counterparties 31,230 (76) 302 226
Member institutions4
175 1 - 1
Total 31,405 $ (75) $ 302 $ 227
Derivative positions without credit exposure 4,310
Total notional $ 35,715
1 Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable.
2 Net credit exposure is less than $1 million.
3 Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing’s parent, CME Group Inc. was rated Aa3 by Moody’s and AA- by Standard and Poor’s at December 31, 2020.
4 Represents mortgage loan purchase commitments with our member institutions.
The following table shows our derivative counterparty credit exposure (dollars in millions):
December 31, 2019
Notional Amount Net Derivatives
Fair Value Before Collateral Cash Collateral Pledged
To (From) Counterparty Net Credit Exposure
to Counterparties
Non-member counterparties:
Asset positions with credit exposure
Uncleared derivatives
BBB2
$ 3 $ - $ - $ -
Cleared derivatives3
20,881 2 83 85
Liability positions with credit exposure
Uncleared derivatives
AA 137 (29) 30 1
A 4,448 (98) 102 4
BBB 1,763 (37) 38 1
Cleared derivatives3
11,475 - 11 11
Total derivative positions with credit exposure to non-member counterparties 38,707 (162) 264 102
Member institutions2,4
118 - - -
Total 38,825 $ (162) $ 264 $ 102
Derivative positions without credit exposure 146
Total notional $ 38,971
1 Represents either the lowest credit rating available for each counterparty based on an NRSRO, or the guarantor credit rating, if applicable.
2 Net credit exposure is less than $1 million.
3 Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing’s parent, CME Group Inc. was rated Aa3 by Moody’s and AA-by Standard and Poor’s at December 31, 2019.
4 Represents mortgage loan purchase commitments with our member institutions.
Consistent with the additional analysis and monitoring on our other Bank products, we are taking additional steps to monitor our derivatives’ credit risk given the recent market volatility stemming from COVID-19. In addition, we continue to monitor market volatility and counterparty ratings, counterparty pricing, news, sovereign and counterparty research, market research and articles, and other COVID-19 analysis.
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. Management has established policies, procedures, and controls to reduce the likelihood of operational risk. We perform annual risk assessments to identify, assess, mitigate, and report on operational risks outside of the Board’s risk appetite. Due to the manual nature of many of our processes, our operational risk exposure is closely monitored.
In response to the outbreak of COVID-19, the majority of our employees continue to work remotely, with a limited number of employees voluntarily working from our headquarters. Many of our members, vendors, and regulators continue to work remotely. While our operations have changed as a result of the global pandemic, we currently do not believe the current working arrangement creates additional operational risk. Refer to “Item 1A. Risk Factors” for additional information.
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.
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 and credit 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.
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 have recently strengthened our cyber-defenses and expect to continue to do so.
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 strategic business decisions, poor implementation and/or execution of strategic plans, or a disproportionate response to changes in the industry and operating environment. We consider 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. For additional information on some of the more important risks we face, refer to “Item 1A. Risk Factors.”

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AUDITED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm
Statements of Condition
Statements of Income
Statements of Comprehensive Income
Statements of Capital
Statements of Cash Flows
Notes to the Financial Statements
Background Information
Note 1 - Summary of Significant Accounting Policies
Note 2 - Recently Adopted and Issued Accounting Guidance
Note 3 - Cash and Due from Banks
Note 4 - Investments
Note 5 - Advances
Note 6 - Mortgage Loans Held for Portfolio
Note 7 - Derivatives and Hedging Activities
Note 8 - Deposits
Note 9 - Consolidated Obligations
Note 10 - Affordable Housing Program
Note 11 - Capital
Note 12 - Pension and Postretirement Benefit Plans
Note 13 - Fair Value
Note 14 - Commitments and Contingencies
Note 15 - Activities with Stockholders
Note 16 - Activities with Other FHLBanks
Note 17 - Subsequent Events
SUPPLEMENTARY DATA:
Supplementary Financial Data (Unaudited)
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders 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, 2020 and 2019, and the related statements of income, comprehensive income, capital and cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
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 Report of Management on Internal Control over Financial Reporting appearing under Item 9A. 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.
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.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Interest-Rate Derivatives and Related Hedged Items
As described in Notes 7 and 13 to the financial statements, the Bank uses derivatives to manage its exposure to interest-rate risks and to reduce funding costs, among other objectives. The total notional amount of derivatives as of December 31, 2020 was $36 billion, of which 94 percent were designated as hedging instruments, and the fair value of derivative assets and liabilities as of December 31, 2020 was $227 million and $4 million, respectively. The fair values of interest-rate derivatives and related hedged items are generally estimated using standard valuation techniques such as discounted cash flow analyses and comparisons to similar instruments. The discounted cash flow model uses market-observable inputs, such as discount rate, forward interest rate, and volatility assumptions.
The principal considerations for our determination that performing procedures relating to the valuation of interest-rate derivatives and related hedged items is a critical audit matter are the significant audit effort in evaluating the discount rate, forward interest rate, and volatility assumptions used to fair value these derivatives and related hedged items, and the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the valuation of interest-rate derivatives and hedged items, including controls over the model, data and assumptions. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in developing an independent range of prices for a sample of interest rate derivatives and related hedged items and comparison of management’s estimate to the independently developed ranges. Developing the independent range of prices involved testing the completeness and accuracy of data provided by management and independently developing the discount rate, forward interest rate, and volatility assumptions.
/s/PricewaterhouseCoopers LLP
Detroit, Michigan
March 10, 2021
We have served as the Bank’s auditor since 1990.
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in millions, except capital stock par value)
December 31,
2020 2019
ASSETS
Cash and due from banks (Note 3) $ 978 $ 1,029
Interest-bearing deposits (Note 4) 401 1
Securities purchased under agreements to resell (Note 4) 4,800 13,950
Federal funds sold (Note 4) 3,695 4,605
Investment securities (Note 4)
Trading securities 4,875 888
Available-for-sale securities (amortized cost of $15,858 and $16,603)
15,910 16,651
Held-to-maturity securities (fair value of $1,921 and $2,439)
1,816 2,370
Total investment securities 22,601 19,909
Advances (Note 5) 46,530 80,360
Mortgage loans held for portfolio, net of allowance for credit losses of $1 and $1 (Note 6)
8,242 9,334
Accrued interest receivable 97 195
Derivative assets, net (Note 7) 227 102
Other assets, net 120 118
TOTAL ASSETS $ 87,691 $ 129,603
LIABILITIES
Deposits (Note 8)
Interest-bearing $ 1,635 $ 987
Non-interest-bearing 273 125
Total deposits 1,908 1,112
Consolidated obligations (Note 9)
Discount notes 27,345 29,531
Bonds 52,254 91,553
Total consolidated obligations 79,599 121,084
Mandatorily redeemable capital stock (Note 11) 52 206
Accrued interest payable 145 252
Affordable Housing Program payable (Note 10) 162 157
Derivative liabilities, net (Note 7) 4 1
Other liabilities 81 65
TOTAL LIABILITIES 81,951 122,877
Commitments and contingencies (Note 14)
CAPITAL (Note 11)
Capital stock - Class B putable ($100 par value); 34 and 45 issued and outstanding shares
3,341 4,517
Retained earnings
Unrestricted 1,775 1,661
Restricted 576 504
Total retained earnings 2,351 2,165
Accumulated other comprehensive income (loss) 48 44
TOTAL CAPITAL 5,740 6,726
TOTAL LIABILITIES AND CAPITAL $ 87,691 $ 129,603
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)
For the Years Ended December 31,
2020 2019 2018
INTEREST INCOME
Advances $ 950 $ 2,466 $ 2,443
Interest-bearing deposits 1 3 1
Securities purchased under agreements to resell 33 179 73
Federal funds sold 31 161 107
Trading securities 48 29 31
Available-for-sale securities 206 506 504
Held-to-maturity securities 38 79 87
Mortgage loans held for portfolio 258 285 252
Total interest income 1,565 3,708 3,498
INTEREST EXPENSE
Consolidated obligations - Discount notes 172 817 736
Consolidated obligations - Bonds 915 2,289 2,095
Deposits 1 14 14
Mandatorily redeemable capital stock 5 12 18
Total interest expense 1,093 3,132 2,863
NET INTEREST INCOME 472 576 635
Provision (reversal) for credit losses on mortgage loans 1 - -
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES 471 576 635
OTHER INCOME (LOSS)
Net gains (losses) on trading securities 17 28 (15)
Net gains (losses) on derivatives and hedging activities (48) (35) 19
Gains on litigation settlements, net 120 - -
Other, net 32 27 16
Total other income (loss) 121 20 20
OTHER EXPENSE
Compensation and benefits 103 65 62
Contractual services 16 16 12
Professional fees 25 33 19
Other operating expenses 22 31 26
Federal Housing Finance Agency 10 10 9
Office of Finance 6 7 7
Other, net 7 6 7
Total other expense 189 168 142
NET INCOME BEFORE ASSESSMENTS 403 428 513
Affordable Housing Program assessments 41 44 53
NET INCOME $ 362 $ 384 $ 460
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
For the Years Ended December 31,
2020 2019 2018
Net income $ 362 $ 384 $ 460
Other comprehensive income (loss)
Net unrealized gains (losses) on available-for-sale securities 4 (39) (31)
Pension and postretirement benefits - (1) 1
Total other comprehensive income (loss) 4 (40) (30)
TOTAL COMPREHENSIVE INCOME (LOSS) $ 366 $ 344 $ 430
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in millions)
Capital Stock
Class B (putable) Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Capital
Shares Par Value Unrestricted Restricted Total
BALANCE, DECEMBER 31, 2017 51 $ 5,068 $ 1,504 $ 335 $ 1,839 $ 114 $ 7,021
Comprehensive income (loss) - - 368 92 460 (30) 430
Proceeds from issuance of capital stock 80 7,987 - - - - 7,987
Repurchases/redemptions of capital stock (76) (7,588) - - - - (7,588)
Net shares reclassified (to) from mandatorily redeemable capital stock (1) (53) - - - - (53)
Cash dividends on capital stock - - (249) - (249) - (249)
BALANCE, DECEMBER 31, 2018 54 $ 5,414 $ 1,623 $ 427 $ 2,050 $ 84 $ 7,548
Comprehensive income (loss) - - 307 77 384 (40) 344
Proceeds from issuance of capital stock 72 7,205 - - - - 7,205
Repurchases/redemptions of capital stock (81) (8,091) - - - - (8,091)
Net shares reclassified (to) from mandatorily redeemable capital stock - (11) - - - - (11)
Cash dividends on capital stock - - (269) - (269) - (269)
BALANCE, DECEMBER 31, 2019 45 $ 4,517 $ 1,661 $ 504 $ 2,165 $ 44 $ 6,726
Adjustment for cumulative effect of accounting change (Note 2) - - 1 - 1 - 1
Comprehensive income (loss) - - 290 72 362 4 366
Proceeds from issuance of capital stock 34 3,376 - - - - 3,376
Repurchases/redemptions of capital stock (45) (4,545) - - - - (4,545)
Net shares reclassified (to) from mandatorily redeemable capital stock - (7) - - - - (7)
Partial recovery of prior capital distribution to Financing Corporation (Note 11) - - 26 - 26 - 26
Cash dividends on capital stock - - (203) - (203) - (203)
BALANCE, DECEMBER 31, 2020 34 $ 3,341 $ 1,775 $ 576 $ 2,351 $ 48 $ 5,740
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
For the Years Ended December 31,
2020 2019 2018
OPERATING ACTIVITIES
Net income $ 362 $ 384 $ 460
Adjustments to reconcile net income to net cash provided by (used in) operating activities
Depreciation and amortization 16 (60) 86
Net (gains) losses on trading securities (17) (28) 15
Net change in derivatives and hedging activities (251) (32) 147
Other adjustments, net 8 4 -
Net change in:
Accrued interest receivable 45 (22) (163)
Other assets (4) (12) 4
Accrued interest payable (107) (15) 57
Other liabilities 4 9 14
Total adjustments (306) (156) 160
Net cash provided by (used in) operating activities 56 228 620
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits (643) (143) 69
Securities purchased under agreements to resell 9,150 (9,250) (100)
Federal funds sold 910 (455) 100
Trading securities
Proceeds from sales 3,449 - -
Proceeds from maturities and paydowns 1,759 55 247
Purchases (9,178) - -
Available-for-sale securities
Proceeds from maturities and paydowns 2,423 2,668 3,541
Purchases (1,437) - (1,812)
Held-to-maturity securities
Proceeds from maturities and paydowns 539 611 641
Advances
Repaid 180,921 290,808 301,462
Originated (146,824) (264,580) (305,197)
Mortgage loans held for portfolio
Principal collected 3,345 1,555 903
Purchased (2,295) (3,074) (1,662)
Other investing activities, net (6) (6) (20)
Net cash provided by (used in) investing activities 42,113 18,189 (1,828)
The accompanying notes are an integral part of these financial statements.
FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
For the Years Ended December 31,
2020 2019 2018
FINANCING ACTIVITIES
Net change in deposits 803 5 (5)
Borrowings from other FHLBanks - (500) (100)
Net payments on derivative contracts with financing elements - - (1)
Net proceeds from issuance of consolidated obligations
Discount notes 178,910 121,189 161,907
Bonds 42,545 66,684 46,812
Payments for maturing and retiring consolidated obligations
Discount notes (181,020) (134,443) (155,794)
Bonds (81,951) (69,227) (51,962)
Proceeds from issuance of capital stock 3,376 7,205 7,987
Proceeds from issuance of mandatorily redeemable capital stock 18 1 2
Payments for repurchases/redemptions of capital stock (4,545) (8,091) (7,588)
Payments for repurchases/redemptions of mandatorily redeemable capital stock (179) (61) (185)
Partial recovery of prior capital distribution to Financing Corporation 26 - -
Cash dividends paid (203) (269) (249)
Net cash provided by (used in) financing activities (42,220) (17,507) 824
Net increase (decrease) in cash and due from banks (51) 910 (384)
Cash and due from banks at beginning of the period 1,029 119 503
Cash and due from banks at end of the period $ 978 $ 1,029 $ 119
SUPPLEMENTAL DISCLOSURES
Cash transactions:
Interest paid $ 1,307 $ 3,245 $ 2,740
Affordable Housing Program payments 36 40 44
Non-cash transactions:
Capitalized interest on reverse mortgage investment securities 51 122 95
Capital stock reclassified to (from) mandatorily redeemable capital stock, net 7 11 53
Traded but not settled investment security purchases 18 - -
The accompanying notes are an integral part of these financial statements.
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 that is exempt from all federal, state, and local taxation (except real property taxes and certain employer payroll taxes) and is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) and were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act) in order to serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank is regulated by the Federal Housing Finance Agency (Finance Agency).
The Bank is a cooperative, meaning it is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain capital stock to support business activities with the Bank. In return, the Bank provides a readily available source of funding and liquidity to its member institutions and eligible housing associates in Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. Commercial banks, savings institutions, credit unions, insurance companies, and community development financial institutions (CDFIs) may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by the Bank’s Board of Directors.
Note 1 - 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).
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 related hedged items and certain investment securities that are reported at fair value on the Statements of Condition. Actual results could significantly differ from these estimates.
Fair Value. The fair value amounts, recorded on 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 13 - 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 7 - Derivatives and Hedging Activities.”
At December 31, 2020 and 2019, the Bank had $5 billion and $14 billion in securities purchased under agreements to resell. There were no offsetting liabilities related to these securities at December 31, 2020 and 2019.
Adoption of Measurement of Credit Losses on Financial Instruments Accounting Guidance
Beginning January 1, 2020, the Bank adopted, on a modified retrospective basis, new accounting guidance pertaining to the measurement of credit losses on financial instruments (the CECL accounting guidance) that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as available-for-sale securities to be recorded through an allowance for credit losses. See “Note 2 - Recently Adopted and Issued Accounting Guidance” for adoption details. Prior periods were not revised to conform to the new basis of accounting. Key changes to the Bank’s accounting policies are detailed within this note.
Interest-Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold
The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold. 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 collateralized loans. Federal funds sold consist of short-term, unsecured loans generally transacted by counterparties that are considered by the Bank to be of investment quality. All of these investments provide short-term liquidity and are carried at amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition.
Beginning January 1, 2020, the Bank adopted the CECL accounting guidance. As such, these investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The Bank uses the collateral maintenance provision practical expedient for securities purchased under agreements to resell. Consequently, a credit loss would be recognized if there is a collateral shortfall which the Bank does not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s amortized cost. Prior to January 1, 2020, securities purchased under agreements to resell were evaluated for impairment if there was a collateral shortfall in which the Bank did not believe the counterparty would replenish in accordance with the contractual terms. See “Note 4 - Investments” for details on the allowance methodologies relating to these investments.
Debt 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 generally 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. For non-MBS callable AFS and HTM investment securities purchased at a premium, the Bank amortizes the premium to the earliest contractual call date. 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.” Beginning January 1, 2019, the Bank adopted new hedge accounting guidance, which impacted the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges, including fair value hedges of AFS 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 in AFS interest income together with the related change in fair value of the derivative, and records the remainder of the change in fair value through AOCI as “Net unrealized gains (losses) on available-for-sale securities.” Prior to January 1, 2019, for AFS securities that were hedged and qualified as a fair value hedge, the Bank recorded 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.”
Additionally, beginning January 1, 2020, the Bank adopted the CECL accounting guidance. As such, the Bank evaluates its individual AFS securities for impairment by comparing the security’s fair value to its amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition. Impairment may exist when the fair value of the investment is less than its amortized cost (i.e. in an unrealized loss position). In assessing whether a credit loss exists on an impaired security, the Bank considers whether there would be a shortfall in receiving all cash flows contractually due. When a shortfall is considered possible, the Bank compares the present value of cash flows to be collected from the security with the amortized cost basis of the security. If the present value of cash flows is less than amortized cost, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance is limited by the amount of the unrealized loss. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately, if applicable.
If management intends to sell an impaired security classified as AFS, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in other income (loss). If management does not intend to sell an impaired security classified as AFS and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to “Net unrealized gains (losses) on available-for-sale securities” within AOCI. Prior to January 1, 2020, the Bank evaluated its individual AFS securities in an unrealized loss position for other-than-temporary impairment (OTTI) on a quarterly basis, as discussed further below.
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. Accrued interest receivable is recorded separately on the Statements of Condition.
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.
Beginning January 1, 2020, the Bank adopted the CECL accounting guidance. As such, the Bank evaluates its HTM securities for impairment on a collective, or pooled basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. An allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately, if applicable. If management intends to sell an impaired security classified as HTM, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in other income (loss). Prior to January 1, 2020, the Bank evaluated its individual HTM securities in an unrealized loss position for OTTI on a quarterly basis, as discussed further below.
Investment Securities - Other-Than-Temporary Impairment
Beginning January 1, 2020, the Bank adopted the CECL accounting guidance. As a result, the accounting guidance related to OTTI for investments was superseded as of that date.
Prior to January 1, 2020, the Bank evaluated its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. A security was considered impaired when its fair value was less than its amortized cost basis. The Bank considered an OTTI to have occurred under any of the following conditions:
•it had an intent to sell the impaired debt security;
•it believed it was more likely than not that it would be required to sell the impaired debt security before the recovery of its amortized cost basis; or
•it did not expect to recover the entire amortized cost basis of the impaired debt security.
Recognition of OTTI. If either of the first two conditions was met, the Bank recognized 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 was met, the Bank performed an analysis to determine if it would recover the entire amortized cost basis of the debt security, which included a cash flow analysis for private-label mortgage-backed securities (MBS). The present value of the cash flows expected to be collected was compared to the amortized cost basis of the debt security to determine whether a credit loss existed. If there was 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 was 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) was recognized in earnings, while the amount related to all other factors was recognized in AOCI. The credit loss on a debt security was limited to the amount of that security’s unrealized losses. The total OTTI was presented on the Statements of Income with an offset for the amount of the non-credit portion of OTTI that was recognized in AOCI, if applicable.
See “Note 4 - Investments” for details on the allowance methodologies relating to AFS and HTM securities.
Advances
Advances (secured loans to members, former members, or eligible housing associates) are carried at amortized cost,
which is net of premiums, discounts, and fair value hedging adjustments unless the Bank has elected the fair value option, in which case, the advances are carried at fair value. For advances carried at amortized cost, accrued interest receivable is recorded separately on the Statements of Condition. The 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.
Beginning January 1, 2020, the Bank adopted the CECL accounting guidance. As such, advances carried at amortized cost are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately, if applicable. Prior to January 1, 2020, the Bank evaluated advances to determine whether an allowance for credit losses was necessary if it was probable an impairment had occurred in the Bank’s advance portfolio as of the balance sheet date and the amount of loss could be reasonably estimated. See “Note 5 - Advances” for details on the allowance methodology relating to advances.
Past Due and Non-Accrual Advances. An advance is considered past due for financial reporting purposes if default of contractual principal or interest exists for a period of 30 days or more. Past due advances may consist of advances still accruing interest or advances on non-accrual status. An advance is placed on non-accrual status when full payment of principal and interest is not reasonably assured, regardless of delinquency status, or when principal or interest has been in default for a period of 90 days or more, unless the advance is both well-secured and in the process of collection. In general, the Bank would not expect advances to be placed on non-accrual status as they are required by regulation to be fully secured by underlying collateral.
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 the hedged item fair value hedging adjustments in advance interest income on the Statements of Income.
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 on 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 the hedged item 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. Accrued interest receivable is recorded separately on the Statements of Condition.
Beginning January 1, 2020, the Bank adopted the CECL accounting guidance. As such, the Bank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses.
