UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20192020
 
OR
 
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
 
Commission File Number 000-52004
 
FEDERAL HOME LOAN BANK OF TOPEKA
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation 48-0561319
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
500 SW Wanamaker Road
Topeka, KS
 
 
66606
(Address of principal executive offices) (Zip Code)
 
Registrant’s telephone number, including area code: 785.233.0507

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)
Name of each exchange
on which registered
NoneN/AN/A

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes  x No


Indicate the number of shares outstanding of each of the registrant’sissuer’s classes of common stock, as of the latest practicable date.
 Shares outstanding as of
November 5, 2019August 6, 2020
Class A Stock, par value $100 per share4,619,1184,761,443
Class B Stock, par value $100 per share11,780,62011,433,517


.FEDERAL HOME LOAN BANK OF TOPEKA
TABLE OF CONTENTS
   
PART I 
Item 1. 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
Item 3.
Item 4.
Part II 
Item 1.
Item 1A. 
Item 2. 
Item 3. 
Item 4. 
Item 5. 
Item 6. 


Important Notice about Information in this Quarterly Report

In this quarterly report, unless the context suggests otherwise, references to the “FHLBank,” “FHLBank Topeka,” “we,” “us” and “our” mean the Federal Home Loan Bank of Topeka, and “FHLBanks” mean all the Federal Home Loan Banks, including the FHLBank Topeka.

The information contained in this quarterly report is accurate only as of the date of this quarterly report and as of the dates specified herein.

The product and service names used in this quarterly report are the property of the FHLBank, and in some cases, the other FHLBanks. Where the context suggests otherwise, the products, services and company names mentioned in this quarterly report are the property of their respective owners.

Special Cautionary Notice Regarding Forward-looking Statements

The information in this Form 10-Q contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements describing the objectives, projections, estimates or future predictions of the FHLBank’s operations. These statements may be identified by the use of forward-looking terminology such as “anticipates,” “believes,” “may,” “is likely,” “could,” “estimate,” “expect,” “will,” “intend,” “probable,” “project,” “should,” or their negatives or other variations of these terms. The FHLBank cautions that by their nature forward-looking statements involve risks or uncertainties and that actual results may differ materially from those expressed in any forward-looking statements as a result of such risks and uncertainties, including but not limited to:
Governmental actions, including legislative, regulatory, judicial or other developments that affect the FHLBank; its members, counterparties or investors; housing government-sponsored enterprises (GSE); or the FHLBank System in general;
Changes in the FHLBank’s capital structure;
Changes in economic and market conditions, including conditions in our district and the U.S. and global economy, as well as the mortgage, housing and capital markets;
The upcoming discontinuanceimpact of the London Interbank Offered Rate (LIBOR)Coronavirus Disease 2019 (COVID-19) pandemic or other pandemics on our members and the related effect on the FHLBank's LIBOR-based financial products, investments, and contracts;our business;
Changes in demand for FHLBank products and servicesGovernmental actions, including legislative, regulatory, judicial or consolidated obligations ofother developments that affect FHLBank; its members, counterparties or investors; housing government-sponsored enterprises (GSE); or the FHLBank System;System in general;
Effects of derivative accounting treatment and other accounting rule requirements, or changes in such requirements;
Competitive forces, including competition for loan demand, purchases of mortgage loans and access to funding;
The effectsability of amortization/accretion;FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with all products and services;
Gains/losses on derivativesChanges in demand for FHLBank products and services or on trading investments andconsolidated obligations of the ability to enter into effective derivative instruments on acceptable terms;
Volatility of market prices, changes in interest rates and indices and the timing and volume of market activity;FHLBank System;
Membership changes, including changes resulting from member failures or mergers, changes due to member eligibility, or changes in the principal place of business of members;
Our ability to declare dividends or to pay dividends at rates consistent with past practices;Changes in the U.S. government’s long-term debt rating and the long-term credit rating of the senior unsecured debt issues of the FHLBank System;
Soundness of other financial institutions, including FHLBank members, non-member borrowers, counterparties, and the other FHLBanks;
The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which FHLBank has joint and several liability;
The volume and quality of eligible mortgage loans originated and sold by participating members to FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program). “Mortgage Partnership Finance,” “MPF,” “MPF Xtra,” and “MPF Direct” are registered trademarks of FHLBank Chicago.
Changes in the fair value and economic value of, impairments of, and risks associated with, FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement protections;
Changes in the value or liquidity of collateral underlying advances to FHLBank members or non-member borrowers or collateral pledged by reverse repurchase and derivative counterparties;
Competitive forces, including competition for loan demand, purchasesVolatility of mortgage loansmarket prices, changes in interest rates and accessindices and the timing and volume of market activity;
Gains/losses on derivatives or on trading investments and the ability to funding;enter into effective derivative instruments on acceptable terms;
The effects of amortization/accretion;
The upcoming discontinuance of the London Interbank Offered Rate (LIBOR) and the related effect on FHLBank's LIBOR-based financial products, investments, and contracts;
Changes in FHLBank’s capital structure;
FHLBank's ability to declare dividends or to pay dividends at rates consistent with past practices; and
The ability of the FHLBank to introduce new products and services to meet market demand and to manage successfully the risks associated with all products and services;
The ability of the FHLBank to keep pace with technological changes and the ability to develop and support technology and information systems, including the ability to securely access the internet and internet-based systems and services, sufficient to effectively manage the risks of the FHLBank’s business;
The ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the FHLBank has joint and several liability;
Changes in the U.S. government’s long-term debt rating and the long-term credit rating of the senior unsecured debt issues of the FHLBank System;
Changes in the fair value and economic value of, impairments of, and risks associated with, the FHLBank’s investments in mortgage loans and mortgage-backed securities (MBS) or other assets and related credit enhancement protections; and
The volume and quality of eligible mortgage loans originated and sold by participating members to the FHLBank through its various mortgage finance products (Mortgage Partnership Finance® (MPF®) Program). “Mortgage Partnership Finance,” “MPF,” “MPF Xtra,” and “MPF Direct” are registered trademarks of the FHLBank Chicago.


Readers of this quarterly report should not rely solely on the forward-looking statements and should consider all risks and uncertainties addressed throughout this quarterly report, as well as those discussed under Part II Item lA – Risk Factors and Item 1A – Risk Factors in our annual report on Form 10-K for the fiscal year ended December 31, 2018,2019, incorporated by reference herein.

All forward-looking statements contained in this Form 10-Q are expressly qualified in their entirety by reference to this cautionary notice. The reader should not place undue reliance on such forward-looking statements, since the statements speak only as of the date that they are made and the FHLBank has no obligation and does not undertake publicly to update, revise or correct any forward-looking statement for any reason to reflect events or circumstances after the date of this quarterly report.


PART I

Item 1: Financial Statements


FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF CONDITION - Unaudited  
(In thousands, except par value)  
09/30/201912/31/201806/30/202012/31/2019
ASSETS  
Cash and due from banks$24,639
$15,060
$28,283
$1,917,166
Interest-bearing deposits481,989
670,660
1,017,972
921,453
Securities purchased under agreements to resell (Note 10)2,137,374
1,251,096
Securities purchased under agreements to resell (Note 9)4,450,000
4,750,000
Federal funds sold900,000
50,000
1,520,000
850,000
  
Investment securities:  
Trading securities (Note 3)2,901,575
2,151,113
2,904,643
2,812,562
Available-for-sale securities (Note 3)6,098,929
1,725,640
7,558,676
7,182,500
Held-to-maturity securities1 (Note 3)
3,728,655
4,456,873
Held-to-maturity securities, fair value of $3,176,712 and $3,556,938 (Note 3)3,182,136
3,569,958
Total investment securities12,729,159
8,333,626
13,645,455
13,565,020
  
Advances (Notes 4, 6)30,634,583
28,730,113
Mortgage loans held for portfolio, net of allowance for credit losses of $905 and $812 (Notes 5, 6)9,833,763
8,410,462
Advances (Note 4)21,528,991
30,241,315
Mortgage loans held for portfolio, net of allowance for credit losses of $7,790 and $985 (Note 5)10,945,717
10,633,009
Accrued interest receivable150,823
109,366
113,448
143,765
Derivative assets, net (Notes 7, 10)137,050
36,095
Derivative assets, net (Notes 6, 9)191,539
154,804
Other assets101,750
108,778
92,531
100,122
  
TOTAL ASSETS$57,131,130
$47,715,256
$53,533,936
$63,276,654
  
LIABILITIES  
Deposits (Note 8)$756,376
$473,820
Deposits (Note 7)$988,292
$790,640
  
Consolidated obligations, net:  
Discount notes (Note 9)21,044,232
20,608,332
Bonds (Note 9)32,441,885
23,966,394
Discount notes (Note 8)13,560,839
27,447,911
Bonds (Note 8)36,445,676
32,013,314
Total consolidated obligations, net53,486,117
44,574,726
50,006,515
59,461,225
  
Mandatorily redeemable capital stock (Note 11)2,477
3,597
Mandatorily redeemable capital stock (Note 10)2,308
2,415
Accrued interest payable116,478
87,903
75,097
117,580
Affordable Housing Program payable41,304
43,081
40,399
43,027
Derivative liabilities, net (Notes 7, 10)990
7,884
Derivative liabilities, net (Notes 6, 9)672
202
Other liabilities69,066
69,993
65,715
70,514
  
TOTAL LIABILITIES54,472,808
45,261,004
51,178,998
60,485,603
  
Commitments and contingencies (Note 14)
Commitments and contingencies (Note 13)
  


1    Fair value: $3,717,004 and $4,447,078 as of September 30, 2019 and December 31, 2018, respectively.
The accompanying notes are an integral part of these financial statements.



6




6


FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF CONDITION - Unaudited  
(In thousands, except par value)  
09/30/201912/31/201806/30/202012/31/2019
CAPITAL  
Capital stock outstanding - putable:  
Class A ($100 par value; 3,444 and 2,473 shares issued and outstanding) (Note 11)$344,453
$247,361
Class B ($100 par value; 13,262 and 12,772 shares issued and outstanding) (Note 11)1,326,237
1,277,176
Class A ($100 par value; 5,007 and 4,476 shares issued and outstanding) (Note 10)$500,679
$447,610
Class B ($100 par value; 8,913 and 13,188 shares issued and outstanding) (Note 10)891,324
1,318,846
Total capital stock1,670,690
1,524,537
1,392,003
1,766,456
  
Retained earnings:  
Unrestricted748,888
716,555
755,700
765,295
Restricted224,060
197,467
240,929
234,514
Total retained earnings972,948
914,022
996,629
999,809
  
Accumulated other comprehensive income (loss) (Note 12)14,684
15,693
Accumulated other comprehensive income (loss) (Note 11)(33,694)24,786
  
TOTAL CAPITAL2,658,322
2,454,252
2,354,938
2,791,051
  
TOTAL LIABILITIES AND CAPITAL$57,131,130
$47,715,256
$53,533,936
$63,276,654


FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF INCOME - Unaudited  
(In thousands)  
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
INTEREST INCOME:  
Interest-bearing deposits$5,300
$3,931
$15,518
$9,402
$560
$5,048
$5,265
$10,218
Securities purchased under agreements to resell26,768
20,618
84,266
46,610
938
29,568
15,528
57,498
Federal funds sold8,179
7,896
28,058
29,539
454
9,555
3,942
19,879
Trading securities20,342
16,764
68,211
54,243
18,083
25,925
38,272
47,869
Available-for-sale securities47,811
12,563
78,694
32,670
9,871
15,487
34,165
30,883
Held-to-maturity securities24,337
30,602
84,469
85,538
7,416
28,859
24,484
60,132
Advances186,431
158,943
563,602
460,751
60,265
189,562
191,152
377,171
Mortgage loans held for portfolio76,546
65,424
225,015
186,709
73,664
75,185
158,770
148,469
Other346
381
1,097
1,165
300
367
654
751
Total interest income396,060
317,122
1,148,930
906,627
171,551
379,556
472,232
752,870
  
INTEREST EXPENSE:  
Deposits2,540
2,289
7,701
6,113
77
2,473
1,631
5,161
Consolidated obligations:  
Discount notes133,680
108,137
433,473
314,109
21,760
150,802
114,711
299,793
Bonds185,096
138,668
519,967
382,442
92,744
176,714
243,486
334,871
Mandatorily redeemable capital stock (Note 11)30
58
113
175
Mandatorily redeemable capital stock (Note 10)14
40
38
83
Other299
311
1,016
766
279
297
603
717
Total interest expense321,645
249,463
962,270
703,605
114,874
330,326
360,469
640,625
  
NET INTEREST INCOME74,415
67,659
186,660
203,022
56,677
49,230
111,763
112,245
Provision (reversal) for credit losses on mortgage loans (Note 6)393
(391)509
(345)
Provision (reversal) for credit losses on mortgage loans (Note 5)1,337
38
601
116
NET INTEREST INCOME AFTER LOAN LOSS PROVISION (REVERSAL)74,022
68,050
186,151
203,367
55,340
49,192
111,162
112,129
  
OTHER INCOME (LOSS):  
Net gains (losses) on trading securities (Note 3)16,186
(11,514)86,784
(50,495)5,375
41,843
99,764
70,598
Net gains (losses) on sale of available-for-sale securities (Note 3)

1,523

Net gains (losses) on sale of held-to-maturity securities (Note 3)
1,529
(46)1,591

(46)
(46)
Net gains (losses) on derivatives and hedging activities (Note 7)(20,386)6,032
(78,939)29,661
Net gains (losses) on derivatives and hedging activities (Note 6)(15,355)(40,011)(137,607)(58,553)
Net gains (losses) on disposal of premises, software and equipment(3,469)
(3,469)3
Standby bond purchase agreement commitment fees566
642
1,685
2,242
535
553
1,100
1,119
Letters of credit fees1,190
1,086
3,581
3,300
1,639
1,205
3,042
2,391
Other937
725
2,470
2,676
1,023
824
2,166
1,530
Total other income (loss)(1,507)(1,500)15,535
(11,025)(10,252)4,368
(33,481)17,042
  

FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF INCOME - Unaudited  
(In thousands)  
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
OTHER EXPENSES:  
Compensation and benefits$9,781
$12,682
$28,598
$29,009
$9,058
$9,559
$19,519
$18,817
Other operating5,031
4,763
14,331
13,419
4,795
5,045
9,475
9,300
Federal Housing Finance Agency812
690
2,437
2,144
1,022
813
2,045
1,625
Office of Finance972
812
2,717
2,313
846
896
1,853
1,745
Advance subsidy4,497

4,497

Other2,037
1,481
5,853
4,501
2,378
2,000
4,650
3,816
Total other expenses18,633
20,428
53,936
51,386
22,596
18,313
42,039
35,303
  
INCOME BEFORE ASSESSMENTS53,882
46,122
147,750
140,956
22,492
35,247
35,642
93,868
  
Affordable Housing Program5,391
4,618
14,786
14,113
2,250
3,529
3,568
9,395
  
NET INCOME$48,491
$41,504
$132,964
$126,843
$20,242
$31,718
$32,074
$84,473


FEDERAL HOME LOAN BANK OF TOPEKAFEDERAL HOME LOAN BANK OF TOPEKA FEDERAL HOME LOAN BANK OF TOPEKA 
STATEMENTS OF COMPREHENSIVE INCOME - Unaudited  
(In thousands)    
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Net income$48,491
$41,504
$132,964
$126,843
$20,242
$31,718
$32,074
$84,473
  
Other comprehensive income (loss):  
Net unrealized gains (losses) on available-for-sale securities(17,324)3,694
(1,249)2,116
35,597
4,227
(58,534)16,075
Net non-credit portion of other-than-temporary impairment losses on held-to-maturity securities
3,655

4,163
Defined benefit pension plan95
5
240
17
28
72
54
145
Total other comprehensive income (loss)(17,229)7,354
(1,009)6,296
35,625
4,299
(58,480)16,220
  
TOTAL COMPREHENSIVE INCOME$31,262
$48,858
$131,955
$133,139
$55,867
$36,017
$(26,406)$100,693
 


FEDERAL HOME LOAN BANK OF TOPEKAFEDERAL HOME LOAN BANK OF TOPEKA  FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF CAPITAL - UnauditedSTATEMENTS OF CAPITAL - Unaudited  STATEMENTS OF CAPITAL - Unaudited  
(In thousands)(In thousands)  (In thousands)  
Capital Stock1
Retained EarningsAccumulatedTotal Capital
Capital Stock1
Retained EarningsAccumulatedTotal Capital
OtherOther
Class AClass BTotalComprehensiveClass AClass BTotalComprehensive
SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)
Balance at June 30, 20181,966
$196,571
12,997
$1,299,708
14,963
$1,496,279
$695,310
$180,480
$875,790
$24,600
$2,396,669
Comprehensive income      33,203
8,301
41,504
7,354
48,858
Proceeds from issuance of capital stock3
310
3,973
397,309
3,976
397,619
 397,619
Repurchase/redemption of capital stock(2,360)(236,009)(21)(2,068)(2,381)(238,077) (238,077)
Net reclassification of shares to mandatorily redeemable capital stock(574)(57,364)(1,577)(157,743)(2,151)(215,107) (215,107)
Net transfer of shares between Class A and Class B2,793
279,316
(2,793)(279,316)

 
Dividends on capital stock (Class A - 2.0%, Class B - 7.2%):      
Cash payment      (69) (69) (69)
Stock issued  232
23,209
232
23,209
(23,209) (23,209) 
Balance at September 30, 20181,828
$182,824
12,811
$1,281,099
14,639
$1,463,923
$705,235
$188,781
$894,016
$31,954
$2,389,893
      
Capital Stock1
Retained EarningsAccumulatedTotal Capital
Other
Class AClass BTotalComprehensive
SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)
Balance at June 30, 20192,155
$215,536
13,830
$1,382,968
15,985
$1,598,504
$735,915
$214,361
$950,276
$31,913
$2,580,693
Balance at March 31, 20191,981
$198,079
13,103
$1,310,317
15,084
$1,508,396
$734,822
$208,018
$942,840
$27,614
$2,478,850
Comprehensive income      38,792
9,699
48,491
(17,229)31,262
      25,375
6,343
31,718
4,299
36,017
Proceeds from issuance of capital stock

3,974
397,429
3,974
397,429
 397,429
11
1,119
4,250
425,023
4,261
426,142
 426,142
Repurchase/redemption of capital stock(721)(72,148)(1,191)(119,069)(1,912)(191,217) (191,217)(2,341)(234,064)(915)(91,463)(3,256)(325,527) (325,527)
Net reclassification of shares to mandatorily redeemable capital stock(253)(25,225)(1,345)(134,550)(1,598)(159,775) (159,775)(346)(34,627)(1)(94)(347)(34,721) (34,721)
Net transfer of shares between Class A and Class B2,263
226,290
(2,263)(226,290)

 
2,850
285,029
(2,850)(285,029)

 
Dividends on capital stock (Class A - 2.5%, Class B - 7.5%):       
      
Cash payment      (70) (70) (70)      (68) (68) (68)
Stock issued  257
25,749
257
25,749
(25,749) (25,749) 
  243
24,214
243
24,214
(24,214) (24,214) 
Balance at September 30, 20193,444$344,453
13,262$1,326,237
16,706$1,670,690
$748,888
$224,060
$972,948
$14,684
$2,658,322
Balance at June 30, 20192,155
$215,536
13,830
$1,382,968
15,985
$1,598,504
$735,915
$214,361
$950,276
$31,913
$2,580,693
      
Capital Stock1
Retained EarningsAccumulatedTotal Capital
Other
Class AClass BTotalComprehensive
SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)
Balance at March 31, 20204,484
$448,404
13,539
$1,353,892
18,023
$1,802,296
$743,731
$236,881
$980,612
$(69,319)$2,713,589
Comprehensive income      16,194
4,048
20,242
35,625
55,867
Proceeds from issuance of capital stock8
766
2,958
295,822
2,966
296,588
 296,588
Repurchase/redemption of capital stock

(202)(20,197)(202)(20,197) (20,197)
Net reclassification of shares to mandatorily redeemable capital stock(4,696)(469,580)(2,318)(231,801)(7,014)(701,381) (701,381)
Net transfer of shares between Class A and Class B5,211
521,089
(5,211)(521,089)

 
Partial recovery of prior capital distribution to Financing Corporation      10,543

10,543
 10,543
Dividends on capital stock (Class A - 0.5%, Class B - 5.5%):       
Cash payment      (71) (71) (71)
Stock issued  147
14,697
147
14,697
(14,697) (14,697) 
Balance at June 30, 20205,007$500,679
8,913$891,324
13,920$1,392,003
$755,700
$240,929
$996,629
$(33,694)$2,354,938
                   
1    Putable


FEDERAL HOME LOAN BANK OF TOPEKAFEDERAL HOME LOAN BANK OF TOPEKA  FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF CAPITAL - UnauditedSTATEMENTS OF CAPITAL - Unaudited  STATEMENTS OF CAPITAL - Unaudited  
(In thousands)(In thousands)  (In thousands)  
Capital Stock1
Retained EarningsAccumulatedTotal Capital
Other
Class AClass BTotalComprehensive
SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)
Balance at December 31, 20172,351
$235,134
14,049
$1,404,905
16,400
$1,640,039
$676,993
$163,413
$840,406
$25,658
$2,506,103
Comprehensive income      101,475
25,368
126,843
6,296
133,139
Proceeds from issuance of capital stock11
1,154
12,939
1,293,853
12,950
1,295,007
 1,295,007
Repurchase/redemption of capital stock(6,457)(645,743)(48)(4,732)(6,505)(650,475) (650,475)
Net reclassification of shares to mandatorily redeemable capital stock(1,950)(195,026)(6,985)(698,519)(8,935)(893,545) (893,545)
Net transfer of shares between Class A and Class B7,873
787,305
(7,873)(787,305)

 
Dividends on capital stock (Class A - 1.7%, Class B - 6.9%):      
Cash payment      (336) (336) (336)
Stock issued  729
72,897
729
72,897
(72,897) (72,897) 
Balance at September 30, 20181,828
$182,824
12,811
$1,281,099
14,639
$1,463,923
$705,235
$188,781
$894,016
$31,954
$2,389,893
      
Capital Stock1
Retained EarningsAccumulatedTotal Capital
Capital Stock1
Retained EarningsAccumulatedTotal Capital
OtherOther
Class AClass BTotalComprehensiveClass AClass BTotalComprehensive
SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)
Balance at December 31, 20182,473
$247,361
12,772
$1,277,176
15,245
$1,524,537
$716,555
$197,467
$914,022
$15,693
$2,454,252
2,473
$247,361
12,772
$1,277,176
15,245
$1,524,537
$716,555
$197,467
$914,022
$15,693
$2,454,252
Comprehensive income      106,371
26,593
132,964
(1,009)131,955
      67,579
16,894
84,473
16,220
100,693
Proceeds from issuance of capital stock12
1,171
11,601
1,160,158
11,613
1,161,329
 1,161,329
12
1,171
7,627
762,729
7,639
763,900
 763,900
Repurchase/redemption of capital stock(6,450)(645,039)(2,256)(225,555)(8,706)(870,594) (870,594)(5,729)(572,891)(1,065)(106,486)(6,794)(679,377) (679,377)
Net reclassification of shares to mandatorily redeemable capital stock(778)(77,763)(1,406)(140,648)(2,184)(218,411) (218,411)(525)(52,538)(61)(6,098)(586)(58,636) (58,636)
Net transfer of shares between Class A and Class B8,187
818,723
(8,187)(818,723)

 
5,924
592,433
(5,924)(592,433)

 
Dividends on capital stock (Class A - 2.4%, Class B - 7.5%):    



  
      
Cash payment    



(209) (209) (209)      (139) (139) (139)
Stock issued  738
73,829
738
73,829
(73,829) (73,829) 
  481
48,080
481
48,080
(48,080) (48,080) 
Balance at September 30, 20193,444$344,453
13,262$1,326,237
16,706$1,670,690
$748,888
$224,060
$972,948
$14,684
$2,658,322
Balance at June 30, 20192,155
$215,536
13,830
$1,382,968
15,985
$1,598,504
$735,915
$214,361
$950,276
$31,913
$2,580,693
      
Capital Stock1
Retained EarningsAccumulatedTotal Capital
Other
Class AClass BTotalComprehensive
SharesPar ValueSharesPar ValueSharesPar ValueUnrestrictedRestrictedTotalIncome (Loss)
Balance at December 31, 20194,476
$447,610
13,188
$1,318,846
17,664
$1,766,456
$765,295
$234,514
$999,809
$24,786
$2,791,051
Adjustment for cumulative effect of accounting change      (6,123)
(6,123) (6,123)
Comprehensive income      25,659
6,415
32,074
(58,480)(26,406)
Proceeds from issuance of capital stock8
813
5,505
550,526
5,513
551,339
 551,339
Repurchase/redemption of capital stock

(586)(58,634)(586)(58,634) (58,634)
Net reclassification of shares to mandatorily redeemable capital stock(6,621)(662,140)(2,445)(244,551)(9,066)(906,691) (906,691)
Net transfer of shares between Class A and Class B7,144
714,396
(7,144)(714,396)

 
Partial recovery of prior capital distribution to Financing Corporation      10,543

10,543
 10,543
Dividends on capital stock (Class A - 1.2%, Class B - 6.5%):    



  
Cash payment    



(141) (141) (141)
Stock issued  395
39,533
395
39,533
(39,533) (39,533) 
Balance at June 30, 20205,007
$500,679
8,913
$891,324
13,920
$1,392,003
$755,700
$240,929
$996,629
$(33,694)$2,354,938
                   
1    Putable


FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF CASH FLOWS - Unaudited  
(In thousands)  
Nine Months EndedSix Months Ended
09/30/201909/30/201806/30/202006/30/2019
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income$132,964
$126,843
$32,074
$84,473
Adjustments to reconcile income (loss) to net cash provided by (used in) operating activities:  
Depreciation and amortization:  
Premiums and discounts on consolidated obligations, net738
(7,736)(27,858)12,355
Concessions on consolidated obligations10,128
4,050
17,768
5,432
Premiums and discounts on investments, net6,246
2,676
10,090
2,731
Premiums, discounts and commitment fees on advances, net(1,379)(3,758)(1,686)(1,152)
Premiums, discounts and deferred loan costs on mortgage loans, net18,542
13,786
28,139
9,714
Fair value adjustments on hedged assets or liabilities2,948
1,249
2,293
2,108
Premises, software and equipment2,331
2,226
1,647
1,532
Other240
17
54
145
Provision (reversal) for credit losses on mortgage loans509
(345)601
116
Non-cash interest on mandatorily redeemable capital stock111
173
37
81
Net realized (gains) losses on sale of available-for-sale securities(1,523)
Net realized (gains) losses on sale of held-to-maturity securities46
(1,591)
46
Net other-than-temporary impairment losses on held-to-maturity securities
26
Net realized (gains) losses on sale of premises and equipment(3)(880)
Net realized (gains) losses on disposal of premises, software and equipment3,469
(3)
Other adjustments(272)(238)4,441
(93)
Net (gains) losses on trading securities(86,784)50,495
(99,764)(70,598)
Net change in derivatives and hedging activities(144,589)36,107
(312,613)(84,826)
(Increase) decrease in accrued interest receivable(41,801)(15,814)30,950
(33,290)
Change in net accrued interest included in derivative assets(1,254)(7,822)14,713
(1,891)
(Increase) decrease in other assets3,056
(854)1,320
924
Increase (decrease) in accrued interest payable28,372
35,166
(42,834)25,952
Change in net accrued interest included in derivative liabilities4,332
(456)(62)1,554
Increase (decrease) in Affordable Housing Program liability(1,777)784
(2,628)447
Increase (decrease) in other liabilities(1,682)(3,691)(5,323)(3,623)
Total adjustments(201,942)103,570
(378,769)(132,339)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(68,978)230,413
(346,695)(47,866)
  

FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF CASH FLOWS - Unaudited  
(In thousands)  
Nine Months EndedSix Months Ended
09/30/201909/30/201806/30/202006/30/2019
CASH FLOWS FROM INVESTING ACTIVITIES:  
Net (increase) decrease in interest-bearing deposits$(32,829)$28,298
$(421,226)$1,288
Net (increase) decrease in securities purchased under resale agreements(886,278)(823,576)300,000
(2,742,904)
Net (increase) decrease in Federal funds sold(850,000)(265,000)(670,000)(2,410,000)
Proceeds from sale of trading securities429

275,186
429
Proceeds from maturities of and principal repayments on trading securities3,015,268
3,290,566
332,497
1,551,440
Purchases of trading securities(3,679,375)(2,682,969)(600,000)(3,174,941)
Proceeds from sale of available-for-sale securities289,045

Proceeds from maturities of and principal repayments on available-for-sale securities8,732
16,165
47,240
5,760
Purchases of available-for-sale securities(4,180,862)(281,489)(430,610)(2,716,448)
Proceeds from sale of held-to-maturity securities9,442
87,827

9,442
Proceeds from maturities of and principal repayments on held-to-maturity securities716,417
699,016
386,780
445,378
Purchases of held-to-maturity securities
(625,170)
Advances repaid279,880,008
300,011,912
149,038,996
212,991,221
Advances originated(281,623,825)(302,270,146)(140,053,196)(215,243,175)
Principal collected on mortgage loans1,011,265
706,748
1,680,347
503,412
Purchases of mortgage loans(2,451,132)(1,553,027)(2,036,535)(1,293,351)
Proceeds from sale of foreclosed assets1,965
3,728
1,157
1,643
Purchases of other long-term assets
(6,000)
Other investing activities2,320
2,136
1,640
1,534
Proceeds from sale of premises, software and equipment
2,416
Purchases of premises, software and equipment(1,037)(8,002)(480)(741)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES(9,059,492)(3,666,567)8,140,841
(12,070,013)
  
CASH FLOWS FROM FINANCING ACTIVITIES:  
Net increase (decrease) in deposits205,498
91,182
197,952
38,264
Net proceeds from issuance of consolidated obligations:  
Discount notes633,162,917
765,464,193
317,940,542
453,966,178
Bonds20,517,358
8,790,535
22,150,583
12,087,946
Payments for maturing and retired consolidated obligations:  
Discount notes(632,736,460)(763,468,454)(331,811,195)(447,428,963)
Bonds(12,082,800)(7,440,940)(17,754,850)(6,571,750)
Net increase (decrease) in other borrowings
6,000
Proceeds from financing derivatives3,470

Net interest payments received (paid) for financing derivatives652
(3,614)(5,803)(1,714)
Proceeds from issuance of capital stock1,161,329
1,295,007
551,339
763,900
Payments for repurchase/redemption of capital stock(870,594)(650,475)(58,634)(679,377)
Payments for repurchase of mandatorily redeemable capital stock(219,642)(894,494)(906,835)(59,564)
Cash dividends paid(209)(336)(141)(139)
Partial recovery of prior capital distribution to Financing Corporation10,543

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES9,138,049
3,188,604
(9,683,029)12,114,781
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS9,579
(247,550)(1,888,883)(3,098)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD15,060
268,050
1,917,166
15,060
CASH AND CASH EQUIVALENTS AT END OF PERIOD$24,639
$20,500
$28,283
$11,962
  

FEDERAL HOME LOAN BANK OF TOPEKA  
STATEMENTS OF CASH FLOWS - Unaudited  
(In thousands)  
Nine Months EndedSix Months Ended
09/30/201909/30/201806/30/202006/30/2019
Supplemental disclosures:  
Interest paid$919,428
$672,944
$428,134
$595,671
Affordable Housing Program payments$16,859
$13,468
$6,245
$9,217
Net transfers of mortgage loans to other assets$627
$2,817
$582
$605

FEDERAL HOME LOAN BANK OF TOPEKA
Notes to Financial Statements - Unaudited
SeptemberJune 30, 20192020


NOTE 1 – BASIS OF PRESENTATION

Basis of Presentation: The accompanying interim financial statements of the FHLBank are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instruction provided by Article 10, Rule 10-01 of Regulation S-X. The financial statements contain all adjustments which are, in the opinion of management, necessary for a fair statement of the FHLBank’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments were of a normal recurring nature. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year or any other interim period.

The FHLBank’s significant accounting policies and certain other disclosures are set forth in the notes to the audited financial statements for the year ended December 31, 2018.2019. The interim financial statements presented herein should be read in conjunction with the FHLBank’s audited financial statements and notes thereto, which are included in the FHLBank’s annual report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 18, 201920, 2020 (annual report on Form 10-K). The notes to the interim financial statements highlight significant changes to the notes included in the annual report on Form 10-K.

Reclassifications: Presentation of cash flow amounts in the prior period have been reclassified to reflect short-term trading securities purchases and proceeds on a gross, rather than net, basis. Certain other immaterial amounts in the financial statements have been reclassified to conform to current period presentations.

Out-of-Period Adjustment:Included in net income for the threenine months ended September 30, 2019 was an out-of-period adjustment of $14,336,000, of which $2,545,000 and $11,791,000 related to income that should have been recorded during the three months ended March 31, 2019 and June 30, 2019, respectively. The out-of-period adjustment related to hedged item valuations for certain available-for-sale securities in fair value hedging relationships and resulted in an increase in available-for-sale interest income and a reduction in other comprehensive income. TheConsequently, available-for-sale interest income was understated by $11,791,000 and $14,336,000 for the three and six months ended June 30, 2019. FHLBank has assessed the impact of this error and concluded that the amounts were not material, either individually or in the aggregate, to any prior period financial statements and the impact of correcting this error in the three months ended September 30, 2019 is not material to the current financial statements.

Use of Estimates: The preparation of financial statements under GAAP requires management to make estimates and assumptions as of the date of the financial statements in determining the reported amounts of assets, liabilities and estimated fair values and in determining the disclosure of any contingent assets or liabilities. Estimates and assumptions by management also affect the reported amounts of income and expense during the reporting period. The most significant of these estimates include the fair value of trading and available-for-sale securities and the fair value of derivatives and the allowance for credit losses.derivatives. Many of the estimates and assumptions, including those used in financial models, are based on financial market conditions as of the date of the financial statements. Because of the volatility of the financial markets, as well as other factors that affect management estimates, actual results may vary from these estimates.

Derivatives and Hedging Activities:Allowance for Credit Losses: Beginning January 1, 2019, the2020, FHLBank adopted new hedge accounting guidance which, among other things, impactspertaining to the presentationmeasurement of gains (losses)credit losses on derivatives and hedging activitiesfinancial instruments that requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments as well as available-for-sale securities to be recorded through an allowance for qualifying hedges. Changescredit losses. Key changes as compared to prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. See Note 1 of the Notes to the Financial Statements included in the fair valueannual report on Form 10-K for information on the prior accounting treatment.

Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold: FHLBank invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold. These investments provide short-term liquidity and are carried at amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition.

These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit losses is recorded with a derivative thatcorresponding adjustment to the provision (reversal) for credit losses. FHLBank uses the collateral maintenance provision practical expedient for securities purchased under agreements to resell. Consequently, a credit loss would be recognized if there is designated and qualifies as a fair value hedge, alongcollateral shortfall which FHLBank does not believe the counterparty will replenish in accordance with changes inits contractual terms. The credit loss would be limited to the difference between the fair value of the hedged asset or liability that are attributablecollateral and the investment’s amortized cost. See Note 3 for details on the allowance methodologies relating to the hedged risk, are recorded in net interest income in the same line as the earnings effect of the hedged item. Net gains (losses) on derivatives and hedging activities for qualifying hedges recorded in net interest income include unrealized and realized gains (losses), which include net interest settlements.these investments.

Prior to January 1, 2019,
Investment Securities:
Available-for-Sale: For securities classified as available-for-sale, FHLBank evaluates an individual security for impairment on a quarterly basis by comparing the security’s fair value hedge ineffectiveness (which representedto its amortized cost. Accrued interest receivable is recorded separately on the amount by which the change inStatements of Condition. Impairment exists when the fair value of the derivative differedinvestment is less than its amortized cost (i.e., in an unrealized loss position). In assessing whether a credit loss exists on an impaired security, FHLBank considers whether there would be a shortfall in receiving all cash flows contractually due. When a shortfall is considered possible, FHLBank compares the present value of cash flows to be collected from the change insecurity 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 management intends to sell an impaired security classified as available-for-sale, 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 ofat the hedged item) was recordedreporting date with any incremental impairment reported in non-interest incomeearnings as net gains (losses) on derivatives and hedging activities.


Investment Securities: Securities that areavailable-for-sale securities. If management does not classified as trading or held-to-maturity areintend to sell an impaired security classified as available-for-sale and are carried at fair value. The change init 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 of available-for-sale securitiesand amortized cost is recorded in other comprehensive income (loss) (OCI) asto net unrealized gains (losses) on available-for-sale securities. Beginning January 1, 2019,securities within other comprehensive income (loss) (OCI).

Held-to-Maturity: Securities that FHLBank has both the FHLBank adopted new hedge accounting guidance,ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost, adjusted for periodic principal repayments, amortization of premiums, and accretion of discounts. Accrued interest receivable is recorded separately on the Statements of Condition.

Held-to-maturity securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. An allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance for credit losses excludes uncollectible accrued interest receivable, which among other things, impactsis measured separately.

See Note 3 for details on the presentationallowance methodologies relating to available-for-sale and held-to-maturity securities.

Advances: Advances are carried at amortized cost, which is original cost adjusted for periodic principal repayments, amortization of gains (losses) on derivativespremiums, accretion of discounts, and hedging activities for qualifying hedges, including fair value hedges of available-for-sale securities. For available-for-sale securities that have been hedged and qualify as a fair value hedge adjustments. Accrued interest receivable is recorded separately on the FHLBank records the portionStatements of the change in the fair value of the investment relatedCondition. Advances are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the risk being hedged in available-for-sale interest income together withprovision (reversal) for credit losses. See Note 4 for details on the related change in the fair value of the derivative, and records the remainder of the change in the fair value of the investment in OCI as net unrealized gains (losses) on available-for-sale securities.allowance methodology relating to advances.

Prior to January 1, 2019,Mortgage Loans Held for available-for-sale securities that were hedgedPortfolio: Mortgage loans held for portfolio are recorded at amortized cost, which is original cost adjusted for periodic principal repayments, amortization of premiums, accretion of discounts, hedging adjustments, other fees, and qualified as a fair value hedge, the FHLBankdirect write-downs. Accrued interest receivable is recorded the portion of the change in the fair value of the investment related to the risk being hedged in non-interest income as net gains (losses)separately on derivatives and hedging activities together with the related change in the fair value of the derivative, and recorded the remainder of the change in the fair value of the investment in OCI as net unrealized gains (losses) on available-for-sale securities.

Prepayment Fees on Advances: The FHLBank charges a borrower a prepayment fee when the borrower prepays certain advances before the original maturity. The FHLBank records prepayment fees net of basis adjustments related to hedging activities included in the carrying value of the advance as advance interest income in the Statements of Income.Condition. FHLBank performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. An allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses.

FHLBank measures expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a new advance does not qualify as a modification ofmortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an existing advance, the existing advance is treated as an advance termination and any prepayment fee, net of hedging adjustments, is recorded to advance interest income in the Statements of Income.individual basis.

When developing the allowance for credit losses, FHLBank measures the estimated loss over the remaining life of a mortgage loan, which also considers how credit enhancements mitigate credit losses. If a new advance qualifiesloan is purchased at a discount, the discount does not offset the allowance for credit losses. The allowance excludes uncollectible accrued interest receivable, as FHLBank writes off accrued interest receivable by reversing interest income if a modificationmortgage loan is placed on nonaccrual status.

FHLBank does not purchase mortgage loans with credit deterioration present at the time of an existing advance, any prepayment fee, netpurchase. FHLBank includes estimates of hedging adjustments, is deferred, recorded inexpected recoveries within the basis of the modified advance, and amortized using a level-yield methodology over the life of the modified advance to advance interest income. If the modified advance is hedged and meets hedge accounting requirements, the modified advance is marked to benchmark or full fair value, dependingallowance for credit losses. See Note 5 for details on the risk being hedged, and subsequent fair value changes that are attributableallowance methodologies relating to the hedged risk are recorded in advance interest income effective January 1, 2019. Prior to January 1, 2019, subsequent fair value changes were recorded in non-interest income as net gains (losses) on derivatives and hedging activities.mortgage loans.


Off-Balance Sheet Credit Exposures: FHLBank evaluates off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision (reversal) for credit losses. See Note 13 for details on the allowance methodologies relating to off-balance sheet credit exposures.

NOTE 2 – RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS AND CHANGES IN AND ADOPTIONS OF ACCOUNTING PRINCIPLES

InclusionCoronavirus Aid, Relief, and Economic Security Act (CARES Act). In March 2020, the CARES Act was signed into law to provide relief from the economic impact of the Secured Overnight FinancingCOVID-19 pandemic to a variety of sectors of the U.S. economy, including businesses, individuals, health care, education, and state and local governments. The CARES Act also includes provisions that provide optional relief from certain accounting and reporting requirements related to troubled debt restructurings (TDRs). TDR relief applies to COVID-19-related modifications made from March 1, 2020 until the earlier of December 31, 2020 or 60 days following the termination of the national emergency declared by the President of the United States for borrowers that were current as of December 31, 2019. FHLBank has elected the optional relief but does not expect it to have a material effect on FHLBank's financial condition, results of operations, cash flows, or disclosures.

Facilitation of the Effects of Reference Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting PurposesReform on Financial Reporting (Accounting StandardsStandard Update (ASU) 2018-16)2020-04). In October 2018,March 2020, the Financial Accounting Standards Board (FASB) issued an amendment that permits usetemporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include: (1) contract modifications; (2) hedging relationships; and (3) sale or transfer of the OIS rate based on SOFRdebt securities classified as a U.S. benchmark interest rateheld-to-maturity. This guidance was effective immediately for hedge accounting purposes under Topic 815 in addition to the U.S. Treasury rate, the LIBOR swap rate, the OIS rate based on the Fed Funds Effective Rate,FHLBank, and the Securities Industryamendments may be applied prospectively through December 31, 2022. FHLBank is in the process of evaluating the guidance, and Financial Markets Association Municipal Swap Rate. The amendments apply to all entities that elect to apply hedge accountingits effect on FHLBank's financial condition, results of the benchmark interest rate. The amendments were adopted on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. The amendment was effective concurrently with ASU 2017-12 (see below) for annual periods,operations and interim periods within those annual periods, beginning January 1, 2019. The adoption of this guidance didcash flows has not materially affect the FHLBank's application of hedge accounting or utilization of hedging strategies.yet been determined.