The Bank measures expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis. When developing the allowance for credit losses, the Bank measures the estimated loss over the remaining life of a mortgage loan, which also considers how the Bank’s credit enhancements mitigate credit losses. The Bank includes estimates of expected recoveries within the allowance for credit losses. The allowance excludes uncollectible accrued interest receivable, as the Bank writes off accrued interest receivable by reversing interest income if a mortgage loan is placed on non-accrual status. The Bank does not purchase mortgage loans with credit deterioration present at the time of purchase.
Prior to January 1, 2020, the Bank recorded an allowance for credit losses on conventional mortgage loans if it was probable an impairment had occurred as of the balance sheet date and the amount of loss could be reasonably estimated. See “Note 6 - Mortgage Loans” for details on the allowance methodology relating to mortgage loans.
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.
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 generally 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) was signed into law. Section 4013 of the CARES Act provides optional, temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications for which borrowers were adversely affected by the coronavirus pandemic (COVID-19). In the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act on its conventional mortgage loan portfolio. As such, all COVID-19 modifications meeting the provisions of the CARES Act will be excluded from TDR classification and accounting. COVID-19 modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification. See “Note 2 - Recently Adopted and Issued Accounting Guidance” for additional details.
Individually Evaluated Loans. The Bank individually evaluates all TDRs and collateral-dependent loans for expected credit losses. 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 generally measures these individually evaluated loans for expected credit loss based on the estimated fair value of the underlying property, less estimated selling costs and expected proceeds from primary mortgage insurance (PMI).
Charge-Off Policy. A charge-off is recorded if it is estimated that the amortized cost 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 on 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 result in a receivable to the Bank, they are classified as a derivative asset and, if classified as a payable to the clearing agent or counterparty, they are classified as a derivative liability. Cash flows associated with a derivative are reflected as cash flows from operating activities on 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.
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 on 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 interest 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. At the inception of each fair value hedge transaction, the Bank formally documents the hedge relationship and its risk management objective and strategy for undertaking the hedge, including identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value attributable to the hedged risk will be assessed. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition and firm commitments.
Beginning January 1, 2019, the Bank adopted new hedge accounting guidance, which impacted the presentation of gains (losses) on derivatives and hedging activities for qualifying hedges. 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 recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness, which represented the amount by which the change in the fair value of the derivative differed from the change in fair value of the hedged item was recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”
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 hedged risk, 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. If documented at the time of hedge designation, a derivative relationship no longer qualifying for short-cut hedge accounting can fallback to the long-haul accounting method.
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, or (iii) 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 on 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.
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 on 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 Statements 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 Statements of Income.
At December 31, 2020 and 2019, premises, software, and equipment totaled $64 million and $66 million, which was net of accumulated depreciation and amortization of $44 million and $36 million. For the years ended December 31, 2020, 2019, and 2018, depreciation and amortization expense for premises, software, and equipment was $8 million, $14 million, and $9 million.
Leases
The Bank leases office space and other facilities, as well as office equipment to run its business operations. At December 31, 2020 and 2019, the Bank included on the Statements of Condition $2 million and $3 million of operating lease right-of-use assets in other assets as well as $2 million and $3 million of operating lease liabilities in other liabilities. The Bank recognized operating lease costs in the other operating expense line item of the Statements of Income.
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” on the Statements of Condition and the amortization of those concessions is included in consolidated obligation interest expense.
Off-Balance Sheet Credit Exposures
Beginning January 1, 2020, the Bank adopted the CECL accounting guidance. As such, the Bank evaluates its off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision (reversal) for credit losses. Prior to January 1, 2020, the Bank recorded an allowance for credit losses on its off-balance sheet credit exposures if it was probable an impairment had occurred as of the balance sheet date and the amount of loss could be reasonably estimated. See “Note 14 - Commitments and Contingencies” for additional information.
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 on 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.
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, calculated as of the last day of each calendar quarter, equals at least one percent of its average balance of outstanding consolidated obligations for the calendar quarter. The restricted retained earnings are not available to pay dividends and are presented separately on 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 on the Statements of Income.
The Bank records legal expenses related to litigation settlements as incurred in other expense on the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement through other income (loss) on 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.
Note 2 - Recently Adopted and Issued Accounting Guidance
Reference Rate Reform (ASU 2020-04 and 2021-01)
On March 12, 2020, the Financial Accounting Standards Board (FASB) issued guidance to provide temporary optional expedients and exceptions to GAAP on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). Entities can elect to not apply certain modification accounting requirements to contracts affected by rate reform, if certain criteria are met. Additionally, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform. Lastly, entities can make a one-time election to sell and/or transfer to AFS or trading any HTM debt securities that refer to an interest rate affected by reference rate reform and were classified as HTM before January 1, 2020.
This guidance, as amended, becomes effective for the Bank upon election of any of the amendments and will be applied prospectively from the date elected until December 31, 2022. For certain hedge accounting optional expedients, they will be applied through the end of the hedging relationship, which could extend beyond December 31, 2022. During the fourth quarter of 2020, the Bank elected applicable optional expedients specific to discounting transition on a retrospective basis, which did not have a material impact on its financial condition, results of operations, or cash flows. The Bank continues to evaluate all other optional expedients and the effect on its financial condition, results of operations, or 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 became effective for the Bank for the annual period ending on December 31, 2020 and the annual periods thereafter. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, cash flows, or disclosures.
Coronavirus Aid, Relief, and Economic Security Act Section 4013
On March 27, 2020, the CARES Act was signed into law and provides optional, temporary relief from the accounting and reporting requirements for TDRs on certain loan modifications related to COVID-19 that are offered by financial institutions. The modifications that would qualify for this relief include any COVID-19 modification involving a conventional mortgage loan that was not more than 30 days past due as of December 31, 2019 and occurred between March 1, 2020 and the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States. On December 27, 2020, the Consolidated Appropriations Act, 2021, was signed into law, extending the applicable period to the earlier of January 1, 2022, or 60 days following the termination of the national emergency declared on March 13, 2020.
In the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act on its conventional mortgage loan portfolio. As such, all COVID-19 modifications meeting the provisions of the CARES Act will be excluded from TDR classification and accounting. COVID-19 modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification. The adoption of the CARES Act did not have a material impact on the Bank’s financial condition, results of operations, or cash flows.
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 on the statement of income as the fees associated with the hosting element (service) and classify payments for capitalized implementation costs on the statement of cash flows in the same manner as payments made for fees associated with the hosting element. Lastly, capitalized implementation costs should be presented on the statement of condition in the same line item that a prepayment for the fees of the associated hosting arrangement would be presented.
This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020, and was adopted on a prospective basis. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows.
Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13)
On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020. The adoption of this guidance did not have any effect on the Bank’s financial condition, results of operations, or cash flows; however, it reduced certain disclosures.
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 CECL accounting guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected. The guidance also requires, among other things, the following:
•The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
•Entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of purchased credit deterioration since origination that is measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price of the assets acquired.
•Entities to record credit losses relating to AFS debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.
•Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).
The FASB issued subsequent amendments to clarify the scope of the CECL accounting guidance and address issues including, but not limited to, accrued interest receivable balances, recoveries, variable interest rates and prepayments. All of this guidance became effective for the Bank for the interim and annual periods beginning on January 1, 2020 and was adopted on a modified retrospective basis. Upon adoption, the Bank recorded no credit losses on its advances, standby letters of credit, and other extensions of credit to borrowers as well as its investment portfolio. For its mortgage loans held for portfolio, the Bank recorded a $1 million decrease in its allowance for credit losses through a cumulative effect adjustment to retained earnings on January 1, 2020. This decrease was attributable to recoveries on mortgage loans that were previously written down and have had their collateral values subsequently improve, partially offset by the incorporation of lifetime credit losses on its mortgage loan portfolio.
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 $210 million and $100 million for the years ended December 31, 2020 and 2019.
Note 4 - Investments
The Bank makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold and makes other investments in debt securities, which are classified as either trading, AFS, or HTM.
INTEREST-BEARING DEPOSITS, SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL, AND FEDERAL FUNDS SOLD
The Bank invests in interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold to provide short-term liquidity. These investments are generally transacted with counterparties that have received a credit rating of triple-B or greater (investment grade) by a nationally recognized statistical rating organization (NRSRO). At December 31, 2020, none of these investments were with counterparties rated below triple-B; however, approximately 21 percent were secured securities purchased under agreements to resell with unrated counterparties. These may differ from any internal ratings of the investments by the Bank.
Federal funds sold are unsecured loans that are generally transacted on an overnight term. Finance Agency regulations include a limit on the amount of unsecured credit the Bank may extend to a counterparty. At December 31, 2020 and 2019, no allowance for credit losses was recorded for interest-bearing deposits and federal funds sold as all assets were repaid or expected to be repaid according to their contractual terms. The carrying values of interest-bearing deposits and federal funds sold exclude accrued interest receivable of less than $1 million as of December 31, 2020 and 2019.
Securities purchased under agreements to resell are secured, short-term, and are structured such that they are evaluated regularly to determine if the market value of the underlying securities decreases below the market value required as collateral (i.e. subject to collateral maintenance provisions). If so, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash, generally by the next business day. Based upon the collateral held as security and collateral maintenance provisions with its counterparties, the Bank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at December 31, 2020 and 2019. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of less than $1 million and $2 million as of December 31, 2020 and 2019.
DEBT SECURITIES
The Bank invests in debt securities, which are classified as either trading, AFS, or HTM. Within these investments, the Bank is subject to credit risk related to private-label MBS that are supported by underlying mortgage or asset-backed loans. The Bank is prohibited by Finance Agency regulations from purchasing certain higher-risk securities, such as equity securities and debt instruments that are not investment quality. Exceptions are allowed for certain investments targeted at low-income persons or communities, and instruments that experience credit deterioration after their purchase by the Bank.
Trading Securities
Trading securities by major security type were as follows (dollars in millions):
December 31,
2020 2019
Non-mortgage-backed securities
U.S. Treasury obligations1
$ 4,069 $ -
Other U.S. obligations1
114 150
GSE and Tennessee Valley Authority obligations 64 60
Other2
246 259
Total non-mortgage-backed securities 4,493 469
Mortgage-backed securities
GSE multifamily 382 419
Total fair value $ 4,875 $ 888
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
During the year ended December 31, 2020, the Bank sold trading securities and realized net gains of less than $1 million. The Bank did not sell any trading securities during the years ended December 31, 2019 and 2018. During the year ended December 31, 2020, the Bank recorded net unrealized gains of $17 million on its trading securities, compared to net unrealized gains of $28 million and net unrealized losses of $15 million for the same periods in 2019 and 2018.
AFS Securities
AFS securities by major security type were as follows (dollars in millions):
December 31, 2020
Amortized
Cost1
Gross
Unrealized
Gains Gross
Unrealized
Losses
Fair
Value
Non-mortgage-backed securities
Other U.S. obligations2
$ 1,670 $ 4 $ (2) $ 1,672
GSE and Tennessee Valley Authority obligations 1,000 22 - 1,022
State or local housing agency obligations 712 - (19) 693
Other3
290 12 - 302
Total non-mortgage-backed securities 3,672 38 (21) 3,689
Mortgage-backed securities
U.S. obligations single-family2
3,527 18 (1) 3,544
GSE single-family 442 4 - 446
GSE multifamily 8,217 47 (33) 8,231
Total mortgage-backed securities 12,186 69 (34) 12,221
Total $ 15,858 $ 107 $ (55) $ 15,910
December 31, 2019
Amortized
Cost1
Gross
Unrealized
Gains Gross
Unrealized
Losses
Fair
Value
Non-mortgage-backed securities
Other U.S. obligations2
$ 2,122 $ 6 $ (1) $ 2,127
GSE and Tennessee Valley Authority obligations 1,034 26 - 1,060
State or local housing agency obligations 761 - (5) 756
Other3
276 9 - 285
Total non-mortgage-backed securities 4,193 41 (6) 4,228
Mortgage-backed securities
U.S. obligations single-family2
4,044 17 (2) 4,059
GSE single-family 646 4 (1) 649
GSE multifamily 7,720 13 (18) 7,715
Total mortgage-backed securities 12,410 34 (21) 12,423
Total $ 16,603 $ 75 $ (27) $ 16,651
1 Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of $31 million and $42 million as of December 31, 2020 and 2019.
2 Represents investment securities backed by the full faith and credit of the U.S. Government.
3 Consists of taxable municipal bonds and/or Private Export Funding Corporation bonds.
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, 2020
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
Other U.S. obligations1
$ 348 $ - $ 698 $ (2) $ 1,046 $ (2)
State or local housing agency obligations 336 (15) 288 (4) 624 (19)
Total non-mortgage-backed securities 684 (15) 986 (6) 1,670 (21)
Mortgage-backed securities
U.S. obligations single-family1
- - 593 (1) 593 (1)
GSE single-family - - 14 - 14 -
GSE multifamily 662 (8) 3,561 (25) 4,223 (33)
Total mortgage-backed securities 662 (8) 4,168 (26) 4,830 (34)
Total $ 1,346 $ (23) $ 5,154 $ (32) $ 6,500 $ (55)
December 31, 2019
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
Other U.S. obligations1
$ 196 $ - $ 706 $ (1) $ 902 $ (1)
State or local housing agency obligations 57 - 344 (5) 401 (5)
Total non-mortgage-backed securities 253 - 1,050 (6) 1,303 (6)
Mortgage-backed securities
U.S. obligations single-family1
169 - 564 (2) 733 (2)
GSE single-family 133 - 104 (1) 237 (1)
GSE multifamily 2,001 (8) 2,766 (10) 4,767 (18)
Total mortgage-backed securities 2,303 (8) 3,434 (13) 5,737 (21)
Total $ 2,556 $ (8) $ 4,484 $ (19) $ 7,040 $ (27)
1 Represents investment securities backed by the full faith and credit of the U.S. Government.
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, 2020 December 31, 2019
Year of Contractual Maturity Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Non-mortgage-backed securities
Due in one year or less $ 4 $ 4 $ 92 $ 92
Due after one year through five years 2,430 2,438 2,099 2,110
Due after five years through ten years 494 498 1,294 1,302
Due after ten years 744 749 708 724
Total non-mortgage-backed securities 3,672 3,689 4,193 4,228
Mortgage-backed securities 12,186 12,221 12,410 12,423
Total $ 15,858 $ 15,910 $ 16,603 $ 16,651
HTM Securities
HTM securities by major security type were as follows (dollars in millions):
December 31, 2020
Amortized
Cost1
Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations $ 379 $ 97 $ - $ 476
State or local housing agency obligations 203 2 (1) 204
Total non-mortgage-backed securities 582 99 (1) 680
Mortgage-backed securities
U.S. obligations single-family2
3 - - 3
GSE single-family 1,225 9 (2) 1,232
Private-label 6 - - 6
Total mortgage-backed securities 1,234 9 (2) 1,241
Total $ 1,816 $ 108 $ (3) $ 1,921
December 31, 2019
Amortized
Cost1
Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Non-mortgage-backed securities
GSE and Tennessee Valley Authority obligations $ 384 $ 72 $ - $ 456
State or local housing agency obligations 221 1 (1) 221
Total non-mortgage-backed securities 605 73 (1) 677
Mortgage-backed securities
U.S. obligations single-family2
5 - - 5
U.S. obligations commercial2
1 - - 1
GSE single-family 1,752 4 (7) 1,749
Private-label 7 - - 7
Total mortgage-backed securities 1,765 4 (7) 1,762
Total $ 2,370 $ 77 $ (8) $ 2,439
1 Amortized cost includes adjustments made to the cost basis of an investment for accretion or amortization and excludes accrued interest receivable of $5 million and $7 million as of December 31, 2020 and 2019.
2 Represents investment securities backed by the full faith and credit of the U.S. Government.
Unrealized Losses
As required prior to adoption of the CECL accounting standard, the following table summarizes 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, 2019
Less than 12 Months 12 Months or More Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Non-mortgage-backed securities
State or local housing agency obligations $ - $ - $ 150 $ (1) $ 150 $ (1)
Total non-mortgage-backed securities - - 150 (1) 150 (1)
Mortgage-backed securities
U.S. obligations single-family1
5 - - - 5 -
GSE single-family 392 (1) 1,007 (6) 1,399 (7)
Private-label - - 4 - 4 -
Total mortgage-backed securities 397 (1) 1,011 (6) 1,408 (7)
Total $ 397 $ (1) $ 1,161 $ (7) $ 1,558 $ (8)
1 Represents investment securities backed by the full faith and credit of the U.S. Government.
Contractual Maturity
The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
December 31, 2020 December 31, 2019
Year of Contractual Maturity Amortized
Cost Fair
Value Amortized
Cost Fair
Value
Non-mortgage-backed securities
Due in one year or less $ - $ - $ - $ -
Due after one year through five years 252 297 - -
Due after five years through ten years 198 203 412 446
Due after ten years 132 180 193 231
Total non-mortgage-backed securities 582 680 605 677
Mortgage-backed securities 1,234 1,241 1,765 1,762
Total $ 1,816 $ 1,921 $ 2,370 $ 2,439
ALLOWANCE FOR CREDIT LOSSES ON AFS AND HTM SECURITIES
The Bank evaluates AFS and HTM investment securities for credit losses on a quarterly basis. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. See “Note 1 - Summary of Significant Accounting Policies” for additional information, including the Bank’s prior methodology for evaluating OTTI.
AFS and HTM Securities (Excluding Private-label MBS)
The Bank’s AFS and HTM securities may include, but are not limited to, certificates of deposit, commercial paper, U.S. obligations, GSE and Tennessee Valley Authority (TVA) obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. The Bank only purchases securities considered investment quality. Excluding private-label MBS, at December 31, 2020, all of the Bank’s AFS securities and HTM securities, based on amortized cost, were rated single-A, or above, by an NRSRO, based on the lowest long-term credit rating for each security. These may differ from any internal ratings of the securities by the Bank.
The Bank evaluates its individual AFS securities for impairment by comparing the security’s fair value to its amortized cost. Impairment may exist when the fair value of the investment is less than its amortized cost (i.e. in an unrealized loss position). At December 31, 2020, certain AFS securities held by the Bank were in an unrealized loss position. These losses are considered temporary as the Bank expects to recover the entire amortized cost basis on these AFS investment securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before its anticipated recovery of each security's remaining amortized cost basis. Further, the Bank has not experienced any payment defaults on the instruments. In addition, substantially all of these securities carry an implicit or explicit government guarantee. As a result, no allowance for credit losses was recorded on these AFS securities at December 31, 2020.
The Bank evaluates its HTM securities for impairment on a collective, or pooled basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. As of December 31, 2020, the Bank had no allowance for credit losses recorded on its HTM securities because the securities: (i) were all highly-rated, (ii) had not experienced, nor did the Bank expect, any payment default on the instruments, and (iii) in the case of U.S. obligations and GSE and TVA obligations, carry an implicit or explicit government guarantee such that the Bank considers the risk of nonpayment to be zero.
Private-label MBS
The Bank holds investments in private-label MBS classified as HTM. As of December 31, 2020, these investments represented less than one percent of the Bank’s HTM portfolio and approximately 69 percent of these securities, based on amortized cost, were rated single-A, or above, by an NRSRO. As of December 31, 2020, the Bank had no allowance for credit losses recorded on its private-label MBS because the securities (i) were highly-rated and/or (ii) had not experienced, nor did the Bank expect, any payment default on the instruments.
Note 5 - 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 month to five years, where the interest rates reset periodically to a specified interest rate index such as LIBOR, SOFR, or other specified index.
REDEMPTION TERM
The following table summarizes the Bank’s advances outstanding by redemption term (dollars in millions):
December 31, 2020 December 31, 2019
Redemption Term Amount1
Weighted
Average
Interest
Rate Amount1
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts $ 3 1.29 % $ 1 2.73 %
Due in one year or less 12,499 1.16 35,432 1.97
Due after one year through two years 8,265 1.69 21,959 2.23
Due after two years through three years 10,550 1.42 8,693 2.33
Due after three years through four years 7,011 1.38 5,109 2.51
Due after four years through five years 4,106 1.12 5,978 2.17
Thereafter 3,654 2.10 3,013 2.72
Total par value 46,088 1.42 % 80,185 2.16 %
Premiums 18 25
Discounts (3) (6)
Fair value hedging adjustments 427 156
Total $ 46,530 $ 80,360
1 Excludes accrued interest receivable of $13 million and $91 million as of December 31, 2020 and 2019.
The following table summarizes advances by year of redemption term or next call date for callable advances, and by year of redemption term or next put date for putable advances (dollars in millions):
Redemption Term
or Next Call Date Redemption Term
or Next Put Date
December 31,
2020 December 31,
2019 December 31,
2020 December 31,
Overdrawn demand deposit accounts $ 3 $ 1 $ 3 $ 1
Due in one year or less 23,622 53,156 13,486 36,278
Due after one year through two years 6,276 11,967 8,319 22,101
Due after two years through three years 6,436 5,427 10,464 8,730
Due after three years through four years 4,053 3,802 6,116 5,004
Due after four years through five years 2,169 3,461 4,057 5,069
Thereafter 3,529 2,371 3,643 3,002
Total par value $ 46,088 $ 80,185 $ 46,088 $ 80,185
The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). Other advances may require a prepayment fee or credit that makes the Bank financially indifferent to the prepayment of the advance. At December 31, 2020 and 2019, the Bank had callable advances outstanding totaling $11.7 billion and $25.5 billion.