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (ASU 2018-15). In August 2018, the FASB issued an amendment 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). Accordingly, the amendments in this ASU require an entity in a hosting arrangement that is a service contract to follow existing guidance relating to internal-use software to determine which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Costs to develop or obtain internal-use software that cannot be capitalized also cannot be capitalized for a hosting arrangement that is a service contract. Therefore, an entity in a hosting arrangement that is a service contract determines to which project stage (that is, preliminary project stage, application development stage, or post-implementation stage) an implementation activity relates. Costs for implementation activities in the application development stage are capitalized depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The amendments in this ASU also require the entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. The amendments in this ASU will bewere effective for annual periods, and interim periods within those annual periods beginning after December 31, 2019, which is January 1, 2020 for the FHLBank. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, for all entities. The FHLBank does not plan on early adoption. The adoption of this guidance isdid not expected to have a material effect on thematerially impact FHLBank's financial condition, results of operations or cash flows.


Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). In August 2018, the FASB issued an amendment modifying the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness. The amendments in the ASU remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this ASU are effective for annual periods ending after December 15, 2020, which is the year ending December 31, 2020 for the FHLBank, and will be applied retrospectively for all comparative periods presented. Early adoption is permitted. The FHLBank does not plan on early adoption. The adoption of this guidance will not have a material impact on the disclosures related to defined benefit plans and will not impact the FHLBank’s financial condition, results of operations or cash flows.

Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). In August 2018, the FASB issued an amendment that modifies the disclosure requirements for fair value measurements. This ASU removes the requirement to disclose: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in OCI for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU will bewere effective for annual periods, and interim periods within those annual periods beginning after December 31, 2019, which is January 1, 2020 for the FHLBank. Early adoption is permitted. The FHLBank does not plan on early adoption. The adoption of this guidance will not have a material impact on the disclosures related to fair value measurements and will not impact the FHLBank’s financial condition, results of operations or cash flows.

Targeted Improvements to Accounting for Hedging Activities, as amended (ASU 2017-12). In August 2017, the FASB issued an amendment to simplify the application of hedge accounting guidance in current GAAP and to improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. This guidance requires that, for fair value hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. In addition, the amendments include certain targeted improvements to the assessment of hedge effectiveness and permit, among other things, the following:
Measurement of the change in fair value of the hedged item on the basis of the benchmark rate component of the contractual coupon cash flows determined at hedge inception;
Measurement of the hedged item in a partial-term fair value hedge of interest rate risk by assuming the hedged item has a term that reflects only the designated cash flows being hedged;
Consideration only of how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest rate risk;
For a cash flow hedge of interest rate risk of a variable rate financial instrument, an entity can designate the variability in cash flows attributable to the contractually specified interest rate as the hedged risk; and
If an entity that applies the shortcut method determines that use of that method was not or is no longer appropriate, the entity may apply a long-haul method for assessing hedge effectiveness as long as the hedge is highly effective and the entity documents at inception which long-haul methodology it will use.

The amendment became effective for annual periods, and interim periods within those annual periods beginning on January 1, 2019 for the FHLBank. The guidance did not affect the FHLBank's application of hedge accounting for existing hedge strategies. For all short-cut hedge accounting trades, the FHLBank updated existing documentation to designate a long-haul method to be utilized in the event a hedge ceases to qualify for the short-cut method. The guidance also provided opportunities to enhance risk management through new hedge strategies, including partial term hedges. The adoption of this guidance did not have a material effect on the FHLBank's financial condition, results of operations or cash flows beyond a prospective change in income statement presentation for fair value hedge relationships and new required disclosures.

Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). In March 2017, the FASB issued an amendment to shorten the amortization period of any premium on callable debt securities to the first call date instead of over the contractual life of the instrument. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is intended to reduce diversity in practice in the amortization of premiums and the consideration of how the potential of a security being called is factored into current impairment assessments. The amendment also intends to more closely align the amortization of premiums and discounts to the expectations incorporated into the market pricing of the instrument. The amendment became effective for annual periods, and interim periods within those annual periods beginning on January 1, 2019 for the FHLBank. The adoption of this guidance did not have an impact on the FHLBank'sdisclosures related to fair value measurements and did not impact FHLBank’s financial condition, results of operations or cash flows.


Measurement of Credit Losses on Financial Instruments, as amended (ASU 2016-13). In June 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. Additionally, under the new guidance, a financial asset, or a group of financial assets, measured at amortized cost basis is required to be presented at the net amount expected to be collected.

The guidance also requires:
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;
The entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis in a similar manner to other financial assets measured at amortized cost basis. The initial allowance for credit losses is required to be added to the purchase price;
Credit losses relating to available-for-sale debt securities to be recorded 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; and
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 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;
The entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost basis in a similar manner to other financial assets measured at amortized cost basis. The initial allowance for credit losses is required to be added to the purchase price;
Credit losses relating to available-for-sale debt securities to be recorded 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; and
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 guidance isbecame effective for the FHLBank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim2020 and annual reporting periods beginning after December 15, 2018. The FHLBank does not plan on early adoption. The guidance should bewas applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment (OTTI) charge had been recognized before the effective date; however, the FHLBank currently does not have any OTTI debt securities. The FHLBank does not expect this guidance to impact certain financial instruments, including advances, Agency and government-sponsored enterprise investments, securities purchased under agreements to resell, and other overnight investments due to the specific terms, issuer guarantees, and/or collateralized nature of the instruments that result in high credit quality holdings with no expected credit losses.earnings. Adoption of this guidance isdid not expected to have a materialmaterially impact on the FHLBank's municipal securities, short-term investments and mortgage loans held for portfolio. Consequently, adoption of this guidance is not expected to have a material impact on the FHLBank’s financial condition, results of operations, or cash flows.

Leases (ASU 2016-02). In February 2016, FASB issued amendments to lease accounting guidance. Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for all leases in the statement of financial condition, which effectively removes a source of off-balance sheet financing for operating leases. A distinction remains between finance leases and operating leases, but the assets and liabilities arising from operating leases are now also required to be recognized in the statement of financial condition. Lessor accounting is largely unchanged. The amendments became effective for annual periods, and interim periods within those annual periods, beginning on January 1, 2019 for the FHLBank. The adoption of this guidance did not have a material effect on the FHLBank's financial condition, results of operations or cash flows.



NOTE 3 – INVESTMENT SECURITIESINVESTMENTS

FHLBank's investment portfolio consists of interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, and debt securities.

Trading Securities:Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold: TradingFHLBank 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 major security type asa nationally recognized statistical rating organization (NRSRO). These may differ from internal ratings of Septemberthe investments, if applicable. As of June 30, 20192020, approximately 64 percent of these overnight investments were with unrated counterparties.

Federal funds sold are unsecured loans that are generally transacted on an overnight term. Federal Housing Finance Agency (FHFA) regulations include a limit on the amount of unsecured credit FHLBank may extend to a counterparty. As of June 30, 2020 and December 31, 20182019, all investments in interest-bearing deposits and Federal funds sold were repaid or expected to be repaid according to the contractual terms. No allowance for credit losses was recorded for these assets as of June 30, 2020 and December 31, 2019. Carrying values of interest-bearing deposits and Federal funds sold exclude accrued interest receivable of $74,000 and $3,000, respectively, as of June 30, 2020, and $589,000 and $30,000, respectively, as of December 31, 2019.

Securities purchased under agreements to resell are summarizedshort-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, FHLBank determined that no allowance for credit losses was needed for its securities purchased under agreements to resell as of June 30, 2020 and December 31, 2019. The carrying value of securities purchased under agreements excludes accrued interest receivable of $16,000 and $424,000 as of June 30, 2020 and December 31, 2019, respectively.

Debt Securities: FHLBank invests in Table 3.1 (in thousands):debt securities, which are classified as either trading, available-for-sale, or held-to-maturity. FHLBank is prohibited by FHFA regulations from purchasing certain higher-risk securities, such as equity securities and debt instruments that are not investment quality, other than certain investments targeted at low-income persons or communities and instruments that experienced credit deterioration after their purchase by FHLBank.

Table 3.1
 Fair Value
 09/30/201912/31/2018
Non-mortgage-backed securities:  
U.S. Treasury obligations$1,533,842
$252,377
GSE obligations1
468,747
1,000,495
Non-mortgage-backed securities2,002,589
1,252,872
Mortgage-backed securities:  
U.S. obligation MBS2

467
GSE MBS3
898,986
897,774
Mortgage-backed securities898,986
898,241
TOTAL$2,901,575
$2,151,113
FHLBank's debt securities include the following major security types, which are based on the issuer and the risk characteristics of the security:
Certificates of deposit - unsecured negotiable promissory notes issued by banks;
U.S. Treasury obligations - sovereign debt of the United States;
1GSE obligations -
Represents debentures issued by other FHLBanks, Federal National Mortgage Association (Fannie Mae), Federal Farm Credit Bank (Farm Credit) and Federal Agricultural Mortgage Corporation (Farmer Mac).Corporation. GSE securities are not guaranteed by the U.S. government.government;
State or local housing agency obligations - municipal bonds issued by housing finance agencies;
2U.S. obligation MBS -
Represents single-family MBS issued by Government National Mortgage Association (Ginnie Mae), which are guaranteed by the U.S. government.government; and
3GSE MBS -
Represents single-family and multi-familymultifamily MBS issued by Fannie Mae and Federal Home Loan Mortgage Corporation (Freddie Mac).

Trading Securities: Trading securities by major security type as of June 30, 2020 and December 31, 2019 are summarized in Table 3.1 (in thousands):

Table 3.1
 Fair Value
 06/30/202012/31/2019
Non-mortgage-backed securities:  
U.S. Treasury obligations$1,565,218
$1,530,518
GSE obligations
435,008
416,025
Non-mortgage-backed securities2,000,226
1,946,543
Mortgage-backed securities:  
GSE MBS904,417
866,019
Mortgage-backed securities904,417
866,019
TOTAL$2,904,643
$2,812,562

Net gains (losses) on trading securities during the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 are shown in Table 3.2 (in thousands):

Table 3.2
 Three Months EndedNine Months Ended
 09/30/201909/30/201809/30/201909/30/2018
Net gains (losses) on trading securities held as of September 30, 2019$16,352
$(10,375)$87,222
$(47,833)
Net gains (losses) on trading securities sold or matured prior to September 30, 2019(166)(1,139)(438)(2,662)
NET GAINS (LOSSES) ON TRADING SECURITIES$16,186
$(11,514)$86,784
$(50,495)
 Three Months EndedSix Months Ended
 06/30/202006/30/201906/30/202006/30/2019
Net gains (losses) on trading securities held as of June 30, 2020$5,430
$41,533
$99,578
$70,192
Net gains (losses) on trading securities sold or matured prior to June 30, 2020(55)310
186
406
NET GAINS (LOSSES) ON TRADING SECURITIES$5,375
$41,843
$99,764
$70,598


Available-for-sale Securities: Available-for-sale securities by major security type as of SeptemberJune 30, 20192020 are summarized in Table 3.3 (in thousands):. Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and fair value hedge accounting adjustments, and excludes accrued interest receivable of $30,140,000 as of June 30, 2020.

Table 3.3
09/30/201906/30/2020
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:  
U.S. Treasury obligations$3,516,938
$
$(6,210)$3,510,728
$4,336,512
$1,563
$(689)$4,337,386
Non-mortgage-backed securities3,516,938

(6,210)3,510,728
4,336,512
1,563
(689)4,337,386
Mortgage-backed securities:  
GSE MBS1
2,564,172
29,013
(4,984)2,588,201
GSE MBS3,253,910
18,845
(51,465)3,221,290
Mortgage-backed securities2,564,172
29,013
(4,984)2,588,201
3,253,910
18,845
(51,465)3,221,290
TOTAL$6,081,110
$29,013
$(11,194)$6,098,929
$7,590,422
$20,408
$(52,154)$7,558,676
1
Represents fixed rate multi-family MBS issued by Fannie Mae.

Available-for-sale securities by major security type as of December 31, 20182019 are summarized in Table 3.4 (in thousands):. Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and fair value hedge accounting adjustments, and excludes accrued interest receivable of $30,321,000 as of December 31, 2019.

Table 3.4
12/31/201812/31/2019
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities: 
U.S. Treasury obligations$4,258,608
$3,580
$(397)$4,261,791
Non-mortgage-backed securities4,258,608
3,580
(397)4,261,791
Mortgage-backed securities:  
GSE MBS1
$1,706,572
$25,815
$(6,747)$1,725,640
GSE MBS2,897,104
28,353
(4,748)2,920,709
Mortgage-backed securities2,897,104
28,353
(4,748)2,920,709
TOTAL$1,706,572
$25,815
$(6,747)$1,725,640
$7,155,712
$31,933
$(5,145)$7,182,500

1
Represents fixed rate multi-family MBS issued by Fannie Mae.

Table 3.5 summarizes the available-for-sale securities with unrealized losses as of SeptemberJune 30, 20192020 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.5
 09/30/2019
 Less Than 12 Months12 Months or MoreTotal
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities:      
U.S. Treasury obligations$3,510,728
$(6,210)$
$
$3,510,728
$(6,210)
Non-mortgage-backed securities3,510,728
(6,210)

3,510,728
(6,210)
Mortgage-backed securities:      
GSE MBS1
155,339
(344)307,143
(4,640)462,482
(4,984)
Mortgage-backed securities155,339
(344)307,143
(4,640)462,482
(4,984)
TOTAL TEMPORARILY IMPAIRED SECURITIES$3,666,067
$(6,554)$307,143
$(4,640)$3,973,210
$(11,194)
1
Represents fixed rate multi-family MBS issued by Fannie Mae.

 06/30/2020
 Less Than 12 Months12 Months or MoreTotal
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities:      
U.S. Treasury obligations$1,561,377
$(587)$502,245
$(102)$2,063,622
$(689)
Non-mortgage-backed securities1,561,377
(587)502,245
(102)2,063,622
(689)
Mortgage-backed securities:      
GSE MBS1,833,749
(43,488)322,819
(7,977)2,156,568
(51,465)
Mortgage-backed securities1,833,749
(43,488)322,819
(7,977)2,156,568
(51,465)
TOTAL TEMPORARILY IMPAIRED SECURITIES$3,395,126
$(44,075)$825,064
$(8,079)$4,220,190
$(52,154)

Table 3.6 summarizes the available-for-sale securities with unrealized losses as of December 31, 20182019 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.6
12/31/201812/31/2019
Less Than 12 Months12 Months or MoreTotalLess Than 12 Months12 Months or MoreTotal
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities: 
U.S. Treasury obligations$1,579,004
$(397)$
$
$1,579,004
$(397)
Non-mortgage-backed securities1,579,004
(397)

1,579,004
(397)
Mortgage-backed securities:  
GSE MBS1
$570,042
$(6,747)$
$
$570,042
$(6,747)
GSE MBS787,809
(932)301,161
(3,816)1,088,970
(4,748)
Mortgage-backed securities787,809
(932)301,161
(3,816)1,088,970
(4,748)
TOTAL TEMPORARILY IMPAIRED SECURITIES$570,042
$(6,747)$
$
$570,042
$(6,747)$2,366,813
$(1,329)$301,161
$(3,816)$2,667,974
$(5,145)

1
Represents fixed rate multi-family MBS issued by Fannie Mae.

The amortized cost and fair values of available-for-sale securities by contractual maturity as of SeptemberJune 30, 20192020 and December 31, 20182019 are shown in Table 3.7 (in thousands). Expected maturities of MBS will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.7
09/30/201912/31/201806/30/202012/31/2019
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Non-mortgage-backed securities:  
Due in one year or less$252,032
$251,643
$
$
$1,771,930
$1,772,277
$754,003
$753,891
Due after one year through five years3,264,906
3,259,085


2,564,582
2,565,109
3,504,605
3,507,900
Due after five years through ten years







Due after ten years







Non-mortgage-backed securities3,516,938
3,510,728


4,336,512
4,337,386
4,258,608
4,261,791
Mortgage-backed securities2,564,172
2,588,201
1,706,572
1,725,640
3,253,910
3,221,290
2,897,104
2,920,709
TOTAL$6,081,110
$6,098,929
$1,706,572
$1,725,640
$7,590,422
$7,558,676
$7,155,712
$7,182,500

Net gains (losses) realized on the sale of available-for-sale securities are recorded in other income (loss) on the Statements of Income. Table 3.8 presents details of the sales for the three and six months ended June 30, 2020 (in thousands). There were no sales of available-for-sale securities during the three and six months ended June 30, 2019.

Table 3.8
 Three Months EndedSix Months Ended
 06/30/202006/30/2020
Proceeds from sale of available-for-sale securities$
$289,045
   
Gross gains on sale of available-for-sale securities$
$1,526
Gross losses on sale of available-for-sale securities
(3)
NET GAINS (LOSSES) ON SALE OF AVAILABLE-FOR-SALE SECURITIES$
$1,523

Held-to-maturity Securities: Held-to-maturity securities by major security type as of SeptemberJune 30, 20192020 are summarized in Table 3.83.9 (in thousands):. Amortized cost includes adjustments made to the cost basis of an investment for accretion and amortization, and excludes accrued interest receivable of $1,393,000 as of June 30, 2020.

Table 3.83.9
09/30/201906/30/2020
Amortized
Cost
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Amortized
Cost
Net Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:  
State or local housing agency obligations$85,670
$85,670
$
$(3,248)$82,422
$81,995
$81,995
$
$(3,615)$78,380
Non-mortgage-backed securities85,670
85,670

(3,248)82,422
81,995
81,995

(3,615)78,380
Mortgage-backed securities:  
U.S. obligation MBS1
97,647
97,647
11
(333)97,325
GSE MBS2
3,545,338
3,545,338
8,360
(16,441)3,537,257
U.S. obligation MBS85,268
85,268
17
(164)85,121
GSE MBS3,014,873
3,014,873
8,074
(9,736)3,013,211
Mortgage-backed securities3,642,985
3,642,985
8,371
(16,774)3,634,582
3,100,141
3,100,141
8,091
(9,900)3,098,332
TOTAL$3,728,655
$3,728,655
$8,371
$(20,022)$3,717,004
$3,182,136
$3,182,136
$8,091
$(13,515)$3,176,712
1
Represents single-family MBS issued by Ginnie Mae.
2
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Held-to-maturity securities by major security type as of December 31, 20182019 are summarized in Table 3.9 (in thousands):

Table 3.9
 12/31/2018
 
Amortized
Cost
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:     
State or local housing agency obligations$86,430
$86,430
$1
$(3,480)$82,951
Non-mortgage-backed securities86,430
86,430
1
(3,480)82,951
Mortgage-backed securities:     
U.S. obligation MBS1
109,866
109,866
125
(99)109,892
GSE MBS2
4,260,577
4,260,577
12,164
(18,506)4,254,235
Mortgage-backed securities4,370,443
4,370,443
12,289
(18,605)4,364,127
TOTAL$4,456,873
$4,456,873
$12,290
$(22,085)$4,447,078
1
Represents single-family MBS issued by Ginnie Mae.
2
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


Table 3.10 summarizes the held-to-maturity securities with unrealized losses as of September 30, 2019 (in thousands). The unrealized losses are aggregated by major security typeAmortized cost includes adjustments made to the cost basis of an investment for accretion and lengthamortization, and excludes accrued interest receivable of time that individual securities have been in a continuous unrealized loss position.$4,324,000 as of December 31, 2019.

Table 3.10
09/30/2019
Less Than 12 Months12 Months or MoreTotal12/31/2019
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Amortized
Cost
Carrying Value
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Non-mortgage-backed securities:  
State or local housing agency obligations$55,666
$(5)$26,757
$(3,243)$82,423
$(3,248)$82,805
$82,805
$5
$(1,956)$80,854
Non-mortgage-backed securities55,666
(5)26,757
(3,243)82,423
(3,248)82,805
82,805
5
(1,956)80,854
Mortgage-backed securities:  
U.S. obligation MBS1
60,360
(217)26,259
(116)86,619
(333)
GSE MBS2
634,043
(2,581)2,147,252
(13,860)2,781,295
(16,441)
U.S. obligation MBS93,375
93,375

(496)92,879
GSE MBS3,393,778
3,393,778
6,558
(17,131)3,383,205
Mortgage-backed securities694,403
(2,798)2,173,511
(13,976)2,867,914
(16,774)3,487,153
3,487,153
6,558
(17,627)3,476,084
TOTAL TEMPORARILY IMPAIRED SECURITIES$750,069
$(2,803)$2,200,268
$(17,219)$2,950,337
$(20,022)
TOTAL$3,569,958
$3,569,958
$6,563
$(19,583)$3,556,938
1
Represents single-family MBS issued by Ginnie Mae.
2
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.

Table 3.11 summarizes the held-to-maturity securities with unrealized losses as of December 31, 2018 (in thousands). The unrealized losses are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.11
 12/31/2018
 Less Than 12 Months12 Months or MoreTotal
 
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Non-mortgage-backed securities:      
State or local housing agency obligations$
$
$26,520
$(3,480)$26,520
$(3,480)
Non-mortgage-backed securities

26,520
(3,480)26,520
(3,480)
Mortgage-backed securities:      
U.S. obligation MBS1


30,702
(99)30,702
(99)
GSE MBS2
1,655,048
(4,769)1,567,728
(13,737)3,222,776
(18,506)
Mortgage-backed securities1,655,048
(4,769)1,598,430
(13,836)3,253,478
(18,605)
TOTAL TEMPORARILY IMPAIRED SECURITIES$1,655,048
$(4,769)$1,624,950
$(17,316)$3,279,998
$(22,085)
1
Represents single-family MBS issued by Ginnie Mae.
2
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.


The amortized cost, carrying value and fair values of held-to-maturity securities by contractual maturity as of SeptemberJune 30, 20192020 and December 31, 20182019 are shown in Table 3.123.11 (in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.123.11
09/30/201912/31/201806/30/202012/31/2019
Amortized
Cost
Carrying
Value
Fair
Value
Amortized
Cost
Carrying
Value
Fair
Value
Amortized
Cost
Net Carrying
Value
Fair
Value
Amortized
Cost
Carrying
Value
Fair
Value
Non-mortgage-backed securities:  
Due in one year or less$
$
$
$
$
$
$
$
$
$
$
$
Due after one year through five years











Due after five years through ten years











Due after ten years85,670
85,670
82,422
86,430
86,430
82,951
81,995
81,995
78,380
82,805
82,805
80,854
Non-mortgage-backed securities85,670
85,670
82,422
86,430
86,430
82,951
81,995
81,995
78,380
82,805
82,805
80,854
Mortgage-backed securities3,642,985
3,642,985
3,634,582
4,370,443
4,370,443
4,364,127
3,100,141
3,100,141
3,098,332
3,487,153
3,487,153
3,476,084
TOTAL$3,728,655
$3,728,655
$3,717,004
$4,456,873
$4,456,873
$4,447,078
$3,182,136
$3,182,136
$3,176,712
$3,569,958
$3,569,958
$3,556,938

Net gains (losses) were realized on the sale of held-to-maturity securities as presented below and are recorded as net gains (losses) on sale of held-to-maturity securities in other income (loss) on the Statements of Income. All securities sold had paid down below 15 percent of the principal outstanding at acquisition.acquisition and were therefore considered maturities under GAAP. Table 3.133.12 presents details of the sales (in thousands). There were no sales of held-to-maturity securities during the three and six months ended June 30, 2020.

Table 3.133.12
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/201906/30/2019
Proceeds from sale of held-to-maturity securities$
$67,566
$9,442
$87,827
$9,442
$9,442
Carrying value of held-to-maturity securities sold
(66,037)(9,488)(86,236)(9,488)(9,488)
NET REALIZED GAINS (LOSSES)$
$1,529
$(46)$1,591
$(46)$(46)

AsAllowance for Credit Losses on Available-for-Sale and Held-to-Maturity Securities: FHLBank evaluates available-for-sale and held-to-maturity investment securities for credit losses on a quarterly basis. FHLBank adopted new accounting guidance for the measurement of Septembercredit losses on financial instruments on January 1, 2020. See Note 2 for additional information.

During the three and six months ended June 30, 2019,2020, FHLBank did not recognize a provision for credit losses associated with available-for-sale investments or held-to-maturity investments. To evaluate investment securities for credit loss as of June 30, 2020, FHLBank employed the fair valuefollowing methodologies, based on the type of a portion of the security.

FHLBank's available-for-sale and held-to-maturity securities are principally certificates of deposit, U.S. obligations, GSE obligations, state or local housing agency obligations, and MBS issued by Ginnie Mae, Freddie Mac, and Fannie Mae that are backed by single-family or multifamily mortgage loans. FHLBank only purchases securities considered investment quality. As of June 30, 2020, all of FHLBank's available-for-sale securities and held-to-maturity securities were belowrated single-A or above by an NRSRO, based on the amortized costlowest long-term credit rating for each security. These may differ from any internal ratings of the securities, dueif applicable.


FHLBank evaluates available-for-sale securities for impairment by comparing the security’s fair value to interest rate volatility and/or illiquidity. However,its amortized cost. Impairment may exist when the decline in fair value of thesethe investment is less than its amortized cost (i.e., in an unrealized loss position). As of June 30, 2020, certain available-for-sale securities iswere in an unrealized loss position. These losses are considered temporary as the FHLBank expects to recover the entire amortized cost basis on the remaining securities in unrecognized loss positions andthese available-for-sale investment securities. FHLBank neither intends to sell these securities nor isconsiders it more likely than not that the FHLBankit will be required to sell these securities before its anticipated recovery of theeach security's remaining amortized cost basis. Further, FHLBank has not experienced any payment defaults on the instruments. In addition, all of these securities carry an implicit or explicit government guarantee. As a result, no allowance for credit losses was recorded on these available-for-sale securities as of June 30, 2020.

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



NOTE 4 – ADVANCES

General Terms: The FHLBank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics and optionality. As of SeptemberJune 30, 20192020 and December 31, 2018, the2019, FHLBank had advances outstanding at interest rates ranging from 0.950.17 percent to 7.20 percent and 0.96 percent to 7.41 percent, and 0.88 percent to 7.41 percent, respectively.respectively, for traditional advances (excludes COVID-19 Relief Advances described below). Table 4.1 presents advances summarized by redemption term as of SeptemberJune 30, 20192020 and December 31, 20182019 (dollar amounts in thousands). Carrying amounts exclude accrued interest receivable of $17,354,000 and $45,637,000 as of June 30, 2020 and December 31, 2019, respectively.

Table 4.1
09/30/201912/31/201806/30/202012/31/2019
Redemption TermAmountWeighted Average Interest RateAmountWeighted Average Interest RateAmountWeighted Average Interest RateAmountWeighted Average Interest Rate
Due in one year or less$14,132,104
2.23%$14,844,804
2.60%$12,157,479
0.58%$13,188,118
1.88%
Due after one year through two years6,623,255
2.29
1,482,844
2.40
1,972,758
1.26
10,448,433
1.96
Due after two years through three years1,378,995
2.45
1,442,333
2.53
1,278,379
1.42
1,254,153
2.27
Due after three years through four years2,438,871
2.31
7,496,058
2.66
1,137,591
1.86
1,067,662
2.42
Due after four years through five years3,150,589
2.35
816,702
2.68
1,387,893
1.43
1,208,854
2.22
Thereafter2,797,752
2.46
2,695,008
2.58
3,259,138
1.98
3,004,835
2.25
Total par value30,521,566
2.29%28,777,749
2.60%21,193,238
1.04%30,172,055
1.99%
Discounts(2,034) (3,413) (11,602) (1,807) 
Hedging adjustments115,051
 (44,223) 347,355
 71,067
 
TOTAL$30,634,583
 $28,730,113
 $21,528,991
 $30,241,315
 

During the three months ended June 30, 2020, FHLBank issued subsidized COVID-19 Relief Advances to help members serve their customers affected by the COVID-19 pandemic. The zero-cost advances have a term of six months and the low-cost advances have terms between 6 and 24 months. As of June 30, 2020, FHLBank had $556,951,000 and $512,890,000 of zero-cost and low-cost advances outstanding, respectively. Discounts of $4,530,000 were initially recorded on these advances and are accreted using the interest method over the life of the advances resulting in the recognition of periodic interest income on the advances at the effective interest rate (i.e., yield recorded equals a prevailing rate) in net interest income, of which $3,682,000 remains outstanding as of June 30, 2020.

FHLBank’s advances outstanding include advances that contain call options that may be exercised with or without prepayment fees at the borrower’s discretion on specific dates (call dates) before the stated advance maturities (callable advances). In exchange for receiving the right to call the advance on a predetermined call schedule, the borrower may pay a higher fixed rate for the advance relative to an equivalent maturity, non-callable, fixed rate advance. The borrower normally exercises its call options on these advances when interest rates decline (fixed rate advances) or spreads change (adjustable rate advances).


Convertible advances allow the FHLBank to convert an advance from one interest payment term structure to another. When issuing convertible advances, the FHLBank purchases put options from a member that allow the FHLBank to convert the fixed rate advance to a variable rate advance at the current market rate or another structure after an agreed-upon lockout period. A convertible advance carries a lower interest rate than a comparable-maturity fixed rate advance without the conversion feature.


Table 4.2 presents advances summarized by redemption term or next call date (for callable advances) and by redemption term or next conversion date (for convertible advances) as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 4.2
Redemption Term
or Next Call Date
Redemption Term
or Next Conversion Date
Redemption Term
or Next Call Date
Redemption Term
or Next Conversion Date
Redemption Term09/30/201912/31/201809/30/201912/31/201806/30/202012/31/201906/30/202012/31/2019
Due in one year or less$24,738,805
$23,343,939
$14,672,104
$15,133,204
$14,396,016
$24,271,238
$13,172,929
$14,053,068
Due after one year through two years1,418,909
1,271,660
6,827,355
1,683,644
1,357,838
1,133,077
2,234,358
10,637,833
Due after two years through three years776,452
1,021,189
1,647,995
1,629,233
778,493
728,429
1,517,329
1,524,153
Due after three years through four years633,870
555,901
2,585,121
7,752,058
741,297
764,990
1,246,591
1,215,412
Due after four years through five years724,005
598,282
3,223,089
954,452
902,643
686,594
1,475,793
1,304,254
Thereafter2,229,525
1,986,778
1,565,902
1,625,158
3,016,951
2,587,727
1,546,238
1,437,335
TOTAL PAR VALUE$30,521,566
$28,777,749
$30,521,566
$28,777,749
$21,193,238
$30,172,055
$21,193,238
$30,172,055

Interest Rate Payment Terms:  Table 4.3 details additional interest rate payment terms for advances as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 4.3
Redemption Term09/30/201912/31/201806/30/202012/31/2019
Fixed rate:  
Due in one year or less$1,805,217
$1,635,464
$9,025,705
$2,691,528
Due after one year5,798,750
5,455,193
6,723,647
5,912,124
Total fixed rate7,603,967
7,090,657
15,749,352
8,603,652
Variable rate: 
 
 
 
Due in one year or less12,326,887
13,209,340
3,131,774
10,496,590
Due after one year10,590,712
8,477,752
2,312,112
11,071,813
Total variable rate22,917,599
21,687,092
5,443,886
21,568,403
TOTAL PAR VALUE$30,521,566
$28,777,749
$21,193,238
$30,172,055

See Note 6
Credit Risk Exposure and Security Terms: FHLBank's advances are primarily made to member financial institutions, including commercial banks and insurance companies. FHLBank manages its credit exposure to advances through an integrated approach that includes establishing a credit limit for informationeach borrower. This approach includes an ongoing review of each borrower's financial condition, in conjunction with FHLBank's collateral and lending policies to limit risk of loss, while balancing borrowers' needs for a reliable source of funding.

In addition, FHLBank lends to eligible borrowers in accordance with federal law and FHFA regulations. Specifically, FHLBank is required to obtain sufficient collateral to fully secure credit products up to the counterparty’s total credit limit. Collateral eligible to secure new or renewed advances includes:
One-to-four family and multifamily mortgage loans (delinquent for no more than 90 days) and securities representing such mortgages;
Loans and securities issued, insured, or guaranteed by the U.S. government or any U.S. government agency (for example, MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae);
Cash or deposits in FHLBank;
Certain other collateral that is real estate-related, provided that the collateral has a readily ascertainable value and that FHLBank can perfect a security interest in it; and
Certain qualifying securities representing undivided equity interests in eligible advance collateral.


During the second quarter of 2020, FHLBank was given the regulatory flexibility to allow members to pledge Small Business Administration (SBA) Paycheck Protection Program (PPP) loans as eligible collateral, with the following restrictions: (1) maximum aggregate lending value for PPP loans is limited to the lesser of $5 billion or 20 percent of the institution’s total lending value on all collateral pledged; and (2) the institution must maintain a CAMELS composite rating of “3” or better. CAMELS is a rating system for banks utilized by federal banking supervisors that represents an evaluation of a bank's financial condition and compliance with laws and regulatory policies. If an institution’s CAMELS composite rating downgrades to “4” or “5”, the institution must substitute all PPP loans being utilized to support outstanding credit obligations with other eligible collateral within five business days. As of June 30, 2020, the amount of PPP loans pledged to FHLBank as collateral was immaterial.

Residential mortgage loans are the principal form of collateral for advances. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the market value or unpaid principal balance of the collateral, as applicable. In addition, community financial institutions are eligible to use expanded statutory collateral provisions for small business, agriculture loans, and community development loans. FHLBank capital stock owned by each borrower is also pledged as collateral. Collateral arrangements may vary depending upon borrower credit quality, financial condition, and performance; borrowing capacity; and overall credit exposure to the borrower. FHLBank can also require additional or substitute collateral to protect its security interest. FHLBanks also have policies and procedures for validating the reasonableness of their collateral valuations. In addition, collateral verifications and on-site reviews are performed by FHLBank based on the risk profile of the borrower. FHLBank management believes that these policies effectively manage credit risk from advances.

FHLBank either allows a borrower to retain physical possession of the collateral assigned to it, or requires the borrower to specifically assign or place physical possession of the collateral with FHLBank or its safekeeping agent. FHLBank perfects its security interest in all pledged collateral. The Federal Home Loan Bank Act of 1932, as amended, (Bank Act) states that any security interest granted to an FHLBank by a borrower will have priority over the claims or rights of any other party, except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach and taking into consideration each borrower's financial strength, FHLBank considers the types and level of collateral to be the primary indicator of credit quality on advances. As of June 30, 2020 and December 31, 2019, FHLBank had rights to collateral on a borrower-by-borrower basis with an estimated value greater than its outstanding advances.

FHLBank continues to evaluate and make changes to its collateral guidelines, as necessary, based on current market conditions. As of June 30, 2020 and December 31, 2019, no advances were past due, on non-accrual status, or considered impaired. In addition, there were no troubled debt restructurings related to advances during the FHLBank’sthree and six months ended June 30, 2020 and 2019.

Based on the collateral held as security, FHLBank's credit riskextension and collateral policies, and repayment history on advances, no losses are expected on advances as of June 30, 2020, and therefore no allowance for credit losses.losses on advances was recorded. For the same reasons, FHLBank did not record any allowance for credit losses on advances as of December 31, 2019.


NOTE 5 – MORTGAGE LOANS

TheMortgage loans held for portfolio consist of loans obtained through the MPF Program involves the FHLBank investing inand are either conventional mortgage loans which have been fundedor government-guaranteed or -insured mortgage loans. Under the MPF Program, FHLBank purchases single-family mortgage loans that are originated or acquired by the FHLBank through or purchased from participating financial institutions (PFIs). These mortgage loans are government-guaranteed or -insured loans (by the Federal Housing Administration, the Department of Veterans Affairs, the Rural Housing Service of the Department of Agriculture and/or the Department of Housing and Urban Development) and conventional residential loans credit-enhanced by PFIs. Depending upon a member’s product selection, the servicing rights can be retainedPFIs or soldare guaranteed or insured by the participating member. The FHLBank does not buy or own any mortgage servicing rights.Federal agencies.


Mortgage Loans Held for Portfolio: Table 5.1 presents information as of SeptemberJune 30, 20192020 and December 31, 20182019 on mortgage loans held for portfolio (in thousands):. Mortgage loans held for portfolio excludes accrued interest receivable of $54,212,000 and $52,358,000 as of June 30, 2020 and December 31, 2019, respectively.

Table 5.1
09/30/201912/31/201806/30/202012/31/2019
Real estate:  
Fixed rate, medium-term1, single-family mortgages
$1,212,501
$1,179,087
$1,540,694
$1,347,385
Fixed rate, long-term, single-family mortgages8,473,501
7,111,856
9,259,462
9,128,268
Total unpaid principal balance9,686,002
8,290,943
10,800,156
10,475,653
Premiums145,443
120,548
158,715
155,793
Discounts(2,541)(2,936)(2,356)(2,503)
Deferred loan costs, net198
223
155
184
Other deferred fees(42)(50)(33)(38)
Hedging adjustments5,608
2,546
(3,130)4,905
Total before Allowance for Credit Losses on Mortgage Loans9,834,668
8,411,274
10,953,507
10,633,994
Allowance for Credit Losses on Mortgage Loans(905)(812)
Allowance for Credit Losses on Mortgage Loans2
(7,790)(985)
MORTGAGE LOANS HELD FOR PORTFOLIO, NET$9,833,763
$8,410,462
$10,945,717
$10,633,009
                   
1 
Medium-term defined as a term of 15 years or less at origination.
2
Effective January 1, 2020, new accounting guidance was adopted relating to the measurement of credit losses on financial instruments and resulted in a cumulative effect adjustment of $6,123,000 (see Table 5.5).

Table 5.2 presents information as of SeptemberJune 30, 20192020 and December 31, 20182019 on the outstanding unpaid principal balance (UPB) of mortgage loans held for portfolio (in thousands):

Table 5.2
 09/30/201912/31/2018
Conventional loans$9,044,728
$7,619,498
Government-guaranteed or -insured loans641,274
671,445
TOTAL UNPAID PRINCIPAL BALANCE$9,686,002
$8,290,943

See Note 6 for information related to the FHLBank’s credit risk on mortgage loans and allowance for credit losses.

 06/30/202012/31/2019
Conventional loans$10,211,211
$9,849,542
Government-guaranteed or -insured loans588,945
626,111
TOTAL UNPAID PRINCIPAL BALANCE$10,800,156
$10,475,653

NOTE 6 – ALLOWANCE FOR CREDIT LOSSESCredit Enhancements:

The FHLBank has established an allowance methodology for each of its portfolio segments: credit products (advances, letters of credit and other extensions of credit to borrowers); government mortgage loans held for portfolio; conventional mortgage loans held for portfolio; the direct financing lease receivable; term Federal funds sold; and term securities purchased under agreements to resell. Based on management's analyses of each portfolio segment, the FHLBank has only established an FHLBank's allowance for credit losses on itsconsiders the credit enhancements associated with conventional mortgage loans under the MPF Program. Credit enhancements may include primary mortgage insurance, supplemental mortgage insurance and the credit enhancement amount plus any recoverable performance-based credit enhancement fees (for certain MPF loans). Potential recoveries from credit enhancements for conventional loans are evaluated at the individual master commitment level to determine the credit enhancements available to recover losses on loans under each individual master commitment.

Conventional MPF loans held for portfolio.portfolio are required to be credit enhanced as determined through the use of a validated model so that the risk of loss is limited to the losses within FHLBank's risk tolerance. FHLBank and its PFIs share the risk of credit losses on conventional loans, by structuring potential losses into layers with respect to each master commitment. After considering the borrower’s equity and any primary mortgage insurance, credit losses on mortgage loans in a master commitment are then absorbed by FHLBank’s First Loss Account. If applicable to the MPF product, FHLBank will withhold a PFI’s scheduled performance-based credit enhancement fee in order to reimburse FHLBank for any losses allocated to the First Loss Account. If the First Loss Account is exhausted, the credit losses are then absorbed by the PFI up to an agreed upon credit enhancement amount. Thereafter, any remaining credit losses are absorbed by FHLBank.

Payment Status of Mortgage Loans: Payment status is the key credit quality indicator for conventional mortgage loans and allows FHLBank 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.

Allowance
Table 5.3 presents the payment status based on amortized cost as well as other delinquency statistics for Credit Losses: Table 6.1 presents a roll-forwardFHLBank’s mortgage loans as of the allowance for credit losses for the three and nine months ended SeptemberJune 30, 2019 and 2018 (in2020 (dollar amounts in thousands):

Table 6.15.3
 Three Months EndedNine Months Ended
 09/30/201909/30/201809/30/201909/30/2018
Balance, beginning of the period$858
$1,029
$812
$1,208
Net (charge-offs) recoveries(346)18
(416)(207)
Provision (reversal) for credit losses393
(391)509
(345)
Balance, end of the period$905
$656
$905
$656

Table 6.2 presents the allowance for credit losses and the recorded investment as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recorded as of September 30, 2019 (in thousands). The recorded investment in a financing receivable is the UPB, adjusted for accrued interest, net deferred loan fees or costs, unamortized premiums or discounts, fair value hedging adjustments and direct write-downs. The recorded investment is not net of any valuation allowance.

Table 6.2
 09/30/2019
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses: 
 
 
 
 
Individually evaluated for impairment$
$
$
$
$
Collectively evaluated for impairment905



905
TOTAL ALLOWANCE FOR CREDIT LOSSES$905
$
$
$
$905
Recorded investment: 
 
 
 
 
Individually evaluated for impairment$11,285
$
$30,690,019
$9,633
$30,710,937
Collectively evaluated for impairment9,218,725
653,184


9,871,909
TOTAL RECORDED INVESTMENT$9,230,010
$653,184
$30,690,019
$9,633
$40,582,846
 06/30/2020
 Conventional Loans
Government
Loans
Total
 Origination YearSubtotal
 Prior to 201620162017201820192020
Amortized Cost:1
         
Past due 30-59 days delinquent$31,704
$7,626
$11,562
$16,134
$38,908
$2,507
$108,441
$16,146
$124,587
Past due 60-89 days delinquent19,774
4,647
11,842
13,608
41,145
3,108
94,124
14,678
108,802
Past due 90 days or more delinquent9,933
1,564
2,375
4,237
429

18,538
9,903
28,441
Total past due61,411
13,837
25,779
33,979
80,482
5,615
221,103
40,727
261,830
Total current loans2,434,511
785,921
930,001
1,019,350
3,178,072
1,787,600
10,135,455
556,222
10,691,677
Total mortgage loans$2,495,922
$799,758
$955,780
$1,053,329
$3,258,554
$1,793,215
$10,356,558
$596,949
$10,953,507
          
Other delinquency statistics:       
 
 
In process of foreclosure2
      $69,126
$12,434
$81,560
Serious delinquency rate3
      0.8%3.1%0.9%
Past due 90 days or more and still accruing interest      $
$9,903
$9,903
Loans on non-accrual status4
      $22,314
$
$22,314
                   
1 
The recorded investmentExcludes accrued interest receivable.
2
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total amortized cost for credit products includes only advances. The recorded investmentthe portfolio class.
4
Loans on non-accrual status include $1,320,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which FHLBank, for all other credit products is insignificant.economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

FHLBank'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. FHLBank continues to apply its accounting policy for past due loans and charge-offs to loans during the forbearance period whether it be formal or informal. The accrual status for a loan under forbearance will be driven by the past due status of the loan without consideration of the forbearance as the legal terms of the contractual arrangement have not been modified. As of June 30, 2020, there was $144,812,000, or 1.4 percent, of unpaid principal balances of conventional loans in a forbearance plan as a result of COVID-19, representing $7,270,000, $53,809,000, $78,287,000, and $5,446,000 with payments statuses of current, 30 to 59 days past due, 60 to 89 days past due, and greater than 90 days past due, respectively.


Table 6.35.4 presents the allowance for credit losses and thepayment status based on recorded investment as well as the method used to evaluate impairment relating to all portfolio segments regardless of whether or not an estimated credit loss has been recordedother delinquency statistics for FHLBank’s mortgage loans as of September 30, 2018 (inDecember 31, 2019 (dollar amounts in thousands):

Table 6.35.4

 09/30/2018
 Conventional
Loans
Government
Loans
Credit
Products
1
Direct
Financing
Lease
Receivable
Total
Allowance for credit losses: 
 
 
 
 
Individually evaluated for impairment$37
$
$
$
$37
Collectively evaluated for impairment619



619
TOTAL ALLOWANCE FOR CREDIT LOSSES$656
$
$
$
$656
Recorded investment: 
 
 
 
 
Individually evaluated for impairment$9,904
$
$28,514,148
$12,718
$28,536,770
Collectively evaluated for impairment7,450,722
693,567


8,144,289
TOTAL RECORDED INVESTMENT$7,460,626
$693,567
$28,514,148
$12,718
$36,681,059
 12/31/2019
 
Conventional
Loans
Government
Loans
Total
Recorded investment:1
   
Past due 30-59 days delinquent$59,226
$15,515
$74,741
Past due 60-89 days delinquent7,561
6,128
13,689
Past due 90 days or more delinquent11,813
8,778
20,591
Total past due78,600
30,421
109,021
Total current loans9,969,930
607,400
10,577,330
Total recorded investment$10,048,530
$637,821
$10,686,351
    
Other delinquency statistics: 
 
 
In process of foreclosure2
$3,352
$2,730
$6,082
Serious delinquency rate3
0.1%1.4%0.1%
Past due 90 days or more and still accruing interest$
$8,778
$8,778
Loans on non-accrual status4
$14,923
$
$14,923
                   
1 
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.

Credit Quality Indicators: The FHLBank’s key credit quality indicators include the migration of: (1) past due loans; (2) non-accrual loans; (3) loans in process of foreclosure; and (4) impaired loans, all of which are used either on an individual or pool basis to determine the allowance for credit losses.


Table 6.4 summarizes the delinquency aging and key credit quality indicators for all of the FHLBank’s portfolio segments as of September 30, 2019 (dollar amounts in thousands):

Table 6.4
 09/30/2019
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment:     
Past due 30-59 days delinquent$48,259
$14,885
$
$
$63,144
Past due 60-89 days delinquent7,182
4,226


11,408
Past due 90 days or more delinquent10,083
8,427


18,510
Total past due65,524
27,538


93,062
Total current loans9,164,486
625,646
30,690,019
9,633
40,489,784
Total recorded investment$9,230,010
$653,184
$30,690,019
$9,633
$40,582,846
      
Other delinquency statistics: 
 
 
 
 
In process of foreclosure, included above2
$3,505
$2,676
$
$
$6,181
Serious delinquency rate3
0.1%1.3%%%%
Past due 90 days or more and still accruing interest$
$8,427
$
$
$8,427
Loans on non-accrual status4
$13,824
$
$
$
$13,824
1
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.Includes accrued interest receivable.
2 
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3 
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
4 
Loans on non-accrual status include $1,279,000$1,219,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.


Table 6.5 summarizesAllowance for Credit Losses:
Conventional Mortgage Loans: Conventional 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. FHLBank 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. FHLBank uses a model that discounts projected cash flows to estimate expected credit losses over the key credit quality indicators for alllife of the FHLBank’s portfolio segmentsloans. This model relies on a number of inputs, such as both current and forecasted property values and interest rates as well as historical borrower behavior experience. FHLBank also incorporates associated credit enhancements, as available, to determine its estimate of December 31, 2018 (dollar amountsexpected credit losses.

Certain conventional loans may be evaluated for credit losses using the practical expedient for collateral dependent assets. A mortgage loan is considered collateral dependent if repayment is expected to be provided by the sale of the underlying property, that is, if it is considered likely that the borrower will default. FHLBank may estimate the fair value of this collateral by applying an appropriate loss severity rate or using third party estimates or property valuation model(s). 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. FHLBank records a direct charge-off of the loan balance, if certain triggering criteria are met. Expected recoveries of prior charge-offs, if any, are included in thousands):the allowance for credit losses.


FHLBank established an allowance for credit losses on its conventional mortgage loans held for portfolio. Table 5.5 presents a roll-forward of the allowance for credit losses on mortgage loans for the three and six months ended June 30, 2020 and 2019.

Table 6.55.5
 12/31/2018
 
Conventional
Loans
Government
Loans
Credit
Products1
Direct
Financing
Lease
Receivable
Total
Recorded investment:     
Past due 30-59 days delinquent$34,020
$14,790
$
$
$48,810
Past due 60-89 days delinquent6,750
6,114


12,864
Past due 90 days or more delinquent8,169
7,898


16,067
Total past due48,939
28,802


77,741
Total current loans7,720,640
655,054
28,777,274
11,966
37,164,934
Total recorded investment$7,769,579
$683,856
$28,777,274
$11,966
$37,242,675
      
Other delinquency statistics: 
 
 
 
 
In process of foreclosure, included above2
$2,922
$2,398
$
$
$5,320
Serious delinquency rate3
0.1%1.2%%%%
Past due 90 days or more and still accruing interest$
$7,898
$
$
$7,898
Loans on non-accrual status4
$11,301
$
$
$
$11,301
 Three Months EndedSix Months Ended
 06/30/202006/30/201906/30/202006/30/2019
Balance, beginning of the period$6,468
$824
$985
$812
Adjustment for cumulative effect of accounting change

6,123

Net (charge-offs) recoveries(15)(4)81
(70)
Provision (reversal) for credit losses1,337
38
601
116
Balance, end of the period$7,790
$858
$7,790
$858
1
The recorded investment for credit products includes only advances. The recorded investment for all other credit products is insignificant.
2
Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
3
Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment for the portfolio class.
4
Loans on non-accrual status include $1,265,000 of troubled debt restructurings. Troubled debt restructurings are restructurings in which the FHLBank, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

Government-Guaranteed or -Insured Mortgage Loans: FHLBank invests in fixed-rate mortgage loans that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, the Rural Housing Service of the Department of Agriculture, and/or the Department of Housing and Urban Development. The servicer provides and maintains insurance or a guarantee from the applicable government agency. The servicer 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-guaranteed or -insured mortgage loans. Any losses on these loans that are not recovered from the issuer or the guarantor are absorbed by the servicer. Therefore, FHLBank had $1,336,000only has credit risk for these loans if the servicer fails to pay for losses not covered by the guarantee or insurance. Based on FHLBank's assessment of its servicers and $2,183,000 classified as real estate ownedthe collateral backing the loans, the risk of loss was immaterial, consequently, no allowance for credit losses for government-guaranteed or -insured mortgage loans was recorded in other assets as of SeptemberJune 30, 2019 and2020 or December 31, 2018, respectively.2019. Furthermore, none of these mortgage loans has 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 76 – DERIVATIVES AND HEDGING ACTIVITIES

Table 7.16.1 presents outstanding notional amounts and fair values of the derivatives outstanding by type of derivative and by hedge designation as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands). Total derivative assets and liabilities include the effect of netting adjustments and cash collateral.

Table 7.16.1
09/30/201912/31/201806/30/202012/31/2019
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Notional
Amount
Derivative
Assets
Derivative
Liabilities
Derivatives designated as hedging instruments: 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps$14,098,263
$20,184
$126,203
$8,345,925
$73,969
$24,177
$17,876,350
$22,249
$313,198
$16,448,512
$23,462
$80,398
Total derivatives designated as hedging relationships14,098,263
20,184
126,203
8,345,925
73,969
24,177
17,876,350
22,249
313,198
16,448,512
23,462
80,398
Derivatives not designated as hedging instruments:  
Interest rate swaps3,637,306
848
38,832
2,151,920
12,907
17,322
4,980,845
78
79,401
3,099,622
736
26,285
Interest rate caps/floors1,248,200
170

1,373,200
1,044

762,500
104

1,130,000
117

Mortgage delivery commitments375,772
206
658
101,551
552
3
107,916
414
3
221,800
495
25
Consolidated obligation discount note commitments


525,000


Total derivatives not designated as hedging instruments5,261,278
1,224
39,490
4,151,671
14,503
17,325
5,851,261
596
79,404
4,451,422
1,348
26,310
TOTAL$19,359,541
21,408
165,693
$12,497,596
88,472
41,502
$23,727,611
22,845
392,602
$20,899,934
24,810
106,708
Netting adjustments and cash collateral1
 115,642
(164,703) (52,377)(33,618) 168,694
(391,930) 129,994
(106,506)
DERIVATIVE ASSETS AND LIABILITIES $137,050
$990
 $36,095
$7,884
 $191,539
$672
 $154,804
$202
                   
1 
Amounts represent the application of the netting requirements that allow the FHLBank to settle positive and negative positions, cash collateral, and related accrued interest held or placed with the same clearing agent and/or derivative counterparty. Cash collateral posted was $280,745,000$561,124,000 and $58,902,000$236,700,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Cash collateral received was $400,000$500,000 and $77,661,000$200,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.
 
The FHLBank carries derivative instruments at fair value on its Statements of Condition. Any change in the fair value of derivatives designated under a fair value hedging relationship is recorded each period in current period earnings. Fair value hedge accounting allows for the offsetting fair value of the hedged risk in the hedged item to also be recorded in current period earnings.

Beginning on January 1, 2019, changesChanges in fair value of the derivative hedging instrument and the hedged item attributable to the hedged risk for designated fair value hedges are recorded in net interest income in the same line as the earnings effect of the hedged item. Prior to January 1, 2019, for fair value hedges, any hedge ineffectiveness (which represented the amount by which the change in the fair value of the derivative differed from the change in the fair value of the hedge item) was recorded in non-interest income as net gains (losses) on derivatives and hedging activities.


Interest settlements on derivatives designated as fair value hedges were recorded in net interest income or expense prior to, and continue to be recorded in net interest income or expense after January 1, 2019. However, beginning on January 1, 2019, disclosed gainsGains (losses) on fair value derivativeshedges include unrealized changes in fair value as well as net interest settlements. For the three months ended SeptemberJune 30, 20192020 and 2018, the2019, FHLBank recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income and net gains (losses) on derivatives and hedging activities, if applicable, as presented in Table 7.26.2 (in thousands):

Table 7.26.2
Three Months EndedThree Months Ended
09/30/201906/30/2020
Interest Income/ExpenseInterest Income/Expense
AdvancesAvailable-for-sale SecuritiesConsolidated Obligation Discount NotesConsolidated Obligation BondsAdvancesAvailable-for-sale SecuritiesConsolidated Obligation Discount NotesConsolidated Obligation Bonds
Total amounts presented in the Statements of Income$186,431
$47,811
$133,680
$185,096
$60,265
$9,871
$21,760
$92,744
Gains (losses) on fair value hedging relationships:  
Interest rate contracts:  
Derivatives1
$(39,873)$(61,468)$(4)$3,915
$(31,591)$(35,810)$24
$1,919
Hedged items2
43,355
75,743
3
(5,061)19,718
4,490
14,257
10,959
NET GAINS (LOSSES) ON FAIR VALUE HEDGING RELATIONSHIPS$3,482
$14,275
$(1)$(1,146)$(11,873)$(31,320)$14,281
$12,878

09/30/20183
6/30/2019
Interest Income/ExpenseNon-interest IncomeInterest Income/Expense
AdvancesAvailable-for-sale SecuritiesConsolidated Obligation BondsNet gains (losses) on derivatives and hedging activitiesAdvancesAvailable-for-sale SecuritiesConsolidated Obligation Discount NotesConsolidated Obligation Bonds
Total amounts presented in the Statements of Income$189,562
$15,487
$150,802
$176,714
Gains (losses) on fair value hedging relationships:  
Interest rate contracts:  
Derivatives1
$4,385
$510
$(2,280)$28,615
$(71,071)$(100,045)$(7)$17,348
Hedged items2
(1,022)

(28,753)76,397
88,484
15
(20,817)
NET GAINS (LOSSES) ON FAIR VALUE HEDGING RELATIONSHIPS$3,363
$510
$(2,280)$(138)$5,326
$(11,561)$8
$(3,469)
                   
1 
Includes net interest settlements in interest income/expense.
2 
Includes amortization/accretion on closed fair value relationships in interest income.
3
Prior period amounts were not conformed to new hedge accounting guidance adopted January 1, 2019.


For the ninesix months ended SeptemberJune 30, 20192020 and 2018, the2019, FHLBank recorded net gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank’s net interest income and net gains (losses) on derivatives and hedging activities, if applicable, as presented in Table 7.36.3 (in thousands):

Table 7.36.3
Nine Months EndedSix Months Ended
09/30/201906/30/2020
Interest Income/ExpenseInterest Income/Expense
AdvancesAvailable-for-sale SecuritiesConsolidated Obligation Discount NotesConsolidated Obligation BondsAdvancesAvailable-for-sale SecuritiesConsolidated Obligation Discount NotesConsolidated Obligation Bonds
Total amounts presented in the Statements of Income$563,602
$78,694
$433,473
$519,967
$191,152
$34,165
$114,711
$243,486
Gains (losses) on fair value hedging relationships:  
Interest rate contracts:  
Derivatives1
$(144,016)$(205,705)$21
$30,968
$(291,723)$(396,093)$18,547
$47,365
Hedged items2
159,254
206,340
(12)(39,427)276,560
348,633
(1,433)(28,866)
NET GAINS (LOSSES) ON FAIR VALUE HEDGING RELATIONSHIPS$15,238
$635
$9
$(8,459)$(15,163)$(47,460)$17,114
$18,499

09/30/20183
6/30/2019
Interest Income/ExpenseNon-interest IncomeInterest Income/Expense
AdvancesAvailable-for-sale SecuritiesConsolidated Obligation BondsNet gains (losses) on derivatives and hedging activitiesAdvancesAvailable-for-sale SecuritiesConsolidated Obligation Discount NotesConsolidated Obligation Bonds
Total amounts presented in the Statements of Income$377,171
$30,883
$299,793
$334,871
Gains (losses) on fair value hedging relationships:  
Interest rate contracts:  
Derivatives1
$4,423
$(752)$(2,700)$122,399
$(104,143)$(144,237)$25
$27,053
Hedged items2
(3,283)

(124,369)115,899
130,597
(15)(34,366)
NET GAINS (LOSSES) ON FAIR VALUE HEDGING RELATIONSHIPS$1,140
$(752)$(2,700)$(1,970)$11,756
$(13,640)$10
$(7,313)
                   
1 
Includes net interest settlements in interest income/expense.
2 
Includes amortization/accretion on closed fair value relationships in interest income.
3
Prior period amounts were not conformed to new hedge accounting guidance adopted January 1, 2019.


Table 7.46.4 presents the cumulative basis adjustments on hedged items designated as fair value hedges and the related amortized cost of the hedged items as of SeptemberJune 30, 2020 and December 31, 2019 (in thousands):

Table 7.46.4
09/30/2019
Line Item in Statement of Condition of Hedged Item
Carrying Value of Hedged Asset/(Liability)1
Basis Adjustments for Active Hedging Relationships2
Basis Adjustments for Discontinued Hedging Relationships2
Cumulative Amount of Fair Value Hedging Basis Adjustments2
06/30/202006/30/2020
Line Item in Statements of Condition of Hedged Item
Carrying Value of Hedged Asset/(Liability)1
Basis Adjustments for Active Hedging Relationships2
Basis Adjustments for Discontinued Hedging Relationships2
Cumulative Amount of Fair Value Hedging Basis Adjustments2
Advances$6,038,392
$343,561
$3,794
$347,355
Available-for-sale securities7,590,422
425,458

425,458
Consolidated obligation discount notes(2,773,177)(1,282)
(1,282)
Consolidated obligation bonds(2,444,519)(55,256)
(55,256)
 
12/31/201912/31/2019
Line Item in Statements of Condition of Hedged Item
Carrying Value of Hedged Asset/(Liability)1
Basis Adjustments for Active Hedging Relationships2
Basis Adjustments for Discontinued Hedging Relationships2
Cumulative Amount of Fair Value Hedging Basis Adjustments2
Advances$4,672,632
$113,443
$1,608
$115,051
$4,951,445
$69,643
$1,424
$71,067
Available-for-sale securities6,081,110
145,653

145,653
7,155,712
79,141

79,141
Consolidated obligation bonds(3,734,212)(32,913)
(32,913)(3,270,635)(26,389)
(26,389)
                   
1 
Includes only the portion of carrying value representing the hedged items in fair value hedging relationships. For available-for-sale securities, amortized cost is considered to be carrying value (i.e., the fair value adjustment recorded in accumulated OCI (AOCI) is excluded).
2 
Included in amortized cost of the hedged asset/liability.

Table 7.56.5 provides information regarding gains and losses on derivatives and hedging activities recorded in non-interest income (in thousands). For fair value hedging relationships, the portion of net gains (losses) representing hedge ineffectiveness are recorded in non-interest income for periods prior to January 1, 2019.

Table 7.56.5
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Derivatives designated as hedging instruments:  
Interest rate swaps $(138) $(1,970)
Total net gains (losses) related to fair value hedge ineffectiveness

(138) (1,970)
Derivatives not designated as hedging instruments:    
Economic hedges:    
Interest rate swaps$(19,566)8,256
$(80,593)38,087
$(1,345)$(41,842)$(113,060)$(61,027)
Interest rate caps/floors(494)(184)(874)378
(158)246
(13)(380)
Net interest settlements(691)(1,192)(1,238)(4,592)(12,962)(251)(18,116)(547)
Mortgage delivery commitments365
(710)3,836
(2,242)(890)1,836
(6,418)3,471
Consolidated obligation discount note commitments

(70)



(70)
Total net gains (losses) related to derivatives not designated as hedging instruments(20,386)6,170
(78,939)31,631
NET GAINS (LOSSES) ON DERIVATIVES AND HEDGING ACTIVITIES$(20,386)$6,032
$(78,939)$29,661
$(15,355)$(40,011)$(137,607)$(58,553)

Based on credit analyses and collateral requirements, FHLBank management does not anticipate any credit losses on its derivative agreements. The maximum credit risk applicable to a single counterparty was $440,000$468,000 and $25,799,000$211,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. The counterparty was different for each period.

For uncleared derivative transactions, the FHLBank has entered into bilateral security agreements with its counterparties with bilateral-collateral-exchange provisions that require all credit exposures be collateralized, subject to minimum transfer amounts.


The FHLBank utilizes two Derivative Clearing Organizations (Clearinghouse) for all cleared derivative transactions, LCH Limited and CME Clearing. At both Clearinghouses, initial margin is considered cash collateral. For cleared derivatives, the Clearinghouse determines initial margin requirements and generally, credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including but not limited to credit rating downgrades. The FHLBank was not required to post additional initial margin by its clearing agents as of SeptemberJune 30, 20192020 and December 31, 2018.2019.

The FHLBank’s net exposure on derivative agreements is presented in Note 109.


NOTE 87 – DEPOSITS

The FHLBank offers demand, overnight and short-term deposit programs to its members and to other qualifying non-members. Table 8.17.1 details the types of deposits held by the FHLBank as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 8.17.1
09/30/201912/31/201806/30/202012/31/2019
Interest-bearing:  
Demand$302,491
$265,021
$313,744
$383,197
Overnight304,000
158,300
422,900
280,300
Term1,000

Total interest-bearing606,491
423,321
737,644
663,497
Non-interest-bearing:  
Other149,885
50,499
250,648
127,143
Total non-interest-bearing149,885
50,499
250,648
127,143
TOTAL DEPOSITS$756,376
$473,820
$988,292
$790,640


NOTE 98 – CONSOLIDATED OBLIGATIONS

Consolidated Obligation Bonds: Table 9.18.1 presents the FHLBank’s participation in consolidated obligation bonds outstanding as of SeptemberJune 30, 20192020 and December 31, 20182019 (dollar amounts in thousands):

Table 9.18.1
09/30/201912/31/201806/30/202012/31/2019
Year of Contractual MaturityAmount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
Due in one year or less$15,086,200
2.10%$8,960,500
2.17%$24,381,250
0.52%$15,991,800
1.79%
Due after one year through two years7,990,600
2.12
5,625,750
2.28
2,517,550
1.44
6,318,350
1.90
Due after two years through three years1,373,900
2.24
2,285,100
2.11
1,484,200
1.89
1,375,000
2.11
Due after three years through four years1,351,700
2.33
1,134,750
2.21
894,600
1.78
1,285,900
2.39
Due after four years through five years1,131,600
2.34
1,087,900
2.58
1,261,200
1.62
1,223,350
2.40
Thereafter5,471,600
2.84
4,879,850
3.01
5,825,300
2.01
5,776,300
2.78
Total par value32,405,600
2.26%23,973,850
2.38%36,364,100
0.95%31,970,700
2.05%
Premiums21,331
 15,591
 46,213
 34,789
 
Discounts(3,573) (4,088) (3,961) (3,357) 
Concession fees(14,386) (12,445) (15,932) (15,207) 
Hedging adjustments32,913
 (6,514) 55,256
 26,389
 
TOTAL$32,441,885
 $23,966,394
 $36,445,676
 $32,013,314
 


The FHLBank issues optional principal redemption bonds (callable bonds) that may be redeemed in whole or in part at the discretion of the FHLBank on predetermined call dates in accordance with terms of bond offerings. The FHLBank’s participation in consolidated obligation bonds outstanding as of SeptemberJune 30, 20192020 and December 31, 20182019 includes callable bonds totaling $9,412,000,000$7,084,500,000 and $8,559,000,000,$8,891,500,000, respectively. The FHLBank uses the unswapped callable bonds for financing its callable fixed rate advances (Note 4), MBS (Note 3) and mortgage loans (Note 5). Contemporaneous with a portion of its fixed rate callable bond issuances, the FHLBank also enters into interest rate swap agreements (in which the FHLBank generally pays a variable rate and receives a fixed rate) with call features that mirror the options in the callable bonds (a sold callable swap). The combined sold callable swap and callable debt transaction allows the FHLBank to obtain attractively priced variable rate financing. Table 9.28.2 summarizes the FHLBank’s participation in consolidated obligation bonds outstanding by year of maturity, or by the next call date for callable bonds as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 9.28.2
Year of Maturity or Next Call Date09/30/201912/31/201806/30/202012/31/2019
Due in one year or less$23,908,200
$16,971,500
$31,465,750
$24,583,300
Due after one year through two years6,520,600
5,270,750
2,427,550
5,148,350
Due after two years through three years618,900
655,100
912,700
615,000
Due after three years through four years590,200
319,750
438,100
682,400
Due after four years through five years345,100
275,150
509,200
356,850
Thereafter422,600
481,600
610,800
584,800
TOTAL PAR VALUE$32,405,600
$23,973,850
$36,364,100
$31,970,700

Table 9.38.3 summarizes interest rate payment terms for consolidated obligation bonds as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 9.38.3
09/30/201912/31/201806/30/202012/31/2019
Simple variable rate$16,287,000
$10,095,000
$22,259,000
$16,017,000
Fixed rate15,288,600
12,858,850
14,105,100
15,573,700
Step340,000
470,000

110,000
Variable rate with cap260,000
20,000

220,000
Fixed to variable rate220,000
515,000

50,000
Range10,000
15,000
TOTAL PAR VALUE$32,405,600
$23,973,850
$36,364,100
$31,970,700

Consolidated Discount Notes: Table 9.48.4 summarizes the FHLBank’s participation in consolidated obligation discount notes, all of which are due within one year (dollar amounts in thousands):

Table 9.48.4
 Book ValuePar Value
Weighted
Average
Interest
Rate1
September 30, 2019$21,044,232
$21,084,315
2.00%
    
December 31, 2018$20,608,332
$20,649,098
2.35%
 Book ValuePar Value
Weighted
Average
Interest
Rate1
June 30, 2020$13,560,839
$13,565,416
0.42%
    
December 31, 2019$27,447,911
$27,510,042
1.54%
                   
1 
Represents yield to maturity excluding concession fees.



NOTE 109 – ASSETS AND LIABILITIES SUBJECT TO OFFSETTING

The FHLBank presents certain financial instruments, including derivatives, repurchase agreements and securities purchased under agreements to resell, on a net basis by clearing agent by Clearinghouse, or by counterparty, when it has met the netting requirements. For these financial instruments, the FHLBank has elected to offset its asset and liability positions, as well as cash collateral received or pledged, and associated accrued interest.

The FHLBank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and 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 clearing agent, or both. Based on this analysis, the FHLBank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

Tables 10.19.1 and 10.29.2 present the fair value of financial assets, including the related collateral received from or pledged to clearing agents or counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 10.19.1
09/30/2019
06/30/202006/30/2020
Description
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Assets
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset
in the
Statements of
Condition
Net Amounts
of Assets
Presented
in the
Statements of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative assets:  
Uncleared derivatives$18,927
$(17,117)$1,810
$(206)$1,604
$21,371
$(19,101)$2,270
$(414)$1,856
Cleared derivatives2,481
132,759
135,240

135,240
1,474
187,795
189,269

189,269
Total derivative assets21,408
115,642
137,050
(206)136,844
22,845
168,694
191,539
(414)191,125
Securities purchased under agreements to resell2,137,374

2,137,374
(2,137,374)
4,450,000

4,450,000
(4,450,000)
TOTAL$2,158,782
$115,642
$2,274,424
$(2,137,580)$136,844
$4,472,845
$168,694
$4,641,539
$(4,450,414)$191,125
                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statements of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

Table 10.29.2
12/31/2018
12/31/201912/31/2019
Description
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Assets
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Gross Amounts
of Recognized
Assets
Gross Amounts
Offset
in the
Statements of
Condition
Net Amounts
of Assets
Presented
in the
Statements of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative assets:  
Uncleared derivatives$88,296
$(83,378)$4,918
$(1,618)$3,300
$21,749
$(14,424)$7,325
$(495)$6,830
Cleared derivatives176
31,001
31,177

31,177
3,061
144,418
147,479

147,479
Total derivative assets88,472
(52,377)36,095
(1,618)34,477
24,810
129,994
154,804
(495)154,309
Securities purchased under agreements to resell1,251,096

1,251,096
(1,251,096)
4,750,000

4,750,000
(4,750,000)
TOTAL$1,339,568
$(52,377)$1,287,191
$(1,252,714)$34,477
$4,774,810
$129,994
$4,904,804
$(4,750,495)$154,309
                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statements of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).


Tables 10.39.3 and 10.49.4 present the fair value of financial liabilities, including the related collateral received from or pledged to counterparties, based on the terms of the FHLBank’s master netting arrangements or similar agreements as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 10.39.3
09/30/2019
06/30/202006/30/2020
Description
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Liabilities
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset
in the
Statements of
Condition
Net Amounts
of Liabilities
Presented
in the
Statements of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative liabilities:  
Uncleared derivatives$165,301
$(164,311)$990
$(658)$332
$388,903
$(388,231)$672
$(3)$669
Cleared derivatives392
(392)


3,699
(3,699)


Total derivative liabilities165,693
(164,703)990
(658)332
392,602
(391,930)672
(3)669
TOTAL$165,693
$(164,703)$990
$(658)$332
$392,602
$(391,930)$672
$(3)$669
                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statements of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).

Table 10.49.4
12/31/2018
12/31/201912/31/2019
Description
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset
in the
Statement of
Condition
Net Amounts
of Liabilities
Presented
in the
Statement of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset
in the
Statements of
Condition
Net Amounts
of Liabilities
Presented
in the
Statements of
Condition
Gross Amounts
Not Offset
in the
Statement of
Condition1
Net
Amount
Derivative liabilities:  
Uncleared derivatives$36,363
$(28,479)$7,884
$(3)$7,881
$105,468
$(105,266)$202
$(25)$177
Cleared derivatives5,139
(5,139)


1,240
(1,240)


Total derivative liabilities41,502
(33,618)7,884
(3)7,881
106,708
(106,506)202
(25)177
TOTAL$41,502
$(33,618)$7,884
$(3)$7,881
$106,708
$(106,506)$202
$(25)$177
                   
1 
Represents noncash collateral received on financial instruments that: (1) do not qualify for netting on the Statements of Condition; or (2) are not subject to an enforceable netting agreement (e.g., mortgage delivery commitments).



NOTE 1110 – CAPITAL

Capital Requirements: The FHLBank is subject to three capital requirements under the provisions of the Gramm-Leach-Bliley Act (GLB Act) and the Federal Housing Finance Agency's (FHFA)FHFA's capital structure regulation. Regulatory capital does not include AOCI but does include mandatorily redeemable capital stock.
Risk-based capital. The FHLBank must maintain at all times permanent capital in an amount at least equal to the sum of its credit risk, market risk and operations risk capital requirements. The risk-based capital requirements are all calculated in accordance with the rules and regulations of the FHFA. Only permanent capital, defined as Class B Common Stock and retained earnings, can be used by the FHLBank to satisfy its risk-based capital requirement. The FHFA may require the FHLBank to maintain a greater amount of permanent capital than is required by the risk-based capital requirement as defined, but the FHFA has not placed any such requirement on the FHLBank to date.
Total regulatory capital. The GLB Act requires the FHLBank to maintain at all times at least a 4.0 percent total capital-to-asset ratio. Total regulatory capital is defined as the sum of permanent capital, Class A Common Stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the FHFA as available to absorb losses.
Leverage capital. The FHLBank is required to maintain at all times a leverage capital-to-assets ratio of at least 5.0 percent, with the leverage capital ratio defined as the sum of permanent capital weighted 1.5 times and non-permanent capital (currently only Class A Common Stock) weighted 1.0 times, divided by total assets.

Table 11.110.1 illustrates that the FHLBank was in compliance with its regulatory capital requirements as of SeptemberJune 30, 20192020 and December 31, 20182019 (dollar amounts in thousands):

Table 11.110.1
09/30/201912/31/201806/30/202012/31/2019
RequiredActualRequiredActualRequiredActualRequiredActual
Regulatory capital requirements:  
Risk-based capital$382,468
$2,300,065
$387,729
$2,193,001
$348,135
$1,888,817
$486,650
$2,319,531
Total regulatory capital-to-asset ratio4.0%4.6%4.0%5.1%4.0%4.5%4.0%4.4%
Total regulatory capital$2,285,245
$2,646,115
$1,908,610
$2,442,156
$2,141,357
$2,390,940
$2,531,066
$2,768,680
Leverage capital ratio5.0%6.6%5.0%7.4%5.0%6.2%5.0%6.2%
Leverage capital$2,856,557
$3,796,147
$2,385,763
$3,538,656
$2,676,697
$3,335,348
$3,163,833
$3,928,446

Mandatorily Redeemable Capital Stock: The FHLBank is a cooperative whose members own most of the FHLBank’s capital stock. Former members (including certain non-members that own FHLBank capital stock as a result of merger or acquisition, relocation, charter termination, or involuntary termination of an FHLBank member) own the remaining capital stock to support business transactions still carried on the FHLBank's Statements of Condition. Shares cannot be purchased or sold except between the FHLBank and its members at a price equal to the $100 per share par value. If a member cancels its written notice of redemption or notice of withdrawal, the FHLBank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock would no longer be classified as interest expense.


Table 11.210.2 presents a roll-forward of mandatorily redeemable capital stock for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):

Table 11.210.2
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Balance, beginning of period$2,750
$4,578
$3,597
$5,312
$2,390
$3,548
$2,415
$3,597
Capital stock subject to mandatory redemption reclassified from equity during the period159,775
215,107
218,411
893,545
701,381
34,721
1,007,338
58,636
Capital stock redemption cancellations reclassified to equity during the period

(100,647)
Redemption or repurchase of mandatorily redeemable capital stock during the period(160,078)(215,206)(219,642)(894,494)(701,476)(35,558)(906,835)(59,564)
Stock dividend classified as mandatorily redeemable capital stock during the period30
57
111
173
13
39
37
81
Balance, end of period$2,477
$4,536
$2,477
$4,536
$2,308
$2,750
$2,308
$2,750

Table 11.310.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands). The year of redemption in Table 11.310.3 is the end of the redemption period in accordance with the FHLBank’s capital plan. The FHLBank is not required to redeem or repurchase membership stock until six months (for Class A Common Stock) or five years (for Class B Common Stock) after the FHLBank receives notice for withdrawal from the member. Additionally, the FHLBank is not required to redeem or repurchase activity-based stock until any activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding. However, the FHLBank intends to repurchase the excess activity-based stock of non-members to the extent that it can do so and still meet its regulatory capital requirements.

Table 11.310.3
Contractual Year of Repurchase09/30/201912/31/201806/30/202012/31/2019
Year 1$
$
$122
$
Year 21

862
1
Year 3873
1

869
Year 4
1,798


Year 5

1

Past contractual redemption date due to remaining activity1
1,603
1,798
1,323
1,545
TOTAL$2,477
$3,597
$2,308
$2,415
                   
1 
Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

Excess Capital Stock: Excess capital stock is defined as the amount of stock held by a member (or former member) in excess of that institution’s minimum stock purchase requirement. FHFA rules limit the ability of the FHLBank to create excess member stock under certain circumstances. For example, the FHLBank may not pay dividends in the form of capital stock or issue new excess stock to members if the FHLBank’s excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank’s excess stock to exceed one percent of its total assets. As of SeptemberJune 30, 2019, the2020, FHLBank’s excess stock was less than one percent of total assets.

Capital Classification Determination: The FHFA determines each FHLBank’s capital classification on at least a quarterly basis. If an FHLBank is determined to be other than adequately capitalized, thethat FHLBank becomes subject to additional supervisory authority by the FHFA. Before implementing a reclassification, the Director of the FHFA is required to provide thean FHLBank with written notice of the proposed action and an opportunity to submit a response. As of the most recent review by the FHFA, for the second quarter of 2019, the FHLBank Topeka was classified as adequately capitalized.


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 $680,000,000. 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-off their prior capital distributions to FICO directly against retained earnings. Upon the dissolution of FICO in June 2020, FICO determined that excess funds aggregating to $200,031,000 were available for distribution to its stockholders, the FHLBanks. Specifically, FHLBank Topeka’s partial recovery of prior capital distribution was $10,543,000, which was determined based on its share of the $680,000,000 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 in 1987, 1988, and 1989. These funds have been credited to unrestricted retained earnings.


NOTE 1211 – ACCUMULATED OTHER COMPREHENSIVE INCOME

Table 12.111.1 summarizes the changes in AOCI for the three months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):

Table 12.111.1
Three Months EndedThree Months Ended
Net Unrealized Gains (Losses) on Available-for-sale SecuritiesNet Non-credit Portion of OTTI Gains (Losses) on
Held-to-maturity Securities
Defined Benefit Pension PlanTotal AOCINet Unrealized Gains (Losses) on Available-for-sale SecuritiesDefined Benefit Pension PlanTotal AOCI
Balance at June 30, 2018$29,628
$(3,655)$(1,373)$24,600
Other comprehensive income (loss) before reclassification:  
Unrealized gains (losses)3,694
 3,694
Accretion of non-credit loss 30
 30
Non-credit losses included in basis of securities sold 3,625
 3,625
Reclassifications from other comprehensive income (loss) to net income: 

Amortization of net losses - defined benefit pension plan1
 5
5
Net current period other comprehensive income (loss)3,694
3,655
5
7,354
Balance at September 30, 2018$33,322
$
$(1,368)$31,954
 
Balance at June 30, 2019$35,143
$
$(3,230)$31,913
Balance at March 31, 2019$30,916
$(3,302)$27,614
Other comprehensive income (loss) before reclassification:    
Unrealized gains (losses)(17,324) (17,324)4,227
 4,227
Reclassifications from other comprehensive income (loss) to net income:  

Amortization of net losses - defined benefit pension plan1
 95
95
 72
72
Net current period other comprehensive income (loss)(17,324)
95
(17,229)4,227
72
4,299
Balance at September 30, 2019$17,819
$
$(3,135)$14,684
Balance at June 30, 2019$35,143
$(3,230)$31,913
 
Balance at March 31, 2020$(67,343)$(1,976)$(69,319)
Other comprehensive income (loss) before reclassification:  
Unrealized gains (losses)35,597
 35,597
Reclassifications from other comprehensive income (loss) to net income: 
Amortization of net losses - defined benefit pension plan1
 28
28
Net current period other comprehensive income (loss)35,597
28
35,625
Balance at June 30, 2020$(31,746)$(1,948)$(33,694)
 
                  
1 
Recorded in “Other” non-interest expense on the Statements of Income. Amount represents a debit (increase to other expenses).


Table 12.211.2 summarizes the changes in AOCI for the ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):

Table 12.211.2
Nine Months Ended
Net Unrealized Gains (Losses) on Available-for-sale Securities
Net Non-credit Portion of OTTI
Gains (Losses) on Held-to-maturity Securities
Defined Benefit Pension PlanTotal AOCI
Balance at December 31, 2017$31,206
$(4,163)$(1,385)$25,658
Other comprehensive income (loss) before reclassification: 
Unrealized gains (losses)2,116
 2,116
Accretion of non-credit loss 513
 513
Non-credit losses included in basis of securities sold 3,625
 3,625
Reclassifications from other comprehensive income (loss) to net income: 
Non-credit OTTI to credit OTTI1
 25
 25
Amortization of net losses - defined benefit pension plan2
 17
17
Net current period other comprehensive income (loss)2,116
4,163
17
6,296
Balance at September 30, 2018$33,322
$
$(1,368)$31,954
 Six Months Ended
 Net Unrealized Gains (Losses) on Available-for-sale SecuritiesDefined Benefit Pension PlanTotal AOCI
Balance at December 31, 2018$19,068
$
$(3,375)$15,693
$19,068
$(3,375)$15,693
Other comprehensive income (loss) before reclassification:  
Unrealized gains (losses)(1,249) (1,249)16,075
 16,075
Reclassifications from other comprehensive income (loss) to net income:  
Amortization of net losses - defined benefit pension plan2
 240
240
Amortization of net losses - defined benefit pension plan1
 145
145
Net current period other comprehensive income (loss)(1,249)
240
(1,009)16,075
145
16,220
Balance at September 30, 2019$17,819
$
$(3,135)$14,684
Balance at June 30, 2019$35,143
$(3,230)$31,913
 
 
Balance at December 31, 2019$26,788
$(2,002)$24,786
Other comprehensive income (loss) before reclassification: 
Unrealized gains (losses)(57,011) (57,011)
Reclassifications from other comprehensive income (loss) to net income: 
Realized net (gains) losses included in net income2
(1,523) (1,523)
Amortization of net losses - defined benefit pension plan1
 54
54
Net current period other comprehensive income (loss)(58,534)54
(58,480)
Balance at June 30, 2020$(31,746)$(1,948)$(33,694)
                   
1
Recorded in “Other” non-interest income on the Statements of Income. Amount represents a debit (decrease to other income (loss)).
2 
Recorded in “Other” non-interest expense on the Statements of Income. Amount represents a debit (increase to other expenses).
2
Recorded in “Net gains (losses) on sale of available-for-sale securities” non-interest income on the Statements of Income. Amount represents a credit (increase to other income (loss)).


NOTE 1312 – FAIR VALUES

The fair value amounts recorded on the Statements of Condition and presented in the note disclosures have been determined by the FHLBank using available market and other pertinent information and reflect the FHLBank’s best judgment of appropriate valuation methods. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., an exit price). Although the FHLBank uses its best judgment in estimating the fair value of its financial instruments, there are inherent limitations in any valuation technique. Therefore, the fair values may not be indicative of the amounts that would have been realized in market transactions as of SeptemberJune 30, 20192020 and December 31, 2018.2019. Additionally, these values do not represent an estimate of the overall market value of the FHLBank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.


Subjectivity of Estimates: Estimates of the fair value of advances with options, mortgage instruments, derivatives with embedded options and consolidated obligation bonds with options 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, methods to determine 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 Hierarchy: The fair value hierarchy requires the FHLBank to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of the market observability of the fair value measurement for the asset or liability. The FHLBank must disclose the level within the fair value hierarchy in which the measurements are classified for all assets and liabilities.

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 active markets that the FHLBank can access on the measurement date. An active market for the asset or liability is a market in which the transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 Inputs – Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets and liabilities in active markets; (2) quoted prices for similar assets and liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for the asset or liability.

The FHLBank 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. There were no transfers of assets or liabilities between fair value levels during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.