The Bank also holds putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on predetermined exercise date. Generally these put options are exercised when interest rates increase relative to contractual rates. At both December 31, 2020 and 2019, the Bank had putable advances outstanding totaling $1.4 billion.
PREPAYMENT FEES
The Bank generally charges a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank financially indifferent to the prepayment of the advance. For certain advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Prepayment fees and credits are recorded net of the hedged item fair value hedging adjustments in advance interest income on the Statements of Income. The Bank recorded net prepayment fees on advances of $75 million, $9 million, and $8 million for the years ended December 31, 2020, 2019, and 2018.
ADVANCE CONCENTRATIONS
The Bank’s advances are concentrated in commercial banks, savings institutions, and insurance companies. At December 31, 2020, the Bank did not have any members who individually held 10 percent or more of the Bank’s advances. At December 31, 2019, the Bank had outstanding advances of $25.5 billion to Wells Fargo Bank, N.A., who individually held 10 percent or more of the Bank’s advances, which represented 32 percent of the total principal amount of outstanding advances.
ALLOWANCE FOR CREDIT LOSSES
The Bank evaluates advances for credit losses on a quarterly basis. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. See “Note 1 - Summary of Significant Accounting Policies” for additional information, including the Bank’s prior methodology for evaluating impairment.
The Bank manages its credit exposure to advances through an approach that includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower’s financial condition in conjunction with the Bank’s collateral and lending policies to limit risk of loss while balancing borrowers’ needs for a reliable source of funding. In addition, the Bank lends to eligible borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.
The Bank is required by regulation to obtain sufficient collateral to fully secure its advances. The estimated value of the collateral required to secure each borrower’s advances is calculated by applying collateral discounts, or haircuts, to the unpaid principal balance or market value, as applicable, of the collateral. The Bank also has policies and procedures for validating the reasonableness of the Bank’s collateral valuations. In addition, collateral verifications and on-site reviews are performed by the Bank based on the risk profile of the borrower. Management believes that these policies effectively manage the Bank’s credit risk from advances.
Eligible collateral includes:
•fully disbursed whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages;
•loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), or Government National Mortgage Association;
•cash deposited with the Bank; and
•other real estate-related collateral acceptable to the Bank, such as second lien mortgages, home equity lines of credit, tax-exempt municipal securities, and commercial real estate mortgages, provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in it.
Community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank has a lien on each member’s capital stock investment; however, capital stock cannot be pledged as collateral to secure advances.
Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can also require additional or substitute collateral to protect its security interest. The Bank periodically evaluates and makes changes to its collateral guidelines and collateral haircuts.
Borrowers may pledge collateral to the Bank by executing a blanket pledge agreement, specifically assigning collateral, or placing physical possession of collateral with the Bank or its custodians. The Bank perfects its security interest in all pledged collateral by filing Uniform Commercial Code financing statements or by taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to the Bank by its members, or any affiliates of its members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.
Under a blanket pledge agreement, the Bank is granted a security interest in all financial assets of the borrower to fully secure the borrower’s obligation. Other than securities and cash deposits, the Bank does not initially take delivery of collateral from blanket agreement borrowers. In the event of a default or a deterioration in the financial condition of a blanket pledge agreement borrower, the Bank has the ability to require delivery of pledged collateral sufficient to secure the borrower’s obligation. With respect to non-blanket pledge agreement borrowers that are federally insured, the Bank generally requires collateral to be specifically assigned. With respect to non-blanket pledge agreement borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or loans to the Bank or its custodians.
Using a risk-based approach and taking into consideration each borrower’s financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its advances. At December 31, 2020 and 2019, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, as applicable, in excess of its outstanding advances.
As a result of recent stressed market conditions stemming from COVID-19, the Bank is taking additional steps to monitor its credit risk on advances. These steps include increased frequency of collateral valuation and identifying, analyzing, and monitoring borrowers with higher risk profiles.
The Bank has never experienced a credit loss on its advances. At December 31, 2020 and 2019, none of the Bank’s advances were considered past due for financial reporting purposes, on non-accrual status, or considered impaired. In addition, there were no TDRs related to advances during the years ended December 31, 2020 and 2019.
In December 2020, the Bank declared a member bank in default under its contractual terms. In light of this event, the Bank did individually assess the related advances for expected credit losses as of December 31, 2020 and concluded that no allowance for credit losses was necessary in light of the advances being well-secured with underlying collateral. Refer to “Note 14 - Commitments and Contingencies” for additional information.
All other advances were evaluated on a collective basis as of December 31, 2020 and, based upon the Bank’s collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no expected credit losses on those advances. For the same reasons, the Bank did not record any allowance for credit losses for its advances at December 31, 2019.
Note 6 - Mortgage Loans Held for Portfolio
Mortgage loans held for portfolio includes conventional mortgage loans and government-guaranteed or -insured mortgage loans obtained through the Mortgage Partnership Finance (MPF) program (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago) and the Mortgage Purchase Program (MPP). The MPF program, which represented 98 percent of the Bank’s mortgage loans held for portfolio at December 31, 2020 and 2019, involves investment by the Bank in single-family mortgage loans held for portfolio that are purchased from participating financial institutions (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 two percent of the Bank’s mortgage loans held for portfolio at December 31, 2020 and 2019. 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,
2020 2019
Fixed rate, long-term single-family mortgage loans $ 6,945 $ 8,192
Fixed rate, medium-term1 single-family mortgage loans
1,182 1,016
Total unpaid principal balance 8,127 9,208
Premiums 107 125
Discounts (3) (4)
Basis adjustments from mortgage loan purchase commitments 12 6
Total mortgage loans held for portfolio2
$ 8,243 $ 9,335
Allowance for credit losses (1) (1)
Total mortgage loans held for portfolio, net $ 8,242 $ 9,334
1 Medium-term is defined as a term of 15 years or less.
2 Excludes accrued interest receivable of $40 million and $48 million as of December 31, 2020 and 2019.
The following table presents the Bank’s mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):
December 31,
2020 2019
Conventional mortgage loans $ 7,646 $ 8,712
Government-insured mortgage loans 481 496
Total unpaid principal balance $ 8,127 $ 9,208
PAYMENT STATUS OF MORTGAGE LOANS
Payment status is the key credit quality indicator for conventional mortgage loans and allows the Bank to monitor the migration of past due loans. Past due loans are those where the borrower has failed to make timely payments of principal and/or interest in accordance with the terms of the loan. Other delinquency statistics include non-accrual loans and loans in process of foreclosure.
The following tables present the payment status for MPF and MPP conventional mortgage loans (dollars in millions):
December 31, 2020
Origination Year
Prior to 2016 2016 to 2020 Total
Past due 30 - 59 days $ 19 $ 18 $ 37
Past due 60 - 89 days 9 9 18
Past due 90 - 179 days 21 21 42
Past due 180 days or more 25 17 42
Total past due mortgage loans 74 65 139
Total current mortgage loans 1,952 5,661 7,613
Total amortized cost of mortgage loans1
$ 2,026 $ 5,726 $ 7,752
December 31, 2019
Past due 30 - 59 days $ 57
Past due 60 - 89 days 14
Past due 90 - 179 days 10
Past due 180 days or more 10
Total past due mortgage loans 91
Total current mortgage loans 8,783
Total recorded investment of mortgage loans1
$ 8,874
1 Amortized cost represents the unpaid principal balance adjusted for unamortized premiums, discounts, basis adjustments, and direct write-downs. Recorded investment at December 31, 2019 includes accrued interest receivable whereas the amortized cost at December 31, 2020 excludes accrued interest receivable.
Section 4013 of the CARES Act provides temporary relief from the accounting and reporting requirements for TDRs for certain loan modifications related to COVID-19. The modifications that would qualify for this relief include any COVID-19 modification involving a conventional mortgage loan, including a forbearance arrangement, an interest rate modification, a repayment plan, or any similar arrangement that defers or delays payment of principal or interest. To be eligible under the CARES Act, the conventional loan must be not more than 30 days past due as of December 31, 2019 and the modification must occur between March 1, 2020 and the earlier of January 1, 2022, or 60 days following the termination of the national
emergency declared by the President of the United States.
In the second quarter of 2020, the Bank elected to apply the TDR relief provided by the CARES Act on its conventional mortgage loan portfolio. As such, all COVID-19 modifications meeting the provisions of the CARES Act will be excluded from TDR classification and accounting. As of December 31, 2020, the Bank had $1 million of these modifications outstanding, of which all of these loans were on accrual status. COVID-19 modifications that do not meet the provisions of the CARES Act will continue to be assessed for TDR classification.
The Bank’s servicers may grant a forbearance period to borrowers who have requested forbearance based on COVID-19 related difficulties regardless of the status of the loan at the time of the request. The Bank continues to apply its accounting policy for past due loans and charge-offs to loans during the forbearance period. The accrual status for loans under forbearance will be driven by the past due status of the loan as the legal terms of the contractual arrangement have not been modified.
The following table presents the unpaid principal balance of MPF and MPP conventional loans in a forbearance plan as a result of COVID-19 (dollars in millions):
December 31, 2020
Past due 30 - 59 days $ 3
Past due 60 - 89 days 6
Past due 90 days or more and in non-accrual status 42
Current mortgage loans 2
Total unpaid principal balance1
$ 53
1 These conventional loans in forbearance represent less than one percent of the Bank’s total mortgage loans held for portfolio at December 31, 2020.
The following tables present other delinquency statistics for MPF and MPP mortgage loans (dollars in millions):
December 31, 2020
Amortized Cost Conventional Government-Insured Total
In process of foreclosure1
$ 8 $ 1 $ 9
Serious delinquency rate2
1 % 3 % 1 %
Past due 90 days or more and still accruing interest3
$ - $ 13 $ 13
Non-accrual mortgage loans4
$ 93 $ - $ 93
December 31, 2019
Recorded Investment Conventional Government- Insured Total
In process of foreclosure1
$ 5 $ 1 $ 6
Serious delinquency rate2
- % 1 % - %
Past due 90 days or more and still accruing interest3
$ - $ 7 $ 7
Non-accrual mortgage loans4
$ 31 $ - $ 31
1 Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported.
2 Represents mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of total mortgage loans.
3 Represents government-insured mortgage loans that are 90 days or more past due.
4 Represents conventional mortgage loans that are 90 days or more past due or TDRs. As of December 31, 2020, none of these conventional mortgage loans on non-accrual status had an associated allowance for expected credit losses.
ALLOWANCE FOR CREDIT LOSSES
The Bank evaluates mortgage loans for credit losses on a quarterly basis. The Bank adopted new accounting guidance for the measurement of credit losses on financial instruments on January 1, 2020. See “Note 1 - Summary of Significant Accounting Policies” for additional information, including the Bank’s prior methodology for evaluating impairment.
Conventional Mortgage Loans
Conventional mortgage loans are evaluated collectively when similar risk characteristics exists. Conventional loans that do not share risk characteristics with other pools are evaluated for expected credit losses on an individual basis. The Bank determines its allowances for credit losses on conventional loans through analyses that include consideration of various loan portfolio and collateral-related characteristics, such as past performance, current conditions, and reasonable and supportable forecasts of expected economic conditions.
For collectively evaluated loans, the Bank uses a projected cash flow model to estimate expected credit losses over the life of the loans. This model relies on a number of inputs, such as current and projected property values and interest rates, as well as historical borrower behavior experience. For MPF loans, the Bank also incorporates associated credit enhancements when determining its estimate of expected credit losses. In limited instances, the Bank may incorporate a management adjustment in the allowance for credit losses for conventional mortgage loans due to changes in economic and business conditions or other factors that may not be fully captured in its model.
For individually evaluated loans, the Bank uses the practical expedient for collateral dependent assets. A mortgage loan is considered collateral dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default. The Bank estimates the fair value of this collateral using a property valuation model. The expected credit loss of a collateral dependent mortgage loan is equal to the difference between the amortized cost of the loan and the estimated fair value of the collateral, less estimated selling costs. The Bank records a direct charge-off of the loan balance, if certain triggering criteria are met. Expected recoveries of prior charge-offs are included in the allowance for credit losses.
Prior to January 1, 2020, the Bank recorded an allowance for credit losses on conventional mortgage loans if it was probable an impairment had occurred as of the balance sheet date and the amount of loss could be reasonably estimated.
At both December 31, 2020 and 2019, the Bank’s allowance for credit losses on conventional mortgage loans totaled $1 million. As a result of adopting the CECL accounting standard, the Bank recorded a $1 million decrease in its allowance for credit losses through a cumulative effect adjustment to retained earnings on January 1, 2020. This decrease was attributable to recoveries on conventional mortgage loans that were previously written down and have had their collateral values subsequently improve, partially offset by the incorporation of lifetime credit losses on its mortgage loan portfolio. During the year ended December 31, 2020, the Bank’s cash flow model for collectively evaluated loans projected an increase in expected credit losses due primarily to increased loan delinquencies, including those associated with COVID-19 related forbearance plans, and also due to a deceleration in forecasted regional home price appreciation. Expected recoveries of prior charge-offs remained stable during the year ended December 31, 2020.
As required prior to adoption of the CECL accounting standard, 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, 2019
Allowance for credit losses
Collectively evaluated for impairment $ 1
Recorded investment1
Collectively evaluated for impairment $ 8,825
Individually evaluated for impairment, without a related allowance 49
Total recorded investment $ 8,874
1 Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.
Government-Insured Mortgage Loans
The Bank invests in government-insured fixed rate mortgage loans portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance.
The Bank has never experienced a credit loss on its government-insured mortgage loans. The Bank has assessed its servicers and determined there was no expectation that a servicer would fail to remit payments due until paid in full. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at December 31, 2020 and 2019. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.
Note 7 - Derivatives and Hedging Activities
NATURE OF BUSINESS ACTIVITY
The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the Bank’s interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.
The Bank enters into derivative contracts to manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions. Finance Agency regulations and the Bank’s risk management policies establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.
Derivative financial instruments are used by the Bank to achieve its financial and risk management objectives. The Bank reevaluates its hedging strategies periodically and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the Bank uses derivatives are to:
•reduce the interest rate sensitivity and repricing gaps of assets and liabilities;
•preserve an interest rate spread between the yield of an asset and the cost of the related liability. Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the asset does not match a change in the interest rate on the liability;
•mitigate the adverse earnings effects of the shortening or extension of certain assets and liabilities;
•manage embedded options in assets and liabilities; and
•reduce funding costs by combining a derivative with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation.
TYPES OF DERIVATIVES
The Bank may use the following derivative instruments:
•Interest Rate Swaps. 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 derivative transactions is LIBOR or the overnight index swap (OIS) rate, based on either federal funds or SOFR.
•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 on 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 give 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 loan 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. Treasury obligations, other 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. To manage interest rate risk, the Bank may fund investment securities with callable consolidated obligations or utilize interest rate swaps, caps, floors, or swaptions. Derivatives held by the Bank that are associated with trading and HTM securities, if applicable, are designated as economic hedges and derivatives held by the Bank associated with AFS securities are generally designated as a fair value hedge.
•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.
•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 non-callable debt 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 and simultaneously execute interest rate swaps to hedge the basis risk of the variable interest rate debt. Interest rate swaps used to hedge variable interest rate debt do not qualify for hedge accounting and are treated as economic hedges. 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. In this case, the interest rate swap functions 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 derivatives, see “Note 1 - Summary of Significant Accounting 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.
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, 2020 December 31, 2019
Notional
Amount Derivative
Assets Derivative
Liabilities Notional
Amount Derivative
Assets Derivative
Liabilities
Derivatives designated as hedging instruments (fair value hedges)
Interest rate swaps $ 33,552 $ 46 $ 262 $ 37,684 $ 31 $ 159
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps 1,817 12 73 1,038 8 43
Forward settlement agreements (TBAs) 169 - 1 122 - -
Mortgage loan purchase commitments 177 1 - 127 - -
Total derivatives not designated as hedging instruments 2,163 13 74 1,287 8 43
Total derivatives before netting and collateral adjustments $ 35,715 59 336 $ 38,971 39 202
Netting adjustments and cash collateral1
168 (332) 63 (201)
Total derivative assets and derivative liabilities $ 227 $ 4 $ 102 $ 1
1 Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. At December 31, 2020 and 2019, cash collateral, including accrued interest, posted by the Bank was $507 million and $264 million. At December 31, 2020, the Bank held cash collateral, including accrued interest, from clearing agents and/or counterparties of $7 million. At December 31, 2019, the Bank held no cash collateral, including accrued interest, from clearing agents and/or counterparties.
Effective January 1, 2019, as a result of the adoption of ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, 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 is attributable to the hedged risk, are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, any hedge ineffectiveness, or the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedged item, was recorded in other income (loss) in “Net gains (losses) on derivatives and hedging activities.”
The following tables summarize the income effect from fair value hedging relationships recorded in either net interest income or other income as well as total income (expense) by product recorded on the Statements of Income (dollars in millions):
For the Year Ended December 31, 2020
Interest Income (Expense)
Advances Available-for-Sale Securities Consolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$ 950 $ 206 $ (915)
Gains (losses) on fair value hedging relationships
Interest rate contracts
Derivatives2
(455) (283) 261
Hedged items3
271 173 (150)
Net gains (losses) on fair value hedging relationships $ (184) $ (110) $ 111
For the Year Ended December 31, 2019
Interest Income (Expense)
Advances Available-for-Sale Securities Consolidated Obligation Bonds
Total interest income (expense) recorded on the Statements of Income1
$ 2,466 $ 506 $ (2,289)
Gains (losses) on fair value hedging relationships
Interest rate contracts
Derivatives2
(223) (233) 188
Hedged items3
276 224 (357)
Net gains (losses) on fair value hedging relationships $ 53 $ (9) $ (169)
For the Year Ended December 31, 2018
Interest Income (Expense) Other Income
Advances Available-for-Sale Securities Consolidated Obligation Bonds Net Gains (Losses) on Derivatives and Hedging Activities
Total income (expense) recorded on the Statements of Income1
$ 2,443 $ 504 $ (2,095) $ 19
Gains (losses) on fair value hedging relationships
Interest rate contracts
Derivatives4
47 (22) (217) 203
Hedged items5
7 4 (2) (200)
Net gains (losses) on fair value hedging relationships $ 54 $ (18) $ (219) $ 3
1 Amounts shown to give context to the disclosure and include total interest income (expense) of the products indicated, including coupon, prepayment fees, amortization, and derivative net interest settlements. In 2020 and 2019, interest income (expense) amounts also include gains and losses on derivatives and hedged items in fair value hedging relationships. In 2018, gains and losses on derivatives and hedged items in fair value hedging relationships were recorded in other income in “net gains (losses) on derivatives and hedging activities” along with gains and losses on economic derivatives.
2 Includes changes in fair value, net interest settlements on derivatives, and amortization of the financing element of off-market derivatives.
3 Includes changes in fair value and amortization/accretion of basis adjustments on closed hedge relationships.
4 Interest income (expense) amounts include net interest settlements on derivatives and amortization of the financing element of off-market derivatives. Other income amounts include changes in fair value.
5 Interest income (expense) amounts include amortization/accretion of basis adjustments on closed hedge relationships. Other income amounts include changes in fair value.
The following tables summarize cumulative fair value hedging adjustments and the related amortized cost of the hedged items (dollars in millions):
December 31, 2020
Advances Available-for-Sale Securities Consolidated Obligation Bonds
Amortized cost of hedged asset/liability1
$ 17,875 $ 7,137 $ 12,163
Fair value hedging adjustments
Changes in fair value for active hedging relationships included in amortized cost $ 406 $ 340 $ 161
Basis adjustments for discontinued hedging relationships included in amortized cost 21 - (10)
Total amount of fair value hedging adjustments $ 427 $ 340 $ 151
December 31, 2019
Advances Available-for-Sale Securities Consolidated Obligation Bonds
Amortized cost of hedged asset/liability1
$ 14,806 $ 6,221 $ 20,256
Fair value hedging adjustments
Changes in fair value for active hedging relationships included in amortized cost $ 146 $ 167 $ 16
Basis adjustments for discontinued hedging relationships included in amortized cost 10 - (15)
Total amount of fair value hedging adjustments $ 156 $ 167 $ 1
1 Includes only the portion of amortized cost representing the hedged items in fair value hedging relationships.
The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented on the Statements of Income (dollars in millions). For the year ended December 31, 2018, net gains (losses) representing hedge ineffectiveness for fair value hedging relationships were recorded in “Net gains (losses) on derivatives and hedging activities.” Beginning on January 1, 2019, changes in the fair value of the derivative and the hedged item in a fair value hedge relationship are recorded in net interest income.
For the Years Ended December 31,
2020 2019 2018
Derivatives designated as hedging instruments (fair value hedges)
Interest rate swaps $ 3
Derivatives not designated as hedging instruments (economic hedges)
Interest rate swaps $ (32) $ (34) $ 16
Forward settlement agreements (TBAs) (13) (5) 2
Mortgage loan purchase commitments 11 5 (2)
Net interest settlements (14) (1) (3)
Total net gains (losses) related to derivatives not designated as hedging instruments (48) (35) 13
Price alignment amount1
- - 3
Net gains (losses) on derivatives and hedging activities $ (48) $ (35) $ 19
1 This amount represents interest on variation margin which is a component of the derivative fair value for cleared transactions. The amounts reported for the years ended December 31, 2020 and 2019 were less than $1 million and reflect the price alignment amounts on variation margin for daily settled derivative contracts not designated as hedging instruments. The price alignment amounts on variation margin for daily settled derivative contracts designated as hedging instruments are recorded in the same line item as the earnings effect of the hedged item. The amount reported for the year ended December 31, 2018 reflects the price alignment amounts on variation margin for all daily settled derivative contracts.