Tables 13.112.1 and 13.212.2 present the carrying value, fair value and fair value hierarchy of financial assets and liabilities as of SeptemberJune 30, 20192020 and December 31, 2018. The2019. FHLBank records trading securities, available-for-sale securities, derivative assets, and derivative liabilities at fair value on a recurring basis, and on occasion certain mortgage loans held for portfolio and certain other assets at fair value on a nonrecurring basis. The FHLBank measures all other financial assets and liabilities at amortized cost. Further details about the financial assets and liabilities held at fair value on either a recurring or non-recurring basis are presented in Tables 13.312.3 and 13.4.12.4.


The carrying value, fair value and fair value hierarchy of the FHLBank’s financial assets and liabilities as of SeptemberJune 30, 20192020 and December 31, 20182019 are summarized in Tables 13.112.1 and 13.212.2 (in thousands):

Table 13.112.1
09/30/201906/30/2020
Carrying
Value
Total
Fair
Value
Level 1Level 2Level 3
Netting
Adjustment and Cash
Collateral1
Carrying
Value
Total
Fair
Value
Level 1Level 2Level 3
Netting
Adjustment and Cash
Collateral1
Assets:  
Cash and due from banks$24,639
$24,639
$24,639
$
$
$
$28,283
$28,283
$28,283
$
$
$
Interest-bearing deposits481,989
481,989

481,989


1,017,972
1,017,972

1,017,972


Securities purchased under agreements to resell2,137,374
2,137,374

2,137,374


4,450,000
4,450,000

4,450,000


Federal funds sold900,000
900,000

900,000


1,520,000
1,520,000

1,520,000


Trading securities2,901,575
2,901,575

2,901,575


2,904,643
2,904,643

2,904,643


Available-for-sale securities6,098,929
6,098,929

6,098,929


7,558,676
7,558,676

7,558,676


Held-to-maturity securities3,728,655
3,717,004

3,634,582
82,422

3,182,136
3,176,712

3,098,332
78,380

Advances30,634,583
30,680,520

30,680,520


21,528,991
21,618,227

21,618,227


Mortgage loans held for portfolio, net of allowance9,833,763
10,149,450

10,147,407
2,043

10,945,717
11,629,669

11,628,390
1,279

Accrued interest receivable150,823
150,823

150,823


113,448
113,448

113,448


Derivative assets137,050
137,050

21,408

115,642
191,539
191,539

22,845

168,694
Liabilities:  
Deposits756,376
756,376

756,376


988,292
988,292

988,292


Consolidated obligation discount notes21,044,232
21,045,884

21,045,884


13,560,839
13,563,296

13,563,296


Consolidated obligation bonds32,441,885
32,528,060

32,528,060


36,445,676
36,685,244

36,685,244


Mandatorily redeemable capital stock2,477
2,477
2,477



2,308
2,308
2,308



Accrued interest payable116,478
116,478

116,478


75,097
75,097

75,097


Derivative liabilities990
990

165,693

(164,703)672
672

392,602

(391,930)
Other Asset (Liability):  
Industrial revenue bonds35,000
35,277

35,277


35,000
37,933

37,933


Financing obligation payable(35,000)(35,277)
(35,277)

(35,000)(37,933)
(37,933)

                   
1 
Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.


Table 13.212.2
12/31/201812/31/2019
Carrying
Value
Total
Fair
Value
Level 1Level 2Level 3
Netting
Adjustment
and Cash
Collateral1
Carrying
Value
Total
Fair
Value
Level 1Level 2Level 3
Netting
Adjustment
and Cash
Collateral1
Assets:  
Cash and due from banks$15,060
$15,060
$15,060
$
$
$
$1,917,166
$1,917,166
$1,917,166
$
$
$
Interest-bearing deposits670,660
670,660

670,660


921,453
921,453

921,453


Securities purchased under agreements to resell1,251,096
1,251,096

1,251,096


4,750,000
4,750,000

4,750,000


Federal funds sold50,000
50,000

50,000


850,000
850,000

850,000


Trading securities2,151,113
2,151,113

2,151,113


2,812,562
2,812,562

2,812,562


Available-for-sale securities1,725,640
1,725,640

1,725,640


7,182,500
7,182,500

7,182,500


Held-to-maturity securities4,456,873
4,447,078

4,364,127
82,951

3,569,958
3,556,938

3,476,084
80,854

Advances28,730,113
28,728,201

28,728,201


30,241,315
30,295,813

30,295,813


Mortgage loans held for portfolio, net of allowance8,410,462
8,388,885

8,387,425
1,460

10,633,009
10,983,356

10,981,458
1,898

Accrued interest receivable109,366
109,366

109,366


143,765
143,765

143,765


Derivative assets36,095
36,095

88,472

(52,377)154,804
154,804

24,810

129,994
Liabilities: 

  

 
Deposits473,820
473,820

473,820


790,640
790,640

790,640


Consolidated obligation discount notes20,608,332
20,606,743

20,606,743


27,447,911
27,448,021

27,448,021


Consolidated obligation bonds23,966,394
23,727,705

23,727,705


32,013,314
32,103,154

32,103,154


Mandatorily redeemable capital stock3,597
3,597
3,597



2,415
2,415
2,415



Accrued interest payable87,903
87,903

87,903


117,580
117,580

117,580


Derivative liabilities7,884
7,884

41,502

(33,618)202
202

106,708

(106,506)
Other Asset (Liability):  
Industrial revenue bonds35,000
32,154

32,154


35,000
34,850

34,850


Financing obligation payable(35,000)(32,154)
(32,154)

(35,000)(34,850)
(34,850)

                   
1 
Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.


Fair Value Measurements: Tables 13.312.3 and 13.412.4 present, for each hierarchy level, the FHLBank’s assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the Statements of Condition as of or for the periods ended SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands).


Table 13.312.3
09/30/201906/30/2020
TotalLevel 1Level 2Level 3
Netting
Adjustment and Cash
Collateral1
TotalLevel 1Level 2Level 3
Netting
Adjustment and Cash
Collateral1
Recurring fair value measurements - Assets:  
Trading securities:  
U.S. Treasury obligations$1,533,842
$
$1,533,842
$
$
$1,565,218
$
$1,565,218
$
$
GSE obligations2
468,747

468,747


GSE MBS3
898,986

898,986


GSE obligations435,008

435,008


GSE MBS904,417

904,417


Total trading securities2,901,575

2,901,575


2,904,643

2,904,643


Available-for-sale securities:  
U.S. Treasury obligations3,510,728

3,510,728


4,337,386

4,337,386


GSE MBS4
2,588,201

2,588,201


GSE MBS3,221,290

3,221,290


Total available-for-sale securities6,098,929

6,098,929


7,558,676

7,558,676


Derivative assets:  
Interest-rate related136,844

21,202

115,642
191,125

22,431

168,694
Mortgage delivery commitments206

206


414

414


Total derivative assets137,050

21,408

115,642
191,539

22,845

168,694
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS$9,137,554
$
$9,021,912
$
$115,642
$10,654,858
$
$10,486,164
$
$168,694
  
Recurring fair value measurements - Liabilities:  
Derivative liabilities:  
Interest-rate related$332
$
$165,035
$
$(164,703)$669
$
$392,599
$
$(391,930)
Mortgage delivery commitments658

658


3

3


Total derivative liabilities990

165,693

(164,703)672

392,602

(391,930)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES$990
$
$165,693
$
$(164,703)$672
$
$392,602
$
$(391,930)
  
Nonrecurring fair value measurements - Assets5:
 
Nonrecurring fair value measurements - Assets2:
 
Impaired mortgage loans$2,056
$
$
$2,056
$
$1,285
$
$
$1,285
$
Real estate owned22


22

TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS$2,078
$
$
$2,078
$
$1,285
$
$
$1,285
$
                   
1 
Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.
2 
Represents debentures issued by other FHLBanks, Fannie Mae, Farm Credit and Farmer Mac.
3
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
4
Represents multi-family MBS issued by Fannie Mae.
5
Includes assets adjusted to fair value during the ninesix months ended SeptemberJune 30, 20192020 and still outstanding as of SeptemberJune 30, 20192020.


Table 13.412.4
12/31/201812/31/2019
TotalLevel 1Level 2Level 3
Netting
Adjustment
and Cash
Collateral1
TotalLevel 1Level 2Level 3
Netting
Adjustment
and Cash
Collateral1
Recurring fair value measurements - Assets:  
Trading securities:  
U.S. Treasury obligations$252,377
$
$252,377
$
$
$1,530,518
$
$1,530,518
$
$
GSE obligations2
1,000,495

1,000,495


U.S. obligation MBS3
467

467


GSE MBS4
897,774

897,774


GSE obligations416,025

416,025


GSE MBS866,019

866,019


Total trading securities2,151,113

2,151,113


2,812,562

2,812,562


Available-for-sale securities:  
GSE MBS5
1,725,640

1,725,640


U.S. Treasury obligations4,261,791

4,261,791


GSE MBS2,920,709

2,920,709


Total available-for-sale securities1,725,640

1,725,640


7,182,500

7,182,500


Derivative assets:  
Interest-rate related35,543

87,920

(52,377)154,309

24,315

129,994
Mortgage delivery commitments552

552


495

495


Total derivative assets36,095

88,472

(52,377)154,804

24,810

129,994
TOTAL RECURRING FAIR VALUE MEASUREMENTS - ASSETS$3,912,848
$
$3,965,225
$
$(52,377)$10,149,866
$
$10,019,872
$
$129,994
  
Recurring fair value measurements - Liabilities:  
Derivative liabilities:  
Interest-rate related$7,881
$
$41,499
$
$(33,618)$177
$
$106,683
$
$(106,506)
Mortgage delivery commitments3

3


25

25


Total derivative liabilities7,884

41,502

(33,618)202

106,708

(106,506)
TOTAL RECURRING FAIR VALUE MEASUREMENTS - LIABILITIES$7,884
$
$41,502
$
$(33,618)$202
$
$106,708
$
$(106,506)
  
Nonrecurring fair value measurements - Assets6:
 
Nonrecurring fair value measurements - Assets2:
 
Impaired mortgage loans1,463


1,463

$1,909
$
$
$1,909
$
Real estate owned1,028


1,028

144


144

TOTAL NONRECURRING FAIR VALUE MEASUREMENTS - ASSETS$2,491
$
$
$2,491
$
$2,053
$
$
$2,053
$
                   
1 
Represents the effect of legally enforceable master netting agreements that allow the FHLBank to net settle positive and negative positions and also derivative cash collateral and related accrued interest held or placed with the same clearing agent or derivative counterparty.
2 
Represents debentures issued by other FHLBanks, Fannie Mae, Farm Credit and Farmer Mac.
3
Represents single-family MBS issued by Ginnie Mae.
4
Represents single-family and multi-family MBS issued by Fannie Mae and Freddie Mac.
5
Represents multi-family MBS issued by Fannie Mae.
6
Includes assets adjusted to fair value during the year ended December 31, 20182019 and still outstanding as of December 31, 2018.2019.



NOTE 1413 – COMMITMENTS AND CONTINGENCIES

Joint and Several Liability: As provided in the Federal Home Loan Bank Act of 1932, as amended (Bank Act) or in FHFA regulations, consolidated obligations are backed only by the financial resources of the FHLBanks. FHLBank Topeka is jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The par amounts for which FHLBank Topeka is jointly and severally liable were approximately $956,780,794,000$865,823,009,000 and $986,994,515,000$966,413,924,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.


The joint and several obligations are mandated by FHFA regulations and are not the result of arms-length transactions among the FHLBanks. As described above, the FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several liability. Because the FHLBanks are subject to the authority of the FHFA as it relates to decisions involving the allocation of the joint and several liability for all FHLBanks' consolidated obligations, FHLBank Topeka regularly monitors the financial condition of the other FHLBanks to determine whether it should expect a loss to arise from its joint and several obligations. If the FHLBank were to determine that a loss was probable and the amount of the loss could be reasonably estimated, the FHLBank would charge to income the amount of the expected loss. Based upon the creditworthiness of the other FHLBanks as of SeptemberJune 30, 2019,2020, FHLBank Topeka has concluded that a loss accrual is not necessary at this time.

Off-balance Sheet Commitments: As of SeptemberJune 30, 20192020 and December 31, 2018,2019, off-balance sheet commitments are presented in Table 14.113.1 (in thousands):

Table 14.113.1
09/30/201912/31/201806/30/202012/31/2019
Notional Amount
Expire
Within
One Year
Expire
After
One Year
Total
Expire
Within
One Year
Expire
After
One Year
Total
Expire
Within
One Year
Expire
After
One Year
Total
Expire
Within
One Year
Expire
After
One Year
Total
Standby letters of credit outstanding$3,538,145
$7,290
$3,545,435
$3,824,497
$37,933
$3,862,430
$5,242,155
$5,635
$5,247,790
$4,764,724
$4,335
$4,769,059
Advance commitments outstanding77,115
31,420
108,535
116,475
43,782
160,257
64,220
16,090
80,310
64,282
15,693
79,975
Commitments for standby bond purchases184,945
580,884
765,829
69,277
686,602
755,879
382,521
280,726
663,247

701,392
701,392
Commitments to fund or purchase mortgage loans375,772

375,772
101,551

101,551
107,916

107,916
221,800

221,800
Commitments to issue consolidated bonds, at par81,000

81,000



138,000

138,000



Commitments to issue consolidated discount notes, at par


1,825,000

1,825,000



411,161

411,161

Commitments to Extend Credit: The FHLBank issues standby letters of credit on behalf of its members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances and are fully collateralized at the time of issuance with assets allowed by the FHLBank’s Member Products Policy (MPP). 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 for members for a fee. If the FHLBank is required to make payment for a beneficiary's draw, the member either reimburses the FHLBank for the amount drawn or, subject to the FHLBank's discretion, the amount drawn may be converted into a collateralized advance to the member. However, standby letters of credit usually expire without being drawn upon. Outstanding standby letters of credit have original or extended expiration periods of up to 6 years. OurFHLBank's current outstanding standby letters of credit expire no later than 2023.2024. Unearned fees as well as the value of the guarantees related to standby letters of credit are recorded in other liabilities and amounted to $1,300,000$1,418,000 and $1,296,000$1,470,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Advance commitments legally bind and unconditionally obligate the FHLBank for additional advances up to 24 months in the future. Based upon management’s credit analysis of members and collateral requirements under the MPP, the FHLBank does not expect to incur any credit losses on the outstanding letters of credit or advance commitments.

Standby Bond-Purchase Agreements: The FHLBank has entered into standby bond purchase agreements with state housing authorities whereby the FHLBank, for a fee, agrees to purchase and hold the authorities’ bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBank to purchase the bond. The bond purchase commitments entered into by the FHLBank expire no later than 2022, though some are renewable at the option of the FHLBank. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the total commitments for bond purchases included agreements with two in-district state housing authorities. TheFHLBank was required to purchase $122,390,000 in bonds under these agreements during the six months ended June 30, 2020. These bonds were classified as available-for-sale securities, and were acquired at par and sold at par within the same month. FHLBank was not required to purchase any bonds under any agreements during the three and ninesix months ended SeptemberJune 30, 2019 and 2018.2019.

Commitments to Purchase Mortgage Loans: These commitments that unconditionally obligate the FHLBank to purchase mortgage loans from participating FHLBank Topeka members in the MPF Program are generally for periods not to exceed 60 calendar days. Certain commitments are recorded as derivatives at their fair values on the Statements of Condition. The FHLBank recorded mortgage delivery commitment net derivative asset (liability) balances of $(452,000)$411,000 and $549,000$470,000 as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively.


Commitments to Issue Consolidated Obligations: The FHLBank enters into commitments to issue consolidated obligation bonds and discount notes outstanding in the normal course of its business. Most settle within the shortest period possible and are considered regular way trades; however, certain commitments are recorded as derivatives at their fair values on the Statements of Condition.


NOTE 1514 – TRANSACTIONS WITH STOCKHOLDERS

The FHLBank is a cooperative whose members own most of the capital stock of the FHLBank and generally receive dividends on their investments. In addition, certain former members that still have outstanding transactions are also required to maintain their investments in FHLBank capital stock until the transactions mature or are paid off. Nearly all outstanding advances are with current members, and the majority of outstanding mortgage loans held for portfolio were purchased from current or former members. The FHLBank also maintains demand deposit accounts for members primarily to facilitate settlement activities that are directly related to advances and mortgage loan purchases.

Transactions with members are entered into in the ordinary course of business. In instances where members also have officers or directors who are directors of the FHLBank, transactions with those members are subject to the same eligibility and credit criteria, as well as the same terms and conditions, as other transactions with members. For financial reporting and disclosure purposes, the FHLBank defines related parties as FHLBank directors’ financial institutions and members with capital stock investments in excess of 10 percent of the FHLBank’s total regulatory capital stock outstanding, which includes mandatorily redeemable capital stock.

Activity with Members that Exceed a 10 Percent Ownership in FHLBank Capital Stock: Tables 15.114.1 and 15.214.2 present information on members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of SeptemberJune 30, 20192020 and December 31, 20182019 (dollar amounts in thousands). None of the officers or directors of these members currently serve on the FHLBank’s board of directors.

Table 15.114.1
09/30/2019
06/30/202006/30/2020
Member NameStateTotal Class A Stock Par ValuePercent of Total Class ATotal Class B Stock Par ValuePercent of Total Class BTotal Capital Stock Par ValuePercent of Total Capital StockStateTotal Class A Stock Par ValuePercent of Total Class ATotal Class B Stock Par ValuePercent of Total Class BTotal Capital Stock Par ValuePercent of Total Capital Stock
BOKF, N.A.OK$99,450
28.7%$312,727
23.6%$412,177
24.6%
MidFirst BankOK500
0.1
368,500
27.8
369,000
22.1
OK$86,625
17.3%$237,034
26.6%$323,659
23.2%
TOTAL $99,950
28.8%$681,227
51.4%$781,177
46.7% $86,625
17.3%$237,034
26.6%$323,659
23.2%

Table 15.214.2
12/31/2018
12/31/201912/31/2019
Member NameStateTotal Class A Stock Par ValuePercent of Total Class ATotal Class B Stock Par ValuePercent of Total Class BTotal Capital Stock Par ValuePercent of Total Capital StockStateTotal Class A Stock Par ValuePercent of Total Class ATotal Class B Stock Par ValuePercent of Total Class BTotal Capital Stock Par ValuePercent of Total Capital Stock
MidFirst BankOK$500
0.1%$385,825
29.2%$386,325
21.8%
BOKF, N.A.OK$24,006
9.6%$274,000
21.4%$298,006
19.5%OK184,282
41.0
202,000
15.3
386,282
21.8
MidFirst BankOK500
0.2
294,700
23.0
295,200
19.3
TOTAL $24,506
9.8%$568,700
44.4%$593,206
38.8% $184,782
41.1%$587,825
44.5%$772,607
43.6%

Advance and deposit balances with members that owned more than 10 percent of outstanding FHLBank regulatory capital stock as of SeptemberJune 30, 20192020 and December 31, 20182019 are summarized in Table 15.314.3 (dollar amounts in thousands). Information is only listed for the period in which the member owned more than 10 percent of outstanding FHLBank regulatory stock.

Table 15.314.3
09/30/201912/31/201809/30/201912/31/201806/30/202012/31/201906/30/202012/31/2019
Member NameOutstanding AdvancesPercent of TotalOutstanding AdvancesPercent of TotalOutstanding DepositsPercent of TotalOutstanding DepositsPercent of TotalOutstanding AdvancesPercent of TotalOutstanding AdvancesPercent of TotalOutstanding DepositsPercent of TotalOutstanding DepositsPercent of Total
MidFirst Bank$5,085,000
24.0%$8,585,000
28.5%$646
0.1%$1,030
0.1%
BOKF, N.A.$6,800,000
22.3%$6,100,000
21.2%$29,785
4.0%$29,288
6.2%  4,500,000
14.9
  22,457
2.9
MidFirst Bank8,200,000
26.9
6,560,000
22.8
850
0.1
331
0.1
TOTAL$15,000,000
49.2%$12,660,000
44.0%$30,635
4.1%$29,619
6.3%$5,085,000
24.0%$13,085,000
43.4%$646
0.1%$23,487
3.0%

BOKF, N.A. and MidFirst Bank did not sell any mortgage loans into the MPF Program during the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019. BOKF, N.A. did not sell any mortgage loans into the MPF Program during the three and six months ended June 30, 2019.


Transactions with FHLBank Directors’ Financial Institutions: Table 15.414.4 presents information as of SeptemberJune 30, 20192020 and December 31, 20182019 for members that had an officer or director serving on the FHLBank’s board of directors (dollar amounts in thousands). Information is only included for the period in which the officer or director served on the FHLBank’s board of directors. Capital stock listed is regulatory capital stock, which includes mandatorily redeemable capital stock.

Table 15.414.4
09/30/201912/31/201806/30/202012/31/2019
Outstanding AmountPercent of TotalOutstanding AmountPercent of TotalOutstanding AmountPercent of TotalOutstanding AmountPercent of Total
Advances$180,964
0.6%$157,012
0.5%$183,011
0.9%$178,945
0.6%
        
Deposits$29,295
3.9%$9,679
2.1%$20,126
2.0%$15,748
2.0%
    
��    
Class A Common Stock$6,344
1.8%$4,179
1.7%$4,602
0.9%$6,467
1.4%
Class B Common Stock5,658
0.4
4,924
0.4
5,921
0.7
5,571
0.4
TOTAL CAPITAL STOCK$12,002
0.7%$9,103
0.6%$10,523
0.8%$12,038
0.7%

Table 15.514.5 presents mortgage loans acquired during the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 for members that had an officer or director serving on the FHLBank’s board of directors in 20192020 or 20182019 (dollar amounts in thousands). Information is only included for the period in which the officer or director served on the FHLBank’s board of directors.

Table 15.514.5
 Three Months EndedNine Months Ended
 09/30/201909/30/201809/30/201909/30/2018
 AmountPercent of TotalAmountPercent of TotalAmountPercent of TotalAmountPercent of Total
Mortgage loans acquired$61,362
5.4%$24,676
4.3%$128,251
5.3%$80,047
5.2%
 Three Months EndedSix Months Ended
 06/30/202006/30/201906/30/202006/30/2019
 AmountPercent of TotalAmountPercent of TotalAmountPercent of TotalAmountPercent of Total
Mortgage loans acquired$40,701
3.6%$43,809
5.6%$86,810
4.3%$66,889
5.3%


Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to assist the reader in understanding our business and assessing our operations both historically and prospectively. This discussion should be read in conjunction with our interim financial statements and related notes presented under Part I Item 1 of this quarterly report on Form 10-Q and the annual report on Form 10-K for the year ended December 31, 2018,2019, which includes audited financial statements and related notes for the year ended December 31, 2018.2019. Our MD&A includes the following sections:
Executive Level Overview – a general description of our business and financial highlights;
Financial Market Trends – a discussion of current trends in the financial markets and overall economic environment, including the related impact on our operations;
Critical Accounting Policies and Estimates – a discussion of accounting policies that require critical estimates and assumptions;
Results of Operations – an analysis of our operating results, including disclosures about the sustainability of our earnings;
Financial Condition – an analysis of our financial position;
Liquidity and Capital Resources – an analysis of our cash flows and capital position;
Risk Management – a discussion of our risk management strategies;
Impact of Recently Issued Accounting Standards; and
Legislative and Regulatory Developments.

Executive Level Overview
We are a regional wholesale bank that makes advances (loans) to, purchases mortgage loans from, and provides limited other financial services primarily to our members. The FHLBanks, together with the Office of Finance, a joint office of the FHLBanks, make up the FHLBank System, which consists of 11 district FHLBanks. As independent, member-owned cooperatives, the FHLBanks seek to maintain a balance between their public purpose and their ability to provide adequate returns on the capital supplied by their members. The FHLBanks are supervised and regulated by the FHFA, an independent agency in the executive branch of the U.S. government. The FHFA’s mission is to ensure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.

Our primary funding source is consolidated obligations issued through the FHLBanks’ Office of Finance that facilitates the issuance and servicing of the consolidated obligations. The FHFA and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt. Consolidated obligations are debt instruments that constitute the joint and several obligations of all FHLBanks. Although consolidated obligations are not obligations of, nor guaranteed by, the U.S. government, the capital markets have traditionally viewed the FHLBanks’ consolidated obligations as “Federal agency” debt. As a result, the FHLBanks have historically had ready access to funding at relatively favorable spreads to U.S. Treasuries. Additional funds are provided by deposits (received from both member and non-member financial institutions), other borrowings, and the issuance of capital stock.

We serve eligible financial institutions in Colorado, Kansas, Nebraska, and Oklahoma (collectively, the Tenth District of the FHLBank System), who are also the member-owners of the FHLBank. Initially, a member is required to purchase shares of Class A Common Stock based on the member’s total assets subject to a per member cap of $500 thousand. Each member may be required to purchase activity-based capital stock (Class B Common Stock) as it engages in certain business activities with the FHLBank, including advances, standby letters of credit, and Acquired MemberMembers Assets (AMA), at levels determined by management with the Boardboard of Director’sdirector’s approval and within the ranges stipulated in our Capital Plan. Currently, our capital increases when members are required to purchase additional capital stock in the form of Class B Common Stock to support an increase in their advance borrowings. Inborrowings or AMA activity. On July 23, 2020, FHLBank's board of directors changed the past, capitalestablished AMA activity-based stock also increased whenpurchase requirement to three percent from zero percent pursuant to its Capital Plan, effective as of August 5, 2020. The purchase requirement had been suspended for current members sold additional mortgage loans to us; however, members are no longer required to purchase capital stock for AMA activity, as the mortgage loans are supported by the retained earnings of the FHLBank (formersince July 2013. Former members previously required to purchase AMA activity-based stock are subject to the priorstock requirement in place at the time their membership ended as long as there are UPBs outstanding). unpaid principal balances outstanding. For additional discussion of these changes to capital requirements, see "Liquidity and Capital Resources – Capital" under this Item 2.

At our discretion, we may repurchase excess stock resulting from a decline in a member’s advances.advances or AMA activities. We believe it is important to manage our business and the associated risks so that we strive to provide franchise value by maintaining a core mission asset focus and meeting the following objectives: (1) achieve our liquidity, housing finance and community development missions by meeting member credit needs by offering advances, supporting residential mortgage lending through the MPF Program and through other products; (2) periodically repurchase excess capital stock in order to appropriately manage the size of our balance sheet; and (3) pay acceptable dividends.


True to our mission, we continue to serve as a reliable source of funding for members both during times of economic stability and periods of crisis. While the nation has seen a number of market disruptions during our long history, management believes the speed of the tightening and deterioration of market and economic conditions during the onset of the COVID-19 pandemic is unprecedented. Credit and market conditions began to modestly improve in the second quarter of 2020 as a result of economic stimulus, business resumption, and the initial flattening of the curve of new infection. However, resurgence of virus infections and some subsequent rollbacks of business resumptions combined with disparate industry impacts are expected to inhibit economic recovery during the second half of 2020. Our balance sheet adjusted more readily to economic conditions in the second quarter of 2020, which resulted in an improvement in net interest spreads compared to the first quarter of 2020, but a significant portion of the decline in net income in the first half of 2020 remained the result of net losses on derivatives and hedging activities incurred during the first quarter of 2020. While market volatility cannot be predicted, these losses are expected to be reversed with market changes in the future although the timing of those reversals is uncertain. At no time during this pandemic has our balance sheet liquidity or access to the debt markets prevented us from meeting the liquidity needs of our members. FHLBank has continually conducted business without significant operational difficulties or disruptions during the COVID-19 pandemic, with most employees working remotely since mid-March. Management began bringing employees back to work in our offices in early August and plans to continue this process in phases but is prepared to continue remote operations if local infection trends continue to rise.

During the second quarter of 2020, we provided $0.6 billion of zero-cost funding and $0.5 billion of low-cost funding to help members serve their customers affected by the COVID-19 pandemic. In March 2020, we also began accepting collateral modified by forbearance plans and loan modification agreements, including those with electronic signatures. We worked with the Federal Reserve to allow members to pledge their newly issued PPP loans to the Federal Reserve Bank of Kansas City. Additionally, we began accepting SBA PPP loans as collateral while limiting the reporting burden for members. For MPF customers, we waived delivery commitment extension fees through April 15, 2020 and eased certain underwriting, documentation and payment requirements for those impacted by the pandemic. For mortgage loans in the MPF Program, we offered payment forbearance and temporary loan modification programs for borrowers impacted by the pandemic. We continue to monitor the progress of the pandemic and are committed to assisting our members and their communities as impacts related to the pandemic continue to unfold.

Table 1 presents Selected Financial Data for the periods indicated (dollar amounts in thousands):


Table 1
09/30/201906/30/201903/31/201912/31/201809/30/201806/30/202003/31/202012/31/201909/30/201906/30/2019
Statement of Condition (as of period end):    
Total assets$57,131,130
$60,078,297
$57,427,696
$47,715,256
$51,297,350
$53,533,936
$63,189,513
$63,276,654
$57,131,130
$60,078,297
Investments1
16,248,522
19,442,680
18,522,066
10,305,382
14,440,009
20,633,427
19,597,238
20,086,473
16,248,522
19,442,680
Advances30,634,583
31,099,119
29,862,995
28,730,113
28,471,709
21,528,991
31,678,083
30,241,315
30,634,583
31,099,119
Mortgage loans, net2
9,833,763
9,192,097
8,701,250
8,410,462
8,114,220
10,945,717
11,018,168
10,633,009
9,833,763
9,192,097
Total liabilities54,472,808
57,497,604
54,948,846
45,261,004
48,907,457
51,178,998
60,475,924
60,485,603
54,472,808
57,497,604
Deposits756,376
589,543
544,500
473,820
446,282
988,292
975,397
790,640
756,376
589,543
Consolidated obligation discount notes, net3
21,044,232
27,163,395
26,785,113
20,608,332
22,417,330
13,560,839
25,563,980
27,447,911
21,044,232
27,163,395
Consolidated obligation bonds, net3
32,441,885
29,516,980
27,400,165
23,966,394
25,836,920
36,445,676
33,730,055
32,013,314
32,441,885
29,516,980
Total consolidated obligations, net3
53,486,117
56,680,375
54,185,278
44,574,726
48,254,250
50,006,515
59,294,035
59,461,225
53,486,117
56,680,375
Mandatorily redeemable capital stock2,477
2,750
3,548
3,597
4,536
2,308
2,390
2,415
2,477
2,750
Total capital2,658,322
2,580,693
2,478,850
2,454,252
2,389,893
2,354,938
2,713,589
2,791,051
2,658,322
2,580,693
Capital stock1,670,690
1,598,504
1,508,396
1,524,537
1,463,923
1,392,003
1,802,296
1,766,456
1,670,690
1,598,504
Total retained earnings972,948
950,276
942,840
914,022
894,016
996,629
980,612
999,809
972,948
950,276
AOCI14,684
31,913
27,614
15,693
31,954
(33,694)(69,319)24,786
14,684
31,913
Statement of Income (for the quarterly period ended):  
Net interest income74,415
49,230
63,015
68,175
67,659
56,677
55,086
69,404
74,415
49,230
Provision (reversal) for credit losses on mortgage loans393
38
78
372
(391)1,337
(736)(122)393
38
Other income (loss)(1,507)4,368
12,674
(1,822)(1,500)(10,252)(23,229)7,438
(1,507)4,368
Other expenses18,633
18,313
16,990
17,722
20,428
22,596
19,443
18,880
18,633
18,313
Income before assessments53,882
35,247
58,621
48,259
46,122
22,492
13,150
58,084
53,882
35,247
Affordable Housing Program (AHP) assessments5,391
3,529
5,866
4,831
4,618
2,250
1,318
5,811
5,391
3,529
Net income48,491
31,718
52,755
43,428
41,504
20,242
11,832
52,273
48,491
31,718
Selected Financial Ratios and Other Financial Data (for the quarterly period ended):  
Dividends paid in cash4
70
68
71
63
69
71
70
72
70
68
Dividends paid in stock4
25,749
24,214
23,866
23,359
23,209
14,697
24,836
25,340
25,749
24,214
Weighted average dividend rate5
6.61%6.56%6.56%6.24%6.32%3.69%5.94%6.14%6.61%6.56%
Dividend payout ratio6
53.25%76.55%45.37%53.93%56.09%72.95%210.50%48.61%53.25%76.55%
Return on average equity7.54%5.13%8.77%7.07%6.89%3.20%1.75%7.82%7.54%5.13%
Return on average assets0.33%0.22%0.40%0.33%0.32%0.14%0.08%0.35%0.33%0.22%
Average equity to average assets4.36%4.37%4.54%4.69%4.67%4.37%4.44%4.52%4.36%4.37%
Net interest margin7
0.51%0.35%0.48%0.52%0.53%0.39%0.36%0.47%0.51%0.35%
Total capital ratio8
4.65%4.30%4.32%5.14%4.66%4.40%4.29%4.41%4.65%4.30%
Regulatory capital ratio9
4.63%4.25%4.27%5.12%4.61%4.47%4.41%4.38%4.63%4.25%
                   
1 
Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.
2 
The allowance for credit losses on mortgage loans was $7,790,000, $6,468,000, $985,000, $905,000 $858,000, $824,000, $812,000 and $656,000$858,000 as of June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019 and June 30, 2019, March 31, 2019, December 31, 2018respectively. Effective January 1, 2020, new accounting guidance was adopted relating to the measurement of credit losses on financial instruments and September 30, 2018, respectively.resulted in a cumulative effect adjustment of $6,123,000.
3 
Consolidated obligations are bonds and discount notes that we are primarily liable to repay. See Note 1413 to the financial statements for a description of the total consolidated obligations of all FHLBanks for which we are jointly and severally liable.
4 
Dividends reclassified as interest expense on mandatorily redeemable capital stock and not included as dividends recorded in accordance with GAAP were $14,000, $24,000, $26,000, $30,000 $40,000, $43,000, $54,000 and $58,000$40,000 for the quarters ended June 30, 2020, March 31, 2020, December 31, 2019, September 30, 2019 and June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively.
5 
Dividends paid in cash and stock on both classes of stock as a percentage of average capital stock eligible for dividends.
6 
Ratio disclosed represents dividends declared and paid during the period as a percentage of net income for the period presented, although the FHFA regulation requires dividends be paid out of known income prior to declaration date.
7 
Net interest income as a percentage of average earning assets.
8 
GAAP capital stock, which excludes mandatorily redeemable capital stock, plus retained earnings and AOCI as a percentage of total assets.
9 
Regulatory capital (i.e., Class A Common Stock, Class B Common Stock and retained earnings) as a percentage of total assets.


Net income increased $7.0decreased $11.5 million, or 16.836.2 percent, to $48.5$20.2 million for the three months ended SeptemberJune 30, 20192020 compared to $41.5$31.7 million for the three months ended SeptemberJune 30, 2018. Net2019. For the six months ended June 30, 2020, net income increased $6.2decreased $52.4 million, or 4.862.0 percent, for the nine months ended September 30, 2019 to $133.0$32.1 million compared to $126.8$84.5 million for the ninesix months ended SeptemberJune 30, 2018.2019. The increase in both periods was driven by fair value fluctuations on derivatives and trading securities and the change in net interest income for the respective period. Declines in longer-term market interest rates since December 31, 2018 resulted in unrealized fair value losses recorded for the majority of economic derivativesdecrease for both the three- and nine-monthsix-month periods ended September 30, 2019; however, those losses werewas largely offset by positive fair value fluctuations on trading securities. Fair valuedue to net losses on economic derivatives and hedging activities and trading securities were recordedfrom the continued market disruption caused by the COVID-19 pandemic, although some stabilization was observed during the second quarter of 2020 as the financial markets began a modest and uneven recovery.

Net interest income increased $7.5 million for both the three- and nine-month periods in the prior year, resulting in an increase in other income for both the three- and nine-month periods ended September 30, 2019 compared to the same periods in the prior year. Included in net incomequarter, from $49.2 million for the three months ended SeptemberJune 30, 2019 was an out-of-period adjustment of $14.3to $56.7 million that related to hedged item valuations for certain available-for-sale securities in fair value hedging relationships and resulted in an increase in available-for-sale interest income and a reduction in other comprehensive income. For additional information on the out-of-period adjustment, see Note 1 of the Notes to Financial Statements under Part I, Item 1.

Net interest income for the three months ended SeptemberJune 30, 2019 was $74.4 million compared to $67.72020. Net interest income remained relatively flat for the comparative six-month periods, from $112.2 million for the same period in the prior year. For the ninesix months ended SeptemberJune 30, 2019 net interest income was $186.7 million compared to $203.0$111.8 million for the same period in the prior year. The average cost of debt increased for both the three- and nine-month periodssix months ended SeptemberJune 30, 2019 compared to the same periods in the prior year due to an increase in average short-term interest rates between periods. Market interest rates, particularly long-term interest rates, decreased during the second and third quarters of 2019, which caused an increase in prepayment speeds on mortgage-related assets, resulting in acceleration of premium amortization. However, this decrease in long-term market interest rates allowed us to replace some callable consolidated obligation bonds at a lower cost, which we expect will eventually partially offset the recent increase in the average cost of debt. Accelerated amortization of concessions (i.e., broker fees) on called debt and accelerated premium amortization on mortgages and MBS reduced net interest income for both the three- and nine-month periods ended September 30, 2019. Both periods were also impacted by fair value fluctuations on designated fair value hedges; however, the impact was positive for the third quarter of 2019 due to the out-of-period adjustment and negative for the 2019 year-to-date period. Detailed discussion relating to the fluctuations in net interest income can be found under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

2020. The change in net interest income for both periods is attributed primarily to the three-decrease in the cost of debt and nine-month periods ended September 30, 2019continued growth in the mortgage loan portfolio. These factors increased net interest income for the current quarter, but the increase related to these factors in the current year-to-date period was also impactedoffset by the adoption of a new hedge accounting standard on January 1, 2019 that requires fair value fluctuations on designated fair value hedges to be presenteddecrease in net interest income in the income statement line itemfirst quarter of 2020 related to the hedged item, which isdecline in market interest income/expense for us. The guidance was adopted prospectively, so the fair value fluctuations on fair value hedgesrates.
FHLBank's cost of debt decreased as a result of unswapped callable debt refinanced in the current and prior year are presentedperiods combined with a decline in other income, which createsthe cost of discount notes, floating rate debt, and net interest settlements as market interest rates declined, partially offset by accelerated concession amortization on the called debt. Prepayments on mortgage-related assets and the associated premium amortization remained elevated, but the increase in premium amortization was largely offset by the reduction in debt cost from approximately $9 billion in unswapped consolidated obligation bonds called and then re-issued at a lacklower cost during the first half of comparability between periods.

2020.
Total assets increased $9.4decreased between periods, from $63.3 billion at December 31, 2019 to $53.5 billion at June 30, 2020 driven mostly by the $8.7 billion, or 19.728.8 percent, fromdecline in advances between periods as many members experienced significant deposit inflows and excess liquidity as a result of economic stimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and lending facilities. Mortgage loans increased by $0.3 billion during the first six months of 2020, representing 20.4 percent of total assets as of June 30, 2020, compared to 16.8 percent as of December 31, 2018 to September 30, 2019 primarily due to increases in short- and long-term investments, advances, and mortgage loans. The majority2019. Mortgage loans are one of the highest net spread assets on our balance sheet and as they increase and change in compositionas a percent of investments was in responsetotal assets, all things being equal, they have the potential to changes to regulatory liquidity requirements that became effective March 31, 2019, including the purchase of $5.0 billion in U.S. Treasury obligations since the third quarter of 2018.increase our net interest margin.

Total liabilities increased $9.2decreased $9.3 billion or 20.4 percent, from December 31, 20182019 to SeptemberJune 30, 2019. This increase was primarily due2020 which corresponded with the decline in assets, and the funding mix shifted to an $8.5 billion increase in consolidated obligation bonds and a $0.4 billion increase in consolidated obligationlower percentage of discount notes between periods, as we issued more floating rate debt indexed to fund asset growth.the Secured Overnight Financing Rate (SOFR) to more closely reflect the repricing characteristics of our assets. Our funding mix generally is driven by asset composition, but we may also shift our debt composition as a result of market conditions that impact the cost of consolidated obligations swapped or indexed to LIBOR, SOFR, Prime, Treasury bills, or other indices. Short-term advances, including line of credit advances, represent the majority of the assets funded by term discount notes. We also use term and overnight discount notes to fund overnight investments to maintain liquidity sufficient to meet the advance needs of members.index swap (OIS) rate. For additional information on market trends impacting the cost of issuing debt, including discussion of the transition from LIBOR to an alternate reference rate, see "Financial Market Trends" and "Financial Condition" under this Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition.” 2.

Total capital increased $204.1decreased $436.1 million, or 8.315.6 percent, from December 31, 2019 to June 30, 2020 primarily due to a decrease in required capital stock related to the decline in advance utilization between periods due to the increase in capital stock from increased advance utilization and net income in excess of dividends paid.that was subsequently repurchased.

The increasedecrease in net income for the current quartercombined with an increase in average equity resulted in an increase ina return on average equity (ROE), from 6.89 of 3.20 percent and 2.45 percent for the three and six months ended SeptemberJune 30, 20182020, respectively, compared to 7.545.13 percent and 6.93 percent for the threesame periods in the prior year. Dividends paid to members totaled $39.7 million for the six months ended SeptemberJune 30, 2019. The increase in net income combined with a decrease in average capital2020 compared to $48.2 million for the current nine-month period resulted in an increase in ROE,prior year. From June 30, 2019 to June 30, 2020, the dividend rate for Class A Common Stock decreased from 6.742.50 percent to 0.50 percent and the dividend rate for the nine months ended September 30, 2018 comparedClass B Common Stock decreased from 7.50 percent to 7.14 percent for the nine months ended September 30, 2019.5.50 percent. The weighted average dividend rate for the three and six months ended SeptemberJune 30, 20192020 was 6.613.69 percent and 4.85 percent, which represented a dividend payout ratio of 53.273.0 percent and 123.7 percent, respectively, compared to a weighted average dividend rate of 6.326.56 percent for both the three and six months ended June 30, 2019 and a payout ratio of 56.176.6 percent and 57.1 percent for the same periodperiods in 2018. The weighted average2019, respectively. Our dividend rates have historically moved in tandem with short-term market rates, so the decrease reflects the decline in market interest rates resulting from Federal Open Market Committee of the Federal Reserve (FOMC) rate forcuts in March 2020 to stimulate the nine months ended September 30, 2019 was 6.58 percent, which represented a dividend payout ratio of 55.7 percent, compared to a weighted average dividend rate of 6.10 percent and a payout ratio of 57.7 percent for the same period in 2018.U.S. economy.


The increaseDifferences in the weighted average dividend rates wasbetween periods are due to increasesthe change in dividend rates and the dividend rate on our Class A Common Stock and Class B Common Stock between periods and differencesdifference in the mix of outstanding Class A Common Stock and Class B Common Stock between those periods. The Class A Common Stock dividend rate increased from 2.00 percent to 2.50 percent and the Class B Common Stock dividend rate increased from 7.25 percent to 7.50 percent between September 30, 2018 and September 30, 2019. FactorsOther factors impacting the outstanding stock class mix during the first half of 2020 and, therefore, the average dividend rates, include regular exchanges of excess Class B Common Stock to Class A Common Stock and periodic repurchases of excess Class A Common Stock (see “Liquidity and Capital Resources - Capital”under this Item 2). The increase in the payout ratio, despite the decline in dividend rates for the six months ended June 30, 2020, was a result of the decline in net income mostly in the first quarter of 2020 from the aforementioned COVID-19 related market volatility. We anticipate stock dividends on Class A Common Stock and Class B Common Stock will be lower than what was paid in 2019 for the remainder of 2020, consistent with the lower level of short‑term interest rates and our retained earnings policy.

FHFA guidance requires that our strategic business plan describes how our business activities will achieve our mission consistent with the FHFA’s core mission achievement guidance. We intend to manage our balance sheet with an emphasis towards maintaining a primary mission asset ratio above 70 percent. Our ratio of average advances and average mortgage loans to average consolidated obligations less average U.S. Treasury securities classified as trading or available for saleavailable-for-sale with maturities of ten years or less utilizing par balances (primary mission asset ratio) was 75 percent for the ninesix months ended SeptemberJune 30, 2019.2020. However, because this ratio is dependent on several variables such as member demand for our advance and mortgage loan products, it is possible that we will be unable to maintain theour primary mission asset ratio at this level indefinitely.will decline from our current level.

Financial Market Trends
The primary external factors that affect net interest income are market interest rates and the general state of the economy.

General discussion of the level of market interest rates:
Table 2 presents selected market interest rates as of the dates or for the periods shown.

Table 2
09/30/201909/30/201809/30/201909/30/201809/30/201912/31/201809/30/201806/30/202006/30/201906/30/202006/30/201906/30/202012/31/201906/30/2019
Market InstrumentThree-monthNine-monthEndingEndingThree-monthSix-monthEndingEndingEnding
AverageRateRateAverageRateRateRate
Secured Overnight Financing Rate1,2
2.28%1.93%2.38%N/A
2.35%3.00%2.25%
Secured Overnight Financing Rate1
0.05%2.43%0.63%2.43%0.10%1.55%2.50%
Federal funds effective rate1
2.20
1.92
2.33
1.70%1.90
2.40
2.18
0.06
2.40
0.64
2.40
0.08
1.55
2.40
Federal Reserve interest rate on excess reserves1
2.15
1.96
2.30
1.76
1.80
2.40
2.20
0.10
2.37
0.67
2.38
0.10
1.55
2.35
3-month U.S. Treasury bill1
2.02
2.06
2.26
1.83
1.84
2.36
2.20
0.13
2.34
0.62
2.38
0.14
1.55
2.10
3-month LIBOR1
2.20
2.34
2.46
2.20
2.09
2.81
2.40
0.60
2.51
1.07
2.60
0.30
1.91
2.32
2-year U.S. Treasury note1
1.68
2.66
2.10
2.43
1.62
2.51
2.82
0.19
2.13
0.64
2.31
0.15
1.57
1.74
5-year U.S. Treasury note1
1.62
2.81
2.07
2.70
1.55
2.53
2.95
0.36
2.12
0.76
2.29
0.29
1.69
1.76
10-year U.S. Treasury note1
1.79
2.92
2.26
2.87
1.68
2.70
3.06
0.68
2.34
1.03
2.49
0.66
1.92
2.01
30-year residential mortgage note rate1,3
3.99
4.83
4.31
4.72
3.99
4.84
4.96
30-year residential mortgage note rate1,2
3.39
4.29
3.56
4.47
3.29
3.95
4.07
                   
1 
Source is Bloomberg.
2 
SOFR was first published on April 3, 2018.
3
Mortgage Bankers Association weekly 30-year fixed rate mortgage contract rate.

DuringIn March of 2020, the first nine months of 2019,market volatility and stress resulting from the cost of FHLBank consolidated obligations as measured by the spreadCOVID-19 pandemic led to challenging conditions in financial markets with market participants favoring short-term obligations. Spreads to comparative U.S. Treasury rates remained relatively stable, althoughinstruments for FHLBank consolidated obligations widened, increasing the yield curve inverted, which made shorter-term debt more expensive relativecost to longer-term structures. Duringissue these instruments. However, during the October 2019second quarter of 2020, these spreads narrowed resulting in lower costs to issue consolidated obligations driven by robust market demand for the instruments and lower issuance needs by the FHLBanks due to ample liquidity available to market participants. At the July meeting, the Federal Open Market Committee (FOMC) lowered the target Federal funds rate another 25 basis points, the third decrease since the FOMC began a series of rate increases in 2015, citing global economic uncertainty and persistently low inflationary pressures. The possibility of an additional reduction inmaintained the Federal funds rate at a range between 0 percent and 0.25 percent and said it would maintain its quantitative easing (QE), repo and overnight lending programs to keep credit available until it is confident that the economy has recovered from the downturn related to the COVID-19 pandemic and is on track to achieve its maximum employment and price stability goals. The FOMC stated its intent to continue its purchases of U.S. Treasuries and agency MBS as part of its QE. Monetary and fiscal actions in 2019 is contingent upon, amongresponse to the economic impact of the COVID-19 pandemic and dire economic outlooks for the next several years have driven Treasury and other things, labor market conditions, inflation indicators and expectations, and financial and international developments.benchmark rates to or near historic lows. We issue debt at a spread above U.S. Treasury securities; as a result, the level of interest rates impacts the cost of issuing FHLBank consolidated obligations and the cost of advances to our members and housing associates.

The COVID-19 pandemic has caused significant economic and financial turmoil both in the U.S. and around the world, and has fueled concerns that it will lead to a global recession. Our ability to obtain funds through the issuance of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets. Volatility in the capital markets caused by the COVID-19 pandemic can impact demand for FHLBank debt and the cost of the debt the FHLBanks issue. The outlook for the remainder of 2020 is uncertain, and there is a possibility that the FOMC may keep interest rates low or use other policies if economic conditions warrant, each of which could impact the efficiency of our asset and liability management activities. For further discussion, see this Item 2 – “Financial Condition – Consolidated Obligations.”


In July 2017, the United Kingdom's Financial Conduct Authority (FCA) announced that it plansplanned to phase out the regulatory oversight of LIBOR interest rate indices by 2021. The FCA and the submitting LIBOR banks have indicated they will support the LIBOR indices through 2021 to allow for an orderly transition to an alternative reference rate. The Alternative Reference Rates Committee (ARRC) in the United States has proposed SOFR as its recommended alternative to US Dollar (USD) LIBOR in the United States. SOFR is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York began publishing SOFR rates in April 2018. As noted throughout this quarterly report, many of our assets and liabilities, including derivative assets and derivative liabilities, are indexed to LIBOR (USD LIBOR only).USD LIBOR. A portion of these assets and liabilities and related collateral have maturity dates that extend beyond 2021. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 2.

Other factors impacting FHLBank consolidated obligations:
We believe investors continue to view FHLBank consolidated obligations as carrying a relatively strong credit profile. Historically, our strong credit profile has resulted in steady investor demand for FHLBank discount notes and short-term bonds.consolidated obligations. We believe several market events continue to have the potential to impact the demand for our consolidated obligations including the economic impact of the COVID-19 pandemic, geopolitical events and/or disruptions; potential policy changes under the current administration; recent regulatory changes in liquidity requirements; changes in interest rates and the shape of the yield curve as the FOMC contemplates changes to monetary policy; and the replacement of LIBOR with another index as previously discussed.

Critical Accounting Policies and Estimates
The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others in terms of their importance to results. These assumptions and assessments includeinclude: (1) the following:
Accountingaccounting related to derivatives and hedging activities;
Fair and (2) fair value determinations;
Accounting for deferred premium/discount associated with MBS; and
Determining the adequacy of the allowance for credit losses.determinations.

Changes in any of the estimates and assumptions underlying critical accounting policies could have a material effect on our financial statements.

The accounting policies that management believes are the most critical to an understanding of our financial results and condition and require complex management judgment are described under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our annual report on Form 10-K, incorporated by reference herein. There were no material changes to our critical accounting policies and estimates during the quarter ended SeptemberJune 30, 2019.2020.


Results of Operations
Earnings Analysis: Table 3 presents changes in the major components of our net income (dollar amounts in thousands):

Table 3
Increase (Decrease) in Earnings ComponentsIncrease (Decrease) in Earnings Components
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/2019 vs. 09/30/201809/30/2019 vs. 09/30/201806/30/2020 vs. 06/30/201906/30/2020 vs. 06/30/2019
Dollar ChangePercentage ChangeDollar ChangePercentage ChangeDollar ChangePercentage ChangeDollar ChangePercentage Change
Total interest income$78,938
24.9 %$242,303
26.7 %$(208,005)(54.8)%$(280,638)(37.3)%
Total interest expense72,182
28.9
258,665
36.8
(215,452)(65.2)(280,156)(43.7)
Net interest income6,756
10.0
(16,362)(8.1)7,447
15.1
(482)(0.4)
Provision (reversal) for credit losses on mortgage loans784
200.5
854
247.5
1,299
3,418.4
485
418.1
Net interest income after mortgage loan loss provision5,972
8.8
(17,216)(8.5)6,148
12.5
(967)(0.9)
Net gains (losses) on trading securities27,700
240.6
137,279
271.9
(36,468)(87.2)29,166
41.3
Net gains (losses) on derivatives and hedging activities(26,418)(438.0)(108,600)(366.1)24,656
61.6
(79,054)(135.0)
Other non-interest income(1,289)(32.4)(2,119)(21.6)(2,808)(110.7)(635)(12.7)
Total other income (loss)(7)(0.5)26,560
240.9
(14,620)(334.7)(50,523)(296.5)
Operating expenses(2,633)(15.1)501
1.2
(751)(5.1)877
3.1
Other non-interest expenses838
28.1
2,049
22.9
5,034
135.7
5,859
81.5
Total other expenses(1,795)(8.8)2,550
5.0
4,283
23.4
6,736
19.1
AHP assessments773
16.7
673
4.8
(1,279)(36.2)(5,827)(62.0)
NET INCOME$6,987
16.8 %$6,121
4.8 %$(11,476)(36.2)%$(52,399)(62.0)%

Table 4 presents the amounts contributed by our principal sources of interest income (dollar amounts in thousands):

Table 4
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Interest IncomePercent of TotalInterest IncomePercent of TotalInterest IncomePercent of TotalInterest IncomePercent of TotalInterest IncomePercent of TotalInterest IncomePercent of TotalInterest IncomePercent of TotalInterest IncomePercent of Total
Investments1
$132,737
33.5%$92,374
29.2%$359,216
31.3%$258,002
28.5%$37,322
21.8%$114,442
30.2%$121,656
25.8%$226,479
30.1%
Advances186,431
47.1
158,943
50.1
563,602
49.0
460,751
50.8
60,265
35.1
189,562
49.9
191,152
40.5
377,171
50.1
Mortgage loans held for portfolio76,546
19.3
65,424
20.6
225,015
19.6
186,709
20.6
73,664
42.9
75,185
19.8
158,770
33.6
148,469
19.7
Other346
0.1
381
0.1
1,097
0.1
1,165
0.1
300
0.2
367
0.1
654
0.1
751
0.1
TOTAL INTEREST INCOME$396,060
100.0%$317,122
100.0%$1,148,930
100.0%$906,627
100.0%$171,551
100.0%$379,556
100.0%$472,232
100.0%$752,870
100.0%
                   
1 
Includes trading securities, available-for-sale securities, held-to-maturity securities, interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold.


Net income forCredit and market conditions improved in the three months ended September 30, 2019 was $48.5 millionsecond quarter of 2020 as a result of economic stimulus, business resumption, and the initial flattening of the curve of new COVID-19 infections. However, resurgence of virus infections and some subsequent rollbacks of business resumptions combined with disparate industry impacts are expected to inhibit economic recovery during the second half of 2020. We were able to adjust our balance sheet to economic conditions in the second quarter of 2020, which resulted in an improvement in net interest spreads compared to $41.5the first quarter of 2020. However, the decline in net income persisted in the second quarter of 2020, primarily driven by net losses on derivatives and hedging activities incurred during the first quarter of 2020. While market volatility cannot be predicted, these losses are expected to be reversed with market changes in the future although the timing of those reversals is uncertain. At no time during this pandemic has our balance sheet liquidity or access to the debt markets prevented us from meeting the liquidity needs of our members. We have continually conducted business without significant operational difficulties or disruptions during the COVID-19 pandemic, with most employees working remotely since mid-March. Management began bringing employees back to work in our offices in early August and plans to continue this process in phases but is prepared to continue remote operations if local infection trends continue to rise.

Net income decreased $11.5 million, or 36.2 percent, to $20.2 million for the three months ended SeptemberJune 30, 2018. Net income2020 compared to $31.7 million for the ninethree months ended SeptemberJune 30, 2019 was $133.02019. For the six months ended June 30, 2020, net income decreased $52.4 million, or 62.0 percent, to $32.1 million compared to $126.8$84.5 million for the ninesix months ended SeptemberJune 30, 2018.2019. The increase indecrease for both the three- and six-month periods was drivenlargely due to losses on derivatives and hedging activities and trading securities from the continued market disruption caused by the COVID-19 pandemic, although some stabilization was observed during the second quarter of 2020 as the financial markets began a modest and uneven recovery. The declines in the fair values of derivatives resulted from market volatility related to the COVID-19 pandemic as spreads between investments and their associated swaps widened considerably during the first quarter of 2020, therefore impacting fair values at the end of the quarter. These spreads normalized during the second quarter of 2020, but the continued low interest rate environment kept the fair values of derivatives constrained and caused a decline in net interest settlements (from net interest received in 2019 to net interest paid in 2020, which decreased income) for both the three- and six-month periods. This decline was partially offset by gains on trading securities, as the coupons on the trading securities are higher than current market rates. While we generally consider fair value fluctuations to be temporary and expect to recover these losses in future periods, the outlook for the remainder of 2020 is uncertain, so the fair values of our assets and derivatives could decline or fail to recover for a prolonged period of time. For detailed discussion relating to the fluctuations in net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities, see "Net Gains (Losses) on Derivatives and Hedging Activities" and "Net Gains (Losses) On Trading Securities" under this Item 2. Despite the decrease in interest rates, net interest income increased $7.5 million for the three months ended June 30, 2020 and held relatively steady at a decrease of $0.5 million for the six months ended June 30, 2020 compared to the prior year periods. Other expenses increased by $4.3 million and $6.7 million for the three and six months ended June 30, 2019 to June 30, 2020, respectively, primarily due to the subsidy recorded for the below-market interest rates on COVID-19 Relief Advances. See "Financial Condition - Advances" under this Item 2 for additional information on the advances issued in response to COVID-19.

Net Interest Income:Net interest income increased $7.5 million for the quarter, from $49.2 million for the three months ended June 30, 2019 to $56.7 million for the three months ended June 30, 2020. Net interest income remained relatively flat for the comparative six-month periods, from $112.2 million for the six months ended June 30, 2019 to $111.8 million for the six months ended June 30, 2020. The change in net interest income for both periods was attributed primarily to a decrease in the respective period. Declinescost of debt and continued growth in longer-termthe mortgage loan portfolio. These factors increased net interest income for the current quarter, but the increase related to these factors in the current year-to-date period was offset by the decrease in net interest income in the first quarter of 2020 related to the decline in market interest rates. The cost of debt decreased as a result of lower rates on term, callable debt refinanced in the current and prior periods combined with a decline in the cost of discount notes, floating rate debt and net interest settlements as market interest rates since December 31, 2018declined, partially offset by higher accelerated concession amortization on the called debt. Prepayments on mortgage-related assets and the associated premium amortization remained elevated, but the increase in amortization was largely offset by the reduction in debt cost from approximately $9 billion in unswapped consolidated obligation bonds called and then re-issued at a lower cost during the first half of 2020.


The Federal Reserve’s rapid reduction in the Federal funds target rate and purchase of U.S. Treasury bonds in response to the pandemic-related market volatility resulted in unrealized fair value losses recordeddeclines across the interest rate curve during the first quarter of 2020 that persisted into the second quarter of 2020. During the first quarter, this volatility created margin compression on the short end of the curve, as overnight assets repriced downward faster than the liabilities funding them. Liabilities repriced lower throughout the second quarter of 2020, which resulted in an improvement in net interest spreads. The decline in long-term interest rates has caused an increase in mortgage loan prepayments, which reduces net interest income in the form of accelerated amortization of premiums on mortgage-related assets and reinvestment at lower market rates. However, the decrease in long-term market interest rates has allowed us to replace approximately $9 billion of unswapped callable debt at a lower cost. Replacing callable debt results in accelerated amortization of concessions (broker fees) in the month of the call, but the refinanced debt will continue to provide additional benefit in the form of lower rates for future periods, as the majorityacceleration of the related concessions rolls off. Advance demand by members dropped significantly during the second quarter of 2020 as many members experienced significant deposit inflows and excess liquidity as a result of economic derivativesstimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and lending facilities.

Average Balances and Yields: The average balance of interest-earning assets increased $1.8 billion, or 3.1 percent, and $4.7 billion, or 8.5 percent, for the three and ninesix months ended SeptemberJune 30, 2019; however, those losses were largely offset by positive fair value fluctuations on trading securities. The prior year comparative periods recorded fair value net losses on economic derivatives and trading securities, which resulted in an increase in other income for both the three- and nine-month periods ended September 30, 2019 when2020, respectively, compared to the same periods in the prior year (for further discussion see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Net Gains (Losses) on Derivatives and Hedging Activities"). Includedyear. The increase in net income for the three months ended September 30, 2019 was an out-of-period adjustment of $14.3 million that related to hedged item valuations for certain available-for-sale securities in fair value hedging relationships and resulted inboth periods reflects an increase in available-for-sale interest income and a reduction in other comprehensive income. For additional information on the out-of-period adjustment, see Note 1 of the Notes to Financial Statements under Part I, Item 1.

Net Interest Income: Net interest income, which includes interest earned on advances, mortgage loans and long-term investments less interest paid on consolidated obligations, deposits,and a decrease in advances, as we have experienced consistent growth in the mortgage loan portfolio but deposit inflows from stimulus payments and other borrowings is the primary source ofFederal relief available to our earnings. Net interest income increased $6.8 million for the three months ended September 30, 2019 and decreased $16.4 million for the nine months ended September 30, 2019 compared to the prior year periods.members has reduced advance demand. The average cost of debt increased for both the three- and nine-monthmoderate increase in long-term investments between periods due torepresents an increase in average short-term interest rates between periods. Market interest rates, particularly long-term interest rates, decreased during the second and third quarters of 2019, which caused an increase in prepayment speeds on mortgage-related assets, resulting in acceleration of premium amortization. However, this decrease in long-term market interest rates allowed us to replace some callable consolidated obligation bonds athigh-quality liquid asset (HQLA) investments offset by a lower cost, which we expect will eventually partially offset some of the recent increase in the average cost of debt. Accelerated amortization of concessions (i.e., broker fees) on called debt and accelerated premium amortization on mortgages and MBS reduced net interest income for both the three- and nine-month periods. Both periods were also impacted by fair value fluctuations on designated fair value hedges; however, the impact was positive for the quarter largely due to the impact of the out-of-period adjustment and negative for the year-to-date period.

Net interest margin decreased from 53 basis points for the three months ended September 30, 2018 to 51 basis points for the three months ended September 30, 2019, and decreased from 50 basis points for the nine months ended September 30, 2018 to 45 basis points for the nine months ended September 30, 2019. Theslight decline in net interest margin unrelatedmortgage-backed security investments. Investments are used to fair value fluctuations for both periods was primarily due to an increase in the cost of consolidated obligations, which increased 26 basis pointsenhance income and 60 basis points for the threeprovide liquidity within balance sheet and nine months ended September 30, 2019, respectively, compared to the prior year periods. Net interest spread decreased for the three and nine months ended September 30, 2019 compared to the prior year periods primarily due also to the increase in the cost of debt and the resulting margin compression, which is discussed in greater detail below (see Tables 9 and 11).

The average yield on investments, which consists of interest-bearing deposits, Federal funds sold, reverse repurchase agreements, and investment securities increased 38 basis points, from 2.37 percent for the three months ended September 30, 2018 to 2.75 percent for the three months ended September 30, 2019. The average yield on investments increased 43 basis points, from 2.16 percent for the nine months ended September 30, 2018 to 2.59 percent for the nine months ended September 30, 2019. The increase in yields for both periods was primarilyportfolio parameters. As a result of the increaserecent decline in short-term interest rates and higher average balancesadvances, we exceeded our targeted AMA risk tolerance as a percent of money market investments andour balance sheet as of June 30, 2020 so we are implementing strategies to manage growth in higher-yielding fixed rate multi-family GSE MBS, along with the upward repricing of indices associated with variable rate instruments. The increase in money market investments was driven by attractive yields and spreads on reverse repurchase agreements while maintaining targeted leverage. For both periods, this increase in yield was partially offset by purchases of U.S. Treasury obligations with average yields lower than the existing portfolio in response to changes to regulatory liquidity requirements.

The average yield on advances increased 19 basis points, from 2.31 percent for the three months ended September 30, 2018 to 2.50 percent for the three months ended September 30, 2019. The average yield on advances increased 65 basis points, from 2.00 percent for the nine months ended September 30, 2018 to 2.65 percent for the nine months ended September 30, 2019. The increase in the average yield on advances during both the three and nine months ended September 30, 2019 compared to the prior year periods was due to continued increases in our cost of funds related to FOMC policy changes between periods and the corresponding overall increase in average short term rates, which adjusted variable rate advances and advance originations upward and positively impacted the net interest settlements on swapped advances. The average balance of advances increased $2.3 billion, or 8.4 percent, from the three months ended September 30, 2018 compared to the same period in 2019. The average balance of advances decreased $2.3 billion, or 7.4 percent, from the nine months ended September 30, 2018 to the same period of 2019. The decline in the average balance of advances for the year-to-date period is relative to higher advance balances in the first half of 2018, when the spread between short-term advances and excess reserves at the Federal Reserve was more favorable for our members. The change in the relationship between certain short-term rates between periods decreased demand, as short-term advance rates became less attractive relative to the rate on excess reserves, but demand for short-term advances rebounded in the third quarter of 2019 due to the decline in interest rates.

The average yield on mortgage loans decreased 7 basis points, from 3.26 percent for the three months ended September 30, 2018 to 3.19 percent for the three months ended September 30, 2019. The average yield on mortgage loans increased 8 basis points, from 3.26 percent for the nine months ended September 30, 2018 to 3.34 percent for the nine months ended September 30, 2019. The decrease in yield for the three-month period was a result of increased premium amortization. Premium amortization is generally tied to prepayment rates (amortization accelerates as prepayments increase) and prepayments have increased with the decline in mortgage rates since September 30, 2018. Premium amortization is expected to remain at or near current levels or increase, as mortgage interest rates are expected to remain at current levels or decline. Spreads on mortgage loans have improved, as some of the debt funding the portfolio was called and replaced at lower rates during the second and third quarters of 2019.

The average cost of consolidated obligation bonds increased 26 basis points, from 2.11 percent for the three months ended September 30, 2018 to 2.37 percent for the current three-month period, and the average cost of discount notes increased 24 basis points over the same period, from 1.96 percent for the three months ended September 30, 2018 to 2.20 percent for the three months ended September 30, 2019. The average cost of consolidated obligation bonds increased 53 basis points, from 1.93 percent for the nine months ended September 30, 2018 to 2.46 percent for the nine months ended September 30, 2019. The average cost of discount notes increased 66 basis points, from 1.69 percent for the nine months ended September 30, 2018 to 2.35 percent for the nine months ended September 30, 2019. The increase in the average cost of consolidated obligation bonds and discount notes was a result of the increase in interest rates, most notably short-term interest rates, between periods. The decline in interest rates during the second and third quarters of 2019 allowed us to call some callable consolidated obligation bonds and replace at a lower cost, which will ultimately offset some of the increase in the average cost of debt.loan portfolio. For further discussion of how we use discount notesinvestments, advances and bonds,mortgage loans, see Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Consolidated Obligations.Condition.

Market interest rates and trends affect yields and net interest margin on earning assets, including advances, mortgage loans, and investments. The average yield on total interest-earning assets for the three months ended June 30, 2020 was 1.19 percent compared to 2.70 percent for the three months ended June 30, 2019. The average cost of interest-bearing liabilities for the three months ended June 30, 2020 was 0.84 percent, compared to 2.46 percent for the three months ended June 30, 2019, resulting in a net interest spread of 35 basis points and 24 basis points, respectively. Net interest margin increased by four basis points to 39 basis points for the three months ended June 30, 2020 compared to 35 basis points for the same period in the prior year primarily due to a decrease in the cost of debt. The cost of debt decreased as a result of called debt reissued at lower rates combined with a decline in the cost of discount notes, floating rate debt, and net interest settlements as market interest rates declined, partially offset by accelerated concession amortization on the called debt. The $2.2 billion, or 24.7 percent, increase in the average balance of mortgage loans contributed to the improvement in net interest margin, as mortgage loans are one of our highest net spread assets. Mortgage loans also increased as a percentage of total assets during the first six months of 2020, representing 20.4 percent of total assets as of June 30, 2020, compared to 16.8 percent as of December 31, 2019. The spread on mortgage loans has been compressed in recent periods as a result of accelerated premium amortization from prepayments, but this increase in premium amortization has been largely offset by the reduction in the cost of debt so this spread is expected to widen in future periods as the accelerated amortization of concessions on called debt rolls off. The average balance of advances declined $3.6 billion, or 12.8 percent, for the three-months ended June 30, 2020 when compared to the prior year period, but the impact to net interest margin was minimal, as the majority of the decline was in our line of credit and short-term advances, which are typically low-spread products that are funded short-term.

The average yield on total interest-earning assets for the six months ended June 30, 2020 was 1.59 percent compared to 2.76 percent for the six months ended June 30, 2019. The average cost of interest-bearing liabilities for the six months ended June 30, 2020 was 1.28 percent, compared to 2.46 percent for the six months ended June 30, 2019, resulting in a net interest spread of 31 basis points and 30 basis points, respectively, for the comparative year-to-date periods. Liabilities continued repricing downward during the second quarter of 2020, but the spread compression that occurred in the first quarter of 2020 driven largely by the changes in short-term interest rates, specifically as it related to overnight assets funded with term debt, caused net interest margin to decrease by three basis points to 38 basis points for the six months ended June 30, 2020 compared to 41 basis points for the same period in the prior year. The average cost of discount notes decreased 141 basis points and the average yield on short-term investments decreased 189 basis points during the current six-month period compared to the same period in the prior year (see Table 11). As previously discussed, the $2.3 billion, or 25.8 percent, increase in the average balance of mortgage loans contributed positively to net interest spread and net interest margin for the six month period, but the accelerated premium amortization and the accelerated concession amortization of called bonds has reduced the net spread. The average balance of advances declined $1.2 billion, or 4.2 percent, for the six months ended June 30, 2020 when compared to the prior year period, but the impact to net interest margin was minimal for the six-month period as well, as the majority of the decline for the six-month period was also in short-term advances.

Our net interest spread is impacted by derivative and hedging activities, as the assets and liabilities hedged with derivative instruments designated under fair value hedging relationships are adjusted for changes in fair values, while other assets and liabilities are carried at historical cost. For 2019, net interest income includes unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships as a result of new hedge accounting guidance adopted January 1, 2019. Further, in both 2018 and 2019, net interest payments or receipts on interest rate swaps designated as fair value hedges and the amortization/accretion of hedging activities are recognized as adjustments to the interest income or expense of the hedged asset or liability. However, net interest payments or receipts on derivatives that do not qualify for hedge accounting (economic hedges) flow through net gains (losses) on derivatives and hedging activities instead of net interest income (net interest received/paid on economic derivatives is identified in(see Tables 13 through 16 under this Item 2), instead of net interest income, which does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to a variable rate. Tables 5 through 8 present the impact of derivatives and hedging activities recorded in net interest income (in thousands):

Table5
Three Months Ended 09/30/2019Three Months Ended 06/30/2020
AdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotalAdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotal
Unrealized gains (losses) due to fair value changes$(924)$12,610
$
$
$114
$11,800
$(205)$415
$
$1,100
$(19)$1,291
Net amortization/accretion of hedging activities(182)
(658)

(840)(359)
(694)

(1,053)
Net interest received (paid)4,588
1,665

(1)(1,260)4,992
(11,309)(31,735)
13,181
12,897
(16,966)
TOTAL$3,482
$14,275
$(658)$(1)$(1,146)$15,952
$(11,873)$(31,320)$(694)$14,281
$12,878
$(16,728)

Table 6
Three Months Ended 09/30/2018Three Months Ended 06/30/2019
AdvancesInvestmentsMortgage LoansConsolidated Obligation BondsTotalAdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotal
Unrealized gains (losses) due to fair value changes$(874)$(13,609)$
$
$(357)$(14,840)
Net amortization/accretion of hedging activities$(1,022)$
$(53)$
$(1,075)(183)
(658)

(841)
Net interest received (paid)4,385
510

(2,280)2,615
6,383
2,048

8
(3,112)5,327
TOTAL$3,363
$510
$(53)$(2,280)$1,540
$5,326
$(11,561)$(658)$8
$(3,469)$(10,354)

Table 7
Nine Months Ended 09/30/2019Six Months Ended 06/30/2020
AdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotalAdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotal
Unrealized gains (losses) due to fair value changes$(1,964)$(4,673)$
$
$(462)$(7,099)$(2,120)$(5,365)$
$1,095
$(17)$(6,407)
Net amortization/accretion of hedging activities(1,172)
(1,776)

(2,948)(617)
(1,676)

(2,293)
Net interest received (paid)18,374
5,308

9
(7,997)15,694
(12,426)(42,095)
16,019
18,516
(19,986)
TOTAL$15,238
$635
$(1,776)$9
$(8,459)$5,647
$(15,163)$(47,460)$(1,676)$17,114
$18,499
$(28,686)


Table 8
Nine Months Ended 09/30/2018Six Months Ended 06/30/2019
AdvancesInvestmentsMortgage LoansConsolidated Obligation BondsTotalAdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotal
Unrealized gains (losses) due to fair value changes$(1,040)$(17,283)$
$
$(576)$(18,899)
Net amortization/accretion of hedging activities$(3,283)$
$(182)$
$(3,465)(990)
(1,118)

(2,108)
Net interest received (paid)4,423
(752)
(2,700)971
13,786
3,643

10
(6,737)10,702
TOTAL$1,140
$(752)$(182)$(2,700)$(2,494)$11,756
$(13,640)$(1,118)$10
$(7,313)$(10,305)


Table 9 presents average balances and annualized yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):

Table 9
Three Months EndedThree Months Ended
09/30/201909/30/201806/30/202006/30/2019
Average
Balance
Interest
Income/
Expense
Yield1
Average
Balance
Interest
Income/
Expense
YieldAverage
Balance
Interest
Income/
Expense
YieldAverage
Balance
Interest
Income/
Expense
Yield
Interest-earning assets: 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits$920,843
$5,300
2.28%$778,834
$3,931
2.00%$1,691,102
$560
0.13%$810,639
$5,048
2.50%
Securities purchased under agreements to resell4,437,123
26,768
2.39
3,989,197
20,618
2.05
3,728,022
938
0.10
4,676,419
29,568
2.54
Federal funds sold1,456,826
8,179
2.23
1,604,630
7,896
1.95
3,193,659
454
0.06
1,578,022
9,555
2.43
Investment securities2,3
12,354,021
92,490
2.97
9,078,722
59,929
2.62
Advances3,4
29,613,293
186,431
2.50
27,319,208
158,943
2.31
Mortgage loans5,6
9,508,161
76,546
3.19
7,967,297
65,424
3.26
Investment securities1
13,785,748
35,370
1.03
12,188,680
70,271
2.31
Advances1,2
24,531,947
60,265
0.99
28,117,525
189,562
2.70
Mortgage loans3,4
11,165,315
73,664
2.65
8,956,011
75,185
3.37
Other interest-earning assets45,861
346
2.99
45,700
381
3.30
42,525
300
2.83
47,827
367
3.08
Total earning assets58,336,128
396,060
2.69
50,783,588
317,122
2.48
58,138,318
171,551
1.19
56,375,123
379,556
2.70
Other non-interest-earning assets227,491
 
 
357,581
 
 
216,385
 
 
290,850
 
 
Total assets$58,563,619
 
 
$51,141,169
 
 
$58,354,703
 
 
$56,665,973
 
 

Interest-bearing liabilities: 
 
 
 
 
 
 
 
 
 
 
 
Deposits$542,683
2,540
1.86
$543,255
2,289
1.67
$832,539
77
0.04
$476,764
2,473
2.08
Consolidated obligations3:
 
 
 
 
 
 
Consolidated obligations1:
 
 
 
 
 
 
Discount Notes24,054,320
133,680
2.20
21,865,096
108,137
1.96
20,075,483
21,760
0.44
24,937,939
150,802
2.43
Bonds30,952,832
185,096
2.37
26,025,883
138,668
2.11
34,055,611
92,744
1.10
28,305,382
176,714
2.50
Other borrowings46,487
329
2.81
54,836
369
2.66
43,759
293
2.69
48,051
337
2.82
Total interest-bearing liabilities55,596,322
321,645
2.29
48,489,070
249,463
2.04
55,007,392
114,874
0.84
53,768,136
330,326
2.46
Capital and other non-interest-bearing funds2,967,297
 
 
2,652,099
 
 
3,347,312
 
 
2,897,837
 
 
Total funding$58,563,619
 
 
$51,141,169
 
 
$58,354,704
 
 
$56,665,973
 
 

Net interest income and net interest spread7
 
$74,415
0.40% 
$67,659
0.44%
Net interest income and net interest spread5
 
$56,677
0.35% 
$49,230
0.24%

Net interest margin8
 
 
0.51% 
 
0.53%
Net interest margin6
 
 
0.39% 
 
0.35%
                   
1
The out-of-period adjustment of $14.3 million to interest income increased the yield on investments and total earning assets, net interest spread, and net interest margin. The out-of-period adjustment had no impact on the year-to-date calculations in Table 11.
2 The non-credit portion of the OTTI discount on held-to-maturity securities and the fair value adjustment on available-for-sale securities are excluded from the average balance for calculations of yield since the changes are adjustments to equity.
3 
Interest income/expense and average rates include the effect of associated derivatives that qualify for hedge accounting treatment. For 2019, interest amounts reported for advances, investment securities, consolidated obligation discount notes, and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts do not conform to new hedge accounting guidance adopted January 1, 2019.
42 
Advance income includes prepayment fees on terminated advances.
53 
CECredit enhancement fee payments are netted against interest earnings on the mortgage loans. The expense related to CEcredit enhancement fee payments to PFIs was $1.7$2.0 million and $1.5$1.7 million for the three months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.
64 
Mortgage loans average balance includes outstanding principal for non-performing conventional loans. However, these loans no longer accrue interest.
75 
Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
86 
Net interest margin is defined as net interest income as a percentage of average interest-earning assets.





Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 10 summarizes changes in interest income and interest expense (in thousands):

Table 10
Three Months EndedThree Months Ended
09/30/2019 vs. 09/30/201806/30/2020 vs. 06/30/2019
Increase (Decrease) Due toIncrease (Decrease) Due to
Volume1,2
Rate1,2
Total
Volume1,2
Rate1,2
Total
Interest Income3:
 
 
 
 
 
 
Interest-bearing deposits$774
$595
$1,369
$2,710
$(7,198)$(4,488)
Securities purchased under agreements to resell2,470
3,680
6,150
(4,993)(23,637)(28,630)
Federal funds sold(768)1,051
283
4,893
(13,994)(9,101)
Investment securities23,735
8,826
32,561
8,232
(43,133)(34,901)
Advances13,901
13,587
27,488
(21,606)(107,691)(129,297)
Mortgage loans12,428
(1,306)11,122
16,421
(17,942)(1,521)
Other assets1
(36)(35)(39)(28)(67)
Total interest-earning assets52,541
26,397
78,938
5,618
(213,623)(208,005)
Interest Expense3:
 
 
 
 
 
 
Deposits(2)253
251
1,063
(3,459)(2,396)
Consolidated obligations: 
 
 
 
 
 
Discount notes11,426
14,117
25,543
(24,771)(104,271)(129,042)
Bonds28,202
18,226
46,428
30,538
(114,508)(83,970)
Other borrowings(59)19
(40)(29)(15)(44)
Total interest-bearing liabilities39,567
32,615
72,182
6,801
(222,253)(215,452)
Change in net interest income$12,974
$(6,218)$6,756
$(1,183)$8,630
$7,447
                   
1 
Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2 
Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.
3 
Interest income/expense and average rates include the effect of associated derivatives that qualify for hedge accounting treatment. For 2019, interest amounts reported for advances, investment securities, consolidated obligation discount notes, and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts do not conform to new hedge accounting guidance adopted January 1, 2019.


Table 11 presents average balances and yields of major earning asset categories and the sources funding those earning assets (dollar amounts in thousands):

Table 11
Nine Months EndedSix Months Ended
09/30/201909/30/201806/30/202006/30/2019
Average
Balance
Interest
Income/
Expense
YieldAverage
Balance
Interest
Income/
Expense
YieldAverage
Balance
Interest
Income/
Expense
YieldAverage
Balance
Interest
Income/
Expense
Yield
Interest-earning assets: 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits$856,180
$15,518
2.42%$705,057
$9,402
1.78%$1,571,461
$5,265
0.67%$823,313
$10,218
2.50%
Securities purchased under agreements to resell4,512,240
84,266
2.50
3,369,892
46,610
1.85
3,916,544
15,528
0.80
4,550,421
57,498
2.55
Federal funds sold1,583,982
28,058
2.37
2,343,044
29,539
1.69
2,376,379
3,942
0.33
1,648,613
19,879
2.43
Investment securities1,2
11,585,625
231,374
2.67
9,563,982
172,451
2.41
13,927,667
96,921
1.40
11,195,059
138,884
2.50
Advances2,3
28,486,279
563,602
2.65
30,765,902
460,751
2.00
26,732,849
191,152
1.44
27,913,432
377,171
2.72
Mortgage loans4,5
9,004,201
225,015
3.34
7,656,992
186,709
3.26
11,005,911
158,770
2.90
8,748,045
148,469
3.42
Other interest-earning assets47,627
1,097
3.08
45,761
1,165
3.40
48,410
654
2.72
48,525
751
3.12
Total earning assets56,076,134
1,148,930
2.74
54,450,630
906,627
2.23
59,579,221
472,232
1.59
54,927,408
752,870
2.76
Other non-interest-earning assets271,516
 
 
341,634
 
 
320,207
 
 
293,893
 
 
Total assets$56,347,650
 
 
$54,792,264
 
 
$59,899,428
 
 
$55,221,301
 
 
























Interest-bearing liabilities: 
 
 
 
 
 
 
 
 
 
 
 
Deposits$511,000
7,701
2.01
$559,483
6,113
1.46
$745,389
1,631
0.44
$494,896
5,161
2.10
Consolidated obligations2:
 
 
 
 
 
 
 
 
 
 
 
 
Discount Notes24,619,124
433,473
2.35
24,883,153
314,109
1.69
22,587,952
114,711
1.02
24,906,207
299,793
2.43
Bonds28,290,980
519,967
2.46
26,506,554
382,442
1.93
33,209,227
243,486
1.47
26,937,995
334,871
2.51
Other borrowings54,571
1,129
2.77
44,522
941
2.82
51,970
641
2.48
58,680
800
2.75
Total interest-bearing liabilities53,475,675
962,270
2.41
51,993,712
703,605
1.81
56,594,538
360,469
1.28
52,397,778
640,625
2.46
Capital and other non-interest-bearing funds2,871,975
 
 
2,798,552
 
 
3,304,890
 
 
2,823,523
 
 
Total funding$56,347,650
 
 
$54,792,264
 
 
$59,899,428
 
 
$55,221,301
 
 
























Net interest income and net interest spread6
 
$186,660
0.33% 
$203,022
0.42% 
$111,763
0.31% 
$112,245
0.30%
























Net interest margin7
 
 
0.45% 
 
0.50% 
 
0.38% 
 
0.41%
                   
1
The non-credit portion of the OTTI discount on held-to-maturity securities and the fair value adjustment on available-for-sale securities are excluded from the average balance for calculations of yield since the changes are adjustments to equity.
2 
Interest income/expense and average rates include the effect of associated derivatives that qualify for hedge accounting treatment. For 2019, interest amounts reported for advances, investment securities, consolidated obligation discount notes, and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts do not conform to new hedge accounting guidance adopted January 1, 2019.
32 
Advance income includes prepayment fees on terminated advances.
43 
CECredit enhancement fee payments are netted against interest earnings on the mortgage loans. The expense related to CEcredit enhancement fee payments to PFIs was $5.0$4.0 million and $4.5$3.3 million for the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, respectively.
54 
Mortgage loans average balance includes outstanding principal for non-performing conventional loans. However, these loans no longer accrue interest.
65 
Net interest spread is the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
76 
Net interest margin is defined as net interest income as a percentage of average interest-earning assets.