MANAGING CREDIT RISK ON DERIVATIVES
The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative contracts. The Bank manages credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in the Bank’s policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.
The Bank transacts most of its derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty, referred to as uncleared derivatives, or cleared through a clearing agent with a Clearinghouse, referred to as cleared derivatives. Once a derivative transaction has been accepted for clearing by a Clearinghouse, the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The Bank is not a derivative dealer and does not trade derivatives for short-term profit.
For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in the derivative contracts to mitigate the risk. The Bank requires collateral agreements on its uncleared derivatives.
Certain of the Bank’s uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank’s credit rating. If the Bank’s credit rating is lowered by a NRSRO, the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions, unless the collateral delivery threshold is set to zero. The aggregate fair value of all uncleared derivative instruments with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at December 31, 2020 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, 2020.
For cleared derivatives, the Clearinghouse is the Bank’s counterparty. The Bank utilizes one Clearinghouse, CME Clearing, for all cleared derivative transactions. CME Clearing notifies the clearing agent of the required initial margin and daily variation margin requirements, and the clearing agent in turn notifies the Bank.
The Clearinghouse determines initial margin requirements which are considered cash collateral. Generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. The Bank was not required to post additional initial margin by its clearing agent, based on credit considerations, at December 31, 2020. Variation margin requirements with CME Clearing are based on changes in the fair value of cleared derivatives and are legally characterized as daily settlement payments, rather than cash collateral.
The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments for changes in the fair value of cleared derivatives is posted daily through a clearing agent.
OFFSETTING OF DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES
The Bank presents derivative instruments, related cash collateral received or pledged, and associated accrued interest on a net basis by clearing agent and/or by counterparty when it has met the netting requirements. Additional information regarding these agreements is provided in “Note 1 - Summary of Significant Accounting Policies.”
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 tables present the fair value of derivative instruments meeting or not meeting the netting requirements and the related collateral received from or pledged to counterparties (dollars in millions):
December 31, 2020
Derivative Instruments Meeting Netting Requirements
Gross Amount Recognized1
Gross Amounts of Netting Adjustments and Cash Collateral Derivative Instruments Not Meeting Netting Requirements2
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
Uncleared derivatives $ 58 $ (58) $ 1 $ 1
Cleared derivatives - 226 - 226
Total $ 58 $ 168 $ 1 $ 227
Derivative Liabilities
Uncleared derivatives $ 328 $ (324) $ - $ 4
Cleared derivatives 8 (8) - -
Total $ 336 $ (332) $ - $ 4
December 31, 2019
Derivative Instruments Meeting Netting Requirements
Gross Amount Recognized1
Gross Amounts of Netting Adjustments and Cash Collateral Derivative Instruments Not Meeting Netting Requirements2
Total Derivative Assets and Total Derivative Liabilities
Derivative Assets
Uncleared derivatives $ 34 $ (28) $ - $ 6
Cleared derivatives 5 91 - 96
Total $ 39 $ 63 $ - $ 102
Derivative Liabilities
Uncleared derivatives $ 199 $ (198) $ - $ 1
Cleared derivatives 3 (3) - -
Total $ 202 $ (201) $ - $ 1
1 Represents derivative assets and derivative liabilities prior to netting adjustments and cash collateral, including accrued interest.
2 Represents mortgage loan purchase commitments not subject to enforceable netting requirements.
Note 8 - 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 0.09 percent, 1.47 percent, and 1.48 percent for the years ended December 31, 2020, 2019, and 2018.
The following table details the Bank’s interest bearing and non-interest bearing deposits (dollars in millions):
December 31,
2020 2019
Interest-bearing
Demand and overnight $ 1,586 $ 860
Term 49 127
Non-interest-bearing
Demand 273 125
Total $ 1,908 $ 1,112
Note 9 - Consolidated Obligations
Consolidated obligations consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. Bonds are issued primarily to raise short-, intermediate-, and long-term funds for the Bank and are not subject to any statutory or regulatory limits on their maturity. Discount notes are issued primarily to raise short-term funds for the Bank and have original maturities of up to one year. Discount notes generally sell at or below their face amount and are redeemed at par value when they mature.
Although the Bank is primarily liable for the portion of consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all FHLBank System consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority. At December 31, 2020 and 2019, the total par value of outstanding consolidated obligations of the FHLBanks was $746.8 billion and $1,025.9 billion.
DISCOUNT NOTES
The following table summarizes the Bank’s discount notes (dollars in millions):
December 31, 2020 December 31, 2019
Amount Weighted
Average
Interest
Rate Amount Weighted
Average
Interest
Rate
Par value $ 27,350 0.10 % $ 29,592 1.65 %
Discounts and concessions1
(5) (61)
Total $ 27,345 $ 29,531
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, 2020 December 31, 2019
Year of Contractual Maturity Amount Weighted
Average
Interest
Rate Amount Weighted
Average
Interest
Rate
Due in one year or less $ 29,224 0.88 % $ 58,106 1.81 %
Due after one year through two years 9,398 1.10 16,997 1.91
Due after two years through three years 3,296 2.42 3,907 2.35
Due after three years through four years 3,548 3.00 3,083 2.53
Due after four years through five years 1,058 2.19 3,503 3.03
Thereafter 5,406 2.50 5,777 3.00
Total par value 51,930 1.36 % 91,373 1.99 %
Premiums 199 217
Discounts and concessions1
(26) (38)
Fair value hedging adjustments 151 1
Total $ 52,254 $ 91,553
1 Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation bonds.
Bonds are issued with fixed or variable rate payment terms that use a variety of indices for interest rate resets such as SOFR or LIBOR. 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 these consolidated bonds are issued, the Bank may enter into derivatives containing features that offset the terms and embedded options, if any, of the consolidated bond obligations.
The following table summarizes the Bank’s bonds outstanding by call features (dollars in millions):
December 31,
2020 2019
Non-callable or non-putable $ 48,610 $ 87,246
Callable 3,320 4,127
Total par value $ 51,930 $ 91,373
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 2020 2019
Due in one year or less $ 31,749 $ 60,639
Due after one year through two years 10,038 17,643
Due after two years through three years 3,326 4,410
Due after three years through four years 3,648 2,788
Due after four years through five years 805 3,376
Thereafter 2,364 2,517
Total par value $ 51,930 $ 91,373
Note 10 - 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 contribution shortfall, as described above, in 2020, 2019, or 2018. 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 2020, 2019, or 2018.
The following table presents a rollforward of the Bank’s AHP liability (dollars in millions):
For the Years Ended December 31,
2020 2019 2018
Balance, beginning of year $ 157 $ 153 $ 142
Assessments 41 44 53
Disbursements, net1
(36) (40) (42)
Balance, end of year $ 162 $ 157 $ 153
1 Includes $2 million of funds reimbursed to the AHP during 2018.
Note 11 - 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 on the Bank’s Statements of Condition. Effective October 1, 2020, each member is also required to purchase and hold activity-based stock in an amount equal to 0.10 percent of its standby letters of credit. This requirement applied to any new, renewed or modified standby letters of credit issued on or after October 1, 2020. 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, 2020 and 2019, the Bank’s excess capital stock outstanding was less than $1 million.
MANDATORILY REDEEMABLE CAPITAL STOCK
At December 31, 2020 and 2019, the Bank’s mandatorily redeemable capital stock totaled $52 million and $206 million. The Bank recorded interest expense on mandatorily redeemable capital stock of $5 million, $12 million, and $18 million for the years ended December 31, 2020, 2019, and 2018.
As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance companies ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014, had their memberships terminated on February 19, 2021. On the effective date of the final rule, the Bank reclassified the total
outstanding capital stock held by all of the captive insurance companies that were Bank members, to mandatorily redeemable
capital stock. For more information on the Bank’s mandatorily redeemable capital stock, see “Note 1 - Summary of Significant Accounting Policies.”
The following table summarizes changes in mandatorily redeemable capital stock (dollars in millions):
For the Years Ended December 31,
2020 2019 2018
Balance, beginning of period $ 206 $ 255 $ 385
Capital stock reclassified to (from) mandatorily redeemable capital stock, net 7 11 53
Net payments for repurchases/redemptions of mandatorily redeemable capital stock (161) (60) (183)
Balance, end of period $ 52 $ 206 $ 255
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
2020 2019
Due after one year through two years $ 11 $ 1
Due after two years through three years 2 11
Due after three years through four years - 5
Thereafter2
27 175
Past contractual redemption date due to outstanding activity with the Bank 12 14
Total $ 52 $ 206
1 At the Bank’s election, the mandatorily redeemable capital stock may be redeemed prior to the expiration of the five year redemption period that commences on the date of the notice of redemption, or in the case of captive insurance company members, on the date of the membership termination.
2 Represents mandatorily redeemable capital stock resulting from the Finance Agency rule previously discussed that makes captive insurance companies ineligible for FHLBank membership.
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, calculated as of the last day of each calendar, equals at least one percent of its average balance of outstanding consolidated obligations for the calendar quarter. The restricted retained earnings are not available to pay dividends. At December 31, 2020 and 2019, the Bank’s restricted retained earnings account totaled $576 million and $504 million.
PARTIAL RECOVERY OF PRIOR CAPITAL DISTRIBUTION TO FINANCING CORPORATION
The Competitive Equality Banking Act of 1987 was enacted in August 1987, which, among other things, provided for the recapitalization of the Federal Savings and Loan Insurance Corporation through a newly-chartered entity, the Financing Corporation (FICO). The capitalization of FICO was provided by capital distributions from the FHLBanks to FICO in exchange for FICO nonvoting capital stock. Capital distributions were made by the FHLBanks in 1987, 1988, and 1989 that aggregated to $680 million. Upon passage of Financial Institutions Reform, Recovery and Enforcement Act of 1989, the FHLBanks’ previous investment in capital stock of FICO was determined to be non-redeemable and the FHLBanks charged their prior capital distributions to FICO directly against retained earnings.
In connection with the dissolution of FICO in July 2020, FICO determined that excess funds aggregating to $200 million were available for distribution to its stockholders, the FHLBanks, and FICO distributed these funds to the FHLBanks in June 2020. Specifically, the Bank’s partial recovery of prior capital distribution approximated $26 million, which was determined based on its share of the $680 million originally contributed. The FHLBanks treated the receipt of these funds as a return of the FHLBanks’ investment in FICO capital stock, and therefore as a partial recovery of the prior capital distributions made by the FHLBanks to FICO. These funds have been credited to unrestricted retained earnings.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table summarizes changes in AOCI (dollars in millions):
Net unrealized gains (losses) on AFS securities (Note 4) Pension and postretirement benefits
(Note 12) Total AOCI
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
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities (39) - (39)
Reclassification from AOCI to net income
Amortization - pension and postretirement - (1) (1)
Net current period other comprehensive income (loss) (39) (1) (40)
Balance, December 31, 2019 48 (4) 44
Other comprehensive income (loss) before reclassifications
Net unrealized gains (losses) on AFS securities 4 - 4
Net current period other comprehensive income (loss) 4 - 4
Balance, December 31, 2020 $ 52 $ (4) $ 48
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. The Bank did not hold any nonpermanent capital at December 31, 2020 and 2019.
In addition to the requirements previously discussed, during 2019, the Finance Agency finalized an Advisory Bulletin on capital stock (the Capital Stock AB) which required each FHLBank to maintain at all times a ratio of at least two percent of capital stock to total assets, effective February 2020. For purposes of the Capital Stock AB, capital stock includes mandatorily redeemable capital stock. The capital stock to total assets ratio is measured on a daily average basis at month end.
If the Bank’s capital falls below the required levels, the Finance Agency has authority to take actions necessary to return it to levels that it deems to be consistent with safe and sound business operations.
The following table shows the Bank’s compliance with the Finance Agency’s regulatory capital requirements (dollars in millions) as of December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Required Actual Required Actual
Regulatory capital requirements
Risk-based capital $ 704 $ 5,744 $ 1,138 $ 6,888
Regulatory capital $ 3,508 $ 5,744 $ 5,184 $ 6,888
Leverage capital $ 4,385 $ 8,616 $ 6,480 $ 10,332
Capital-to-assets ratio 4.00 % 6.55 % 4.00 % 5.31 %
Capital stock-to-assets ratio 2.00 % 3.78 % N/A1
N/A1
Leverage ratio 5.00 % 9.83 % 5.00 % 7.97 %
1 The Capital Stock AB became effective in February 2020.
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, 2020, 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 12 - 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, 2019. The Bank’s contributions for the plan years ended June 30, 2019 and June 30, 2018 were not more than five percent of the total contributions to the Pentegra DB Plan.
The following table summarizes the net pension cost and funded status of the Pentegra DB Plan (dollars in millions):
2020 2019 2018
Net pension cost1
$ 34 $ 2 $ 1
Pentegra DB Plan’s funded status as of July 12
108.20 % 108.62 % 110.96 %
Des Moines Bank DB Plan’s funded status as of July 1 99.57 % 102.81 % 107.53 %
Seattle Bank DB Plan’s funded status as of July 1 99.81 % 103.62 % 106.00 %
1 Represents the net pension cost charged to compensation and benefits expense on the Statements of Income for the years ended December 31, 2020, 2019, and 2018. During 2020, the Bank made a $32 million discretionary contribution to the plan.
2 The Pentegra DB Plan’s funded status is preliminary and may further increase because plan participants are permitted to make contributions through March 15 of the following year. The final funded status as of July 1, 2020 will not be available until the Form 5500 for the plan year July 1, 2020 through June 30, 2021 is filed (this Form 5500 is due to be filed no later than April 2022). The final funded status as of July 1, 2019 will not be available until the Form 5500 for the plan year July 1, 2019 through June 30, 2020 is filed (this Form 5500 is due to be filed no later than April 2021).
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 13 - Fair Value
Fair value amounts are determined by the Bank using available market information and reflect the Bank’s best judgment of appropriate valuation methods. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., exit price). The fair value hierarchy requires an entity to maximize the use of significant observable inputs and minimize the use of significant unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability.
The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:
•Level 1 Inputs. Quoted prices (unadjusted) for identical assets or liabilities in an active market that the Bank can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 Inputs. Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities), and (iv) market-corroborated inputs.
•Level 3 Inputs. Unobservable inputs for the asset or liability.
The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. The Bank had no transfers of assets or liabilities into or out of Level 3 of the fair value hierarchy during the years ended December 31, 2020, 2019, or 2018.
The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at December 31, 2020 (dollars in millions). The Bank records trading securities, AFS securities, derivative assets, derivative liabilities, and certain other assets at fair value on a recurring basis, and on occasion certain impaired mortgage loans held for portfolio on a non-recurring basis. The Bank records all other financial assets and liabilities at amortized cost. The fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.
Fair Value
Financial Instruments Carrying Value Level 1 Level 2 Level 3 Netting Adjustment and Cash Collateral1
Total
Assets
Cash and due from banks $ 978 $ 978 $ - $ - $ - $ 978
Interest-bearing deposits 401 - 401 - - 401
Securities purchased under agreements to resell 4,800 - 4,800 - - 4,800
Federal funds sold 3,695 - 3,695 - - 3,695
Trading securities 4,875 - 4,875 - - 4,875
Available-for-sale securities 15,910 - 15,910 - - 15,910
Held-to-maturity securities 1,816 - 1,915 6 - 1,921
Advances 46,530 - 47,146 - - 47,146
Mortgage loans held for portfolio, net 8,242 - 8,443 75 - 8,518
Accrued interest receivable 97 - 97 - - 97
Derivative assets, net 227 - 59 - 168 227
Other assets 39 39 - - - 39
Liabilities
Deposits (1,908) - (1,908) - - (1,908)
Consolidated obligations
Discount notes (27,345) - (27,346) - - (27,346)
Bonds (52,254) - (53,246) - - (53,246)
Total consolidated obligations (79,599) - (80,592) - - (80,592)
Mandatorily redeemable capital stock (52) (52) - - - (52)
Accrued interest payable (145) - (145) - - (145)
Derivative liabilities, net (4) - (336) - 332 (4)
1 Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.
The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank’s financial instruments at December 31, 2019 (dollars in millions):
Fair Value
Financial Instruments Carrying Value Level 1 Level 2 Level 3 Netting Adjustments and Cash Collateral1
Total
Assets
Cash and due from banks $ 1,029 $ 1,029 $ - $ - $ - $ 1,029
Interest-bearing deposits 1 - 1 - - 1
Securities purchased under agreements to resell 13,950 - 13,950 - - 13,950
Federal funds sold 4,605 - 4,605 - - 4,605
Trading securities 888 - 888 - - 888
Available-for-sale securities 16,651 - 16,651 - - 16,651
Held-to-maturity securities 2,370 - 2,432 7 - 2,439
Advances 80,360 - 80,576 - - 80,576
Mortgage loans held for portfolio, net 9,334 - 9,458 52 - 9,510
Accrued interest receivable 195 - 195 - - 195
Derivative assets, net 102 - 39 - 63 102
Other assets 34 34 - - - 34
Liabilities
Deposits (1,112) - (1,112) - - (1,112)
Consolidated obligations
Discount notes (29,531) - (29,532) - - (29,532)
Bonds (91,553) - (92,002) - - (92,002)
Total consolidated obligations (121,084) - (121,534) - - (121,534)
Mandatorily redeemable capital stock (206) (206) - - - (206)
Accrued interest payable (252) - (252) - - (252)
Derivative liabilities, net (1) - (202) - 201 (1)
1 Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.
SUMMARY OF VALUATION TECHNIQUES AND PRIMARY INPUTS
The valuation techniques and primary inputs used to develop the measurement of fair value for assets and liabilities that are measured at fair value on a recurring or non-recurring basis on the Statements of Condition are outlined below.
Trading and AFS Investment Securities. The Bank’s valuation technique incorporates prices from multiple designated third-party pricing vendors, when available. The pricing vendors generally use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, benchmark securities and yields, reported trades, dealer estimates, issuer spreads, bids, offers, and other market-related data. Since many investment securities do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established process in place to challenge investment valuations, which facilitates resolution of questionable prices identified by the Bank. Annually, the Bank conducts reviews its pricing vendors to confirm and further augment its understanding of the vendors’ pricing processes, methodologies, and control procedures for investment securities.
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, 2020 and 2019, multiple prices were received for the majority of the Bank’s trading and AFS investment securities. Based on the Bank’s review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy.
Impaired Mortgage Loans Held for Portfolio. The fair value of impaired mortgage loans held for portfolio is estimated by obtaining property values from an external pricing vendor. This vendor utilizes multiple pricing models that generally factor in market observable inputs, including actual sales transactions and home price indices. The Bank applies an adjustment to these values to capture certain limitations in the estimation process and takes into consideration estimated selling costs and expected PMI proceeds. In limited instances, the Bank may estimate the fair value of an impaired mortgage loan by calculating the present value of expected future cash flows discounted at the loan’s effective interest rate.
Derivative Assets and Liabilities and the Related Hedged Items. The fair value of derivatives is generally estimated using standard valuation techniques such as discounted cash flow analyses and comparisons to similar instruments, and includes variation margin payments for daily settled contracts. In limited instances, fair value estimates for interest-rate related derivatives may be obtained using an external pricing model that utilizes observable market data. The Bank is subject to credit risk in derivatives transactions due to the potential nonperformance of its derivatives counterparties. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral/payments is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. To mitigate credit risk on uncleared derivatives, the Bank enters into master netting agreements with its counterparties as well as collateral agreements that have collateral delivery thresholds. The Bank has evaluated the potential for the fair value of its derivatives to be affected by counterparty credit risk and its own credit risk and has determined that no adjustments were significant to the overall fair value measurements.
The fair values of the Bank’s derivative assets and derivative liabilities include accrued interest receivable/payable and related cash collateral. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. The fair values of derivatives are netted by clearing agent and/or counterparty if the netting requirements are met. If these netted amounts result in a receivable to the Bank, they are classified as an asset and, if classified as a payable to the clearing agent or counterparty, they are classified as a liability.
The Bank’s discounted cash flow model utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). The Bank uses the following inputs for measuring the fair value of interest-related derivatives:
•Discount rate assumption. The Bank utilizes the federal funds OIS or SOFR OIS swap curve depending on the terms of the derivative agreement.
•Forward interest rate assumption. The Bank utilizes the swap curve of the instrument’s index rate.
•Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.
For forward settlement agreements (TBAs), the Bank utilizes TBA securities prices that are determined by coupon class and expected term until settlement. For mortgage loan purchase commitments, the Bank utilizes TBA securities prices adjusted for factors such as credit risk and servicing spreads.
For the related hedged items, the fair value is estimated using a discounted cash flow analyses which typically considers the following inputs:
•Discount rate assumption. The Bank utilizes the designated benchmark interest rate curve.
•Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.
Other Assets. These represent grantor trust assets, which are carried at estimated fair value based on quoted market prices as of the last business day of the reporting period.
Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods previously described are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates.