Changes in the volume of interest-earning assets and the level of interest rates influence changes in net interest income, net interest spread and net interest margin. Table 12 summarizes changes in interest income and interest expense (in thousands):

Table 12
Nine Months EndedSix Months Ended
09/30/2019 vs. 09/30/201806/30/2020 vs. 06/30/2019
Increase (Decrease) Due toIncrease (Decrease) Due to
Volume1,2
Rate1,2
Total
Volume1,2
Rate1,2
Total
Interest Income3:
 
 
 
 
 
 
Interest-bearing deposits$2,286
$3,830
$6,116
$5,526
$(10,479)$(4,953)
Securities purchased under agreements to resell18,521
19,135
37,656
(7,082)(34,888)(41,970)
Federal funds sold(11,292)9,811
(1,481)6,213
(22,150)(15,937)
Investment securities39,051
19,872
58,923
28,582
(70,545)(41,963)
Advances(36,195)139,046
102,851
(15,333)(170,686)(186,019)
Mortgage loans33,566
4,740
38,306
34,685
(24,384)10,301
Other assets46
(114)(68)(2)(95)(97)
Total earning assets45,983
196,320
242,303
52,589
(333,227)(280,638)
Interest Expense3:
 
 
 
 
 
 
Deposits(567)2,155
1,588
1,806
(5,336)(3,530)
Consolidated obligations: 
 
 
 
 
 
Discount notes(3,367)122,731
119,364
(25,667)(159,415)(185,082)
Bonds27,137
110,388
137,525
66,380
(157,765)(91,385)
Other borrowings208
(20)188
(87)(72)(159)
Total interest-bearing liabilities23,411
235,254
258,665
42,432
(322,588)(280,156)
Change in net interest income$22,572
$(38,934)$(16,362)$10,157
$(10,639)$(482)
                   
1 
Changes in interest income and interest expense not identifiable as either volume-related or rate-related have been allocated to volume and rate based upon the proportion of the absolute value of the volume and rate changes.
2 
Amounts used to calculate volume and rate changes are based on numbers in dollars. Accordingly, recalculations using the amounts in thousands as disclosed in this report may not produce the same results.
3 
Interest income/expense and average rates include the effect of associated derivatives that qualify for hedge accounting treatment. For 2019, interest amounts reported for advances, investment securities, consolidated obligation discount notes, and consolidated obligation bonds include realized and unrealized gains (losses) on hedged items and derivatives in qualifying hedge relationships. Prior period interest amounts do not conform to new hedge accounting guidance adopted January 1, 2019.

Net Gains (Losses) on Derivatives and Hedging Activities: The volatility in other income (loss) is driven predominantly by net gains (losses) on derivative and hedging transactions,derivatives that do not qualify for hedge accounting treatment under GAAP (economic derivatives), which generally include interest rate swaps, caps and floors. Net gains (losses) from derivatives and hedging activities are sensitive to several factors, including: (1) the general level of interest rates; (2) the shape of the term structure of interest rates; and (3) implied volatilities of interest rates. The fair value of options, particularly interest rate caps and floors, are also impacted by the time value decay that occurs as the options approach maturity, but this factor represents the normal amortization of the cost of these options and flows through income irrespective of any changes in the other factors impacting the fair value of the options (level of rates, shape of curve, and implied volatility).


As reflected in Tables 13 through 16, the majority of the derivative net unrealized gains and losses on derivatives are related to changes in the fair values of economic hedges, which do not qualify for hedge accounting treatment under GAAP.derivatives. Net interest payments or receipts on these economic hedgesderivatives flow through net gains (losses) on derivatives and hedging activities instead of net interest income, which does not reflect the full economic impact of the swaps on yields, especially for trading investments that are swapped to variable rates. For periods prior to January 1, 2019, ineffectiveness on fair value hedges contributed to unrealized gains and losses on derivatives, but to a lesser degree. Beginning January 1, 2019, fair value fluctuations on fair value hedges are recorded in the financial statement line item related to the hedged item (i.e., interest income or expense) in accordance with the prospective adoption of new hedge accounting guidance. In the past, we generally recorded net unrealized gains on derivatives when the overall level of interest rates would rise over the period and recorded net unrealized losses when the overall level of interest rates would fall over the period, due to the mix of the economic hedges. Net unrealized gains or losses on derivatives will continue to be a function of the general level of LIBOR swap rates andbut also a function of the spread betweenspreads in relationship to the LIBOR swap curve and the GSE interest rate curve (interest rates swaps that are economic hedges of GSE debentures held in trading), but will also be affected by the spread between the LIBOR swap curve and mortgage rates (interest rate swaps that are economic hedges of fixed rate GSE MBS held in trading), the OIS curve and U.S. Treasury rates, and the SOFR swap curve and U.S. Treasury rates (interest rate swaps that are economic hedges of fixed rate U.S. Treasury obligations held in trading).relevant index rate. Tables 13 through 16 present the earnings impact of derivatives and hedging activities by financial instrument as recorded in other non-interest income (in thousands):

Table 13
Three Months Ended 09/30/2019Three Months Ended 06/30/2020
AdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotalAdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesTotal
Derivatives not designated as hedging instruments: 
 
 
  
 
 
 
 
  
Economic hedges – unrealized gains (losses) due to fair value changes$(905)$(21,050)$
$(67)$1,962
$(20,060)$(300)$(1,177)$
$(26)$(1,503)
Mortgage delivery commitments

365


365


(890)
(890)
Economic hedges – net interest received (paid)(5)(315)
(42)(329)(691)(34)(12,899)
(29)(12,962)
Net gains (losses) on derivatives and hedging activities(910)(21,365)365
(109)1,633
(20,386)(334)(14,076)(890)(55)(15,355)
Net gains (losses) on trading securities hedged on an economic basis with derivatives
16,375



16,375

4,975


4,975
TOTAL$(910)$(4,990)$365
$(109)$1,633
$(4,011)$(334)$(9,101)$(890)$(55)$(10,380)

Table 14
Three Months Ended 09/30/2018Three Months Ended 06/30/2019
AdvancesInvestmentsMortgage Loans
Consolidated
Obligation Bonds
OtherTotalAdvancesInvestmentsMortgage Loans
Consolidated
Obligation Discount Notes
Consolidated
Obligation Bonds
Total
Net gains (losses) on derivatives and hedging activities: 
 
 
 
 
 
Fair value hedges - unrealized gains (losses) due to fair value changes$(268)$(131)$
$261
$
$(138)
Derivatives not designated as hedging instruments: 
 
 
  
 
Economic hedges – unrealized gains (losses) due to fair value changes
10,356

(1,917)
8,439
$(960)$(46,792)$
$85
$6,071
$(41,596)
Mortgage delivery commitments

(710)

(710)

1,836


1,836
Economic hedges – net interest received (paid)
(540)
(652)
(1,192)(2)490

(5)(734)(251)
Price alignment amount on derivatives for which variation margin is daily settled



(367)(367)
Net gains (losses) on derivatives and hedging activities(268)9,685
(710)(2,308)(367)6,032
(962)(46,302)1,836
80
5,337
(40,011)
Net gains (losses) on trading securities hedged on an economic basis with derivatives
(10,637)


(10,637)
41,967



41,967
TOTAL$(268)$(952)$(710)$(2,308)$(367)$(4,605)$(962)$(4,335)$1,836
$80
$5,337
$1,956


Table 15
Nine Months Ended 09/30/2019Six Months Ended 06/30/2020
AdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotalAdvancesInvestmentsMortgage LoansConsolidated Obligation Discount NotesConsolidated Obligation BondsTotal
Derivatives not designated as hedging instruments: 
 
 
  
 
 
 
 
  
 
Economic hedges – unrealized gains (losses) due to fair value changes$(2,385)$(94,567)$
$18
$15,467
$(81,467)$(4,172)$(109,227)$
$(26)$352
$(113,073)
Mortgage delivery commitments

3,836


3,836


(6,418)

(6,418)
Commitment to issue discount notes


(70)
(70)
Discount note commitments





Economic hedges – net interest received (paid)(9)700

(47)(1,882)(1,238)(51)(18,166)
(29)130
(18,116)
Net gains (losses) on derivatives and hedging activities(2,394)(93,867)3,836
(99)13,585
(78,939)(4,223)(127,393)(6,418)(55)482
(137,607)
Net gains (losses) on trading securities hedged on an economic basis with derivatives
87,361



87,361

99,442



99,442
TOTAL$(2,394)$(6,506)$3,836
$(99)$13,585
$8,422
$(4,223)$(27,951)$(6,418)$(55)$482
$(38,165)

Table 16
Nine Months Ended 09/30/2018Six Months Ended 06/30/2019
AdvancesInvestmentsMortgage Loans
Consolidated
Obligation Bonds
OtherTotalAdvancesInvestmentsMortgage Loans
Consolidated
Obligation Discount Notes
Consolidated
Obligation Bonds
Total
Net gains (losses) on derivatives and hedging activities: 
 
 
 
 
 
Fair value hedges - unrealized gains (losses) due to fair value changes$(2,272)$415
$
$(113)$
$(1,970)
Derivatives not designated as hedging instruments: 
 
 
  
 
Economic hedges – unrealized gains (losses) due to fair value changes
53,818

(14,484)
39,334
$(1,480)$(73,517)$
$85
$13,505
$(61,407)
Mortgage delivery commitments

(2,242)

(2,242)

3,471


3,471
Discount note commitments


(70)
(70)
Economic hedges – net interest received (paid)
(3,889)
(703)
(4,592)(4)1,015

(5)(1,553)(547)
Price alignment amount on derivatives for which variation margin is daily settled



(869)(869)
Net gains (losses) on derivatives and hedging activities(2,272)50,344
(2,242)(15,300)(869)29,661
(1,484)(72,502)3,471
10
11,952
(58,553)
Net gains (losses) on trading securities hedged on an economic basis with derivatives
(49,177)


(49,177)
70,986



70,986
TOTAL$(2,272)$1,167
$(2,242)$(15,300)$(869)$(19,516)$(1,484)$(1,516)$3,471
$10
$11,952
$12,433

For the three and ninesix months ended SeptemberJune 30, 2019,2020, net gains and losses on derivatives and hedging activities resulted in a decrease in net income of $26.4$15.4 million and $108.6$137.6 million, respectively, compared to a decrease of $40.0 million and $58.6 million for the prior year periods primarily as a result of changestemporary declines in the LIBOR swap curve between periods, and, to a lesser extent, changes in other swap indices. The majorityfair values of the declines in fair value for both periods werederivatives resulting from market volatility related to the economic interest rateCOVID-19 pandemic, although some recovery occurred in the second quarter of 2020, as spreads between investments and their associated swaps hedgingnormalized from the multi-family GSE MBS, GSE debentures, and U.S. Treasury obligations. The overall increasewidening that negatively impacted fair values during the first quarter of 2020. Further, the decrease in the level of swap index rates from September 30, 2018 to SeptemberJune 30, 2019 to June 30, 2020 had a positivenegative impact on the net interest settlements of interest rate swaps, which increaseddecreased net income by $0.5$13.0 million and $3.4$18.1 million for the three and ninesix months ended SeptemberJune 30, 2019,2020, respectively, compared to a decrease in net income of $0.3 million and $0.5 million for the prior year periods.three and six months ended June 30, 2019, respectively.


The net unrealized lossesfair value changes on the economic interest rate swaps hedging the multi-familymultifamily GSE MBS, U.S. Treasury obligations, and GSE debentures were mostlypartially offset by the net unrealized gainsfair value changes attributable to the swapped securities for the three and six months ended June 30, 2020, which are recorded in net gains (losses) on trading securities. The net unrealized gains (losses) on the derivatives and trading securities for the current year-to-date period were larger due to the considerable fair value impact of the aforementioned spread widening between investments and swaps in the first quarter of 2020. The unrealized gains on trading securities were generally driven by the decreases in interest rates between periods and are discussed in greater detail below. Tables 17 and 18 present the relationship between the trading securities and the associated interest rate swaps that do not qualify for hedge accounting treatment by investment type (in thousands):

Table 17
Three Months EndedThree Months Ended
09/30/201909/30/201806/30/202006/30/2019
Gain (Loss) on DerivativesGain (Loss) on Trading SecuritiesNetGain (Loss) on DerivativesGain (Loss) on Trading SecuritiesNetGain (Loss) on DerivativesGain (Loss) on Trading SecuritiesNetGain (Loss) on DerivativesGain (Loss) on Trading SecuritiesNet
U.S. Treasury obligations$(5,268)$2,565
$(2,703)$(466)$344
$(122)$4,484
$(5,043)$(559)$(13,852)$12,777
$(1,075)
GSE debentures(3,709)3,551
(158)3,373
(3,601)(228)(1,361)1,433
72
(9,898)8,695
(1,203)
GSE MBS(11,842)10,259
(1,583)7,633
(7,380)253
(4,157)8,585
4,428
(23,382)20,495
(2,887)
TOTAL$(20,819)$16,375
$(4,444)$10,540
$(10,637)$(97)$(1,034)$4,975
$3,941
$(47,132)$41,967
$(5,165)


Table 18
Nine Months EndedSix Months Ended
09/30/201909/30/201806/30/202006/30/2019
Gains (Losses) on DerivativesGains (Losses) on Trading SecuritiesNetGains (Losses) on DerivativesGains (Losses) on Trading SecuritiesNetGains (Losses) on DerivativesGains (Losses) on Trading SecuritiesNetGains (Losses) on DerivativesGains (Losses) on Trading SecuritiesNet
U.S. Treasury obligations$(25,894)$22,090
$(3,804)$(466)$344
$(122)$(36,755)$34,700
$(2,055)$(20,626)$19,525
$(1,101)
GSE debentures(19,265)18,747
(518)16,697
(15,181)1,516
(21,245)18,983
(2,262)(15,556)15,196
(360)
GSE MBS(48,916)46,524
(2,392)37,209
(34,340)2,869
(51,404)45,759
(5,645)(37,074)36,265
(809)
TOTAL$(94,075)$87,361
$(6,714)$53,440
$(49,177)$4,263
$(109,404)$99,442
$(9,962)$(73,256)$70,986
$(2,270)

For additional detail regarding gains and losses on trading securities, see Table 19 and related discussion under this Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations.”

See Tables 50 and 51 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.


Net Gains (Losses) on Trading Securities: All unrealized gains and losses related to trading securities are recorded in other income (loss) as net gains (losses) on trading securities; however, only gains and losses relating to trading securities that are related to economic hedges are included in Tables 13 through 16. Unrealized gains (losses) fluctuate as the fair value of our trading portfolio fluctuates. There are a number of factors that can impact the fair value of a trading security including the movement in interest rates, changes in credit spreads, the passage of time, and changes in price volatility. Table 19 presents the major components of the net gains (losses) on trading securities (in thousands):

Table 19
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Trading securities not hedged:  
GSE debentures$(58)$(614)$(495)$(1,371)$
$(143)$
$(437)
U.S. obligation MBS and GSE MBS(8)(1)(82)34
455
(18)135
(74)
Short-term securities(123)(262)
19
(55)37
187
123
Total trading securities not hedged(189)(877)(577)(1,318)400
(124)322
(388)
Trading securities hedged on an economic basis with derivatives:  
U.S. Treasury obligations2,565
344
22,090
344
(5,043)12,777
34,700
19,525
GSE debentures3,551
(3,601)18,747
(15,181)1,433
8,695
18,983
15,196
GSE MBS10,259
(7,380)46,524
(34,340)8,585
20,495
45,759
36,265
Total trading securities hedged on an economic basis with derivatives16,375
(10,637)87,361
(49,177)4,975
41,967
99,442
70,986
TOTAL$16,186
$(11,514)$86,784
$(50,495)$5,375
$41,843
$99,764
$70,598

Our trading portfolio is comprised primarily of fixed rate U.S. Treasury obligations, GSE debentures, and multi-familymultifamily GSE MBS, with smaller percentagesa small percentage of variable rate GSE debentures and GSE MBS. Periodically, we also invest in short-term securities classified as trading for liquidity purposes. In general, the fixed rate securities are related to economic hedges in the form of interest rate swaps that convert fixed rates to variable rates (see Tables 17 and 18 for the association between the gains (losses) on the fixed rate securities and the related economic hedges). The fair values of the fixed rate GSE debentures are affected by changes in intermediate interest rates and credit spreads, and are swapped on an economic basis to three-month LIBOR. The fair values of the fixed rate multi-familymultifamily GSE MBS are affected by changes in mortgage rates and credit spreads, and these securities are swapped on an economic basis to one-month LIBOR. We experienced unrealized gainsThe fair values of $10.3 millionthe U.S. Treasury obligations are affected by changes in intermediate Treasury rates and $46.5 millionswapped on our fixed rate multi-family GSE MBS investmentsan economic basis to OIS or SOFR. Yields on U.S. Treasuries were mixed during the second quarter of 2020 relative to the prevailing yields at the end of the first quarter, with higher yields in the short-end of the curve and lower yields for maturities two years and longer, which resulted in losses for the three and ninecurrent quarter because the weighted average life of our portfolio is less than two years. The gains for the current six months ended Septemberreflect the decline in Treasury rates between June 30, 2019 respectively, compared to unrealized losses of $7.4 million and $34.3 million for the three and nine months ended SeptemberJune 30, 2018, respectively, due to a decrease in mortgage-related interest rates between periods.2020. The decrease in intermediate interest rates between periods resulted in unrealized gains on the fixed rate GSE debentures and U.S. Treasury obligations for the three months and ninesix months ended SeptemberJune 30, 2019.2020. In addition to interest rates and credit spreads, the value of these securities is affected by time decay. The fixed rate GSE debentures possess coupons that are well above current market rates for similar securities and, therefore, are currently valued at substantial premiums. As these securities approach maturity, their prices will converge to par resulting in a decrease in their current premium price (i.e., time decay). Given thatUnrealized gains on our fixed rate multifamily GSE MBS investments for the variable rate GSE debentures re-price monthly, they generally account forthree and six months ended June 30, 2020 were due to a small portion of the net gains (losses) on trading securities unless current market spreads on these variable rate securities diverge from the spreads at the time of our acquisition of the securities.

See Tables 50 and 51 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” for additional detail regarding notional and fair value amounts of derivative instruments.decrease in mortgage-related interest rates between periods.

Other Expenses: Other expenses, which include compensation and benefits and other operating expenses, decreased $1.8increased $4.3 million and $6.7 million for the three and six months ended SeptemberJune 30, 20192020, respectively, compared to the prior year period mostlyprimarily due to fluctuations in the cost of employee benefits. Other expenses increased $2.6 millionsubsidy recorded for the nine months ended September 30, 2019 comparedbelow-market interest rates on COVID-19 Relief Advances. See "Financial Condition – Advances" under this Item 2 for additional information on the advances issued in response to the prior year period due primarily toCOVID-19. We expect modest increases in compensation and benefits expense for 2020 in anticipation of hiring for new positions. We also expect an increase in mortgage loan transaction fees dueFHLBank System-related expenses in 2020. We do not expect a material increase in operating expenses related to the growth in the mortgage loan portfolio.COVID-19 pandemic, as certain budgeted expenses were reallocated for pandemic-related operating expenses.


Non-GAAP Measures: We fulfill our mission by: (1) providing liquidity to our members through the offering of advances to finance housing, economic development and community lending; (2) supporting residential mortgage lending through the MPF Program and purchases of MBS; and (3) providing regional affordable housing programs that create housing opportunities for very low-, low- and moderate-income families. In order to effectively accomplish our mission, we must obtain adequate funding amounts at acceptable interest rate levels. We use derivatives as tools to reduce our funding costs and manage interest rate risk and prepayment risk. We also acquire and classify certain investments as trading securities for liquidity and asset-liability management purposes. Although we strive to manage interest rate risk and prepayment risk utilizing these transactions for asset-liability tools, we do not manage the fluctuations in the fair value of our derivatives or trading securities. We are essentially a “hold-to-maturity” investor and transact derivatives only for hedging purposes, even though some derivative hedging relationships do not qualify for hedge accounting under GAAP (referred to as economic hedges) and therefore can add significant volatility to our GAAP net income.

We believe that certain non-GAAP financial measures are helpful in understanding our operating results and provide meaningful period-to-period comparison of our long-term economic value in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility, gains/losses on instrument sales, or transactions that are considered unpredictable or not routine. Our business model is primarily one of holding assets and liabilities to maturity.unpredictable. However, we utilize some assets and liabilitiesmay engage in periodic instrument sales for liquidity purposes which may involve periodic instrument sales.or to reduce our exposure to LIBOR-indexed instruments. We report the following non-GAAP financial measures that we believe are useful to stakeholders as key measures of our operating performance: (1) adjusted income, (2) adjusted net interest income, (3) adjusted net interest margin, and (3)(4) adjusted ROE. Reconciliations of these non-GAAP financial measures to the most comparable GAAP measure are included below. Although we calculate our non-GAAP financial measures consistently from period to period using appropriate GAAP components, non-GAAP financial measures are not required to be uniformly applied and are not audited. Another material limitation associated with the use of non-GAAP financial measures is that they have no standardized measurement prescribed by GAAP and may not be comparable to similar non-GAAP financial measures used by other companies. While we believe the non-GAAP measures contained in this quarterly report are frequently used by our stakeholders in the evaluation of our performance, such non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of financial information prepared in accordance with GAAP.


Our adjusted income is defined asAs part of evaluating our financial performance, we adjust net income reported in accordance with GAAP as adjusted for the impact of: (1) AHP assessments (equivalent to an effective minimum income tax rate of 10 percent); (2) fair value changes on derivatives and hedging activities (excludes net interest settlements related to derivatives not qualifying for hedge accounting)settlements); and (3) unpredictable items, such as prepayment fees, on advances; and (4) other items excluded because they are not considered a part of our routine operations, such as gains/losses on retirement of debt, gains/losses on mortgage loans held for sale, and gains/losses on securities. We use adjustedThe result is referred to as “adjusted income,” which is a non-GAAP measure of income. Adjusted income is used to compute an adjusted ROE that is then compared to the average overnight Federal funds effective rate, with the difference referred to as adjusted ROE spread. Components of adjusted income and adjusted ROE spread are used: (1) to measure performance under our incentive compensation plans; (2) as a measure in determining the level of quarterly dividends; and (3) in strategic planning. While we utilize adjusted income as a key measure in determining the level of dividends, we consider GAAP net income volatility caused by gains (losses) on derivatives and hedging activities and trading securities in determining the adequacy of our retained earnings as determined under GAAP. Because the adequacy of GAAP retained earnings is considered in setting the level of our quarterly dividends, gains (losses) on derivatives and hedging activities and trading securities can come into consideration when setting the level of our quarterly dividends. Because we are primarily a “hold-to-maturity” investor and do not trade derivatives, we believe that adjusted income, adjusted ROE and adjusted ROE spread are helpful in understanding our operating results and provide a meaningful period-to-period comparison. In contrast, GAAP net income, ROE based on GAAP net income and ROE spread based on GAAP net income can vary significantly from period to period because of fair value changes on derivatives and certain other items that management excludes when evaluating operational performance. Management believes such volatility hinders a consistent measurement analysis.

Derivative and hedge accounting affects the timing of income or expense from derivatives. However, when the derivatives are held to maturity or call dates, there is no economic income or expense impact from these derivatives. For example, interest rate caps are purchased with an upfront fixed cost to provide protection against the risk of rising interest rates. Under derivative accounting guidance, these instruments are then marked to fair value each month, which can result in having to recognize significant fair value gains and losses from year to year, producing volatility in our GAAP net income. However, if held to maturity, the sum of such gains and losses over the term of a derivative will equal its original purchase price.

In addition to impacting the timing of income and expense from derivatives, derivative accounting also impacts the presentation of net interest settlements on derivatives and hedging activities. This presentation differs under GAAP for economic hedges when compared to hedges that qualify for hedge accounting. Net interest settlements on economic hedges are included with the economic derivative fair value changes and are recorded in net gains (losses) on derivatives and hedging activities while the net interest settlements on qualifying fair value hedges are included in net interest margin. Therefore, only the economic derivative fair value changes and the ineffectiveness for qualifying hedges included in the net gains (losses) on derivatives and hedging activities are removed to arrive at adjusted income (i.e., net interest settlements, on economic hedges, which represent actual cash inflows or outflows and do not create fair value volatility, are not removed).


Adjusted income was $15.2 million for the quarter ended June 30, 2020 compared to $48.0 million for the quarter ended June 30, 2019 and $57.1 million for the six months ended June 30, 2020 compared to $100.1 million for the six months ended June 30, 2019. The decreases for both the current three- and six-month periods compared to GAAP net income was a result of the decline in adjusted net interest income due to the impact of lower market interest rates on net interest settlements, which resulted in income in 2019 and expense in 2020 reported in adjusted net interest income (see Table 21). Fair value gains and losses in GAAP net interest margin are removed while interest settlements on economic derivatives are added or subtracted from GAAP net interest income so that only the derivative interest settlements are recorded in net interest margin for adjusted net interest income presentation purposes. See further details below, including a reconciliation of adjusted income and adjusted net interest income.

Table 20 presents a reconciliation of GAAP net income to adjusted income (in thousands):

Table 20
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Net income, as reported under GAAP$48,491
$41,504
$132,964
$126,843
$20,242
$31,718
$32,074
$84,473
AHP assessments5,391
4,618
14,786
14,113
2,250
3,529
3,568
9,395
Income before AHP assessments53,882
46,122
147,750
140,956
22,492
35,247
35,642
93,868
Derivative (gains) losses1
7,895
(7,224)84,800
(34,253)1,102
54,600
125,898
76,905
Trading (gains) losses(16,186)11,514
(86,784)50,495
(5,375)(41,843)(99,764)(70,598)
Prepayment fees on terminated advances(373)(153)(517)(254)(3,013)(75)(3,185)(144)
Net (gains) losses on sale of held-to-maturity securities
(1,529)46
(1,591)
46

46
Net (gains) losses on sale of available-for-sale securities

(1,523)
Total excluded items(8,664)2,608
(2,455)14,397
(7,286)12,728
21,426
6,209
Adjusted income (a non-GAAP measure)$45,218
$48,730
$145,295
$155,353
$15,206
$47,975
$57,068
$100,077
                   
1 
Consists of fair value changes on all derivatives and hedging activities excluding net interest settlements (see next table) on economic hedges.

Adjusted income decreased $3.5 million for the three months ended September 30, 2019 compared to the same period in the prior year. The decrease was primarily due to a $4.8 million decrease in adjusted net interest income (see Table 21), which was partially offset by a $1.8 million decrease in other expenses mostly due to fluctuations in the cost of employee benefits. Adjusted income decreased $10.1 million for the nine months ended September 30, 2019 compared to the same period in the prior year as a result of a $6.2 million decrease in adjusted net interest income and a $2.6 million increase in other expenses. For both the three- and nine-month periods ended September 30, 2019, the decline in adjusted net interest income compared to the same periods in the prior year was a result of accelerated amortization of concessions on called bonds and accelerated amortization of premiums on mortgage-related assets, as discussed previously. The increase in other expenses for the nine-month period ended September 30, 2019 was due primarily to an increase in mortgage loan transaction fees due to growth in the mortgage loan portfolio.

Table 21 presents a reconciliation of GAAP net interest income to adjusted net interest income (in thousands):

Table 21
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Net interest income, as reported under GAAP$74,415
$67,659
$186,660
$203,022
$56,677
$49,230
$111,763
$112,245
(Gains) losses on derivatives qualifying for hedge accounting recorded in net interest income1
(11,800)
7,099

Net interest settlements on economic hedges(691)(1,192)(1,238)(4,592)
(Gains) losses on derivatives qualifying for hedge accounting recorded in net interest income(1,291)14,840
6,407
18,899
Net interest settlements on derivatives not qualifying for hedge accounting(12,962)(251)(18,116)(547)
Prepayment fees on terminated advances(373)(153)(517)(254)(3,013)(75)(3,185)(144)
Adjusted net interest income (a non-GAAP measure)$61,551
$66,314
$192,004
$198,176
$39,411
$63,744
$96,869
$130,453
  
Net interest margin, as calculated under GAAP for the period0.51%0.53%0.45%0.50%
Net interest margin, as calculated under GAAP0.39%0.35%0.38%0.41%
Adjusted net interest margin (a non-GAAP measure)0.42%0.52%0.46%0.49%0.27%0.45%0.33%0.48%
_________                   
1
Beginning January 1, 2019, fair value gains and losses on fair value hedges are required to be presented in the income statement line item related to the hedged item, which impacts net interest income prospectively.

Management uses adjusted income to evaluate the quality of our earnings. FHLBank management believes that the presentation of adjusted income as measured for management purposes enhances the understanding of our performance by highlighting its underlying results and profitability. Management uses adjusted net interest income to evaluate the earnings impact of economic hedges. Under GAAP, the net interest amount that converts economically swapped fixed rate investments or liabilities to a variable rate is recorded as part of net gains (losses) on derivatives and hedging activities rather than net interest income. Presenting fixed rate investments with the corresponding net interest amount in adjusted net interest income reflects the widening of the spread between the variable rate assets created by the economic hedge and the variable rate liabilities funding them as a result of the change in average LIBOR, SOFR, or OIS between periods. Further, beginning January 1, 2019, fairFair value gains and losses on fair value hedges are required to be presented in the income statement line item related to the hedged item, which impacts net interest income. These fluctuations are excluded from the calculation of adjusted net income and adjusted net interest income.

Table 22 presents a comparison of adjusted ROE (a non-GAAP financial measure) to the average overnight Federal funds rate, which we use as a key measure of effective utilization and management of members’ capital. The decreasesdecrease in adjusted ROE for the three and ninesix months ended SeptemberJune 30, 20192020 compared to the same periods in the prior year reflectperiod reflects the decrease in adjusted net income for both periods.

and the increase in average capital. Adjusted ROE spread for the three and nine months ended September 30, 2019 and 2018 is calculated as follows (dollar amounts in thousands):

Table 22
Three Months EndedNine Months EndedThree Months EndedSix Months Ended
09/30/201909/30/201809/30/201909/30/201806/30/202006/30/201906/30/202006/30/2019
Average GAAP total capital for the period$2,551,704
$2,388,912
$2,490,516
$2,516,496
Average GAAP total capital$2,547,842
$2,478,610
$2,636,722
$2,459,414
ROE, based upon GAAP net income7.54%6.89%7.14%6.74%3.20%5.13%2.45%6.93%
Adjusted ROE, based upon adjusted income7.03%8.09%7.80%8.25%2.40%7.76%4.35%8.21%
Average overnight Federal funds effective rate2.20%1.92%2.33%1.70%0.06%2.40%0.64%2.40%
Adjusted ROE as a spread to average overnight Federal funds effective rate4.83%6.17%5.47%6.55%2.34%5.36%3.71%5.81%


Financial Condition
Overall: Total assets increased $9.4declined between periods, from $63.3 billion at December 31, 2019 to $53.5 billion at June 30, 2020, driven mostly by the $8.7 billion, or 19.728.8 percent, decline in advances between periods as many members experienced significant deposit inflows and excess liquidity as a result of economic stimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and lending facilities. Mortgage loans increased by $0.3 billion during the first six months of 2020, representing 20.4 percent of total assets as of June 30, 2020, compared to 16.8 percent as of December 31, 2019. Mortgage loans are one of the highest net spread assets on our balance sheet and as they increase as a percent of total assets, all things being equal, they have the potential to increase our net interest margin. Total liabilities decreased $9.3 billion from December 31, 20182019 to SeptemberJune 30, 2019 primarily due2020 which corresponded with the decline in assets, and the funding mix shifted to increases in short- and long-term investments, advances, and mortgage loans. The majoritya lower percentage of the increase and change in composition of investments was in response to changes to regulatory liquidity requirements that became effective March 31, 2019, including the purchase of $5.0 billion in U.S. Treasury obligations since the third quarter of 2018. Total capital increased $204.1 million, or 8.3 percent,discount notes between periods, dueas we issued more floating rate debt indexed to the increase in outstanding capital stock from advance utilization and net income in excess of dividends paid.

Average interest-earning assets increased $7.6 billion, or 14.9 percent, for the three months ended September 30, 2019 and increased $1.6 billion, or 3.0 percent, for the nine months ended September 30, 2019. The average balance of advances increased for the quarter ended September 30, 2019, primarily due to increases in short-term advances due to a decrease in short-term interest rates during the quarter. The average balance of advances declined for the year-to-date period, but higher average levels of investment securities and continued strong growth in the average balances of mortgage loans kept average interest-earning assets relatively steady. The decline in the average balance of advances resulted from the change in the relationship between certain short-term rates, as short-term advance rates became less attractive relative to the rate on excess reserves. The increase in mortgage loans was attributed in large part to continued production from our top five PFIs and utilization of recent program enhancements that provide PFIs with additional funding opportunities.

Total liabilities increased $9.2 billion, or 20.4 percent, from December 31, 2018 to September 30, 2019. This increase was primarily due to an $8.5 billion increase in consolidated obligation bonds and a $0.4 billion increase in consolidated obligation discount notes to fund the growth in assets.SOFR. Our funding mix generally is driven by asset composition, but we may also shift our debt composition as a result of market conditions that impact the cost of consolidated obligations swapped or indexed to LIBOR, SOFR, Prime, Treasury bills, or other indices. We replaced some discount note funding with bonds indexed to SOFR during the third quarter of 2019.OIS. For additional information on ourmarket trends impacting the cost of issuing debt, including discussion of the transition from LIBOR transition effortsto an alternate reference rate, see "Financial Market Trends" and LIBOR exposure, see “Risk Management – Interest Rate Risk Management”"Financial Condition" under this Item 2.

Total capital decreased $436.1 million, or 15.6 percent, from December 31, 2019 to June 30, 2020 primarily due to a decrease in required capital stock related to the decline in advance utilization between periods, resulting in excess stock that was subsequently repurchased.


Dividends paid to members totaled $74.0$39.7 million for the ninesix months ended SeptemberJune 30, 20192020 compared to $73.2$48.2 million for the same period in the prior year. From June 30, 2019 to June 30, 2020, the dividend rate for Class A Common Stock decreased from 2.50 percent to 0.50 percent and the dividend rate for Class B Common Stock decreased from 7.50 percent to 5.50 percent. The weighted average dividend rate for the three months ended SeptemberJune 30, 20192020 was 6.613.69 percent, which represented a dividend payout ratio of 53.273.0 percent, compared to a weighted average dividend rate of 6.326.56 percent and a payout ratio of 56.176.6 percent for the same period in 2018.2019. The weighted average dividend rate for the ninesix months ended SeptemberJune 30, 20192020 was 6.584.85 percent, which represented a dividend payout ratio of 55.7123.7 percent, compared to a weighted average dividend rate of 6.106.56 percent and a payout ratio of 57.757.1 percent for the same period in 2018.


Short-term money2019. The significant increase in payout ratios between the six-month periods was a result of the steep decline in income as a result of the aforementioned COVID-19 market investmentsvolatility that began near the end of the first quarter of 2020. The dividend payout ratio represents dividends declared and investment securities increased notablypaid during a quarter as a percentage of assetsnet income for the quarter, although FHFA regulation requires dividends be paid out of known income prior to the declaration date. For example, dividends declared and paid in March 2020 were based on income during the three months ended February 2020. Our dividend rates have historically moved in tandem with short-term market rates, so the decrease reflects the decline in market interest rates resulting from FOMC rate cuts in March 2020 to stimulate the U.S. economy. (See Item 1 – “Business – Capital, Capital Rules and Dividends” of our Form 10-K for other factors that contribute to the level of dividends paid). We anticipate stock dividends on Class A Common Stock and Class B Common Stock will remain at September 30, 2019 compared to December 31, 2018. The increasethese lower levels in money market investments was driven by attractive yieldsthe second half of 2020, consistent with the lower level of short‑term interest rates and spreads on reverse repurchase agreements while maintaining targeted leverage. The increase in investment securities was largely due to purchases of U.S. Treasury obligations in response to regulatory liquidity requirements that became effective March 31, 2019. our retained earnings policy.

We continue to fund our short-term advances and overnight investments with term and overnight discount notes, but we also began to fund overnight investments with floating rate bonds to achieve certain liquidity targets, which contributed tois reflected in Table 23, as the increased allocation of consolidated obligationdiscount notes decreased and bonds as a percentage of total consolidated obligations, along with the bonds issued to fund the growth in mortgage loans and U.S. Treasury obligations. The decrease in the percentage of advances and mortgage loans to total assets was a direct result of the increase in short-term investments and investment securities at September 30, 2019 compared to December 31, 2018.increased. Table 23 presents the percentage concentration of the major components of our Statements of Condition:

Table 23
Component ConcentrationComponent Concentration
09/30/201912/31/201806/30/202012/31/2019
Assets:  
Cash and due from banks0.1 %3.0%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold6.2%4.1%13.1
10.3
Investment securities22.3
17.5
25.5
21.4
Advances53.6
60.2
40.2
47.8
Mortgage loans, net17.2
17.6
20.4
16.8
Other assets0.7
0.6
0.7
0.7
Total assets100.0%100.0%100.0 %100.0%
  
Liabilities:  
Deposits1.3%1.0%1.9 %1.2%
Consolidated obligation discount notes, net36.8
43.2
25.3
43.4
Consolidated obligation bonds, net56.8
50.2
68.1
50.6
Other liabilities0.4
0.5
0.3
0.4
Total liabilities95.3
94.9
95.6
95.6
  
Capital:  
Capital stock outstanding2.9
3.2
2.6
2.8
Retained earnings1.7
1.9
1.9
1.6
Accumulated other comprehensive income (loss)0.1

(0.1)
Total capital4.7
5.1
4.4
4.4
Total liabilities and capital100.0%100.0%100.0 %100.0%


Table 24 presents changes in the major components of our Statements of Condition (dollar amounts in thousands):

Table 24
Increase (Decrease)
in Components
Increase (Decrease)
in Components
09/30/2019 vs. 12/31/201806/30/2020 vs. 12/31/2019
Dollar
Change
Percent
Change
Dollar
Change
Percent
Change
Assets:    
Cash and due from banks$9,579
63.6 %$(1,888,883)(98.5)%
Interest-bearing deposits, securities purchased under agreements to resell and Federal funds sold1,547,607
78.5
466,519
7.2
Investment securities4,395,533
52.7
80,435
0.6
Advances1,904,470
6.6
(8,712,324)(28.8)
Mortgage loans, net1,423,301
16.9
312,708
2.9
Other assets135,384
53.3
(1,173)(0.3)
Total assets$9,415,874
19.7 %$(9,742,718)(15.4)%
    
Liabilities: 
 
 
 
Deposits$282,556
59.6 %$197,652
25.0 %
Consolidated obligation discount notes, net435,900
2.1
(13,887,072)(50.6)
Consolidated obligation bonds, net8,475,491
35.4
4,432,362
13.8
Other liabilities17,857
8.4
(49,547)(21.2)
Total liabilities9,211,804
20.4
(9,306,605)(15.4)
    
Capital:    
Capital stock outstanding146,153
9.6
(374,453)(21.2)
Retained earnings58,926
6.4
(3,180)(0.3)
Accumulated other comprehensive income (loss)(1,009)(6.4)(58,480)(235.9)
Total capital204,070
8.3
(436,113)(15.6)
Total liabilities and capital$9,415,874
19.7 %$(9,742,718)(15.4)%

Advances: Our advance products are developed, as authorized in the Bank Act and regulations established by the FHFA, to meet the specific liquidity and term funding needs of our members. As a wholesale provider of funds, we compete with brokered certificates of deposit and security repurchase agreements. The Federal Reserve Bank’s PPP Liquidity Facility was a direct competitor for FHLBank advances during the second quarter of 2020, although any quantification of that impact on advance balances is difficult to determine. We strive to price our advances relative to our marginal cost of funds while trying to remain competitive with the wholesale funding markets. While there is typically less competition in the long-term maturities, member demand for advances in these maturities has historically been lower than the demand for advances with short- and medium-term maturities. Nonetheless, long-term advances are also priced at relatively low spreads to our cost of funds.

Advances decreased $8.7 billion from December 31, 2019 to June 30, 2020 as a result of a decrease in member demand for advances, as many members experienced significant deposit inflows and excess liquidity as a result of economic stimulus packages passed by Congress along with the Federal Reserve Bank’s easing of monetary policy, security purchase programs, and lending facilities. Though the majority of the decrease in advances during the second quarter is attributable to our largest borrowers, the decline in advance demand was widespread among FHLBank membership. Advance composition shifted from adjustable rate to fixed rate, as members called adjustable rate callable advances in favor of regular fixed rate advances as interest rates declined. Members also extended fixed rate advance terms as a result of the decline in interest rates. We anticipate volatility in advance balances in 2020 based on several factors related to the COVID-19 pandemic, including large members with relatively strong deposit growth and access to other funding sources, which could cause an additional decline in advance balances.


During the three months ended June 30, 2020, we issued subsidized COVID-19 Relief Advances to help members serve their customers affected by the COVID-19 pandemic. The zero-cost advances have a term of six months and the low-cost advances have terms between 6 and 24 months. As of June 30, 2020, $0.6 billion and $0.5 billion of zero-cost and low-cost advances were outstanding, respectively. Discounts of $4.5 million were initially recorded on these advances and are accreted using the interest method over the life of the advances resulting in the recognition of periodic interest income on the advances at the effective interest rate (i.e., yield recorded equals a prevailing rate) in net interest income, of which $3.7 million remains outstanding at June 30, 2020. Advances are no longer being issued under this program, but management continues to monitor the progress of the pandemic and is committed to assisting our members and their communities as impacts related to the COVID-19 pandemic continue to unfold.

Table 25 summarizes advances outstanding by product (dollar amounts in thousands):
 
Table 25
09/30/201912/31/201806/30/202012/31/2019
DollarPercentDollarPercentDollarPercentDollarPercent
Adjustable rate: 
 
 
 
 
 
 
 
Standard advance products: 
 
 
 
 
 
 
 
Line of credit$11,272,387
36.9%$11,989,165
41.7%$1,906,859
9.0%$9,421,491
31.2%
Regular adjustable rate advances745,000
2.5
655,000
2.3
810,015
3.8
665,000
2.2
Adjustable rate callable advances10,863,000
35.6
9,003,675
31.3
2,689,800
12.7
11,444,700
38.0
Standard housing and community development advances: 
 
 
 
 
 
 
 
Adjustable rate callable advances37,212
0.1
39,252
0.1
37,212
0.2
37,212
0.1
Total adjustable rate advances22,917,599
75.1
21,687,092
75.4
5,443,886
25.7
21,568,403
71.5
Fixed rate: 
 
 
 
 
 
 
 
Standard advance products: 
 
 
 
 
 
 
 
Short-term fixed rate advances465,500
1.5
370,838
1.3
6,034,260
28.5
1,111,007
3.7
Regular fixed rate advances4,627,503
15.2
4,310,003
15.0
6,792,509
32.0
4,717,025
15.6
Fixed rate callable advances16,646
0.1
16,785
0.1
17,506
0.1
17,241
0.1
Standard housing and community development advances: 
 
 
  
 
 
 
Regular fixed rate advances477,058
1.6
461,431
1.6
469,559
2.2
470,925
1.6
Fixed rate callable advances4,831

4,831

831

2,831

Total fixed rate advances5,591,538
18.4
5,163,888
18.0
13,314,665
62.8
6,319,029
21.0
Convertible: 
 
 
 
 
 
 
 
Standard advance products: 
 
 
 
 
 
 
 
Fixed rate convertible advances1,312,850
4.3
1,150,850
4.0
1,775,900
8.4
1,607,500
5.3
Amortizing: 
 
 
 
 
 
 
 
Standard advance products: 
 
 
 
 
 
 
 
Fixed rate amortizing advances344,463
1.1
389,523
1.3
333,987
1.6
331,551
1.1
Fixed rate callable amortizing advances12,801

15,028
0.1
7,187

10,807

Standard housing and community development advances: 
 
 
  
 
 
 
Fixed rate amortizing advances331,802
1.1
359,949
1.2
307,574
1.5
324,477
1.1
Fixed rate callable amortizing advances10,513

11,419

10,039

10,288

Total amortizing advances699,579
2.2
775,919
2.6
658,787
3.1
677,123
2.2
TOTAL PAR VALUE$30,521,566
100.0%$28,777,749
100.0%$21,193,238
100.0%$30,172,055
100.0%
                   
An individual advance may be reclassified to a different product type between periods due to the occurrence of a triggering event such as the passing of a call date (i.e., from fixed rate callable advance to regular fixed rate advance) or conversion of an advance (i.e., from fixed rate convertible advance to adjustable rate callable advance).


Advances are one of the primary ways we fulfill our mission of providing liquidity to our members and constituted the largest asset on our balance sheet at SeptemberJune 30, 20192020 and December 31, 2018. The 6.1 percent increase in advance2019. Advance par value decreased by 29.8 percent from December 31, 20182019 to SeptemberJune 30, 20192020 (see Table 25) and the majority of the decrease was primarily duein short-term adjustable rate advances. The composition of the advance portfolio remains concentrated in advances that either reprice or mature on a relatively short-term basis as members continue to an increasebenefit from pricing efficiency in oura declining interest rate environment. Members are beginning to transition away from regular adjustable rate callable advances. advances as pricing on other products has become more attractive and we expect this trend to continue.

As of SeptemberJune 30, 20192020 and December 31, 2018, 59.52019, 62.4 percent and 63.057.6 percent, respectively, of our members carried outstanding advance balances. The overall demand for our advances is typically influenced by our members’ ability to profitably invest the funds in loans and investments as well as their need for liquidity, which is influenced by changes in loan demand and their ability to efficiently grow deposits proportionately. As previously mentioned, most members are flush with liquidity as a result of economic stimulus payments and other funding options such as the Federal Reserve Bank's PPP Liquidity Facility. The attractiveness of our advances is also influenced by the impact our dividends have on the effective cost of advances. InFollowing the recent periods, a portion of the growth in average advances resulted from our members’ ability to invest advances in excess reserves at the Federal Reserve and receive a profitable risk adjusted return largely because of the dividend paid on the capital stock supporting the advances. During 2018, the relationship between the interest on excess reserves and other short-term interest rates changed, resulting in asteep decline in the average balance ofrates, our short-term advances as the short-term advance rates became lessshould continue to become more attractive relative to other funding options even when taking the yield on excess reserves atreduction in dividend rates into consideration. We experienced advance growth from our smaller members in the Federal Reserve.short term as they took advantage of the subsidized COVID-19 Relief Advances to help serve their customers affected by the COVID-19 pandemic, but this increase did not offset decreases from larger members as previously discussed. When, and if, member advance demand changes, a few larger members could have a significant impact on the amount of total outstanding advances. If our members reduce the volume of their advances, we expect to continue our past practice of repurchasing excess capital stock.

Rather than match-funding long-term, fixed rate, large dollar advances, we elect to swap a significant portion of large dollar advances with longer maturities to short-term indices (primarily(e.g., one- or three-month LIBOR, and, to a much smaller extent, OIS beginning in late 2018, and SOFR beginning in 2019) to synthetically create adjustable rate advances. When coupled with the volume of our short-term advances, advances that effectively re-price at least every three months represent 91.280.5 percent and 89.891.0 percent of our total advance portfolio as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. We anticipate continuing the practice of swapping large dollar advances with longer maturities to short-term indices. In the first quarter of 2019, we began swapping fixed rate non-callable advances to SOFR as part of our plan to transition away from LIBOR as a reference rate. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 2.

Table 26 presents information on our five largest borrowers (dollar amounts in thousands). If the borrower was not one of our top five borrowers for one of the periods presented, the applicable columns are left blank. Based on no historical loss experience on advances since the inception of the FHLBank, along with our rights to collateral with an estimated fair value in excess of the book value of these advances, we do not expect to incur any credit losses on these advances.

Table 26
09/30/201912/31/201806/30/202012/31/2019
Borrower Name
Advance
Par Value
Percent of Total
Advance Par
Advance
Par Value
Percent of Total
Advance Par
Advance
Par Value
Percent of Total
Advance Par
Advance
Par Value
Percent of Total
Advance Par
MidFirst Bank$8,200,000
26.9%$6,560,000
22.8%$5,085,000
24.0%$8,585,000
28.5%
BOKF, N.A.6,800,000
22.3
6,100,000
21.2
Capitol Federal Savings Bank2,140,000
7.0
2,175,000
7.6
1,893,000
8.9
2,090,000
6.9
United of Omaha Life Insurance Co.1,118,363
3.7
813,182
2.8
1,237,686
5.8
1,205,761
4.0
Security Life of Denver Insurance Co.840,000
2.7




1,010,000
4.8
925,000
3.1
Colorado Federal Savings



625,000
2.2
BOKF, N.A.1,000,000
4.7
4,500,000
14.9
TOTAL$19,098,363
62.6%$16,273,182
56.6%$10,225,686
48.2%$17,305,761
57.4%


Table 27 presents the accrued interest income associated with the five borrowers with the highest interest income for the periods presented (dollar amounts in thousands). If the borrower was not one of our top five borrowers for whom we accrued the highest amount of interest income for one of the periods presented, the applicable columns are left blank.

Table 27
Three Months EndedThree Months Ended
09/30/201909/30/201806/30/202006/30/2019
Borrower NameAdvance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Capitol Federal Savings Bank$8,513
12.4%$12,906
7.0%
MidFirst Bank8,053
11.7
45,328
24.6
BOKF, N.A.$49,347
27.0%$31,805
20.6%3,529
5.1
47,357
25.7
MidFirst Bank39,859
21.9
24,425
15.8
Capitol Federal Savings Bank14,915
8.2
11,645
7.5
American Fidelity Assurance Co.3,001
4.4




Bellco Credit Union2,876
4.2




United of Omaha Life Insurance Co.6,053
3.3
5,023
3.3
  6,114
3.3
Security Life of Denver Insurance Co.4,262
2.3




  3,993
2.2
Bellco Credit Union  3,772
2.4
TOTAL$114,436
62.7%$76,670
49.6%$25,972
37.8%$115,698
62.8%
                   
1 
Total advance income by borrower excludes: (1) changes in unrealized gains (losses) from qualifying fair value hedging relationships; (2) net interest settlements on derivatives hedging the advances; and (3) prepayment fees received.

Table 28 presents the accrued interest income associated with the five borrowers providing the highest amount of interest income earned for the periods presented (dollar amounts in thousands). If the borrower was not one of our top five borrowers for whom we accrued the highest amount of interest income for one of the periods presented, the applicable columns are left blank.

Table 28
Nine Months EndedSix Months Ended
09/30/201909/30/201806/30/202006/30/2019
Borrower NameAdvance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
Advance Income
Percent of Total
Advance Income1
MidFirst Bank$38,638
19.1%$86,154
23.7%
BOKF, N.A.$143,014
26.2%$87,956
19.3%30,142
14.9
93,667
25.7
MidFirst Bank126,013
23.1
70,680
15.5
Capitol Federal Savings Bank40,476
7.4
48,296
10.6
18,993
9.4
25,561
7.0
United of Omaha Life Insurance Co.18,285
3.3
12,199
2.7
6,998
3.4
12,232
3.4
Security Life of Denver Insurance Co.12,046
2.2




6,552
3.2
7,784
2.1
Ent Federal Credit Union  11,032
2.4
TOTAL$339,834
62.2%$230,163
50.5%$101,323
50.0%$225,398
61.9%
                   
1 
Total advance income by borrower excludes: (1) changes in unrealized gains (losses) from qualifying fair value hedging relationships; (2) net interest settlements on derivatives hedging the advances; and (3) prepayment fees received.

See Table 4 for information on the amount of interest income on advances as a percentage of total interest income for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018.2019.

MPF Program: The MPF Program is a secondary mortgage market alternative for our members, especially utilized by the smaller institutions in our district. We participate in the MPF Program through the MPF Provider, a division of FHLBank Chicago. Under the MPF Program, participating members can sell us conventional and government single-family residential mortgage loans.


The principal amount of new mortgage loans acquired and held on our balance sheet from our PFIs during the ninesix months ended SeptemberJune 30, 20192020 was $2.4$2.0 billion. These new originations and acquisitions, net of loan payments received, resulted in an increase of 16.92.9 percent in the outstanding net balance of our mortgage loan portfolio from December 31, 20182019 to SeptemberJune 30, 2019. Despite the increase, net2020. Net mortgage loans as a percentage of total assets decreased,increased, from 17.616.8 percent as of December 31, 20182019 to 17.220.4 percent as of SeptemberJune 30, 2019 because of an increase in the percentage of investments held to meet new regulatory liquidity requirements.2020. Table 4 presents the amount of interest income on mortgage loans held for portfolio as a percentage of total interest income for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018. Although2019.

As a result of the recent decline in advances, we exceeded our targeted AMA risk tolerance as a percent of our balance sheet as of June 30, 2020 so we are implementing strategies to manage growth in the mortgage loan balances have grown steadily in recent years, the percentage of mortgage loan interest income to total interest income declined slightly for the three- and nine-month periods ended September 30, 2019 compared to the same periods ended September 30, 2018, respectively. This is due to an increase in the average balance and yield of investment securities and the resulting increase in investment interest income.

portfolio. Recent growth in mortgage loans held for portfolio is attributed primarily to continued strong production from our top five PFIs, supported by enhancements to the pricing options available to PFIs. The primary factors that may influence future growth in our mortgage loans held for portfolio include: (1) the number of new and delivering PFIs; (2) the mortgage loan origination volume of current PFIs; (3) refinancing activity; (4) the level of interest rates and the shape of the yield curve; (5) the relative competitiveness of MPF pricing to the prices offered by other buyers of residential mortgage loans; and (6) a PFI's level of excess risk-based capital relative to the required risk-based capital charge associated with the PFI's credit enhancement obligations (CE obligation) on MPF mortgage loans. In an effort to manage the level of mortgage loans on our books, management has researched and continues to review options including participating loan volume (as described below) or selling whole loans to other FHLBanks, members or other investors if needed. Although we may determine to sell whole loans from time to time, we have not identified any specific loans to be sold as of SeptemberJune 30, 2019.2020. The MPF Program is evaluating additional liquidity options that may help participating FHLBanks manage the size of their mortgage loan portfolios in the future.

Historically, we have used the MPF Xtra product and mortgage loan participations with another FHLBank to effectively restrict the growth in mortgage loans held for portfolio and provide management with adequate means to control the amount of mortgage loan portfolio volume retained on our balance sheet to maintain our desired asset composition. The MPF Xtra product is a structure where our PFIs sell mortgage loans to FHLBank Chicago and simultaneously to Fannie Mae. MPF Government MBS is a similar product that allows our PFIs to sell mortgages to FHLBank Chicago that are pooled into Ginnie Mae securities. We also offer the MPF Direct product, which provides the PFI the opportunity to sell a jumbo loan under the MPF Program structure to Redwood Trust (i.e., an unaffiliated entity)third party for securitization. These products are intended to further assist our members and their mortgage product needs while enhancing our ability to manage mortgage volumes and receive a counterparty fee from FHLBank Chicago based on mortgage volumes sold by our PFIs. We have the authority to offer participation interests in risk sharing MPF loan pools to member institutions and mortgage loan participations with another FHLBank, which may further enhance our ability to manage the size of our mortgage loan portfolio in the future. We expect our utilization of MPF Xtra to increase in the last half of 2020.

Table 29 presents the outstanding balances of mortgage loans sold to us, net of participations, from our top five PFIs and the percentage of those loans to total mortgage loans outstanding (dollar amounts in thousands). If the member was not one of our top five PFIs for one of the periods presented, the applicable columns are left blank.

Table 29
09/30/201912/31/201806/30/202012/31/2019
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
Mortgage
Loan Balance
Percent of Total
Mortgage Loans
NBKC Bank$719,924
7.4%$570,440
6.9%$810,584
7.5%$925,748
8.8%
Fidelity Bank416,364
3.9
393,205
3.8
FirstBank of Colorado417,552
4.3
372,533
4.5
411,347
3.8
424,437
4.1
West Gate Bank370,214
3.4




Tulsa Teachers Credit Union367,786
3.4




Mutual of Omaha Bank410,615
4.2




  396,389
3.8
Fidelity Bank342,573
3.5
253,413
3.1
Tulsa Teachers Credit Union324,860
3.4
291,691
3.5
Ent Federal Credit Union  203,048
2.4
Sunflower Bank  383,226
3.7
TOTAL$2,215,524
22.8%$1,691,125
20.4%$2,376,295
22.0%$2,523,005
24.2%


Two indications of credit quality are scores provided by Fair Isaac Corporation (FICO®) and loan-to-value (LTV) ratios. FICO is a widely used credit industry indicator to assess borrower credit quality with scores typically ranging from 300 to 850 with the low end of the scale indicating greater credit risk. The MPF Program requires a minimum FICO score of 620 for all conventional loans. LTV is a primary variable in credit performance. Generally speaking, a higher LTV ratio means greater risk of loss in the event of a default and also means higher loss severity. The weighted average FICO score and LTV recorded at origination for conventional mortgage loans outstanding as of SeptemberJune 30, 20192020 was 750751 and 74.974.2 percent, respectively. See Note 65 of the Notes to Financial Statements under Part I, Item 1 for additional information regarding credit quality indicators.

Allowance for Credit Losses on Mortgage Loans Held for Portfolio – The allowance for credit losses increased slightly$6.8 million from December 31, 20182019 to SeptemberJune 30, 2019.2020 primarily as a result of the adoption of new accounting guidance pertaining to measurement of credit losses on financial instruments that resulted in an adjustment to retained earnings of $6.1 million. The provision in the current quarter was due to an increase in delinquencies combined with worsening forward-looking economic assumptions resulting from the COVID-19 pandemic. Delinquencies of conventional loans trended higher but remained at low levels relative to the portfolio, at 0.72.1 percent and 0.60.8 percent of total conventional loans at SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. We believe that policies and procedures are in place to effectively manage the credit risk on mortgage loans held in portfolio. See Note 65 of the Notes to Financial Statements under Part I, Item 1 for a summary of the allowance for credit losses on mortgage loans as well as payment status and other delinquency aging and key credit quality indicatorsstatistics for our mortgage loan portfolio.

The CARES Act allows financial institutions to provide payment forbearance to assist borrowers who have experienced a hardship resulting from COVID-19. The MPF Provider released information on COVID-19 borrower assistance plans, and the FHLBank System continues to consider additional relief in line with the CARES Act, which could impact our mortgage loan portfolio and allowance in future periods. For additional information on loans under forbearance, see Note 5 of the Notes to Financial Statements under Part I, Item 1.

Investments: Investments are used to enhance income and provide liquidity and primary and secondary market support for the U.S. housing securities market. Total investments increased from December 31, 20182019 to SeptemberJune 30, 2019,2020, predominantly due to increases in the balances of short-term investments. Long-term investments andincreased slightly due to purchases of U.S. Treasury obligations. The majorityavailable-for-sale securities and increases in the carrying value of the increasesecurities held at fair value, offset by maturities and change in compositionsales of long-term investments was in response to changes to regulatory liquidity requirements that became effective March 31, 2019, including the purchase of $5.0 billion in U.S. Treasury obligations since the third quarter of 2018. The U.S. Treasury obligations satisfy changes to regulatory liquidity requirements and were swapped to OIS or SOFR. The $1.5 billion increase in overnight investments was intended to supplement earnings and offset upcoming maturities while market conditions were favorable.investment securities.

Short-term Investments – Short-term investments, which are used to provide funds to meet the credit needs of our members, maintain liquidity, meet other financial obligations such as debt servicing, and enhance income, consist primarily of reverse repurchase agreements, interest-bearing deposits, overnight Federal funds sold, term Federal funds sold, and certificates of deposit and commercial paper.deposit. The Bank Act and FHFA regulations and guidelines set liquidity requirements for us, and our Boardboard of Directorsdirectors has adopted additional liquidity policies. In addition, we maintain a contingency liquidity plan in the event of financial market disruptions. See “Risk Management – Liquidity Risk Management” under this Item 2 for a discussion of our liquidity management.

Within our portfolio of short-term investments, we face credit risk from unsecured exposures. Our short-term unsecured credit investments have maturities generally ranging between overnight and three months and may include the following types:
Interest-bearing deposits. Unsecured deposits that earn interest.
Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions that are made on either an overnight or term basis.
Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.
Certificates of deposit. Unsecured negotiable promissory notes issued by banks and payable to the bearer at maturity.

Table 30 presents the carrying value of our unsecured credit exposure with private counterparties by investment type (in thousands). The unsecured investment credit exposure presented may not reflect the average or maximum exposure during the period as the balances presented reflect the balances at period end.

Table 30
09/30/201912/31/201806/30/202012/31/2019
Interest-bearing deposits$479,511
$669,653
$1,009,360
$919,693
Federal funds sold900,000
50,000
1,520,000
850,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$1,379,511
$719,653
$2,529,360
$1,769,693
                   
1 
Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities and does not include related accrued interest.
 
We actively monitor our credit exposures and the credit quality of our counterparties, including an assessment of each counterparty’s financial performance, capital adequacy, sovereign support and the current market perceptions of the counterparties. General macro-economic, political and market conditions may also be considered when deciding on unsecured exposure. As a result, we may further limit existing exposures.


FHFA regulations: (1) include limits on the amount of unsecured credit an individual FHLBank may extend to a counterparty or to a group of affiliated counterparties; (2) permit us to extend additional unsecured credit for overnight extensions of credit, subject to limitations; and (3) prohibit us 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. For additional information on our management of unsecured credit exposure, see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – Investments” in our annual report on Form 10-K for the year ended December 31, 2018.2019. As of SeptemberJune 30, 2019,2020, we were in compliance with all FHFA regulations relating to unsecured credit exposure.

We manage our credit risk by conducting pre-purchase credit due diligence and on-going surveillance described previously and generally investing in unsecured investments of highly-rated counterparties. From time to time, we extend unsecured credit to qualified members by investing in overnight Federal funds issued by them. As of SeptemberJune 30, 2019,2020, all unsecured investments were rated as investment grade based on Nationally Recognized Statistical Rating Organizations (NRSRO)NRSROs (see Table 34).

Table 31 presents the amount of our unsecured investment credit exposure by remaining contractual maturity and by the domicile of the counterparty or the domicile of the counterparty’s parent for U.S. branches and agency offices of foreign commercial banks as of SeptemberJune 30, 20192020 (in thousands). We also mitigate the credit risk on investments by generally investing in investments that have short-term maturities.

Table 31
Domicile of CounterpartyOvernightOvernight
Domestic$779,511
$1,009,360
Total domestic and U.S. subsidiaries of foreign commercial banks779,511
U.S. Branches and agency offices of foreign commercial banks: 
 
Sweden650,000
Netherlands430,000
Canada200,000
300,000
Sweden200,000
United Kingdom200,000
Germany140,000
Total U.S. Branches and agency offices of foreign commercial banks600,000
1,520,000
TOTAL UNSECURED INVESTMENT CREDIT EXPOSURE1
$1,379,511
$2,529,360
                   
1 
Excludes unsecured investment credit exposure to U.S. government, U.S. government agencies, instrumentalities, GSEs and supranational entities, and does not include related accrued interest.

Unsecured credit exposure continues to be cautiously placed. In addition, we anticipate continued future investment in reverse repurchase agreements, which are secured investments, and limiting unsecured exposure, especially to foreign financial institutions, as long as the interest rates are comparable. To enhance our liquidity position, we classify our unsecured short-term investment securities in our trading portfolio, which allows us to sell these securities if necessary.

Long-term investments – Our long-term investment portfolio consists primarily of GSE MBS and U.S. Treasury obligations. Our Risk Management Policy (RMP) restricts the acquisition of investments to highly rated long-term securities. The majority of these long-term securities are GSE MBS, which provide an alternative means to promote liquidity in the mortgage finance markets while providing acceptable returns. We hold fixed and variable rate GSE debentures in our long-term investment portfolio and we generally swap the fixed rate GSE debentures from fixed to variable rates. They provide attractive returns, can serve as excellent collateral (e.g., repurchase agreements and net derivatives exposure), and are generally classified as trading securities and carried at fair value, either to enhance our liquidity position, for asset/liability management purposes, or to provide a fair value offset to the gains or losses on the interest rate swaps tied to these securities. The interest rate swaps do not qualify for hedge accounting, which results in the net interest payments or receipts on these economic hedges flowing through net gains (losses) on derivatives and hedging activities instead of net interest income. During the last half of 2018, we began acquiring fixed rate U.S. Treasury obligations and swapping these securities from fixed to variable rates, as either trading securities that are economically swapped or, beginning in 2019, available-for-sale securities that are swapped in qualifying fair value hedging relationships. In addition to serving as excellent collateral, U.S. Treasuries also satisfy recent changes to regulatory liquidity requirements. Currently, the vast majority of our variable rate investment securities are indexed to LIBOR. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 2.


According to FHFA regulation, no additional MBS purchases can be made if the amortized cost of our mortgage securities exceeds 300 percent of our regulatory capital. Further, quarterly increases in holdings of mortgage securities are restricted to no more than 50 percent of regulatory capital. As of SeptemberJune 30, 2019,2020, the amortized cost of our MBS portfolio represented 269304 percent of our regulatory capital. At times we may exceed the required threshold due to decreases in regulatory capital; however, we were in compliance with the regulatory limit at the time of each purchase during the quartersix months ended SeptemberJune 30, 2019.2020.

As of SeptemberJune 30, 2019,2020, we held $3.6$3.1 billion of par value in MBS in our held-to-maturity portfolio, $2.4$2.9 billion of par value in MBS in our available-for-sale portfolio, and $0.9$0.8 billion of par value in MBS in our trading portfolio. The majority of the MBS in the held-to-maturity portfolio are variable rate GSE securities. The majority of the MBS in the trading and available-for-sale portfolios are fixed rate GSE securities, which are swapped from fixed to variable rates.


Major Security Types – Securities for which we have the ability and intent to hold to maturity are classified as held-to-maturity securities and recorded at carrying value, which is the net total of par, premiums, and discounts. We classify certain investments as trading or available-for-sale securities and carry them at fair value, generally for liquidity purposes, to provide a fair value offset to the gains (losses) on the interest rate swaps tied to swapped securities, and for asset/liability management purposes. Liquidity or other asset/liability management strategies, such as reducing our LIBOR exposure, may require periodic sale of these securities but they are not actively traded with the intent of realizing gains; most often, they are held until maturity or call date. Securities acquired as asset/liability management tools to manage duration risk, which are likely to be sold when the duration risk is no longer present, are classified as trading or available-for-sale securities. Changes in the fair values of investments classified as trading are recorded through other income and original premiums/discounts on these investments are not amortized.


See Note 3 of the Notes to Financial Statements under Part I, Item 1 of this quarterly report for additional information on our different investment classifications including the types of securities held under each classification. The carrying value of our investments is summarized by security type in Table 32 (in thousands).

Table 32
09/30/201912/31/201806/30/202012/31/2019
Trading securities:  
U.S. Treasury obligations$1,533,842
$252,377
$1,565,218
$1,530,518
GSE debentures468,747
1,000,495
435,008
416,025
Mortgage-backed securities:  
U.S. obligation MBS
467
GSE MBS898,986
897,774
904,417
866,019
Total trading securities2,901,575
2,151,113
2,904,643
2,812,562
Available-for-sale securities:  
U.S. Treasury obligations3,510,728

4,337,386
4,261,791
GSE MBS2,588,201
1,725,640
3,221,290
2,920,709
Total available-for-sale securities6,098,929
1,725,640
7,558,676
7,182,500
Held-to-maturity securities:  
State or local housing agency obligations85,670
86,430
81,995
82,805
Mortgage-backed securities:  
U.S. obligation MBS97,647
109,866
85,268
93,375
GSE MBS3,545,338
4,260,577
3,014,873
3,393,778
Total held-to-maturity securities3,728,655
4,456,873
3,182,136
3,569,958
Total securities12,729,159
8,333,626
13,645,455
13,565,020
  
Interest-bearing deposits481,989
670,660
1,017,972
921,453
  
Federal funds sold900,000
50,000
1,520,000
850,000
  
Securities purchased under agreements to resell2,137,374
1,251,096
4,450,000
4,750,000
TOTAL INVESTMENTS$16,248,522
$10,305,382
$20,633,427
$20,086,473


The carrying values by contractual maturities of our investments are summarized by security type in Table 33 (dollar amounts in thousands). Expected maturities of certain securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 33
09/30/201906/30/2020
Due in
one year
or less
Due after
one year
through five years
Due after
five years
through 10 years
Due after
10 years
Carrying
Value
Due in
one year
or less
Due after
one year
through five years
Due after
five years
through 10 years
Due after
10 years
Carrying
Value
Trading securities: 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations$
$1,533,842
$
$
$1,533,842
$252,878
$1,312,340
$
$
$1,565,218
GSE debentures50,001
399,540
19,206

468,747

435,008


435,008
Mortgage-backed securities:  
  
GSE MBS
16,459
833,080
49,447
898,986

546,040
315,054
43,323
904,417
Total trading securities50,001
1,949,841
852,286
49,447
2,901,575
252,878
2,293,388
315,054
43,323
2,904,643
Yield on trading securities2.34%2.57%2.90%1.67% 
2.50%2.64%2.99%0.78% 
Available-for-sale securities:  
U.S. Treasury obligations251,643
3,259,085


3,510,728
1,772,277
2,565,109


4,337,386
GSE MBS
254,415
2,333,786

2,588,201

244,724
2,976,566

3,221,290
Total available-for-sale securities251,643
3,513,500
2,333,786

6,098,929
1,772,277
2,809,833
2,976,566

7,558,676
Yield on available-for-sale securities2.53%2.15%2.84%% 2.15%2.00%2.70%% 
Held-to-maturity securities: 
 
 
 
 
 
 
 
 
 
State or local housing agency obligations


85,670
85,670



81,995
81,995
Mortgage-backed securities: 
 
 
 
 
 
 
 
 
 
U.S. obligation MBS


97,647
97,647



85,268
85,268
GSE MBS
418,870
960,025
2,166,443
3,545,338

891,606
303,956
1,819,311
3,014,873
Total held-to-maturity securities
418,870
960,025
2,349,760
3,728,655

891,606
303,956
1,986,574
3,182,136
Yield on held-to-maturity securities%1.39%1.53%1.67% 
%1.14%1.19%1.41% 
  
Total securities301,644
5,882,211
4,146,097
2,399,207
12,729,159
2,025,155
5,994,827
3,595,576
2,029,897
13,645,455
Yield on total securities2.50%2.23%2.54%1.67% 
2.19%2.10%2.59%1.40% 
  
Interest-bearing deposits481,989



481,989
1,017,972



1,017,972
  
Federal funds sold900,000



900,000
1,520,000



1,520,000
  
Securities purchased under agreements to resell2,137,374



2,137,374
4,450,000



4,450,000
TOTAL INVESTMENTS$3,821,007
$5,882,211
$4,146,097
$2,399,207
$16,248,522
$9,013,127
$5,994,827
$3,595,576
$2,029,897
$20,633,427


Securities Ratings – Tables 34 and 35 present the carrying value of our investments by rating as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands). The ratings presented are the lowest ratings available for the security, issuer, or the issuercounterparty based on NRSROs, where available. Some counterparties for collateralized overnight borrowing are not rated by an NRSRO because they are not issuers of debt or are otherwise not required to be rated by an NRSRO. We also utilize other credit quality factors when analyzing potential investments including, but not limited to, collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, and/or the financial health of the underlying issuer.

Table 34
09/30/201906/30/2020
Carrying Value1
Carrying Value1
Investment GradeUnratedTotalInvestment GradeUnratedTotal
Triple-ADouble-ASingle-ATriple-ADouble-ASingle-A
Interest-bearing deposits2
$
$2,478
$479,511
$
$481,989
$297
$8,612
$1,009,063
$
$1,017,972
  
Federal funds sold2

200,000
700,000

900,000

500,000
1,020,000

1,520,000
  
Securities purchased under agreements to resell3



2,137,374
2,137,374



4,450,000
4,450,000
  
Investment securities: 
 
 
 
 
 
 
 
 
 
Non-mortgage-backed securities: 
 
 
 
 
 
 
 
 
 
U.S. Treasury obligations
5,044,570


5,044,570

5,902,604


5,902,604
GSE debentures
468,747


468,747

435,008


435,008
State or local housing agency obligations55,670
30,000


85,670
51,995
30,000


81,995
Total non-mortgage-backed securities55,670
5,543,317


5,598,987
51,995
6,367,612


6,419,607
Mortgage-backed securities: 
 
 
 
 
 
 
 
 
 
U.S. obligation MBS
97,647


97,647

85,268


85,268
GSE MBS
7,032,525


7,032,525

7,140,580


7,140,580
Total mortgage-backed securities
7,130,172


7,130,172

7,225,848


7,225,848
  
TOTAL INVESTMENTS$55,670
$12,875,967
$1,179,511
$2,137,374
$16,248,522
$52,292
$14,102,072
$2,029,063
$4,450,000
$20,633,427
                   
1 
Investment amounts represent the carrying value and do not include related accrued interest receivable of $46.2$41.4 million at SeptemberJune 30, 2020.
2
Amounts include unsecured credit exposure with overnight maturities.
3
Amounts represent collateralized overnight borrowings.



Table 35
 12/31/2019
 
Carrying Value1
 Investment GradeUnratedTotal
 Triple-ADouble-ASingle-A
Interest-bearing deposits2
$255
$1,761
$919,437
$
$921,453
      
Federal funds sold2


850,000

850,000
      
Securities purchased under agreements to resell3



4,750,000
4,750,000
      
Investment securities: 
 
 
 
 
Non-mortgage-backed securities: 
 
 
 
 
U.S. Treasury obligations
5,792,309


5,792,309
GSE debentures
416,025


416,025
State or local housing agency obligations52,805
30,000


82,805
Total non-mortgage-backed securities52,805
6,238,334


6,291,139
Mortgage-backed securities: 
 
 
 
 
U.S. obligation MBS
93,375


93,375
GSE MBS
7,180,506


7,180,506
Total mortgage-backed securities
7,273,881


7,273,881
      
TOTAL INVESTMENTS$53,060
$13,513,976
$1,769,437
$4,750,000
$20,086,473
1
Investment amounts represent the carrying value and do not include related accrued interest receivable of $45.7 million at December 31, 2019.
2 
Amounts include unsecured credit exposure with overnight maturities.
3 
Amounts represent collateralized overnight borrowings by counterparty rating.



Table 35
 12/31/2018
 
Carrying Value1
 Investment GradeUnratedTotal
 Triple-ADouble-ASingle-A
Interest-bearing deposits2
$435
$1,007
$669,218
$
$670,660
      
Federal funds sold2


50,000

50,000
      
Securities purchased under agreements to resell3



1,251,096
1,251,096
      
Investment securities: 
 
 
 
 
Non-mortgage-backed securities: 
 
 
 
 
U.S. obligations
252,377


252,377
GSE debentures
1,000,495


1,000,495
State or local housing agency obligations56,430
30,000


86,430
Total non-mortgage-backed securities56,430
1,282,872


1,339,302
Mortgage-backed securities: 
 
 
 
 
U.S. obligation MBS
110,333


110,333
GSE MBS
6,883,991


6,883,991
Total mortgage-backed securities
6,994,324


6,994,324
      
TOTAL INVESTMENTS$56,865
$8,278,203
$719,218
$1,251,096
$10,305,382
1
Investment amounts represent the carrying value and do not include related accrued interest receivable of $19.9 million at December 31, 2018.
2
Amounts include unsecured credit exposure with overnight maturities.
3
Amounts represent collateralized overnight borrowings by counterparty rating.borrowings.


Table 36 details interest rate payment terms for the carrying value of our investment securities as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands). We manage the interest rate risk associated with our fixed rate trading and available-for-sale securities by entering into interest rate swaps that convert the investment's fixed rate to a variable rate index (see Tables 50 and 51 under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk)."

Table 36
09/30/201912/31/201806/30/202012/31/2019
Trading securities:  
Non-mortgage-backed securities:  
Fixed rate$1,952,588
$652,376
$2,000,226
$1,946,543
Variable rate50,001
600,496
Non-mortgage-backed securities2,002,589
1,252,872
2,000,226
1,946,543
Mortgage-backed securities:  
Fixed rate848,179
839,726
859,936
817,568
Variable rate50,807
58,515
44,481
48,451
Mortgage-backed securities898,986
898,241
904,417
866,019
Total trading securities2,901,575
2,151,113
2,904,643
2,812,562
Available-for-sale securities:  
Non-mortgage-backed securities:  
Fixed rate3,510,728

4,337,386
4,261,791
Non-mortgage-backed securities3,510,728

4,337,386
4,261,791
Mortgage-backed securities:  
Fixed rate2,588,201
1,725,640
3,221,290
2,920,709
Mortgage-backed securities2,588,201
1,725,640
3,221,290
2,920,709
Total available-for-sale securities6,098,929
1,725,640
7,558,676
7,182,500
Held-to-maturity securities:  
Non-mortgage-backed securities:  
Variable rate85,670
86,430
81,995
82,805
Non-mortgage-backed securities85,670
86,430
81,995
82,805
Mortgage-backed securities:  
Fixed rate111,157
133,498
89,680
104,359
Variable rate3,531,828
4,236,945
3,010,461
3,382,794
Mortgage-backed securities3,642,985
4,370,443
3,100,141
3,487,153
Total held-to-maturity securities3,728,655
4,456,873
3,182,136
3,569,958
TOTAL$12,729,159
$8,333,626
$13,645,455
$13,565,020


Deposits: Total deposits increased $282.6$197.7 million from December 31, 20182019 to SeptemberJune 30, 20192020 primarily as a result of an increase in overnight deposits. Deposit products offered primarily include demand and overnight deposits and short-term certificates of deposit. Demand deposit programs are offered primarily to facilitate customer transactions with us, such as cash flows associated with advances and mortgage loan transactions. Overnight deposits provide an alternative short-term investment option to members. The majority of deposits are in overnight or demand accounts that generally re-price daily based upon a market index such as overnight Federal funds. The level of deposits is driven by member demand for deposit products, which in turn is a function of the liquidity position of members. Factors that influence deposit levels include turnover in member investment and loan portfolios, changes in members’ customer deposit balances, changes in members’ demand for liquidity and our deposit pricing as compared to other short-term market rates. Declines in the level of deposits could occur if demand for loans at member institutions increases, if members choose to de-leverage their balance sheets, or if decreases in the general level of liquidity of members should occur. Fluctuations in deposits have little impact on our ability to obtain liquidity. We historically have had stable and ready access to the capital markets through consolidated obligations and can replace any reduction in deposits with similarly- or lower-priced borrowings.
 

Consolidated Obligations: Consolidated obligations are the joint and several debt obligations of the FHLBanks and consist of bonds and discount notes. Consolidated obligations represent the primary source of liabilities we use to fund advances, mortgage loans and investments. As noted under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk,” we use debt with a variety of maturities and option characteristics to manage our interest rate risk profile. We make use of derivative transactions, executed in conjunction with specific consolidated obligation debt issues, to synthetically structure funding terms and costs.

Bonds are primarily used to fund longer-term (one year or greater) advances, mortgage loans and investments. To the extent that the bonds are funding variable rate assets, we typically either issue bonds that have variable rates matching the variable rate asset index or utilize an interest rate swap to change the bonds' characteristics in order to match the assets' index. Additionally, we sometimes use fixedvariable rate, variablefixed rate, or complex consolidated obligation bonds that are swapped or indexed to SOFR, LIBOR, SOFR, OIS or U.S. Treasury bills to fund short-term advances and money market investments and/or as a liquidity risk management tool.

During 2018, we issued variable rate bonds indexed to the U.S. Treasury bill rate rather than issuing variable rate bonds indexed to LIBOR and we began swapping fixed rate bonds to OIS rates rather than swapping fixed-rate callable bonds to LIBOR. We did so in part to reduce our exposure to LIBOR as the market prepares to transition away from LIBOR as a reference rate. We also began participating in SOFR-indexed debt issuances in November 2018 and swapping certain financial instruments to SOFR in the first quarter of 2019 in an effort to manage our exposure to LIBOR assets and liabilities with maturities beyond 2021. No outstanding LIBOR debt has a maturity date beyond December 31, 2021, which is when LIBOR cessation is expected to occur. For additional information on our LIBOR transition efforts and LIBOR exposure, see “Risk Management – Interest Rate Risk Management” under this Item 2.
 
Discount notes are primarily used to fund: (1) shorter-term advances with indices and resets based on our short-term cost of funds; and (2) investments with maturities of three months or less. However, we sometimes use discount notes to fund longer-term assets, including fixed rate assets, variable rate assets, assets swapped to synthetically create variable rate assets, and short-term anticipated cash flows generated by longer-term fixed rate assets. At September 30, 2019, short-term advances (advances maturing within one year), including line of credit advances, represented 67.0 percent of discount notes outstanding. We also use discount notes to fund a portion of overnight Federal funds sold and reverse repurchase agreements to maintain liquidity sufficient to meet the advance needs of members. These investments represented 14.4 percent of discount notes outstanding as of September 30, 2019.

Total consolidated obligations increased $8.9decreased $9.5 billion, or 20.015.9 percent, from December 31, 20182019 to SeptemberJune 30, 2019.2020. The distribution between consolidated obligation bonds and discount notes shifted from 53.8 percent and 46.2 percent, respectively, at December 31, 20182019 to 60.772.9 percent and 39.327.1 percent at SeptemberJune 30, 2019,2020, respectively. The $8.5 billion increase in consolidatedConsolidated obligation bonds was due primarilyincreased by $4.4 billion as we issued more floating rate debt indexed to SOFR to better reflect the issuancerepricing characteristics of $7.7our assets. The $13.9 billion decrease in discount notes reflects the decline in short-term advances and the shift to term funding indexed to SOFR. We issued $9.6 billion of floating rate bonds indexed to SOFR during the first half of 2020 as we continue to fund the growth in U.S. Treasuriestransition away from LIBOR and increase our allocation of floating rate bonds funding short-term advances and short-term investmentsinvestments. Approximately $9.0 billion of unswapped bonds were called during the first half of 2020 and $7.0 billion ofreplaced at a lower cost with either callable fixed rate bonds largely funding the growth in mortgage loans, of which $1.6 billion were swapped to OIS, issued in part to reduce LIBOR basis risk. During the third quarter of 2019, we replaced some callable bonds at a lower cost. Discount notes of a shorter tenor and shorter-term floating rate bonds were used to fund the increase in short-term investments.or discount notes. While we currently have stable access to funding markets, future developments could impact the cost of replacing outstanding debt. Some of these include, but are not limited to, a large increase in call volume, significant increases in advance demand, legislative and regulatory changes, geopolitical events, proposals addressing GSEs, derivative and financial market reform, market transition from LIBOR to alternative reference rates, a decline in investor demand for consolidated obligations, further rating agency downgrades of U.S. Treasury obligations that will in turn impact the rating on FHLBank consolidated obligations, and changes in Federal Reserve policies, outlooks, and outlooks.programs. Volatility in the capital markets caused by the COVID-19 pandemic could impact demand for FHLBank debt and the cost of the debt the FHLBanks issue.

Derivatives: All derivatives are marked to fair value with any associated accrued interest, and netted by clearing agent by Clearinghouse or by counterparty and offset by the fair value of any swap cash collateral received or delivered where the legal right of offset has been determined, and included on the Statements of Condition as an asset when there is a net fair value gain or as a liability when there is a net fair value loss. Fair values of our derivatives primarily fluctuate as the SOFR, OIS and LIBOR swap interest rate curves fluctuate. Other factors such as implied price/interest rate volatility, the shape of the above interest rate curves and time decay can also drive the market price for derivatives.
The notional amount of total derivatives outstanding increased by $2.8 billion, from $20.9 billion at December 31, 2019 to $23.7 billion at June 30, 2020, primarily due to increases in interest rate swaps hedging fixed rate consolidated obligation discount notes. These swaps are used to convert a fixed rate discount note to a variable rate that adjusts daily to better reflect the repricing characteristics of our short-term advances and investments. For additional information regarding the types of derivative instruments and risks hedged, see Tables 50 and 51 under Item 7A – “Quantitative and Qualitative Disclosures About Market Risk.”