FAIR VALUE ON A RECURRING BASIS
The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on the Statements of Condition at December 31, 2020 (dollars in millions):
Recurring Fair Value Measurements Level 1 Level 2 Level 3 Netting Adjustments and Cash Collateral1
Total
Assets
Trading securities
U.S. Treasury obligations $ - $ 4,069 $ - $ - $ 4,069
Other U.S. obligations - 114 - - 114
GSE and Tennessee Valley Authority obligations - 64 - - 64
Other non-MBS
- 246 - - 246
GSE multifamily MBS - 382 - - 382
Total trading securities - 4,875 - - 4,875
Available-for-sale securities
Other U.S. obligations - 1,672 - - 1,672
GSE and Tennessee Valley Authority obligations - 1,022 - - 1,022
State or local housing agency obligations - 693 - - 693
Other non-MBS - 302 - - 302
U.S. obligations single-family MBS - 3,544 - - 3,544
GSE single-family MBS - 446 - - 446
GSE multifamily MBS - 8,231 - - 8,231
Total available-for-sale securities - 15,910 - - 15,910
Derivative assets, net
Interest-rate related - 58 - 168 226
Mortgage loan purchase commitments - 1 - - 1
Total derivative assets, net - 59 - 168 227
Other assets 39 - - - 39
Total recurring assets at fair value $ 39 $ 20,844 $ - $ 168 $ 21,051
Liabilities
Derivative liabilities, net
Interest-rate related - (335) - 332 (3)
Forward settlement agreements (TBAs) - (1) - - (1)
Total derivative liabilities, net - (336) - 332 (4)
Total recurring liabilities at fair value $ - $ (336) $ - $ 332 $ (4)
1 Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.
The following table summarizes, for each hierarchy level, the Bank’s assets and liabilities that are measured at fair value on the Statements of Condition at December 31, 2019 (dollars in millions):
Recurring Fair Value Measurements Level 1 Level 2 Level 3 Netting Adjustments and Cash Collateral1
Total
Assets
Trading securities
Other U.S. obligations $ - $ 150 $ - $ - $ 150
GSE and Tennessee Valley Authority obligations - 60 - - 60
Other non-MBS
- 259 - - 259
GSE multifamily MBS - 419 - - 419
Total trading securities - 888 - - 888
Available-for-sale securities
Other U.S. obligations - 2,127 - - 2,127
GSE and Tennessee Valley Authority obligations - 1,060 - - 1,060
State or local housing agency obligations - 756 - - 756
Other non-MBS - 285 - - 285
U.S. obligations single-family MBS - 4,059 - - 4,059
GSE single-family MBS - 649 - - 649
GSE multifamily MBS - 7,715 - - 7,715
Total available-for-sale securities - 16,651 - - 16,651
Derivative assets, net
Interest-rate related - 39 - 63 102
Other assets 34 - - - 34
Total recurring assets at fair value $ 34 $ 17,578 $ - $ 63 $ 17,675
Liabilities
Derivative liabilities, net
Interest-rate related - (202) - 201 (1)
Total recurring liabilities at fair value $ - $ (202) $ - $ 201 $ (1)
1 Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.
FAIR VALUE ON A NON-RECURRING BASIS
The Bank measures certain impaired mortgage loans held for portfolio at level 3 fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances. At December 31, 2020 and 2019, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $7 million and $2 million. These fair values were as of the date the fair value adjustment was recorded during the years ended December 31, 2020 and 2019.
Note 14 - 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, 2020 and 2019, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable was $667.5 billion and $904.9 billion.
The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):
December 31, 2020 December 31, 2019
Expire
within one year Expire
after one year Total1
Total
Standby letters of credit2
$ 9,302 $ 59 $ 9,361 $ 10,193
Standby bond purchase agreements3
394 403 797 819
Commitments to purchase mortgage loans 177 - 177 127
Commitments to fund advances 252 - 252 527
1 The Bank has deemed it unnecessary to record any liability for credit losses on these agreements.
2 Excludes commitments to issue standby letters of credit of $34 million at December 31, 2019. At December 31, 2020, the Bank had no commitments to issue standby letters of credit outstanding.
3 The amounts reported as of December 31, 2020 reflect the notional amount of standby bond purchase agreements. The amount reported for December 31, 2019 includes the notional amount and accrued interest.
Standby Letters of Credit. The Bank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as collateral for deposits from federal and state government agencies. Standby letters of credit are executed with members for a fee. If the Bank is required to make payment for a beneficiary’s draw, the member either reimburses the Bank for the amount drawn or, subject to the Bank’s discretion, the amount drawn may be converted into a collateralized advance to the member. The original terms of standby letters of credit outstanding at December 31, 2020, range from less than one month to 10 years, currently no later than 2025. The carrying value of guarantees related to standby letters of credit are recorded in “Other liabilities” on the Statements of Condition and amounted to $2 million at both December 31, 2020 and 2019.
The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of its borrowers. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit. All standby letters of credit, similar to advances, are fully collateralized at the time of issuance and subject to member borrowing limits as established by the Bank.
Standby Bond Purchase Agreements. The Bank has entered into standby bond purchase agreements with state housing associates within its district whereby, for a fee, it agrees to serve as a standby liquidity provider if required, to purchase and hold the housing associate’s bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which the Bank would be required to purchase the bonds and typically allows the Bank to terminate the agreement upon the occurrence of a default event of the issuer. At December 31, 2020, the Bank had standby bond purchase agreements with eight housing associates. The standby bond purchase commitments entered into by the Bank have original expiration periods of up to seven years, currently no later than 2026. During the years ended December 31, 2020, 2019, and 2018, the Bank was not required to purchase any bonds under these agreements.
Commitments to Purchase Mortgage Loans. The Bank enters into commitments that unconditionally obligate it to purchase mortgage loans from its members. These commitments are considered derivatives and their estimated fair value at December 31, 2020 and 2019 is reported in “Note 7 - Derivatives and Hedging Activities” as mortgage loan purchase commitments.
Commitments to Fund Advances. The Bank enters into commitments to fund additional advances up to 24 months in the future. At December 31, 2020 and 2019, the Bank had commitments to fund advances of $252 million and $527 million.
Other Commitments. For each MPF master commitment, the Bank’s potential loss exposure prior to the PFI’s credit enhancement obligation is estimated and tracked in a memorandum account called the first loss account (FLA). For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all MPF master commitments with a PFI credit enhancement obligation was $154 million and $138 million at December 31, 2020 and 2019.
Legal Proceedings. The Bank is subject to various pending legal proceedings arising in the normal course of business. Certain of these legal proceedings involve pending litigation with a current member of the Bank stemming from alleged breaches by the member under the Bank’s MPF program and the member’s failure to repay its outstanding advances owed to the Bank. See “Note 5 - Advances” for additional information. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on the Bank’s financial condition or results of operations.
In addition, as a result of the merger with the Federal Home Loan Bank of Seattle (Seattle Bank), the Bank has been involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label MBS. Of the 11 cases initially filed, as of December 31, 2020, all have been settled (one dismissed in part and settled in part).
The Bank records legal expenses related to litigation settlements as incurred in other expense on the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement. During the year ended December 31, 2020, the Bank settled three of its private-label MBS claims and recognized $120 million in net gains on litigation settlements through other income (loss). During the years ended December 31, 2019 and 2018, the Bank did not recognize any gains on litigation settlements.
The Bank is not currently aware of any pending or threatened legal proceedings to which it is a party that could have a material impact on its financial condition, results of operations, or cash flows.
Note 15 - 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.
The following table summarizes the Bank’s outstanding transactions with Directors’ Financial Institutions (dollars in millions):
December 31, 2020 December 31, 2019
Amount % of Total Amount % of Total
Advances $ 1,526 3 $ 3,337 4
Mortgage loans 154 2 208 2
Deposits 17 1 27 2
Capital stock 110 3 182 4
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, 2020, the Bank did not have any stockholders owning 10 percent or more of its total capital stock outstanding. At December 31, 2019, the Bank had the following business concentrations with stockholders (dollars in millions):
December 31, 2019
Capital Stock Mortgage Interest
Stockholder Amount % of Total1
Advances Loans Income2
Wells Fargo Bank, N.A. $ 1,029 22 $ 25,450 $ 21 $ 1,059
Superior Guaranty Insurance Company3
15 - - 350 -
Total $ 1,044 22 $ 25,450 $ 371 $ 1,059
1 Pursuant to applicable Finance Agency regulations, the Bank’s voting structure limits the voting rights of these stockholders and other members holding a significant amount of the Bank’s capital stock.
2 Represents interest income earned on advances during the year ended December 31, 2019. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.
3 Superior Guaranty Insurance Company is an affiliate of Wells Fargo Bank, N.A.
Note 16 - 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, 2020, 2019, and 2018 (dollars in millions):
Other FHLBank Beginning
Balance Loans Principal
Repayment Ending
Balance
Boston $ - $ 250 $ (250) $ -
Pittsburgh - 5 (5) -
$ - $ 255 $ (255) $ -
Atlanta $ - $ 565 $ (565) $ -
Indianapolis - 550 (550) -
Topeka - 150 (150) -
$ - $ 1,265 $ (1,265) $ -
Boston $ - $ 800 $ (800) $ -
San Francisco - 300 (300) -
Dallas - 500 (500) -
$ - $ 1,600 $ (1,600) $ -
The following table summarizes borrowing activity from other FHLBanks during the years ended December 31, 2020, 2019, and 2018 (dollars in millions):
Other FHLBank Beginning
Balance Borrowing Principal
Payment Ending
Balance
Pittsburgh $ - $ 5 $ (5) $ -
Atlanta $ 500 $ 400 $ (900) $ -
Atlanta $ 200 $ 500 $ (200) $ 500
Boston 400 - (400) -
San Francisco - 500 (500) -
$ 600 $ 1,000 $ (1,100) $ 500
For the years ended December 31, 2020, 2019, and 2018, the interest income and expense related to these transactions was immaterial.
Note 17 - Subsequent Events
Subsequent events have been evaluated from January 1, 2021, through the time of the Form 10-K filing with the Securities and Exchange Commission. No material subsequent events requiring disclosure were identified.
SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Information
The following table presents a summary of our Statements of Condition (dollars in millions):
Statements of Condition December 31, September 30, June 30, March 31,
Cash and due from banks $ 978 $ 788 $ 483 $ 611
Investments1
31,497 32,705 34,315 35,634
Advances 46,530 48,462 57,942 79,757
Mortgage loans held for portfolio, net2
8,242 8,733 9,246 9,546
Total assets 87,691 91,154 102,485 126,068
Consolidated obligations
Discount notes 27,345 30,928 21,364 33,071
Bonds 52,254 52,343 72,748 84,266
Total consolidated obligations4
79,599 83,271 94,112 117,337
Mandatorily redeemable capital stock 52 54 81 96
Total liabilities 81,951 85,358 96,486 119,335
Capital stock - Class B putable 3,341 3,432 3,802 4,653
Retained earnings 2,351 2,359 2,257 2,199
Accumulated other comprehensive income (loss) 48 5 (60) (119)
Total capital 5,740 5,796 5,999 6,733
Statements of Condition December 31, September 30, June 30, March 31,
Cash and due from banks $ 1,029 $ 209 $ 218 $ 81
Investments1
38,465 34,402 39,140 38,271
Advances 80,360 85,009 101,288 99,228
Mortgage loans held for portfolio, net3
9,334 8,952 8,324 7,943
Total assets 129,603 129,148 149,474 146,043
Consolidated obligations
Discount notes 29,531 26,716 36,934 44,994
Bonds 91,553 93,611 103,223 91,979
Total consolidated obligations5
121,084 120,327 140,157 136,973
Mandatorily redeemable capital stock 206 202 203 237
Total liabilities 122,877 122,305 141,997 138,684
Capital stock - Class B putable 4,517 4,676 5,304 5,182
Retained earnings 2,165 2,131 2,120 2,092
Accumulated other comprehensive income (loss) 44 36 53 85
Total capital 6,726 6,843 7,477 7,359
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 at December 31, 2020, $3 million at September 30, 2020, and $1 million at June 30, 2020 and March 31, 2020.
3 Includes an allowance for credit losses of $1 million at December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019.
4 The total par value of outstanding consolidated obligations of the 11 FHLBanks was $746.8 billion, $819.9 billion, $915.8 billion, and $1,174.7 billion at December 31, 2020, September 30, 2020, June 30, 2020, and March 31, 2020.
5 The total par value of outstanding consolidated obligations of the FHLBanks was $1,025.9 billion, $1,010.3 billion, $1,048.4 billion, and $1,010.9 billion at December 31, 2019, September 30, 2019, June 30, 2019, and March 31, 2019.
The following tables present a summary of our Statements of Income (dollars in millions):
For the Three Months Ended
Statements of Income December 31, September 30, June 30, March 31,
Net interest income $ 103 $ 141 $ 119 $ 109
Provision (reversal) for credit losses on mortgage loans (1) 2 - -
Other income (loss)1
5 65 15 36
Other expense2
70 37 39 43
AHP assessments 5 16 10 10
Net income 34 151 85 92
For the Three Months Ended
Statements of Income December 31, September 30, June 30, March 31,
Net interest income $ 141 $ 129 $ 147 $ 159
Other income (loss)1
9 3 3 5
Other expense2
43 43 43 39
AHP assessments 11 9 11 13
Net income 96 80 96 112
1 Other income (loss) includes, among other things, net gains (losses) on investment securities and net gains (losses) on derivatives and hedging activities.
2 Other expense includes, among other things, compensation and benefits, professional fees, and contractual services.
Investment Portfolio Analysis
The following table summarizes the carrying value of our investment portfolio (dollars in millions):
December 31,
2020 2019 2018
Trading securities
U.S. Treasury obligations1
$ 4,069 $ - $ -
Other U.S. obligations1
114 150 159
GSE and Tennessee Valley Authority obligations 64 60 57
Other2
246 259 266
Mortgage-backed securities
GSE multifamily 382 419 433
Total trading securities 4,875 888 915
Available-for-sale securities
Other U.S. obligations1
1,672 2,127 2,602
GSE and Tennessee Valley Authority obligations 1,022 1,060 1,038
State or local housing agency obligations 693 756 814
Other2
302 285 275
Mortgage-backed securities
U.S. obligations single-family1
3,544 4,059 4,483
GSE single-family 446 649 796
GSE multifamily 8,231 7,715 9,011
Total available-for-sale securities 15,910 16,651 19,019
Held-to-maturity securities
GSE obligations and Tennessee Valley Authority obligations 379 384 389
State or local housing agency obligations 203 221 391
Mortgage-backed securities
U.S. obligations single-family1
3 5 9
U.S. obligations commercial1
- 1 1
GSE single-family 1,225 1,752 2,192
Private-label 6 7 10
Total held-to-maturity securities 1,816 2,370 2,992
Interest-bearing deposits 401 1 1
Securities purchased under agreements to resell 4,800 13,950 4,700
Federal funds sold 3,695 4,605 4,150
Total investments $ 31,497 $ 38,465 $ 31,777
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.
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, 2020 (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. Treasury obligations1
$ 4,069 $ - $ - $ - $ 4,069
Other U.S. obligations1
- 18 - 96 114
GSE and Tennessee Valley Authority obligations - - 64 - 64
Other2
34 91 121 - 246
Mortgage-backed securities
GSE multifamily - 352 30 - 382
Total trading securities 4,103 461 215 96 4,875
Yield on trading securities 0.65 % 2.73 % 5.24 % 3.60 %
Available-for-sale securities
Other U.S. obligations1
4 1,500 168 - 1,672
GSE and Tennessee Valley Authority obligations - 583 35 404 1,022
State or local housing agency obligations - 163 186 344 693
Other2
- 192 110 - 302
Mortgage-backed securities
U.S. obligations single-family1
- - - 3,544 3,544
GSE single-family - - - 446 446
GSE multifamily 12 5,376 2,460 383 8,231
Total available-for-sale securities 16 7,814 2,959 5,121 15,910
Yield on available-for-sale securities 0.76 % 2.00 % 1.40 % 0.99 %
Held-to-maturity securities
GSE and Tennessee Valley Authority obligations - 252 28 99 379
State or local housing agency obligations - - 170 33 203
Mortgage-backed securities
U.S. obligations single-family1
- - - 3 3
GSE single-family - 6 96 1,123 1,225
Private-label - - 2 4 6
Total held-to-maturity securities - 258 296 1,262 1,816
Yield on held-to-maturity securities 0.75 % 4.35 % 1.31 % 1.48 %
Total investment securities 4,119 8,533 3,470 6,479 22,601
Interest-bearing deposits 401 - - - 401
Securities purchased under agreements to resell 4,800 - - - 4,800
Federal funds sold 3,695 - - - 3,695
Total investments $ 13,015 $ 8,533 $ 3,470 $ 6,479 $ 31,497
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.
At December 31, 2020, we had investment securities 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 $ 9,151 $ 9,155
United States Department of the Treasury 4,069 4,069
Ginnie Mae 3,547 3,547
Freddie Mac 1,526 1,528
Tennessee Valley Authority 804 884
Total $ 19,097 $ 19,183
Loan Portfolio Analysis
The following table presents supplemental information on our mortgage loans held for portfolio (dollars in millions):
December 31,
2020 2019 2018 2017 2016
Past due 90 days or more and still accruing interest1
$ 13 $ 7 $ 8 $ 11 $ 14
Non-accrual mortgage loans2
$ 93 $ 31 $ 36 $ 48 $ 60
Allowance for credit losses
Balance, beginning of year $ 1 $ 1 $ 2 $ 2 $ 1
Charge-offs3
(1) - - (1) (2)
Recoveries - - - 1 -
Provision (reversal) for credit losses on mortgage loans 1 - (1) - 3
Balance, end of year $ 1 $ 1 $ 1 $ 2 $ 2
Non-accrual mortgage loans
Gross interest income that would have been recorded based on original terms during the year $ 3
Interest actually recognized into net income during the year -
Interest shortfall $ 3
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 less than one percent for the years ended December 31, 2020, 2019, 2018, 2017 and 2016.
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, 2020, 2019, and 2018 (dollars in millions):
Discount Notes1
Bonds2
2020 2019 2018 2020 2019 2018
Outstanding at end of the period $ 27,345 $ 29,531 $ 42,879 $ 11,990 $ 23,458 $ 3,493
Weighted-average rate at end of the period 0.10% 1.65% 2.34% 0.12 % 1.66 % 2.25 %
Daily-average outstanding for the period $ 27,678 $ 35,527 $ 38,986 $ 21,618 $ 15,583 $ 8,060
Weighted-average rate for the period 0.62% 2.30% 1.89% 0.74 % 2.13 % 1.76 %
Highest outstanding at any month-end $ 33,072 $ 46,690 $ 43,122 $ 30,399 $ 23,458 $ 12,037
1 Values are derived using the carrying value of discount notes.
2 Values are derived using the par value of bonds.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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, our President and CEO, and CFO have concluded that our disclosure controls and procedures were effective as of December 31, 2020.
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, 2020, 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 our internal control over financial reporting was effective as of December 31, 2020. Additionally, the effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Refer to “Item 8. Financial Statements and Supplementary Data - Report of Independent Registered Public Accounting Firm” for their audit report.
Previously Identified Material Weaknesses
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.
As disclosed in our 2018 and 2019 Annual Reports on Form 10-K, our management concluded that we had material weaknesses in our internal control over financial reporting.
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.
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.
Remediation of Previously Reported Material Weaknesses in Internal Control over Financial Reporting
Management has remained 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 to fully remediate the material weaknesses previously identified:
1. Management has re-evaluated IT governance and controls and has updated procedures related to user access management. During 2019, we designed enhanced user access controls. These controls were designed to ensure appropriate segregation of duties and adequate restrictions on user and privileged access to the Bank’s IT applications, programs, and data. These controls were implemented during the first quarter of 2020. After completing our testing of the design and operating effectiveness of these controls, management concluded that we have remediated this material weakness.
2. Management has re-evaluated IT governance and controls and has updated procedures related to IT change management. During 2019, we designed and implemented enhanced IT change management controls. These controls were designed to ensure that IT program and data changes affecting financial IT applications and underlying accounting records were identified, tested, authorized, and implemented appropriately. After completing our testing of the design and operating effectiveness of these controls, management concluded that we have remediated this material weakness.
3. During 2019, training was provided to IT personnel and business process owners focusing on controls related to user access and IT change management. Additional training has been provided in 2020 focusing on the execution of user access and IT change management controls, intended to ensure understanding of Bank policies and procedures.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2020, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Principal Accounting Officer Designation
On March 9, 2021, Joelyn R. Jensen-Marren was designated as the Bank’s principal accounting officer for SEC reporting purposes. Ms. Jensen-Marren, age 55, serves as the Bank’s Executive Vice President and CFO. Ms. Jensen-Marren’s management responsibilities include accounting and financial reporting, strategic planning, and fiscal and regulatory-related reporting functions.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 and Economic Recovery Act of 2008 (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.
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, 2021:
Expiration of
Current Term As
Member or Director as of Board
Director Age Independent Director Since December 31 Committees
James G. Livingston (chair) 55 Member June 1, 2015 2021 a, h
Ellen Z. Lamale (vice chair) 67 Independent January 1, 2012 2023 a, c, h
Ruth B. Bennett 68 Independent June 1, 2015 2024 a, b, d
Karl A. Bollingberg 58 Member January 1, 2019 2022 c, g, h
Steven L. Bumann 67 Member January 1, 2015 2021 a, f, i
Cleon P. Butterfield * 66 Independent January 1, 2020 2023 b, d
Christine H. H. Camp 54 Member January 1, 2018 2021 a, b, d, h
David J. Ferries 66 Member June 1, 2015 2022 a, b, e
Chris D. Grimm 62 Member January 1, 2010 2023 e, g, h
James W. Hunt 56 Member January 1, 2021 2024 f, i
Amy K. Johnson 55 Independent January 1, 2020 2023 a, d, g
Jon M. Jones 59 Member January 1, 2021 2024 c, f
Teresa J. Keegan 58 Member January 1, 2012 2023 b, h, i
Michelle M. Keeley 56 Independent January 1, 2015 2022 a, f, i
Joe R. Kesler 65 Member March 9, 2018 2023 e, f
John A. Klebba 64 Member January 1, 2018 2021 a, b, c
Lauren M. MacVay 52 Member January 1, 2018 2021 e, g, h
Michael W. McGowan 52 Independent June 1, 2015 2023 c, g, h
Elsie M. Meeks * 67 Independent January 1, 2015 2022 a, b, d
Jason A. Meyerhoeffer 54 Member June 25, 2019 2022 g, h, i
Carol K. Nelson 64 Independent January 1, 2021 2024 e, g
Cynthia A. Parker 67 Independent June 1, 2015 2021 f, h, i
a) Executive and Governance Committee
b) Audit Committee
c) Risk and Compliance Committee
d) Housing and Community Investment Committee
e) Member Committee
f) Human Resources and Compensation Committee (Compensation Committee)
g) Technology Committee
h) Regulatory Committee
i) Finance Committee
* Public Interest Independent Director
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.
James G. Livingston, the Board’s chair, 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 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 and property development company in Oregon and Washington, since 2008. In her role at RB Bennett Enterprises LLC, she develops, builds, and manages affordable housing. 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 board of Vancouver Affordable housing. She is a former board member of Pacific Northern Environmental, 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 chair of the Audit 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. Mr. Bollingberg previously served as director of lending from 2016 to 2018, as well as various other roles at Alerus since 1987. 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 and vice chair for the Bank of North Dakota, board member and past chair of the Regional Airport Authority, and was campaign chairperson for the Community Violence and Intervention Center Shelter Project. Mr. Bollingberg’s position as an officer of a member institution and his involvement in and knowledge of banking and business development, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as the vice chair of the Risk and Compliance Committee.
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 has held various leadership roles within the financial industry, including vice president and senior vice president roles at BankWest, Inc. He also earned his Certified Public Accountant (CPA) license while working for a local CPA firm and spent time working for the South Dakota Department of Legislative Audit. Mr. Bumann is currently the chairman of the board of directors of the South Dakota Bankers Association and a member of its legislative committee. 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 chair of the Finance Committee.
Cleon P. Butterfield has served as a senior vice president and CFO for the Utah Housing Corporation (UHC) since 2001. Mr. Butterfield joined UHC in 1979 and has held various leadership capacities during his tenure including treasurer, director of operations, and director of program development among others. Mr. Butterfield has served on multiple affordable housing councils and committees. He is also a former member of the State of Utah Alternative Dispute Resolution Council. Additionally, he is a guest lecturer teaching about how low-income housing tax credits and tax-exempt bond financing produce a viable solution for low-income housing needs. Mr. Butterfield’s involvement in and knowledge of affordable housing, his experience in financial management, and his leadership and management skills, as indicated by his background, support his qualifications to serve as a Public Interest Independent Director on our Board of Directors.
Christine H. H. Camp has served as a director on the board of Central Pacific Bank in Honolulu, Hawaii since 2004. During her 16 year tenure, she served as chair of the compensation committee and vice chair of the loan committee and the audit committee and she currently chairs the regulatory compliance committee. 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. She currently serves as chair of the Regulatory Committee and vice chair of the Housing and Community Investment Committee.
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 previous trustee of the Whitney Benefits Educational Foundation and previous director of 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’ position as an officer of a member institution and his 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 chair of the Member 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. He currently serves as vice chair of the Regulatory Committee.
James W. Hunt has served as senior vice president and CFO of OnPoint Community Credit Union in Portland, Oregon, since May of 2009. Prior to joining OnPoint, Mr. Hunt spent eight years serving in several positions within the finance division of Washington Mutual in Seattle, most recently as a senior vice president within the treasury department. From 1987 to 2001, he held a variety of finance positions within Fleet Mortgage Group in Columbia, South Carolina. For seven years, Mr. Hunt served on the board of directors of Financial Beginnings, a non-profit financial education organization benefiting students and young adults in Oregon and Washington. He earned a BBA in Finance from Francis Marion College in South Carolina in 1987, and is a CPA in Oregon and Chartered Financial Analyst (CFA). Mr. Hunt’s position as an officer 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.
Amy K. Johnson retired from her position as global head of operations for Columbia Threadneedle Investments (CTI), the investment management division of Ameriprise Financial, Inc. in Minneapolis, Minnesota, in June 2019. Ms. Johnson held her position as global head of operations for CTI from April 2016 to June 2019 and previously served in several positions at CTI and its predecessors and affiliates since 2001. Her most recent roles included president of Ameriprise Trust Company from November 2006 to April 2017 and CTI COO - North America from May 2010 to April 2016. Ms. Johnson has been a board member of Friends of Ngong Road since 2009 and currently serves as COO, a volunteer position. Based in Minneapolis, Minnesota, its mission is to transform the lives of children impacted by AIDS and HIV in Nairobi, Kenya, through education and support. Ms. Johnson’s involvement in and knowledge of operations and 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 Technology Committee.
Jon M. Jones has served as the president and CEO of Washington Business Bank in Olympia, Washington since 2007. Prior to joining Washington Business Bank, Mr. Jones worked for his own company, Jones Financial Strategies, as a bank consultant and commodities trader. He previously worked for Venture Bank in Olympia, Washington in various roles for 15 years. Mr. Jones started his career in finance at Peoples Bank and Trust in Waterloo, Iowa, where he worked as a credit analyst. He then moved on to be a commercial lending officer at Northwest Bank and Trust in Davenport, Iowa before moving to Washington State in 1990. Mr. Jones is currently the chairman of the board of the Washington Bankers Association. Additionally, he is the current treasurer of the Olympia Master Builders and a past chairman of both the Thurston County Chamber of Commerce and the South Sound YMCA. Mr. Jones continues to serve on the board of the South Sound YMCA and is a member of the Olympia Roundtable. Mr. Jones is a 1984 graduate of the University of Northern Iowa with a BA in Finance and is a 1996 graduate of the Pacific Coast Banking School at the University of Washington. Mr. Jones’ 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 vice chair of the Audit Committee.
Michelle M. Keeley retired from her position as executive vice president of equities and fixed income investments for Ameriprise Financial Services in Minneapolis, Minnesota, in 2010. Prior to joining Ameriprise (American Express), 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. Ms. Keeley joined American Equity Life in 2020 as an independent director. She currently serves on the investment and risk committees of that board. Ms. Keeley has also served as a director of the Minneapolis-based non-profit organization, Graywolf Press, since 2018. In addition to serving on our Board of Directors, Ms. Keeley has been a director of the Bridge Builder Trust mutual funds, an Edward Jones affiliated company, since 2015. Ms Keeley currently serves as chair of the nominating and governance committee on that board and serves on all other committees of the board. 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.
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 chair of the Risk and Compliance 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 26 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. Ms. MacVay has held numerous board positions and currently serves on the board of directors of the Alaska Credit Union League. 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 vice chair of the Member Committee.
Michael W. McGowan is a strategic advisor for a select group of corporations, financial sponsors, and government agencies. He has served as chair and CEO of DCM Limited, a global business and information technologies consulting firm, since 2007. He was the primary founder of Nova Biosource Fuels, Inc., a publicly traded renewable energy company, and continues to be involved in developing technologically disruptive 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 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 currently serves on the board of the Native American Agricultural Fund, a national $280 million trust established through the federal court as a result of proven discrimination by USDA against Native American ranchers and farmers. 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. Ms. Meeks’ involvement in and knowledge of economic development and community management, as indicated by her background, support her qualifications to serve as a Public Interest Independent Director on our Board of Directors. She currently serves as chair of the Housing and Community Investment Committee.
Jason A. Meyerhoeffer has served as president and CEO of First Federal Savings Bank of Twin Falls in Twin Falls, Idaho since 2017. Prior to his current position, Mr. Meyerhoeffer held various leadership roles at First Federal Savings Bank of Twin Falls since 1996 including serving as executive vice president and chief lending officer from 2002 to 2016. He has a nearly 25-year career in banking that began in 1995 as a regional credit officer with West One Bank N.A. Mr. Meyerhoeffer has served as director of several business development corporations and state banking trade associations. Mr. Meyerhoeffer’s position as an officer of a member institution and his 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 vice chair of the Finance Committee.
Carol K. Nelson was named CEO and president of Monzo, Inc. in 2021. For the past year, Ms. Nelson served as a strategic advisor to Monzo in its application for a national bank charter for Monzo Bank USA N.A. Parent Company is the UK’s fastest growing fully regulated digital bank. Prior to that, she was an executive for KeyBank from 2015 to 2019. She served as KeyBank’s pacific region executive and market president, was a member of KeyBank’s executive council, and director and trustee for the KeyBank Foundation. Ms. Nelson was appointed by Governor Inslee to serve as the CEO of the Washington State Department of Revenue from January 2013 to 2015. She served as the CEO and president of Cascade Bank in Everett, Washington from January 2001 to June 2011. She began her banking career at Seafirst Bank which was acquired by Bank of America in 1982 and served in several positions culminating as senior vice president and northern region executive. Ms. Nelson currently serves as chair of the board for United Way of King County and vice chair of the board of the Washington State Major League Baseball Public Facilities District. She is a former director of the Federal Reserve Bank of San Francisco, Seattle Branch serving two terms (2007 to 2009 and 2015 to 2017). She is a past board member of Pacific Coast Banking School and a past board chair of the Washington Bankers Association. She earned a BA in Finance from Seattle University and a MBA from Seattle University. Ms. Nelson’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.
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. She currently serves as vice chair of the Compensation Committee.
Executive Officers
The following persons currently serve as executive officers of the Bank:
Position Held
Executive Officer Age Position Held Since
Kristina K. Williams 56 President and Chief Executive Officer January 2020
Joelyn R. Jensen-Marren 55 Executive Vice President and Chief Financial Officer June 2019
William W. Osborn 55 Executive Vice President and Chief Business Officer August 2020
George H. Collins 61 Executive Vice President and Chief Risk and Compliance Officer July 2020
Kevin T. Larkin 52 Executive Vice President and Chief Information Officer March 2020
William R. Bemis 41 Senior Vice President and Chief Capital Markets Officer June 2019
Nancy L. Betz 62 Senior Vice President and Chief Human Resources and Administrative Officer June 2017
Jennifer H. Ernst 51 Senior Vice President and Director of the Western Office and Community Investment Officer July 2019
Aaron B. Lee 48 Senior Vice President, General Counsel, and Corporate Secretary March 2013
Kelly E. Rasmuson 58 Senior Vice President and Chief Audit Executive June 2016
Deborah G. Baldwin 59 Senior Vice President and Chief Diversity and Inclusion Officer May 2020
Jennifer J. Fox 61 Senior Vice President and Director of Regulatory Relations May 2020
Dara J. Queck 60 Senior Vice President and Chief Bank Operations Officer July 2020
Kristina K. Williams has been President and CEO of the Bank since January 2020. She began her association with the Federal Home Loan Bank System in 2004. Prior to her current role, she served as the COO of the Federal Home Loan Bank of Pittsburgh (Pittsburgh Bank), a position she held from 2011 to 2019. In that role, Ms. Williams had responsibility for all member facing departments, including community investment, communications, bank operations, MPF, member services, and information technology. In her 15 years with the Pittsburgh Bank she also held positions of chief accounting officer, CFO, and acting chief risk officer. Prior to working for the Pittsburgh Bank, Ms. Williams spent 12 years with PNC Financial Services in its wholesale bank and six years in public accounting. She served as vice chair of the West Liberty University (WLU) Board of Governors from August 2019 to December 2020. Ms. Williams has an undergraduate degree from WLU and Masters of Professional Accountancy from West Virginia University. She is also a CPA and received an honorary Doctor of Humane Letters degree from WLU in 2015.
Joelyn R. Jensen-Marren has served as Senior Vice President and CFO since June 2019 and was appointed to Executive Vice President and CFO in February 2021. In her role, Ms. Jensen-Marren has management responsibility for the accounting and financial reporting, strategic planning, and fiscal and regulatory-related reporting functions. Ms. Jensen-Marren joined the Bank in 1999 and has served in various leadership roles including market risk manager, financial risk officer, and more recently as senior vice president, director of portfolio strategy from 2014 to June 2019. Prior to joining the Bank, Ms. Jensen-Marren served as manager of portfolio investments at Centura Bank in Rocky Mount, North Carolina. She currently serves on the Polk County Housing Trust Fund Board. Ms. Jensen-Marren received her undergraduate degree from Iowa State University with a Master’s degree from the University of Colorado.
William W. Osborn has served as Executive Vice President and Chief Business Officer (CBO) since August 2020. Mr. Osborn is responsible for the Bank’s member-facing departments including community investment, funding product group, marketing communications, member experience, member relationships and solutions, and the mortgage product group. Prior to joining the Bank, he served as senior vice president and chief financial officer of the Federal Home Loan Bank of Topeka (Topeka Bank), a position he held from 2010 to 2020. Mr. Osborn also served as director of product profitability and pricing of the Topeka Bank from 2006 to 2007. Mr. Osborn was promoted to director of banking strategies in January 2008, to first vice president in April 2008 and to senior vice president in April 2009. Mr. Osborn is a CFA and member of the CFA Institute. Mr. Osborn received his undergraduate degree from Brigham Young University and MBA degree from Westminster College.
George H. Collins has served as Executive Vice President and Chief Risk and Compliance Officer (CRCO) since July 2020. Mr. Collins has responsibility for the Bank’s enterprise risk management area, including credit risk, market risk, operational risk, and model risk. Prior to joining the Bank, he served as executive vice president and chief risk officer of the Federal Home Loan Bank of Boston (Boston Bank) from 2015 to 2019. From 2006 to 2015, Mr. Collins was senior vice president and chief risk officer of the Boston Bank. Prior to assuming that position, Mr. Collins served as first vice president, director of market risk management from 2005 to 2006. He previously served as vice president and assistant treasurer of the Boston Bank from 2000 to 2005. Mr. Collins is a CFA. He received his undergraduate degrees from the State University of New York at Stony Brook.
Kevin T. Larkin is currently serving as Executive Vice President and Chief Information Officer (CIO), a position he has held since March 2020. Mr. Larkin oversees the Bank’s information technology, information security, and enterprise procurement and vendor management departments. Prior to joining the Bank, Mr. Larkin served as vice president, managing director, IT operations of the Federal Home Loan Bank of Chicago (Chicago Bank) since 2019. He previously served as the vice president, managing director, IT risk, compliance, and administration of the Chicago Bank from 2018 to 2019. Prior to joining the Chicago Bank, Mr. Larkin served as assistant vice president of business systems and IT governance for Illinois Mutual Life Insurance from 2014 to 2018. In addition, Mr. Larkin previously served as the director of business solutions for the Pittsburgh Bank. He received his undergraduate degree from Gannon University and both his MBA and Master’s in Information Systems Management from Duquesne University.
William R. Bemis has served as Senior Vice President and Chief Capital Markets Officer (CCMO) since June 2019. Mr. Bemis oversees the Bank’s treasury and portfolio strategy functions. In addition to developing and implementing financial strategies, products and services to help fulfill the Bank’s mission, Mr. Bemis manages the balance sheet and product pricing for the Bank. Mr. Bemis joined the Bank in 2013 as senior vice president and treasurer. Prior to joining the Bank, Mr. Bemis served as vice president, senior portfolio manager (securitized products) at Aviva Investors North America in Des Moines, Iowa. He received his undergraduate degree from the University of Nebraska-Lincoln and his Master’s degree from the University of Iowa.
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, 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, business resiliency 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 director of human resources for the sales and marketing division and had oversight responsibilities for corporate learning and development. Ms. Betz received her undergraduate degree in Business Management and an M.S. in Adult Education/Learning and Development from Drake University.
Jennifer H. Ernst is currently serving as Senior Vice President, Director of the Western Office, and Community Investment Officer, a position she has held since July 2019. Ms. Ernst is responsible for leading the Western Office to ensure employee engagement and cultural alignment with the Bank’s values and mission. She also provides leadership for the Bank’s Advisory Council and works with its Board of Directors to define a strategic direction for the Bank’s affordable housing and community investment products and strategies. Ms. Ernst joined the Bank in 2015 as Vice President/Community Investment Officer upon the Merger with the Seattle Bank where she had been employed since 2000. Previously, Ms. Ernst held positions at Impact Capital where she worked with community development corporations to create multi-year business plans that informed enterprise investments. Prior to that, she worked as a neighborhood stabilization officer for the City of St. Louis and as a case manager for the Comprehensive Child Development Program. Ms. Ernst earned a Bachelor of Arts degree from the University of the Pacific and studied public administration at the University of Washington and University of Missouri St. Louis. She has served as a member of Plymouth Housing’s audit committee, the City of Seattle’s Levy Oversight Committee, and on various regional committees and panels. In 2013, she received an Ally of the Year award from Next Step Housing. Currently, Ms. Ernst serves as a member of the board of directors for the National Association of Affordable Housing Lenders (NAAHL) where she is a member of its audit and finance committees.
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 and the government and external relations departments. 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 serves on the nonprofit boards of the Iowa Chapter of the American Parkinson Disease Association and Junior Achievement of Central Iowa. Mr. Lee 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.
Deborah G. Baldwin is currently serving as Senior Vice President and Chief Diversity and Inclusion Officer, a position she has held since May 2020. In this role, Ms. Baldwin oversees all aspects of the Banks’ diversity and inclusion efforts, as well as the Bank’s Office of Minority and Women Inclusion (OMWI). Prior to joining the Bank, she consulted on diversity and inclusion strategy development and execution from 2018 to 2020. Prior to consulting, Ms. Baldwin was the deputy director, OMWI, at the National Credit Union Administration from 2016 to 2018. In addition, Ms. Baldwin previously served as assistant vice president, diversity and inclusion, at the Federal Reserve Bank of Chicago from 2011 to 2014. Ms. Baldwin received her undergraduate degree from Georgia State University and holds certifications in unconscious bias training and the Intercultural Development Inventory designed to assess cross-cultural competence.
Jennifer J. Fox is currently serving as Senior Vice President and Director of Regulatory Relations, a position she has held since May 2020. Ms. Fox leads regulatory relations with the Finance Agency, Board, and Executive Team and is responsible for formal communications with the Finance Agency on behalf of the Bank. Ms. Fox has served in the Banks’ internal audit department since joining the Bank in 1998 holding various positions of increased responsibility, most recent as as the Bank’s vice president and director of internal audit from April 2018 to May 2020. Ms. Fox received her undergraduate degree from Iowa State University and several internal auditing certifications, including Certified Internal Auditor.
Dara J. Queck has served as Senior Vice President and Chief Bank Operations Officer since July 2020. Ms. Queck oversees the member and financial operations of the Bank, which includes the advance funding desk, membership, collateral management, business process mapping, and other banking operations. She also serves as the Bank Secrecy Act/Anti-Money Laundering Officer. Ms. Queck previously served as the Bank’s member and financial operations officer since 2017 and director of Member Financial Services prior to that, for a period of more than five years, as well as numerous other positions since 1980. Ms. Queck received her undergraduate degree from Upper Iowa University and is certified in Banking Operations and Technology from Vanderbilt University. Ms. Queck is a certified anti-money laundering specialist and a member of the Association of Certified Anti-Money Laundering Specialists.
Code of Ethics
We have adopted a Code of Ethics (Code) 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, and (v) the policy for complaints regarding questionable accounting, internal accounting controls, and auditing matters, and oversight of fraud investigations. 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 2021 are Ruth Bennett (chair), Teresa Keegan (vice chair), Cleon Butterfield, Christine Camp, David Ferries, John Klebba, and Elsie Meeks. The Audit Committee held a total of 18 meetings in 2020. As of February 28, 2021, the Audit Committee has held one meeting and is scheduled to hold 10 meetings throughout the remainder of 2021. Refer to Exhibit 99.1 of this 2020 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, Cleon Butterfield, Christine Camp, David Ferries, John Klebba, 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
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 section describes and analyzes our 2020 executive compensation program for:
•the executive officers serving as CEO during 2020;
•the executive officer serving as CFO during 2020;
•the three other most highly-compensated executive officers who were serving as executive officers on December 31, 2020; and
•up to two executive officers who would have been included in the three other most highly-compensated executive officers, but were not serving as executive officers on December 31, 2020.
These executive officers are collectively referred to as our named executive officers (NEOs).
During 2020, we had certain changes to our executive team. On January 20, 2020, Ms. Williams became President and CEO, and Mr. Wilson, former President and CEO, served as an advisor until his retirement on February 7, 2020. Effective March 23, 2020, Mr. Larkin became CIO. In addition, effective August 31, 2020, the employment with the Bank of our former CRCO, Mr. Mohandas, and our former CBO, Mr. Clute, was terminated.
This Compensation Discussion and Analysis includes the following parts:
Compensation Philosophy
Elements of Executive Compensation
Finance Agency Oversight - Executive Compensation
Roles and Responsibilities of the Compensation Committee and Management in Establishing Executive Compensation
Analysis Tools the Compensation Committee Uses
Compensation Decisions in 2020
Benefits and Retirement Philosophy
CEO Compensation Pay Ratio
Potential Payments upon Termination or Change of Control
Director Compensation
Compensation Committee Report
Compensation Philosophy
Our compensation philosophy, practices, and principles are important to 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 critical to our long term success and ensuring we bring value for our members. 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:
i.Attract, motivate, reward, and retain the talent and skill sets important to run our business and execute our short- and long-term strategic objectives.
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 is competitive relative to market. Our competitive market consists of FHLBanks, commercial banks, and other financial services companies. We consider total compensation to be competitive at the 50th percentile of the market data.
iv. Align with the Bank’s mission and culture.
In 2020, we implemented our executive compensation philosophy to provide competitive compensation to our NEOs that was aligned to the achievement of business objectives and Bank performance.
Elements of Executive Compensation
Our executive compensation program is comprised of the following elements: (i) base salary, (ii) an executive incentive plan (EIP) 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 for our CEO, (vi) limited perquisites, and (vii) other amounts as defined. 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.
Our President and CEO, former President and CEO, former CRCO, and former CBO are the only NEOs with an employment agreement with us that sets forth minimum base salary. These employment agreements provide that we shall initially pay each NEO an annualized base salary of not less than the amount set forth in the agreement. Base salary may only be adjusted upward 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. Base salary for all other NEOs is generally established by the President and CEO. For additional information regarding base salary, see the section entitled “Base Salary Levels” in this Item 11.
EXECUTIVE INCENTIVE PLAN
In December 2019, the Compensation Committee approved the 2020 EIP. In April 2020, the Compensation Committee approved the Bank-wide Goal measures. The EIP includes an annual cash incentive and a deferred cash incentive. Under the EIP, 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 2020 deferred opportunities are payable in 2024 and are subject to the quarterly average of our MVCS in 2023 and approvals by the Compensation Committee and Board of Directors in 2024. 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 believe that tying the amount of the final awards to the level of our MVCS ensures that our NEOs continue 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 2020 EIP in June of 2020.
The 2020 EIP provides that unless otherwise directed by the Compensation Committee, payments under the EIP 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, typically within 75 days after the end of the calendar year for which the performance or deferral period is ended, but in any event by the end of the calendar year following the performance or deferral period.
Under the EIP, the Compensation Committee may determine an 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) is subject to any disciplinary action or probationary status at the time of payout, or (iii) 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 EIP, 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, (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, or (iv) failure to make sufficient progress in improving Finance Agency examination ratings.
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.
For additional information about our EIP, see “EIP Award Opportunities” and “EIP Performance Measures and Results” in this Item 11.
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. 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 Pentegra 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:
NEO Principal Position Retirement Plan
Kristina K. Williams President and CEO c, e
Michael L. Wilson Former President and CEO b, c, d, e
Joelyn R. Jensen-Marren1
CFO a, c
Kevin T. Larkin1
CIO c
Aaron B. Lee General Counsel and Corporate Secretary a, c, e
William R. Bemis CCMO c, e
Sunil U. Mohandas Former CRCO c, e
Daniel D. Clute Former CBO c, e
1 Ms. Jensen-Marren and Mr. Larkin were eligible to participate in the BEP DC Plan; however, they did not elect to participate during 2020.
a) Des Moines Bank DB Plan
b) Seattle Bank DB Plan
c) DC Plan
d) BEP DB Plan
e) BEP DC Plan
For additional information about our retirement benefits, see “Benefits and Retirement Philosophy” in this Item 11.
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
Certain NEOs have employment agreements with us, which provide for payments in the event of termination based on certain triggering events. All other NEOs are subject to Bank policies. For additional details, see “Potential Payments Upon Termination or Change of Control” in this Item 11.
PERQUISITES
Our NEOs are eligible to receive perquisites as a convenience associated with their overall duties and responsibilities. Our President and CEO and former President and CEO were eligible to receive a monthly car allowance. All NEOs were eligible for certain other perquisites, such as financial planning assistance and/or relocation reimbursements. For additional details, see “Components of All Other Compensation” in this Item 11.
OTHER
Our NEOs may be eligible to receive a hiring bonus and other benefits. Ms. Williams received a hiring bonus in the amount $500,000, paid in 2020, and she is eligible to receive an additional contribution of $525,000 to her non-qualified DC Plan in 2021. Mr. Larkin received a hiring bonus in the amount of $125,000 in 2020 and is entitled to receive an additional bonus of $125,000 in 2021, after completion of his first year of employment.
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 NEOs to the Finance Agency for prior review.
Applicable rules also establish the following principles for executive compensation:
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.
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, generally 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 generally 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 goal responsibilities established for the year, and review NEO compensation relative to the market, in analyzing merit increases.
Analysis Tools the Compensation Committee Uses
For 2020, the Compensation Committee engaged Willis Towers Watson to conduct an assessment of our total rewards and make recommendations regarding compensation for our executives based on the results of their competitive analysis. This included the refinement of a total rewards philosophy and identification of sources of market data for purposes of the competitive compensation assessments of base pay, annual and deferred cash incentives, and benefits. This analysis compared the compensation of our executives utilizing the following sources:
•Public disclosures (e.g., proxy statements and annual reports) for top five highest paid executives;
•Reimer Consulting Key Position Compensation Survey of the FHLBank System;
•Willis Towers Watson Financial Services Industry with assets of $15 billion to $50 billion; and
•Willis Towers Watson General Industry Executive Compensation Survey with sales of $1 billion to $6 billion.
The primary market comparison for their assessment was the other FHLBanks. This was used to determine the market median for each position. The broader financial services and general industry data from Willis Towers Watson was used to establish the minimum and maximum of the range in order to represent the broader market comparison.
When using FHLBank System comparisons, our executives 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 financial services and general industry survey data, our executive positions are compared to roles with similar overall responsibility to our positions.
Compensation Decisions in 2020
How we compensate our NEOs sets the tone for how we administer pay throughout the entire Bank. For 2020, 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 for 2020 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 Willis Towers Watson’s executive compensation survey data.
For 2020, the following base salary increases were approved for our NEOs. These increases were reviewed by, and received non-objection from the Finance Agency:
NEO Principal Position 2020 Base Salary Increase from 2019
Kristina K. Williams1
President and CEO N/A
Michael L. Wilson2
Former President and CEO N/A
Joelyn R. Jensen-Marren CFO 7.5 %
Kevin T. Larkin1
CIO N/A
Aaron B. Lee3
General Counsel and Corporate Secretary 7.0 %
William R. Bemis3
CCMO 4.0 %
Sunil U. Mohandas Former CRCO 2.0 %
Daniel D. Clute4
Former CBO - %
1 Ms. Williams and Mr. Larkin were not employees of the Bank at the time 2020 merit increase decisions were made.
2 Mr. Wilson retired from the Bank effective February 7, 2020.
3 Our General Counsel and Corporate Secretary and CCMO’s increases were not provided to the Finance Agency because they were not an NEO at the time.
4 Mr. Clute received a 1.5 percent lump sum rather than a base salary increase.
EIP AWARD OPPORTUNITIES
EIP pay targets established for our NEOs take into consideration total compensation practices (base salary and incentives) of the survey data reviewed. Under the EIP, our NEOs are assigned target award opportunities, stated as percentages of base salary. The target award opportunities are determined based on the market data and level of responsibility and are approved by our Compensation Committee.
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 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 EIP award opportunities for our NEOs in 2020 were a percentage of base salary as follows:
Title Incentive
Plan Threshold Target Maximum
President and CEO and Former President and CEO Annual 25.0% 42.5% 50.0%
Deferred 25.0% 42.5% 50.0%
Executive Vice Presidents and Senior Vice Presidents1
Annual 20.0% 30.0% 40.0%
Deferred 20.0% 30.0% 40.0%
1 Mr. Mohandas’ and Mr. Clute’s employment with the Bank was terminated effective August 31, 2020. Refer to “Post-Employment Compensation of Sunil U. Mohandas” and “Post-Employment Compensation of Daniel D. Clute” in this Item 11 for additional details on their termination of employment compensation.
The following table provides estimated potential payouts under our EIP:
2020 Grants of Plan-Based Awards
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
NEO Incentive Plan Threshold Target Maximum
Kristina K. Williams Annual $ 202,853 $ 344,851 $ 405,707
Deferred 202,853 344,851 405,707
Michael L. Wilson Annual 22,526 38,294 45,052
Deferred 22,526 38,294 45,052
Joelyn R. Jensen-Marren Annual 68,000 102,000 136,000
Deferred 68,000 102,000 136,000
Kevin T. Larkin Annual 51,104 76,656 102,208
Deferred 51,104 76,656 102,208
Aaron B. Lee Annual 61,402 92,103 122,804
Deferred 61,402 92,103 122,804
William R. Bemis Annual 66,133 99,200 132,267
Deferred 66,133 99,200 132,267
Sunil U. Mohandas1
Annual - - -
Deferred - - -
Daniel D. Clute1
Annual - - -
Deferred - - -
1 Mr. Mohandas’ and Mr. Clute’s employment with the Bank was terminated effective August 31, 2020. Refer to “Post-Employment Compensation of Sunil U. Mohandas” and “Post-Employment Compensation of Daniel D. Clute” in this Item 11 for additional details on their termination of employment compensation.
EIP PERFORMANCE MEASURES AND RESULTS
In December 2019, the Compensation Committee approved the Bank-wide Goals framework. In April 2020, the Compensation Committee approved the Bank-wide Goal measures for 2020, which are summarized below:
i.Core Product Utilization (CPU) is measured by the utilization of core products by all Bank members, including all advances, standby letters of credit, and MPF (including on balance sheet and off balance sheet). The CPU is measured daily for advances, standby letters of credit, and off balance sheet MPF, and monthly for on balance sheet MPF. The monthly utilization metric is then averaged for the annual calculation.
ii.Reduce Operational Risk is measured by the completion of projects and initiatives in 2020 according to scope, timelines and success measures approved by management.
iii.Enhance Corporate Governance is measured by our efforts to remediate outstanding material weaknesses and address other regulatory matters.
iv.Spread between Adjusted Return on Capital Stock and SOFR While Exceeding Targeted Retained Earnings is a measure of profitability in which GAAP net income is adjusted for certain volatile and non-recurring items as disclosed in our 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.”
v.Diversity and Inclusion is a measure of our progress on diversity and inclusion initiatives.
The Bank’s EIP design has historically included Bank-wide Goals. This plan design has resulted in positive results for the Bank and reasonable payouts to our 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 2020, 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 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. The 2020 to 2022 Strategic Business Plan was approved by the Board of Directors in April of 2020.
On a regular basis during 2020, management provided an update to the Board of Directors on the status of performance relative to Bank-wide Goals. The following table provides the 2020 EIP Bank-wide Goals for our NEOs as well as our performance results, which were approved by the Board of Directors in February 2021:
Bank-wide Goals 2020 Results Threshold Target Maximum
Core Product Utilization (20% Weight) 67.50 % 64.20 % 67.30 % 70.50 %
Reduce Operational Risk (35% Weight) 3/3 1/3 2/3 3/3
Enhance Corporate Governance (15% Weight) 2.9/3 1/3 2/3 3/3
Spread between Adjusted Return on Capital Stock and SOFR While Exceeding Targeted Retained Earnings (20% Weight) 5.37 % 3.80 % 4.80 % 5.80 %
Diversity and Inclusion (10% Weight) 1/3 1/3 2/3 3/3
At its January 2021 meeting, the Compensation Committee determined the Bank-wide Goals achievement results for the incentive awards that would be paid out to NEOs for the 2020 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 2020.
The overall weighted achievement of the Bank-wide Goals was 106.69 percent of target for our President and CEO and former President and CEO and 117.08 percent of target for all other NEOs. 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. We received a non-objection letter from the Finance Agency for the Bank-wide Performance awards in March 2021:
NEO Annual Incentive Deferred Incentive Total Bank-wide Performance Award1
Percent of
Salary
Kristina K. Williams $ 367,921 $ 367,921 $ 735,842 91 %
Michael L. Wilson
40,856 40,856 81,712 91
Joelyn R. Jensen-Marren 119,422 119,422 238,844 70
Kevin T. Larkin 89,749 89,749 179,498 70
Aaron B. Lee 107,834 107,834 215,668 70
William R. Bemis 116,143 116,143 232,286 70
Sunil U. Mohandas2
- - - -
Daniel D. Clute2
- - - -
1 The Bank-wide Performance Award consists of annual incentive (50 percent of total incentive), paid in 2021, and deferred incentive (50 percent of total incentive). The deferred incentive amounts were earned as of December 31, 2020, but will not be paid until 2024, and remain subject to modification and forfeiture under the terms of the EIP.
2 Mr. Mohandas’ and Mr. Clute’s employment with the Bank was terminated effective August 31, 2020. Refer to “Post-Employment Compensation of Sunil U. Mohandas” and “Post-Employment Compensation of Daniel D. Clute” in this Item 11 for additional details on their termination of employment compensation.
SUMMARY COMPENSATION TABLE
The following table provides compensation information for our NEOs, as applicable, for the years ended December 31, 2020, 2019, and 2018:
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
Kristina K. Williams4
2020 $ 811,413 $ 500,000 $ 735,842 $ - $ 205,410 $ 2,252,665
President and CEO
Michael L. Wilson5
2020 90,104 - 81,712 618,000 187,123 976,939
Former President and CEO 2019 865,000 - 417,708 644,000 82,514 2,009,222
2018 830,000 - 541,074 - 88,360 1,459,434
Joelyn R. Jensen-Marren6
2020 340,000 - 238,844 267,000 28,500 874,344
CFO 2019 302,645 - 127,590 318,000 29,701 777,936
Kevin T. Larkin7
2020 255,521 125,000 179,498 - 69,816 629,835
CIO
Aaron B. Lee8
2020 307,011 - 215,668 167,000 41,931 731,610
General Counsel and Corporate Secretary
William R. Bemis8
2020 330,667 - 232,286 - 41,845 604,798
CCMO
Sunil U. Mohandas9
2020 272,000 - - - 760,650 1,032,650
Former CRCO 2019 400,000 - 193,152 - 40,546 633,698
2018 365,000 - 171,882 - 40,838 577,720
Daniel D. Clute9
2020 252,763 - - - 733,624 986,387
Former CBO 2019 370,800 - 179,052 - 38,834 588,686
2018 360,000 - 169,528 - 38,970 568,498
1 The components of this column for 2020 consist of annual incentive (50 percent of total incentive), paid in 2021 and deferred incentive (50 percent of total incentive). The deferred incentive amounts were earned as of December 31, 2020, but will not be paid until 2024, and remain subject to modification and forfeiture under the terms of the EIP.
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 pension value decreased by $167,000. In accordance with SEC disclosure requirements, this negative amount is not included in this table.
3 The components of this column for 2020 are provided in the “Components of All Other Compensation” table within this Item 11.
4 Ms. Williams’ 2020 salary, non-equity incentive, and all other compensation are based on the period of her employment with the Bank from January 20, 2020 through December 31, 2020. Ms. Williams also received a one-time bonus related to the start of her employment with the Bank.
5 Mr. Wilson served as the President and CEO through January 19, 2020, and as an advisor from January 20, 2020, until his retirement from the Bank on February 7, 2020. Refer to “Post-Employment Compensation of Michael L. Wilson” in this Item 11 for additional details.
6 Ms. Jensen-Marren was appointed to CFO on June 10, 2019. She was not an NEO prior to 2019.
7 Mr. Larkin’s 2020 salary, non-equity incentive, and all other compensation are based on the period of his employment with the Bank from March 23, 2020 through December 31, 2020. Mr. Larkin also received a one-time bonus related to the start of his employment with the Bank.
8 Mr. Lee and Mr. Bemis were not NEOs prior to 2020.
9 Mr. Mohandas’ and Mr. Clute’s employment with the Bank was terminated effective August 31, 2020. Their 2020 salary is based on the period of their employment with the Bank from January 1, 2020 through August 31, 2020. All other compensation includes their termination of employment compensation, including any non-equity incentive earned during the current year. Refer to “Post-Employment Compensation of Sunil U. Mohandas” and “Post-Employment Compensation of Dan D. Clute” in this Item 11 for additional details on their termination of employment compensation.
COMPONENTS OF ALL OTHER COMPENSATION
Bank Contributions to Vested Defined Contribution Plans
NEO DC Plans BEP DC Plan Retirement/Termination of Employment1
Perquisites and Other Personal Benefits2
Total
Kristina K. Williams $ 15,650 $ 62,450 $ - $ 127,310 $ 205,410
Michael L. Wilson3
17,558 8,846 159,969 750 187,123
Joelyn R. Jensen-Marren4
28,500 - - - 28,500
Kevin T. Larkin4
22,596 - - 47,220 69,816
Aaron B. Lee 25,347 14,870 - 1,714 41,931
William R. Bemis 27,166 14,679 - - 41,845
Sunil U. Mohandas1
7,486 16,406 735,748 1,010 760,650
Daniel D. Clute1
12,936 9,769 708,744 2,175 733,624
1 Mr. Mohandas’ and Mr. Clute’s employment with the Bank was terminated effective August 31, 2020. Refer to “Post-Employment Compensation of Sunil U. Mohandas” and “Post-Employment Compensation of Dan Clute” below for additional details on their termination of employment compensation.
2 Perquisites and other personal benefits were less than $25,000 and less than 10 percent of total perquisites for all NEOs with the exception of Ms. Williams and Mr. Larkin. Perquisites and other personal benefits for Ms. Williams included relocation expenses of $118,685 and a car allowance of $8,625. Perquisites and other personal benefits for Mr. Larkin included relocation expenses of $47,220.
3 Mr. Wilson retired from the Bank effective February 7, 2020. He received a payout of $159,969 for unused vacation. Refer to “Post-Employment Compensation of Michael L. Wilson” below for additional details.
4 Ms. Jensen-Marren and Mr. Larkin did not participate in the BEP DC Plan during 2020.
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 former President and CEO, CFO, and General Counsel and Corporate Secretary participated in our DB Plans prior to the freeze.
The pension benefits payable under the Des Moines DB Plan for the CFO and General Counsel and Corporate Secretary 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, or in certain instances age 45 if employed prior to 2004, 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 former 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. Prior to August 2013, the benefit formula was 2.5 percent. Compensation is defined as base salary plus overtime, bonuses, and incentive compensation. 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 former President and CEO was 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 former President and CEO 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.
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 12 - Pension and Postretirement Benefit Plans” for additional details.
2020 Pension Benefits Table
NEO Plan Name Number of Years
Credited Service 12/31/19 Present Value of Accumulated Benefit 12/31/20 Present Value of Accumulated Benefit Change in Present Value of Accumulated Benefit
Kristina K. Williams Pentegra DB Plan - $ - $ - $ -
BEP DB Plan - - - -
Michael L. Wilson1
Pentegra DB Plan 22.00 2,071,000 2,315,000 244,000
BEP DB Plan 10.41 2,145,000 2,519,000 374,000
Joelyn R. Jensen-Marren Pentegra DB Plan 16.67 1,453,000 1,720,000 267,000
BEP DB Plan - - - -
Kevin T. Larkin Pentegra DB Plan - - - -
BEP DB Plan - - - -
Aaron B. Lee Pentegra DB Plan 10.33 691,000 858,000 167,000
BEP DB Plan - - - -
William R. Bemis Pentegra DB Plan - - - -
BEP DB Plan - - - -
Sunil U. Mohandas Pentegra DB Plan - - - -
BEP DB Plan - - - -
Daniel D. Clute Pentegra DB Plan - - - -
BEP DB Plan - - - -
1 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. 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.
NON-QUALIFIED DEFINED CONTRIBUTION PLANS
Our NEOs are eligible to participate in the BEP DC Plan, a non-qualified defined contribution plan that is similar to 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 2019 year-end balance from the 2020 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). Effective January 1, 2021, participants are eligible to receive an additional four percent Bank contribution of eligible compensation above the limits set forth by the Internal Revenue Code into the BEP DC Plan following the end of each calendar year. In addition, effective January 1, 2021, we may elect to provide a discretionary contribution to an executive upon approval by the Board of Directors and subject to non-objection by the Finance Agency.
2020 Non-Qualified Deferred Compensation Table
NEO Executive
Contributions
In Last FY1
Bank
Contributions
In Last FY2
Aggregate
(Losses)/Earnings
In Last FY Aggregate Withdrawals/Distributions In Last FY Aggregate
Balance
At Last FYE3
Kristina K. Williams $ 373,251 $ 62,450 $ 18,167 $ - $ 395,001
Michael L. Wilson 147,442 8,846 223,182 (887,362) 1,021,418
Joelyn R. Jensen-Marren4
- - - - -
Kevin T. Larkin4
- - - - -
Aaron B. Lee 24,891 14,870 13,200 - 120,333
William R. Bemis 33,422 14,679 19,511 - 131,163
Sunil U. Mohandas 240,005 16,406 15,672 (115,372) 1,070,184
Daniel D. Clute 25,951 9,769 36,163 (47,702) 284,366
1 Amounts represent NEO’s contributions for 2020 which includes the base salary deferral into the BEP during 2020 as well as the amount of the 2020 incentive the NEO has deferred into the BEP in 2021. Amounts shown are included in both the “Salary” and “Non-Equity Incentive” columns of the “Summary Compensation Table” in this Item 11.
2 Amounts represent the Bank’s contributions for 2020 which includes the base salary match into the BEP during 2020 as well as the amount of the 2020 incentive the Bank has matched and will deposit into the BEP in 2021. Amounts shown are included in the “All Other Compensation” column of the “Summary Compensation Table” in this Item 11.
3 Amount represents the NEO’s balance on December 31, 2020. Amounts reported in the contribution columns of this table during 2020 were included in the “Summary of Compensation Table” in this Item 11 and are reflected in the ending balance, with the exception of contributions related to the 2020 incentive the NEO has deferred into the BEP in 2021. All contribution amounts from prior years that are reflected in the aggregate balance at year-end 2020 have been previously reported as compensation to the NEO, and may have been included in a prior year “Summary Compensation Table”, depending on the executives’ NEO status.
4 Ms. Jensen-Marren and Mr. Larkin did not participate in the BEP DC Plan during 2020.
CEO Compensation Pay Ratio
As required by Item 402(u) of Regulation S-K, we are providing the following information:
For fiscal 2020, our last completed fiscal year:
i.The median of the annual total compensation of all employees of the Bank (other than Ms. Williams), was $128,001; and
ii.The annualized total compensation of Ms. Williams, our President and CEO was $2,326,246.
Based on this information, the ratio for 2020 of the annualized total compensation of our President and CEO to the median of the annual total compensation of all employees is 18 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, 2019.
i.SEC rules allow us to identify our median employee once every three years unless there has been a change in our employee population or employee compensation arrangements that we reasonable believe would result in a significant change in our pay ratio disclosure. We believe there have been no changes in our employee population or employee compensation arrangements that would result in a significant change to this pay ratio disclosure.
ii.We last 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.
iii.To find the median of the annual total compensation of all our employees (other than our former President and 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.
iv.We identified our median employee using this compensation measure and methodology, which was consistently applied to all our employees included in the calculation.
v.For 2020, based on our intent to use the same median employee identified in 2018, we reviewed 2020 compensation for this identified median employee, which was calculated by adding together the elements of this employee’s compensation for 2020 in accordance with the requirements of Item 402(c)(2)(x) of Regulation S-K, resulting in annual total compensation of $128,001.
vi.With respect to the annual total compensation of our President and CEO, we annualized the amount reported in the “Total” column of our 2020 Summary Compensation table.
Potential Payments Upon Termination or Change of Control
The following paragraphs set out the material terms relating to termination of our President and CEO, who is the only currently employed NEO with an employment agreement. 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.” All other NEOs were subject to Bank policies during 2020, and the tables set forth the compensation payable to them 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.
These definitions are summaries only and a copy of the employment agreement for our President and CEO is filed as an exhibit to our current report on Form 8-K/A, filed with the SEC on August 3, 2020, and summarized further below. All employment agreements for our President and CEO, former President and CEO, former CRCO, and former CBO, are set forth in “Item 15. Exhibits and Financial Statements Schedules”.
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 NEO may be entitled to the following:
i. Base salary accrued through the date of termination;
ii. Accrued but unpaid incentive plan award(s) earned in a year prior to the year of termination and due to be paid in the year in which termination occurs;
iii. Accrued and earned vacation through the date of termination; and/or
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, 2020, the total amounts payable to our NEOs are outlined in the table below:
Termination For Cause or Without Good Reason
NEO Severance Pay1
Annual Incentive2
Deferred Incentive2
Vacation Payout3
Total
Kristina K. Williams $ - $ - $ - $ 44,952 $ 44,952
Michael L. Wilson4
- - - - -
Joelyn R. Jensen-Marren5
- - - 60,862 60,862
Kevin T. Larkin5
- - - 2,221 2,221
Aaron B. Lee5
- - - 23,776 23,776
William R. Bemis5
- - - 20,960 20,960
Sunil U. Mohandas6
- - - - -
Daniel D. Clute6
- - - - -
1 Termination under these circumstances would not result in severance payments from the Bank but would result in salary earned through December 31, 2020, as reflected under the “Salary” column of the “Summary Compensation Table” in this Item 11.
2 Termination under these circumstances would not result in an incentive award payment since the award would have already been received as of December 31, 2020.
3 This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.
4 Mr. Wilson served as the President and CEO through January 19, 2020, and as an advisor from January 20, 2020, until his retirement from the Bank on February 7, 2020. Refer to “Post-Employment Compensation of Michael L. Wilson” in this Item 11 for additional details.
5 As of December 31, 2020, there was not an employment agreement in force between the Bank and the NEO. However, like all employees, Ms. Jensen-Marren, Mr. Larkin, Mr. Lee, and Mr. Bemis are eligible to receive a payout in connection with unused vacation according to Bank policies.
6 Mr. Mohandas’ and Mr. Clute’s employment with the Bank was terminated effective August 31, 2020. Refer to “Post-Employment Compensation of Sunil U. Mohandas” and “Post-Employment Compensation of Daniel D. Clute” in this Item 11 for additional details on their termination of employment compensation.
TERMINATION WITHOUT CAUSE, FOR GOOD REASON, OR FOLLOWING A CHANGE IN CONTROL
If, however, the NEO’s employment is terminated by us without cause, by the NEO for good reason, or following a change in control, in addition to the payouts previously mentioned, the NEO may 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, 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;
ii. One times the participating NEO’s targeted non-deferred EIP 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;
iii. The EIP 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 incentive plan awards covering periods prior to the one in which the NEO’s employment was terminated, calculated in accordance with the terms of the incentive plan 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.
Payments of all accrued amounts, other than EIP award amounts, shall be paid in lump sum within ten days or no later than first payroll date on or after the NEO’s date of termination. Payment of all EIP award amounts, if any, shall be paid as otherwise provided under the EIP. Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2020, the total amounts payable to our NEOs are outlined in the table below:
Termination Without Cause or For Good Reason
NEO Severance Pay Annual Incentive Deferred Incentive Vacation Payout1
Total
Kristina K. Williams $ 1,700,000 $ 712,772 $ 367,921 $ 44,952 $ 2,825,645
Michael L. Wilson2
- - - - -
Joelyn R. Jensen-Marren3
- - - 60,862 60,862
Kevin T. Larkin3
- - - 2,221 2,221
Aaron B. Lee3
- - - 23,776 23,776
William R. Bemis3
- - - 20,960 20,960
Sunil U. Mohandas - - - - -
Daniel D. Clute - - - - -
1 This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.
2 Mr. Wilson served as the President and CEO through January 19, 2020, and as an advisor from January 20, 2020, until his retirement from the Bank on February 7, 2020. Refer to “Post-Employment Compensation of Michael L. Wilson” in this Item 11 for additional details.
3 As of December 31, 2020, there was not an employment agreement in force between the Bank and the NEO. However, like all employees, Ms. Jensen-Marren, Mr. Larkin, Mr. Lee, and Mr. Bemis are eligible to receive a payout in connection with unused vacation in accordance with Bank policies.
Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2020, the total amounts payable to our NEOs are outlined in the table below:
Termination Following Change in Control
NEO Severance Pay Annual Incentive Deferred Incentive Vacation Payout1
Total
Kristina K. Williams $ 2,541,500 $ 1,399,025 $ 367,921 $ 44,952 $ 4,353,398
Michael L. Wilson2
- - - - -
Joelyn R. Jensen-Marren3
- - - 60,862 60,862
Kevin T. Larkin3
- - - 2,221 2,221
Aaron B. Lee3
- - - 23,776 23,776
William R. Bemis3
- - - 20,960 20,960
Sunil U. Mohandas - - - - -
Daniel D. Clute - - - - -
1 This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.
2 Mr. Wilson served as the President and CEO through January 19, 2020, and as an advisor from January 20, 2020, until his retirement from the Bank on February 7, 2020. Refer to “Post-Employment Compensation of Michael L. Wilson” in this Item 11 for additional details.
3 As of December 31, 2020, there was not an employment agreement in force between the Bank and the NEO. However, like all employees, Ms. Jensen-Marren, Mr. Larkin, Mr. Lee, and Mr. Bemis are eligible to receive a payout in connection with unused vacation in accordance with Bank policies.
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 may be entitled to the following:
i. The EIP 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 incentive plan awards covering periods prior to the one in which the NEO’s employment was terminated; and
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.
Payment of all accrued amounts, other than EIP 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 EIP award amounts, if any, shall be paid as otherwise provided under the applicable EIP.
Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2020, the total amounts payable to our NEOs are outlined in the table below:
Termination by Death, Disability, or Retirement
NEO Severance Pay Annual Incentive Deferred Incentive Vacation Payout1
Total
Kristina K. Williams $ - $ 367,921 $ 367,921 $ 44,952 $ 780,794
Michael L. Wilson2
- - - - -
Joelyn R. Jensen-Marren3
- 119,422 283,151 60,862 463,435
Kevin T. Larkin3
- 89,749 89,749 2,221 181,719
Aaron B. Lee3
- 107,834 302,185 23,776 433,795
William R. Bemis3
- 116,143 279,873 20,960 416,976
Sunil U. Mohandas - - - - -
Daniel D. Clute - - - - -
1 This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.
2 Mr. Wilson served as the President and CEO through January 19, 2020, and as an advisor from January 20, 2020, until his retirement from the Bank on February 7, 2020. Refer to “Post-Employment Compensation of Michael L. Wilson” in this Item 11 for additional details.
3 As of December 31, 2020, there was not an employment agreement in force between the Bank and the NEO. Ms. Jensen-Marren, Mr. Larkin, Mr. Lee, and Mr. Bemis were eligible to receive the amounts disclosed if termination occurred as a result of death, disability or retirement in accordance with Bank policies.
Employment Agreement Between Kristina K. Williams and the Bank
The Bank entered into an employment agreement with Kristina K. Williams, effective on January 20, 2020, in order to establish her duties and compensation and to provide for her employment as President and CEO of the Bank.
The employment agreement provides that the Bank will initially pay Ms. Williams a base salary of $850,000, subject to adjustment as described in the employment agreement.
Ms. Williams’ incentive target will generally not be set lower than 85 percent of her base salary. The Bank will pay, or reimburse Ms. Williams for, all reasonable relocation expenses incurred by Ms. Williams in relocation to the Des Moines area up to a maximum of $250,000. Ms. Williams will also be eligible for certain perquisites, including a car allowance in the amount of $750 per month.
Ms. Williams’ employment agreement provides that:
•the Bank or Ms. Williams 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 Ms. Williams; and
•Ms. Williams 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 Ms. Williams’ employment is terminated by the Bank for Cause or by Ms. Williams without Good Reason, the employment agreement entitles Ms. Williams to the benefits set forth under the heading “Termination for Cause or Without Good Reason.”
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 Ms. Williams’ employment is terminated by the Bank without Cause or by Ms. Williams for Good Reason, in addition to the payouts previously mentioned under “Termination for Cause or Without Good Reason,” the employment agreement entitles Ms. Williams to additional amounts, including the benefits set forth under the heading “Termination without Cause, for Good Reason, or following a Change in Control.”
Termination for Death, Disability, or Retirement
If Ms. Williams’ 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,” she would also be entitled to the benefits set forth under the heading “Termination for Death, Disability or Retirement.”
Post-Employment Compensation of Michael L. Wilson
On February 7, 2020, Mr. Wilson retired from the Bank. Consistent with his employment agreement, he was entitled to the following:
i.Any awards as provided for under any incentive plan in an amount equal to that which he would have received in 2020, in the amount of $524,446;
ii.Annual and deferred incentive award as provided for under the EIP for 2020, prorated, in the amount of $81,712; and
iii. Accrued unused vacation in the amount of $159,969.
Mr. Wilson will also receive unpaid deferred awards from incentive plans, earned in prior years, in the estimated amount of $799,000 in the next few years.
Post-Employment Compensation of Sunil U. Mohandas
In July 2020, the Bank entered into a Separation Agreement and General Release (General Release) with Sunil U. Mohandas. The General Release is consistent with his employment agreement and provides for, among other terms:
i.A separation date of August 31, 2020;
ii.The applicable severance benefits provided under the Separation Agreement dated as of July 14, 2020 between the Bank and Mr. Mohandas, amounting to:
1.One times base salary of $408,000;
2.One times targeted non-deferred award under the Bank’s EIP for 2020 in the amount of $122,400;
3.Annual and deferred incentive award as provided for under the EIP for 2020, prorated, in the amount of $191,074;
4.Accrued unused vacation in the amount of $1,701; and
5.The continuation of certain health benefits in the amount of $12,573.
iii.A release of all claims by Mr. Mohandas.
Mr. Mohandas will also receive unpaid deferred awards from incentive plans, earned in prior years, in the estimated amount of $260,000 in the next few years.
Post-Employment Compensation of Daniel D. Clute
In July 2020, the Bank entered into a Separation Agreement and General Release (the “General Release”) with Daniel D. Clute. The General Release is consistent with his employment agreement and provides for, among other terms:
i.A separation date of August 31, 2020;
ii.The applicable severance benefits provided under the Separation Agreement dated as of July 14, 2020 between the Bank and Mr. Clute, amounting to:
1.One times base salary of $370,800;
2.One times targeted non-deferred award under the Bank’s EIP for 2020 in the amount of $111,240;
3.Annual and deferred incentive award as provided for under the EIP for 2020, prorated, in the amount of $177,560;
4.Accrued unused vacation in the amount of $36,128; and
5.The continuation of certain health benefits in the amount of $13,016.
iii.A release of all claims by Mr. Clute.
Mr. Clute will also receive unpaid deferred awards from incentive plans, earned in prior years, in the estimated amount of $278,000 in the next few years.
Director Compensation
During 2020, the Board of Directors held 14 board meetings and 98 committee meetings. Pursuant to our 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.
The total expenses paid on behalf of the Board of Directors for travel and other reimbursed expenses for 2020 was $155 thousand and annual compensation paid to the Board of Directors, by position, for 2020 was as follows:
Board of Director Position 2020
Chair $ 138,000
Vice Chair 127,000
Audit Committee Chair 122,000
Committee Chairs 117,000
Other Directors 106,000
The following table sets forth each Director’s compensation for the year ended December 31, 2020:
Director Compensation
Director Name Fees Earned Or
Paid In Cash
James G. Livingston (Chair) $ 138,000
Ellen Z. Lamale (Vice Chair) 127,000
Ruth B. Bennett 106,000
Karl A. Bollingberg 106,000
Steven L. Bumann 106,000
Cleon P. Butterfield 106,000
Christine H. H. Camp
117,000
David J. Ferries 106,000
Chris D. Grimm 117,000
Amy K. Johnson 106,000
Teresa J. Keegan 117,000
Michelle M. Keeley 117,000
John F. Kennedy, Sr. 122,000
Joe R. Kesler 106,000
John A. Klebba 117,000
Lauren M. MacVay 117,000
Michael W. McGowan 106,000
Elsie M. Meeks 117,000
Jason A. Meyerhoeffer 106,000
Cynthia A. Parker 106,000
J. Benson Porter 106,000
Robert A. Stuart 106,000
In October of 2020, the Compensation Committee approved the Director Fee Policy for 2021, subject to the review and comment of the Finance Agency. Under the policy, the 2021 Director compensation fees increased from 2020. This policy is listed as an exhibit to this annual report on Form 10-K. Refer to “Item 15. Exhibits and Financial Statement Schedules” for additional information.
Compensation Committee Report
The Compensation Committee reviewed and discussed the 2020 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)
Cynthia A. Parker (Vice Chair)
Steven L. Bumann
James W. Hunt
Jon M. Jones
Joe R. Kesler

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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, 2021 (shares in thousands):
Name Address City State Shares of Capital Stock % of Total Capital Stock
Principal Life Insurance Company 711 High St. Des Moines IA 1,800 5.3 %
Principal Bank1
655 9th St. Des Moines IA 46 0.1
Midland National Life Insurance Company2
4601 Westown Pkwy West Des Moines IA 1,329 3.9
North American Company for Life and Health Insurance2
4601 Westown Pkwy West Des Moines IA 711 2.1
3,886 11.4
All others 30,167 88.6
Total capital stock 34,053 100.0 %
1 Principal Bank is an affiliate of Principal Life Insurance Company.
2 Midland National Life Insurance Company and North American Company for Life and Health Insurance are members within the same holding company that collectively make up five percent or more of our outstanding capital stock.
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, 2021 (shares in thousands):
Name Address City State Shares of Capital Stock % of Total Capital Stock
OnPoint Community Credit Union 2701 N.W. Vaughn St. Portland OR 183 0.54
Zions Bancorporation, National Association One South Main St. Salt Lake City UT 109 0.32
Central Pacific Bank 220 South King St. Honolulu HI 77 0.23
BankWest, Inc. 420 S. Pierre St. Pierre SD 42 0.12
Alerus Financial, National Association 401 Demers Avenue Grand Forks ND 31 0.09
First Federal Savings Bank of Twin Falls 383 Shoshone Street N Twin Falls ID 25 0.07
First Federal Bank & Trust 671 Illinois St. Sheridan WY 21 0.06
Fidelity Bank 7600 Parklawn Ave Edina MN 14 0.04
BANK 409 Hwy 61 S Wapello IA 6 0.02
Legends Bank 200 E Main St. Linn MO 6 0.02
First Montana Bank 201 N Higgins Ave Missoula MT 5 0.01
Washington Business Bank 223 5th Ave. SE Olympia WA 3 0.01
True North Federal Credit Union 2777 Postal Way Juneau AK 2 0.01
524 1.54
All others 33,529 98.46
Total capital stock 34,053 100.00 %

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
TRANSACTIONS WITH RELATED PERSONS
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.
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.
For the year ended December 31, 2020, the review and approval of transactions with related persons was governed by our Code. Under the Code, each director is required to disclose to the Board all actual or apparent conflicts of interest, including any personal financial interest that he or she has, as well as such interests of any immediate family member or business associate of the director known to the director, in any matter to be considered by the Board or in which another person does, or proposes to do, business with the Bank. Following such disclosure, the Board is empowered to determine whether an actual conflict exists. In the event the Board determines the existence of a conflict with respect to any matter, the affected director is required to be recused from all further considerations relating to that matter. The Bank’s General Counsel, Chief Human Resources & Administrative Officer, Chief Audit Executive, or the Board, as appropriate, shall be responsible for interpreting the Code and rendering final rulings regarding violations of this Code.
The Code requires that all directors and employees avoid conflicts of interest, or the appearance of conflicts of interest. In particular, subject to limited exceptions for interests arising through ownership of mutual funds and certain financial interests acquired prior to employment by the Bank, no employee may have a financial interest in or financial relationship with any of our members or other company doing business or considering doing business with the Bank that is not transacted in the ordinary course of the member's business or, in the case of an extension of credit, involves more than the normal risk of repayment or of loss to the member. In addition, the Code also provides that employees and directors are expected to perform their duties fairly and impartially and without discrimination in favor of or against any member institution. Employees are required to annually certify compliance with these and all other Code provisions.
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 in accordance with Finance Agency regulations. 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, 2021, 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, 2021, 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, Cleon Butterfield, Amy Johnson, Michelle Keeley, Ellen Lamale, Michael McGowan, Elsie Meeks, Carol Nelson, and Cynthia Parker are each independent in accordance with NYSE standards. In concluding our nine 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.
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 Christine Camp, David Ferries, Teresa Keegan, 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, Cleon Butterfield, 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 Steven Bumann, James Hunt, Jon Jones, and Joe Kesler. 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 Michelle Keeley and Cynthia Parker.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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,
2020 20193
Audit fees1
$ 1,142 $ 1,093
Audit-related fees2
58 186
All other fees 3 3
Total $ 1,203 $ 1,282
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 $55 thousand and $63 thousand from the Office of Finance for audit fees on the Combined Financial Report for the years ended December 31, 2020 and 2019.
2 Represents fees related to other audit and attest services and technical accounting consultations.
3 The 2019 amounts were revised from what was included in the 2019 10-K to include the amounts subsequently billed, primarily related to additional testing due to our material weaknesses.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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 Organization Certificate of the Federal Home Loan Bank of Des Moines, as amended and restated effective May 31, 20151
3.2 Bylaws of the Federal Home Loan Bank of Des Moines, as amended and restated effective December 13, 20182
4.1 Federal Home Loan Bank of Des Moines Capital Plan, as amended, approved by the Federal Housing Finance Agency on May 31, 20153
4.2 Description of Federal Home Loan Bank of Des Moines Capital Stock4
10.1 Employment Agreement with Michael L. Wilson, effective May 31, 20151
10.2 Employment Agreement with Daniel D. Clute, effective November 10, 20145
10.3 Employment Agreement with Sunil Mohandas, effective January 1, 20186
10.4 Employment Agreement with Kristina K. Williams, effective January 20, 20207
10.5 Amended Severance Policy, effective November 10, 20145
10.6 Form of Indemnification Agreement, effective June 1, 20151
10.7 Joint Capital Enhancement Agreement, as amended, effective August 5, 20118
10.8 Federal Home Loan Bank of Des Moines Seventh Amended and Restated Benefit Equalization Plan, effective January 1, 2021
10.9 Federal Home Loan Bank of Des Moines 2020 Executive Incentive Plan Document, effective January 1, 20209
10.10 2020 Director Fee Policy, effective January 1, 2020
10.11 2021 Director Fee Policy, effective January 1, 2021
10.12 Federal Home Loan Bank of Des Moines Deferral Plan for Directors, effective June 1, 201510
31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Federal Home Loan Bank of Des Moines Audit Committee Report
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1 Incorporated by reference from our Form 8-K filed with the SEC on June 1, 2015 (Commission File No. 000-51999).
2 Incorporated by reference from our Form 8-K filed with the SEC on December 17, 2018 (Commission File No. 000-51999).
3 Incorporated by reference from our Form 10-Q filed with the SEC on November 10, 2020 (Commission File No. 000-51999).
4 Incorporated by reference from our Form 10-K filed with the SEC on March 11, 2020 (Commission File No. 000-51999).
5 Incorporated by reference from our Form 10-Q filed with the SEC on November 12, 2014 (Commission File 000-51999).
6 Incorporated by reference from our Form 8-K/A filed with the SEC on January 19, 2018 (Commission File No. 000-51999).
7 Incorporated by reference from our Form 8-K/A (Amendment No. 1) filed with the SEC on August 3, 2020 (Commission File No. 000-51999).
8 Incorporated by reference from our Form 8-K filed with the SEC on August 5, 2011 (Commission File No. 000-51999).
9 Incorporated by reference from our Form 8-K filed with the SEC on July 6, 2020 (Commission File No. 000-51999).
10 Incorporated by reference from our Form 10-K filed with the SEC on March 21, 2016 (Commission File No. 000-51999).