Liquidity and Capital Resources
Liquidity: We maintain high levels of liquidity to achieve our mission of serving as an economical funding source for our members and housing associates. As part of fulfilling our mission, we also maintain minimum liquidity requirements in accordance with certain FHFA regulations and guidelines and in accordance with policies established by management and the Boardboard of Directors.directors. Our business model enables us to manage the levels of our assets, liabilities, and capital in response to member credit demand, membership composition, and market conditions. As such, assets and liabilities utilized for liquidity purposes can vary significantly in the normal course of business due to the amount and timing of cash flows as a result of these factors. While we increased liquidity and coordination of debt issuance among the FHLBanks in response to market volatility created by the COVID-19 pandemic, at no time during the first half of 2020 did the COVID-19 pandemic affect our balance sheet liquidity or access to the debt markets in a manner that caused us to be unable to meet the liquidity needs of our business or our members.

Sources and Uses of Liquidity – A primary source of our liquidity is the issuance of consolidated obligations. The capital markets traditionally have treated FHLBank obligations as U.S. government agency debt. As a result, even though the U.S. government does not guarantee FHLBank debt, we generally have comparatively stable access to funding at relatively favorable spreads to U.S. Treasury rates. We are primarily and directly liable for our portion of consolidated obligations (i.e., those obligations issued on our behalf). In addition, we are jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all FHLBanks.


During the ninesix months ended SeptemberJune 30, 2019,2020, proceeds (net of premiums and discounts) from the issuance of bonds and discount notes were $20.5$22.2 billion and $633.2$317.9 billion, respectively, compared to $8.8$12.1 billion and $765.5$454.0 billion for the ninesix months ended SeptemberJune 30, 2018.2019. The large difference between the proceeds from bonds and discount notes reflects the cumulative effect of using short-term discount notes to fund short-term advances and our short-term liquidity portfolio. During the first nine months of 2019, we replaced maturing bonds with longer-term fixed rate and shorter-term floating rate consolidated obligation bonds to adjust the maturity of our liabilities relative to our assets. Our other sources of liquidity include deposit inflows, repayments of advances and mortgage loans, maturing investments, interest income, maturing Federal funds purchased,sold, and proceeds from maturing reverse repurchase agreements or the sale of unencumbered assets. We reduced our issuance of discount notes during the second quarter of 2020 to increase our allocation of variable rate term funding.

Our short-term liquidity portfolio which consists of cash, short-term investments, and long-term investments with remaining maturities of one year or less and includesless. Short-term investments may include Federal funds sold, interest-bearing demand deposits, certificates of deposit, commercial paper, and reverse repurchase agreements, increasedagreements. The short-term liquidity portfolio decreased slightly between periods, from $2.6$9.4 billion as of December 31, 20182019 to $3.8$9.0 billion as of SeptemberJune 30, 2019. The increase between periods was relative to2020, but the decrease in targeted leverageamounts remained slightly elevated at the end of both periods in anticipation of potential member needs at the year.end of 2019 and upcoming maturities of U.S. Treasuries as of June 30, 2020. The maturities of our short-term investments are structured to provide periodic cash flows to support our ongoing liquidity needs. To enhance our liquidity position, short-term investment securities (i.e., commercial paper and marketable certificates of deposit) are also classified as trading when held so that they can be readily sold should liquidity be needed immediately.

We also maintain a portfolio of GSE debentures, U.S. Treasury obligations, GSE MBS, and AgencyGSE MBS that can be pledged as collateral for financing in the securities repurchase agreement market and are classified as trading to enhance our liquidity position. The par value of these debentures and U.S. Treasury obligations was $1.9 billion and $1.2 billion as of Septemberboth June 30, 20192020 and December 31, 2018, respectively.2019. The par value of these MBS was $0.9$0.8 billion as of Septemberboth June 30, 20192020 and December 31, 2018.2019, respectively. We also hold $3.5$4.2 billion in par value of U.S. Treasury obligations classified as available-for-sale to satisfy regulatory liquidity requirements that went into effect March 31, 2019. In addition to the balance sheet sources of liquidity discussed previously, we have established lines of credit with numerous counterparties in the Federal funds market as well as with the other FHLBanks. Accordingly, we expect to maintain a sufficient level of liquidity for the foreseeable future.

We strive to manage our average capital ratio to remain above our minimum regulatory and RMP requirements in an effort to ensure that we have the ability to issue additional consolidated obligations should the need arise. Excess capital capacity ensures we are able to meet the liquidity needs of our members and/or repurchase excess stock either upon the submission of a redemption request by a member or at our discretion for balance sheet or capital management purposes.

Our uses of liquidity primarily include issuing advances, purchasing investments and mortgage loans, and repaying called and maturing consolidated obligations for which we are the primary obligor. We also use liquidity to purchase mortgage loans, repay member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, and pay dividends to members.

During the ninesix months ended SeptemberJune 30, 2019,2020, advance disbursements totaled $281.6$140.1 billion compared to $302.3$215.2 billion for the prior year period. During the ninesix months ended SeptemberJune 30, 2019,2020, investment purchases (excluding overnight investments) totaled $7.9$1.0 billion compared to $3.6$5.9 billion for the same period in the prior year. The increasehigher amount of investment purchases in investment purchasesthe prior year was primarily U.S. Treasury obligations purchased in response to new regulatory liquidity requirements. During the ninesix months ended SeptemberJune 30, 2019,2020, payments on consolidated obligation bonds and discount notes were $12.1$17.8 billion and $632.7$331.8 billion, respectively, compared to $7.4$6.6 billion and $763.5$447.4 billion for the prior year period.

Liquidity Requirements – We are subject to the following metricsfunding gap and cash balance guidelines for measuring required liquidity: statutory, operational,liquidity. Funding gaps are defined as the difference between our assets and contingencyliabilities scheduled to mature during a specific period stated as a percentage of total assets. FHFA liquidity guidelines require that we manage our funding gaps,gap to a minimum ratio for the three-month and one-year horizons calculated with data as of the calendar daymonth-end using the average ratio for the three most recent month-ends. FHFA guidelines require us to maintain a minimum number of days of positive cash balances without access to the capital markets for the issuance of consolidated obligations.

FHFA guidelines allow HQLA to be included in liquidity metrics. The FHFA defines HQLA as uncommitted and unencumbered U.S. Treasury securities that have a remaining maturity of no greater than 10 years designated as trading and available-for-sale. We are also allowed to include some legacy GSE debentures as HQLA. We calculate our liquidity under different scenarios.the funding gap guidelines monthly and are required to submit applicable data in a report to the FHFA monthly. We calculate our liquidity under the cash balance guidelines daily and are generally required to submit applicable data in a report to the FHFA weekly. Statutory liquidity requires us to have an amount equal to current deposits received from members invested in obligations of the United States, deposits in eligible banks or trust companies, and advances with a remaining maturity not exceeding five years. OperationalStatutory liquidity required that we maintainis calculated daily. See “Risk Management - Liquidity Risk Management” under this Item 2 for additional discussion on our liquidity requirements. We remained in an amount not less than 20 percentcompliance with liquidity regulatory requirements in effect during the first half of 2020, except for our three-month funding gap requirement during a portion of the sumfirst quarter of our demand and overnight deposits and other overnight borrowings, plus 10 percent of the sum of our term deposits, consolidated obligations, and other borrowings that mature within one year. Contingency liquidity is an amount sufficient to meet our liquidity needs for five business days if we are unable to access the capital markets to issue consolidated obligations. Our net liquidity in excess of contingency liquidity over a cumulative five-business-day period was $8.9 billion as of September 30, 2019. 2020.

Contingency plans are in place at the FHLBank and the Office of Finance that prioritize the allocation of liquidity resources in the event of financial market disruptions, as well as systemic Federal Reserve wire transfer system disruptions. Further, under the Bank Act, the Secretary of Treasury has the authority, at his discretion, to purchase consolidated obligations up to an aggregate amount of $4.0 billion. No borrowings under this authority have been outstanding since 1977. Funding gaps are defined as the difference between our assets and liabilities scheduled to mature during a specific period stated as a percentage of total assets. We are required to maintain a funding gap of negative 10 percent to negative 20 percent for the three-month horizon and negative 25 percent to negative 35 percent for the one-year horizon. The specific targets within these ranges are dependent on market conditions and determined by our regulator.


See “Risk Management - Liquidity Risk Management” under this Item 2 for additional discussion on our liquidity requirements. Effective March 31, 2019, new liquidity guidance required us to maintain sufficient funds to meet our obligations assuming no access to capital markets for an increased period of time, among changes to other liquidity requirements. We remained in compliance with all liquidity requirements in effect during the first nine months of 2019.

Generally, our liquid assets are funded with discount notes or floating rate bonds of a shorter tenor. In order to help ensure sufficient liquidity, we generally maintain a relatively longer weighted-average maturity on our consolidated obligation discount notes and floating rate bonds than the weighted average maturity of short-term liquid investmentinvestments and short-term advance balances. Over time, especially as the yield curve steepens on the short end, maintaining the differential between the weighted average original maturity of discount notes and short-term liquid investments and short-term advances will increase our cost of funds and reduce our net interest income.

Capital: Total capital consists of capital stock, retained earnings, and AOCI.

Capital stock outstanding increased 9.6decreased $436.1 million, or 15.6 percent, from December 31, 20182019 to SeptemberJune 30, 20192020 primarily due to a decrease in required capital stock related to the decline in advance utilization between periods, resulting in excess stock that was subsequently repurchased (see Table 37) due.

Each member is required to hold capital stock to become and remain a member of the FHLBank and enter into specified activities with the FHLBank including, but not limited to, access to the FHLBank’s credit products and selling AMA to the FHLBank. The amount of Class A Common Stock a member must acquire and maintain is the asset-based stock purchase requirement, which is currently equal to 0.1 percent of a member’s total assets as of December 31 of the preceding calendar year, with a minimum requirement of $1,000, and a maximum requirement of $500,000. The amount of Class B Common Stock a member must acquire and maintain is the activity-based stock purchase requirement, which is currently equal to 4.5 percent of the principal amount of advances outstanding to the member less the member’s asset-based stock purchase requirement. As of June 30, 2020 there were no activity-based stock purchase requirements for AMA, letters of credit, or derivatives.

On July 23, 2020, FHLBank's board of directors changed the established AMA activity-based stock purchase requirement pursuant to its Capital Plan, effective as of August 5, 2020 to three percent from the previous requirement of zero percent, with a maximum AMA activity-based stock purchase requirement of three percent of a member’s total assets as of December 31 of the preceding year. Official notification of the new AMA stock requirements was sent on August 5, 2020. Following that notice, members have 60 days to comply with the new requirement. However, if members transact MPF Program mortgage loan fundings or advances during that 60-day period, compliance will occur at the time of the transaction. In addition, on July 23, 2020, the board of directors established a Letter of Credit activity-based stock purchase requirement pursuant to its Capital Plan, effective as of January 22, 2021 to one quarter of one percent from the previous requirement of zero percent. The change in the activity-based stock purchase requirements will not change for former members with outstanding business transactions. As a result of these changes, we anticipate an increase in activity-based stock required fromtotal capital over the correlating increase in advances between periods.remainder of the year.


Excess stock represents the amount of stock held by a member in excess of that institution’s minimum stock requirement. Upon reducing the activity-based stock purchase requirement, through a mandated change or through a reduction of advance balances, excess stock is created since the member is no longer required under our capital plan to hold the same amount of activity-based capital stock. If our excess stock exceeds one percent of our assets before or after the payment of a dividend in the form of stock, we would be prohibited by FHFA regulation from paying dividends in the form of stock. To manage the amount of excess stock, we may repurchase excess Class A Common Stock over FHLBank-established limits held by any individual member periodically throughout the year.member. Our current practices include repurchasing all outstandingrequesting voluntary redemptions of excess Class A Common Stock generally on a monthly basis, and exchanging all excess Class B Common Stock over $50 thousand per member for Class A Common Stock on a regularperiodic basis. Such exchanges occurred on a weekly basis until February 2019, when we began to conduct such exchanges on a daily basis.

Under our cooperatively structured capital plan, our capital stock balances should fluctuate along with any growth (increased capital stock balances) or reduction (decreased capital stock balances) in advance balances and AMA in future periods. Any repurchase of excess capital stock is at our discretion and subject to statutory and regulatory limitations, including being in compliance with all of our regulatory capital requirements after any such discretionary repurchase.

Our activity-based stock purchase requirements are consistent with our cooperative structure; members’ stock ownership requirements and the dollar amount of dividends paid to members generally increases as their activities with us increase. To the extent that a member’s asset-based stock purchase requirement is insufficient to cover the member’s activity-based stock purchase requirement, the member is required to purchase Class B Common Stock. We believe the value of our products and services is enhanced by dividend yields that exceed the return available from other investments with similar terms and credit quality. Factors that affect members’ willingness to enter into activity with us and purchase additional required activity-based stock include, but are not limited to, our dividend rates, the risk-based capital weighting of our capital stock, and alternative investment or borrowing opportunities available to our members.
 

Table 37 provides a summary of member capital requirements under our current capital plan as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):

Table 37
Requirement09/30/201912/31/201806/30/202012/31/2019
Asset-based (Class A Common Stock only)$158,656
$157,406
$161,826
$158,758
Activity-based (additional Class B Common Stock)1
1,278,696
1,192,807
852,765
1,264,160
Total Required Stock2
1,437,352
1,350,213
1,014,591
1,422,918
Excess Stock (Class A and B Common Stock)235,815
177,921
379,720
345,953
Total Regulatory Capital Stock2
$1,673,167
$1,528,134
$1,394,311
$1,768,871
  
Activity-based Requirements:
 
 
 
 
Advances3
$1,368,216
$1,285,470
$949,396
$1,352,339
AMA assets (mortgage loans)4
675
772
572
621
Total Activity-based Requirement1,368,891
1,286,242
949,968
1,352,960
Asset-based Requirement (Class A Common Stock) not supporting member activity1
68,461
63,971
64,623
69,958
Total Required Stock2
$1,437,352
$1,350,213
$1,014,591
$1,422,918
                   
1 
Class A Common Stock, up to a member’s asset-based stock requirement, will be used to satisfy a member’s activity-based stock requirement before any Class B Common Stock is purchased by the member.
2 
Includes mandatorily redeemable capital stock.
3 
Advances to housing associates have no activity-based requirements because housing associates cannot own FHLBank stock.
4 
Non-members previously required to purchase AMA activity-based stock are subject to the AMA activity-based stock requirement in place at the time their membership ended as long as there are UPBs outstanding, but theunpaid principal balances outstanding. The requirement is currentlywas zero percent for members.members at June 30, 2020.

We are subject to three capital requirements under provisions of the GLB Act, the FHFA’s capital structure regulation and our current capital plan, which includes risk-based capital requirement, total capital requirement and leverage capital requirement. We have been in compliance with each of the aforementioned capital rules and requirements at all times since the implementation of our capital plan. See Note 1110 of the Notes to Financial Statements under Part I, Item 1 for additional information and compliance as of SeptemberJune 30, 20192020 and December 31, 2018.2019.

Capital Distributions: Dividends may be paid in cash or capital stock as authorized by our Boardboard of Directors.directors. Quarterly dividends can be paid out of current and previous unrestricted retained earnings, subject to FHFA regulation and our capital plan.

Within our capital plan, we have the ability to pay different dividend rates to the holders of Class A Common Stock and Class B Common Stock. This differential is implemented through a methodology referred to as the dividend parity threshold. Holders of Class A Common Stock and Class B Common Stock share in dividends equally up to the dividend parity threshold for a dividend period, then the dividend rate for holders of Class B Common Stock can exceed the rate for holders of Class A Common Stock, but the dividend rate on Class A Common Stock can never exceed the dividend rate on Class B Common Stock. In essence, the dividend parity threshold: (1) serves as a soft floor to holders of Class A Common Stock since we must pay holders of Class A Common Stock the dividend parity threshold rate before paying a higher rate to holders of Class B Common Stock; (2) indicates a potential dividend rate to holders of Class A Common Stock so that they can make decisions as to whether or not to hold excess Class A Common Stock; and (3) provides us with a tool to manage the amount of excess stock through higher or lower dividend rates by varying the desirability of holding excess shares of Class A Common Stock (i.e., the lower the dividend rate on Class A Common Stock, the less desirable it is to hold excess Class A Common Stock).


The current dividend parity threshold is equal to the average effective overnight Federal funds rate for a dividend period minus 100 basis points and was effective for all dividends paid in 20182019 and 2019.2020. The dividend parity threshold is effectively floored at zero percent when the current overnight Federal funds target rate is less than one percent. Under the capital plan, all dividends paid in the form of capital stock must be paid in the form of Class B Common Stock. Table 38 presents the dividend rates per annum paid on capital stock under our capital plan for the quarterly periods indicated:of 2020:

Table 38
Applicable Rate per Annum09/30/201906/30/201903/31/201912/31/201809/30/201806/30/202003/31/202012/31/201909/30/201906/30/2019
Class A Common Stock2.50 %2.50 %2.25 %2.00 %2.00 %0.50 %2.25 %2.50 %2.50 %2.50 %
Class B Common Stock7.50
7.50
7.50
7.25
7.25
5.50
7.25
7.50
7.50
7.50
Weighted Average1
6.61
6.56
6.56
6.24
6.32
3.69
5.94
6.14
6.61
6.56
Dividend Parity Threshold:  
Average effective overnight Federal funds rate2.20 %2.40 %2.40 %2.22 %1.92 %0.06 %1.23 %1.65 %2.20 %2.40 %
Spread to index(1.00)(1.00)(1.00)(1.00)(1.00)(1.00)(1.00)(1.00)(1.00)(1.00)
TOTAL (floored at zero percent)1.20 %1.40 %1.40 %1.22 %0.92 %0.00 %0.23 %0.65 %1.20 %1.40 %
                   
1 
Weighted average dividend rates are dividends paid in cash and stock on both classes of stock divided by the average of capital stock eligible for dividends.

We paid dividend rates of 2.500.50 percent on Class A Common Stock and 7.505.50 percent on Class B Common Stock for the thirdsecond quarter of 2020. We anticipate stock dividends on Class A Common Stock and Class B Common Stock to be lower than what was paid in 2019 to provide a higher percentage payoutfor the remainder of quarterly2020, consistent with the lower level of short‑term interest rates and our retained earnings to our members. Adverse changes inpolicy. Continued adverse market conditions may result in lower dividend rates in future quarters. While there is no assurance that our Boardboard of Directorsdirectors will not change the dividend parity threshold in the future, the capital plan requires that we provide members with 90 days' notice prior to the end of a dividend period in which a different dividend parity threshold is utilized in the payment of a dividend.

We expect to continue paying dividends primarily in the form of capital stock, but future dividends may be paid in cash. The payment of cash dividends instead of stock dividends should not have a significant impact from a liquidity perspective, as the subsequent redemption of excess stock created by stock dividends would utilize liquidity resources in the same manner as a cash dividend.

Risk Management
Active risk management continues to be an essential part of our operations and a key determinant of our ability to maintain earnings to return an acceptable dividend to our members and meet retained earnings thresholds. We maintain an enterprise risk management (ERM) program in an effort to enable the identification of all significant risks to the organization and institute the prompt and effective management of any major risk exposures. Our ERM program is a structured and disciplined approach that aligns strategy, processes, people, technology and knowledge with the purpose of identifying, evaluating and managing the uncertainties we face as we create value. It is a continuous process of identifying, prioritizing, assessing and managing inherent enterprise risks (i.e., business, compliance, credit, liquidity, market and operations) before they become realized risk events. See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Risk Management” in our Form 10-K for more information on our ERM program. A separate discussion of market risk is included under Item 3 – “Quantitative and Qualitative Disclosures About Market Risk” of this Form 10-Q.


Interest Rate Risk Management: Interest rate risk is the risk that relative and absolute changes in interest rates may adversely affect an institution's financial condition and performance. The goal of an interest rate risk management strategy is not necessarily to eliminate interest rate risk, but to manage it by setting, and operating within, an appropriate framework and limits. We generally manage interest rate risk by acquiring and maintaining a portfolio of assets and liabilities and entering into related derivative transactions to limit the expected mismatches in duration and market value of equity sensitivity. See Item 3 - "Quantitative and Qualitative Disclosures About Market Risk" for additional information on interest rate risk measurement.

Transition from LIBOR to an Alternative Reference Rate – Many of our assets and liabilities are indexed to LIBOR, so we continue to evaluate the potential impact of the replacement of the LIBOR benchmark interest rate, including the likelihood of SOFR prevailing as the most widely adopted replacement reference rate. We have assessed our current LIBOR exposure, which included evaluating the fallback language of derivative and investment contracts indexed to LIBOR, and have developed a transition plan that includes strategies to manage and reduce exposure in addition to operational readiness. Our swap agreements are governed by the International Swap Dealers Association (ISDA). ISDA is in the process of developing a protocol to modify legacy trades to include fallback language. The market transition away from LIBOR is expected to be gradual and complex, including the development of term and credit adjustments to accommodate differences between LIBOR, an unsecured rate, and SOFR, a secured rate. SOFR is based on a broad segment of the overnight U.S. Treasuries repurchase market and is intended to be a measure of the average cost of borrowing cash overnight collateralized by U.S. Treasury securities. We started participating in SOFR-indexed debt issuances in November 2018 and swapping certain financial instruments to SOFR in January 2019 in an effort to manage our exposure

to LIBOR assets and liabilities with maturities beyond 2021. We sold $162.9 million of available-for-sale securities indexed to LIBOR during the first quarter of 2020. We continue to consider the sale of securities as part of our strategy to reduce LIBOR exposure, but market pricing and reinvestment opportunities are limiting factors. Derivative and investment exposure will also be impacted by the actions of industry groups and standard setters, which are still under deliberation.

In September 2019, the FHFA issued a supervisory letter to the FHLBanks providing LIBOR transition guidance. The supervisory letter states 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 except investments. On March 16, 2020, in light of market volatility, the FHFA extended from March 31, 2020 to June 30, 2020 the FHLBanks’ ability to enter into instruments referencing LIBOR that mature after December 31, 2021, except for investments and option embedded products. With respect to investments, the FHLBanks should,were required, by December 31, 2019, to stop purchasing investments that reference LIBOR and mature after December 31, 2021. For additional information, see "Legislative and Regulatory Developments" under this Item 2.

The principal balance of variable rate advances indexed to LIBOR as of SeptemberJune 30, 20192020 was $660$750 million, which represents 2.8813.8 percent of total variable rate advances. The contractual maturities of these LIBOR-indexed advances include $200 million and $460 millionare all due in 2019 and 2020, respectively;by the end of 2021; thus, at September 30, 2019, we have no LIBOR exposure after 2021. We have no advances indexed to SOFR as of SeptemberJune 30, 2019.2020. However, we began to offer these advances during the second quarter of 2020.

Table 39 presents the par value of variable rate investment securities by the related interest rate index as of SeptemberJune 30, 20192020 (dollar amounts in thousands):

Table 39
09/30/2019
06/30/202006/30/2020
IndexTradingAvailable-for-saleHeld-to-maturityTotalPercentAmountPercent
Non-mortgage-backed securities:    
LIBOR$50,000
$
$85,670
$135,670
3.6%$81,995
2.6%
Non-mortgage-backed securities50,000

85,670
135,670
3.6
81,995
2.6
Mortgage-backed securities:    
LIBOR50,889

3,530,909
3,581,798
96.4
3,054,978
97.4
Other

24
24

22

Mortgage-backed securities50,889

3,530,933
3,581,822
96.4
3,055,000
97.4
TOTAL$100,889
$
$3,616,603
$3,717,492
100.0%$3,136,995
100.0%


Table 40 presents the par value of investment securities indexed to LIBOR outstanding by year of contractual maturity as of SeptemberJune 30, 20192020 (in thousands):

Table 40
09/30/2019
06/30/202006/30/2020
Year of Contractual MaturityAmountAmount
Non-mortgage-backed securities:  
2019$50,000
2020
$
2021

Thereafter85,670
81,995
Non-mortgage-backed securities135,670
81,995
Mortgage-backed securities:  
2019
2020

20212,318

Thereafter3,579,480
3,054,978
Mortgage-backed securities3,581,798
3,054,978
TOTAL$3,717,468
$3,136,973

Table 41 presents the notional amount of derivatives, excluding fixedinterest rate swaps (excludes interest rate caps and mortgage purchase commitments,delivery commitments) by the related interest rate index as of SeptemberJune 30, 2019 (dollar amounts2020 (amounts in thousands):

Table41
09/30/2019
06/30/202006/30/2020
IndexTotalPercentPay SideReceive Side
Fixed rate$15,468,893
$7,388,302
LIBOR$10,252,369
54.0%95,000
5,999,814
SOFR4,097,897
21.6
5,107,146
6,843,090
OIS4,633,503
24.4
2,186,156
2,625,989
TOTAL$18,983,769
100.0%$22,857,195
$22,857,195

Table 42 presents the notional amount of derivativesinterest rate swaps (excludes interest rate caps and mortgage delivery commitments) indexed to LIBOR outstanding by termination date as of SeptemberJune 30, 20192020 (in thousands). Actual terminations of certain derivatives will differ from contractual termination dates because derivative counterparties may have call options within the derivative contracts. Likewise, if the financial instrument being hedged by the derivative (either as a qualifying fair value hedge or as an economic hedge) is called or paid off prior to contractual maturity, we could potentially call or terminate the corresponding derivative prior to the termination date.

Table 42
09/30/2019
06/30/202006/30/2020
YearTermination DatePay SideReceive Side
2019$495,600
YearClearedBilateralClearedBilateral
1,334,723
$
$30,000
$95,223
$5,000
20211,865,741

40,000
362,957
15,000
Thereafter6,556,305

25,000
1,613,719
3,907,915
TOTAL$10,252,369
$
$95,000
$2,071,899
$3,927,915


Table 43 presents the par value of variable rate consolidated obligation bonds by the related interest rate index as of SeptemberJune 30, 20192020 (dollar amounts in thousands):

Table 43
09/30/2019
06/30/202006/30/2020
IndexAmountPercentAmountPercent
SOFR$14,409,000
64.7%
LIBOR$6,490,000
38.7%7,800,000
35.1
SOFR7,737,000
46.1
U.S. Treasury2,550,000
15.2
50,000
0.2
TOTAL$16,777,000
100.0%$22,259,000
100.0%

Table 44 presents the par value of consolidated obligation bonds indexed to LIBOR outstanding by year of maturity and by year of maturity or next call date for callable bonds as of SeptemberJune 30, 20192020 (in thousands):

Table 44
09/30/2019
06/30/202006/30/2020
YearMaturity DateMaturity or Next Call DateMaturity Date
2019$650,000
$1,150,000
20204,590,000
4,590,000
$4,250,000
2021790,000
750,000
3,550,000
Thereafter460,000


TOTAL$6,490,000
$6,490,000
$7,800,000

Credit Risk Management: Credit risk is defined as the potential that a borrower or counterparty will fail to meet its financial obligations in accordance with agreed terms. We manage credit risk by following established policies, evaluating the creditworthiness of our counterparties, and utilizing collateral agreements and settlement netting for derivative transactions where enforceability of the legal right of offset has been determined. The most important step in the management of credit risk is the initial decision to extend credit. Continuous monitoring of counterparties is completed for all areas where we are exposed to credit risk, whether that is through lending, investing or derivative activities.

Lending and AMA Activities – Credit risk with members arises largely as a result of our lending and AMA activities (members’ CEcredit enhancement obligations on conventional mortgage loans that we acquire through the MPF Program). We manage our exposure to credit risk on advances, letters of credit, and members’ CEcredit enhancement obligations on conventional mortgage loans through a combined approach that provides ongoing review of the financial condition of our members coupled with prudent collateralization.

As provided in the Bank Act, a member’s investment in our capital stock is held as additional collateral for the member’s advances and other credit obligations (letters of credit, CEcredit enhancement obligations, etc.). In addition, we can call for additional collateral or substitute collateral during the life of an advance or other credit obligation to protect our security interest.

Credit risk arising from AMA activities under our MPF Program falls into three categories: (1) the risk of credit losses on the mortgage loans represented in our First Loss Account (FLA) and last loss positions; (2) the risk that a PFI will not perform as promised with respect to its loss position provided through its CEcredit enhancement obligations on conventional mortgage loan pools, which are covered by the same collateral arrangements as those described for advances; and (3) the risk that a third-party insurer (obligated under primary mortgage insurance (PMI) or supplemental mortgage insurance (SMI) arrangements) will fail to perform as expected. Should a PMI third-party insurer fail to perform, it would increase our credit risk exposure because our FLAFirst Loss Account is the next layer to absorb credit losses on conventional mortgage loan pools. Likewise, if an SMIa supplemental mortgage insurance third-party insurer fails to perform, it would increase our credit risk exposure because it would reduce the participating member’s CEcredit enhancement obligation loss layer since SMIsupplemental mortgage insurance is purchased by PFIs to cover all or a portion of their CEcredit enhancement obligation exposure for mortgage pools under certain MPF Program products. Credit risk exposure to third-party insurers to which we have PMIprimary mortgage insurance and/or SMIsupplemental mortgage insurance exposure is monitored on a monthly basis and regularly reported to the Boardboard of Directors.directors. We perform credit analysis of third-party PMIprimary mortgage insurance and SMIsupplemental mortgage insurance insurers on at least a semi-annual basis. On a monthly basis, we review trends that could identify risks with our mortgage loan portfolio, including low FICO scores and high LTV ratios. Based on the credit underwriting standards under the MPF Program and this monthly review, we have concluded that the mortgage loans we hold would not be considered subprime.

Investments – Our RMP restricts the acquisition of investments to high-quality, short-term money market instruments and highly rated long-term securities. The short-term investment portfolio represents unsecured credit and reverse repurchase agreements. Counterparty ratings are monitored daily while performance and capital adequacy are monitored on a monthly basis in an effort to mitigate unsecured credit risk on our short-term investments. Collateral eligibility and transaction margin requirements on our reverse repurchase agreements are monitored daily. U.S. Treasury obligations and MBS securitized by Fannie Mae or Freddie Mac represent the majority of our long-term investments. Other long-term investments include MBS issued by Ginnie Mae, unsecured GSE debentures and collateralized state and local housing finance agency securities that were rated at least double-A at the time of purchase.securities.

Derivatives – We transact most of our derivatives with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed with a counterparty (uncleared derivatives) or with an executing broker and cleared through a Futures Commission Merchant (i.e., clearing agent) that acts on our behalf to clear and settle derivative transactions through a Clearinghouse (cleared derivatives).

We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative transactions. 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 this risk through credit analysis and collateral management. We are also required to follow the requirements set forth by applicable regulation.

Uncleared Derivatives. We are subject to non-performance by the counterparties to our uncleared derivative transactions. All bilateral security agreements with our non-member counterparties include bilateral-collateral-exchange provisions that require all credit exposures be collateralized, subject to a minimum transfer amount. As a result of these risk mitigation practices, we do not anticipate any credit losses on our uncleared derivative transactions as of SeptemberJune 30, 2019.2020.

Cleared Derivatives. We are subject to nonperformance by the Clearinghouse(s) and clearing agent(s). The requirement that we post initial and variation margin, through the clearing agent, to the Clearinghouse, exposes us 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 and/or payments are posted daily for changes in the value of cleared derivatives through a clearing agent. We do not anticipate any credit losses on our cleared derivatives as of SeptemberJune 30, 2019.2020.

We regularly monitor the exposures on our derivative transactions by determining the market value of positions using internal pricing models. The market values generated by the pricing model used to value derivatives are compared to dealer model results on a monthly basis to ensure that our derivative pricing model is reasonably calibrated to actual market pricing methodologies utilized by the dealers. In addition, we have our internal pricing model validated annuallyregularly by an independent consultant. As a result of these risk mitigation initiatives, management does not anticipate any credit losses on our derivative transactions. See Note 76 of the Notes to Financial Statements under Part I, Item 1 for additional information on managing credit risk on derivatives.

The contractual or notional amount of derivative transactions reflects our involvement in the various classes of financial instruments. The maximum credit risk with respect to derivative transactions is the estimated cost of replacing the derivative transactions if there are defaults, minus the value of any related collateral posted to satisfy the initial margin (if required). Our derivative transactions are subject to variation margin which is derived from the change in market value of the transaction and must be posted by the net debtor on demand. Cleared transactions are subject to initial margin as well as variation margin. The initial margin is intended to protect the Clearinghouse against default of a customer. Initial margin is calculated to cover the potential price volatility of the derivative transaction between the time of the default and the assignment of the transaction to another clearing agent or termination of the transaction. Although the initial margin requirement should decrease over time as the duration and market volatility decrease, it remains outstanding for the life of the transaction; thus, it is possible that we could either have: (1) net credit exposure with a Clearinghouse even if our net creditor position has been fully satisfied by the receipt of variation margin; or (2) net credit exposure with a Clearinghouse despite being the net debtor (i.e., being in a liability position). In determining maximum credit risk, we consider accrued interest receivables and payables as well as the netting requirements to net assets and liabilities.


Tables 45 and 46 present derivative notional amounts and counterparty credit exposure by whole-letter rating (in the event of a split rating, we use the lowest rating published by Moody’sMoody's Investor Service (Moody's) or Standard & Poor’s (S&P))Poor's) for derivative positions with counterparties to which we had credit exposure (in thousands):

Table 45
09/30/2019
06/30/202006/30/2020
Credit RatingNotional AmountNet Derivatives Fair Value Before CollateralCash Collateral Pledged From (To) CounterpartyNet Credit Exposure to CounterpartiesNotional AmountNet Derivatives Fair Value Before CollateralCash Collateral Pledged From (To) CounterpartyNet Credit Exposure to Counterparties
Asset positions with credit exposure:  
Uncleared derivatives: 
Single-A$288,500
$583
$400
$183
Cleared derivatives1
11,810,950
2,089
(133,151)135,240
$5,550,697
$1,089
$(68,890)$69,979
Liability positions with credit exposure:  
Uncleared derivatives2:
  
Single-A4,541,472
(105,365)(106,694)1,329
4,047,879
(307,013)(308,736)1,723
Triple-B311,528
(9,325)(9,417)92
244,862
(21,468)(21,601)133
Cleared derivatives1
13,045,642
(3,314)(122,604)119,290
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE$16,952,450
$(112,018)$(248,862)$136,844
$22,889,080
$(330,706)$(521,831)$191,125
                   
1 
Represents derivative transactions cleared with LCH Limited and CME Clearing. LCH Limited was rated AA- by S&P; LCH Limited's parent company, LCH Group Holdings Limited, was not rated; and London Stock Exchange Group, LCH Group Holdings Limited's ultimate parent, was rated A3 by Moody's and A by S&P as of SeptemberJune 30, 20192020. CME Clearing is not rated; however, CME Clearing's parent company, CME Group, Inc., was rated Aa3 by Moody's and AA- by S&P as of SeptemberJune 30, 20192020.
2 
Exposure can change on a daily basis; thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is returned.

Table 46
12/31/2018
12/31/201912/31/2019
Credit RatingNotional AmountNet Derivatives Fair Value Before CollateralCash Collateral Pledged From (To) CounterpartyNet Credit Exposure to CounterpartiesNotional AmountNet Derivatives Fair Value Before CollateralCash Collateral Pledged From (To) CounterpartyNet Credit Exposure to Counterparties
Asset positions with credit exposure:  
Uncleared derivatives:  
Single-A$36,000
$14
$
$14
$63,500
$257
$
$257
Cleared derivatives1
14,150,148
1,821
(145,658)147,479
Liability positions with credit exposure:  
Uncleared derivatives1:
 
Uncleared derivatives2:
 
Single-A1,225,774
(18,975)(22,261)3,286
6,123,478
(78,575)(84,633)6,058
Cleared derivatives2
4,623,289
(4,963)(36,140)31,177
Triple-B286,008
(5,894)(6,409)515
TOTAL DERIVATIVE POSITIONS WITH CREDIT EXPOSURE$5,885,063
$(23,924)$(58,401)$34,477
$20,623,134
$(82,391)$(236,700)$154,309
                   
1
Represents derivative transactions cleared with LCH Limited and CME Clearing. LCH Limited was rated AA- by S&P; LCH Limited's parent company, LCH Group Holdings Limited, was not rated; and London Stock Exchange Group, LCH Group Holdings Limited's ultimate parent, was rated A3 by Moody's and A by S&P as of December 31, 2019. CME Clearing is not rated; however, CME Clearing's parent company, CME Group, Inc., was rated Aa3 by Moody's and AA- by S&P as of December 31, 2019.
2 
Exposure can change on a daily basis; thus, there is often a short lag time between the date the exposure is identified, collateral is requested and collateral is returned.
2
Represents derivative transactions cleared with LCH Limited and CME Clearing. LCH Limited was rated A+ by S&P; LCH Limited's parent company, LCH Group Holdings Limited, was not rated; and London Stock Exchange Group, LCH Group Holdings Limited's ultimate parent, was rated A3 by Moody's and A- by S&P as of December 31, 2018. CME Clearing is not rated; however, CME Clearing's parent company, CME Group, Inc., was rated Aa3 by Moody's and AA- by S&P as of December 31, 2018.


Foreign Counterparty Risk  Loans, acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets payable to us by entities of foreign countries, regardless of the currency in which the claim is denominated are referred to as "cross-border outstandings." Our cross-border outstandings consist primarily of short-term trading securities and Federal funds sold issued by banks and other financial institutions, which are non-sovereign entities, and derivative asset exposure with counterparties that are also non-sovereign entities. Secured reverse repurchase agreements outstanding are excluded from cross-border outstandings because they are fully collateralized.

In addition to credit risk, cross-border outstandings have the risk that, as a result of political or economic conditions in a country, borrowers may be unable to meet their contractual repayment obligations of principal and/or interest when due because of the unavailability of, or restrictions on, foreign exchange needed by borrowers to repay their obligations. We continue to cautiously place unsecured cross-border outstandings.

Table 47 presents the fair value of cross-border outstandings as of SeptemberJune 30, 20192020 (dollar amounts in thousands):

Table 47
Total1
Sweden
Other1
Total
AmountPercent of Total AssetsAmountPercent of Total AssetsAmountPercent of Total AssetsAmountPercent of Total Assets
Federal funds sold2
$600,000
1.1%$650,000
1.2%$870,000
1.6%$1,520,000
2.8%
        
Derivative assets:        
Net exposure at fair value(18,224) 
 (28,544) (28,544) 
Cash collateral held19,236
 
 28,702
 28,702
 
Net exposure after cash collateral1,012



158

158

        
TOTAL$601,012
1.1%$650,000
1.2%$870,158
1.6%$1,520,158
2.8%
                   
1 
Represents foreign countries where individual exposure is less than one percent of total assets. Total cross-border outstandings to countries that individually represented between 0.75 and 1.0 percent of our total assets as of June 30, 2020 were $0.4 billion (Netherlands).
2 
Consists solely of overnight Federal funds sold.

Liquidity Risk Management: Maintaining the ability to meet our obligations as they come due and to meet the credit needs of our members and housing associates in a timely and cost-efficient manner is the primary objective of managing liquidity risk. We seek to be in a position to meet the credit needs of our members, as well as our debt service and liquidity needs, without maintaining excessive holdings of low-yielding liquid investments or being forced to incur unnecessarily high borrowing costs.

We manage liquidity, first and foremost, to meet the needs of members, while adhering to statutoryregulatory and contingencystatutory liquidity requirements. We maintain daily liquidity levels above certain thresholds and consider hypothetical adverse scenarios. These thresholds are outlined in our internal policies and comply with federal statutes, FHFA regulations and other FHFA guidance not issued in the form of regulations. We remained in compliance with each of these liquidity regulatory requirements throughout the thirdsecond quarter of 2019.2020.

We are focused on maintaining a cost-effective liquidity and funding balance between our financial assets and financial liabilities. The FHLBanks work collectively to manage the system-wide liquidity and funding management and jointly monitor the combined refinancing risk. In managing and monitoring the amounts of assets that require refunding, we may consider contractual maturities of the financial assets, as well as certain assumptions regarding expected cash flows (i.e., estimated prepayments and scheduled amortizations). See the Notes to the Financial Statements under Item 1 for more detailed information regarding contractual maturities of certain of our financial assets and liabilities.

We generally maintained stable access to the capital markets for the quarter ended SeptemberJune 30, 2019.2020. For additional discussion of the market for our consolidated obligations and the overall market affecting liquidity, see “Financial Market Trends” under this Item 2.

Our derivative instruments contain provisions that require all credit exposures be collateralized. See Note 76 of the Notes to Financial Statements under Part I, Item 1 for additional information on collateral posting requirements.


Recently Issued Accounting Standards
See Note 2 of the Notes to Financial Statements under Part I, Item 1 – "Financial Statements" for a discussion of recently issued accounting standards.


Legislative and Regulatory Developments
FHFA Advisory Bulletin 2019-03Margin and Capital Stock Management. Requirements for Covered Swap Entities.On August 14, 2019,July 1, 2020, the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), the Farm Credit Administration, and the FHFA (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: (1) 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 such as notional reductions or portfolio compression exercises; (2) 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 from $8 billion to $50 billion, and limits Phase 5 to counterparties with an AANA of uncleared swaps from $50 billion to $750 billion; and (3) clarifies that initial margin trading documentation does not need to be executed prior to a counterparty reaching the initial margin threshold.

On the same date, the Prudential Banking Regulators issued an Advisory Bulletin (the AB) providing guidance that augments existing statutoryinterim final rule, effective September 1, 2020, extending the initial margin compliance date for Phase 5 counterparties to September 1, 2021 and regulatory capital requirementsextending the initial margin compliance date for Phase 6 counterparties to require each FHLBank to maintain a ratio of at least two percent of capital stock to total assets in order to help preserve the cooperative structure incentives that encourage members to remain fully engaged in the oversight of their investment in the FHLBank. Beginning in FebruarySeptember 1, 2022. On July 10, 2020, the FHFA will considerCommodity Futures Trading Commission (CFTC) issued a final rule and a proposed rule which collectively, among other things, extend the proportion of capital stockinitial margin compliance date for Phase 5 counterparties to assets, measured on a daily average basis at month end, when assessing each FHLBank’s capital management practices. September 1, 2021 and extend the initial margin compliance date for Phase 6 counterparties to September 1, 2022, thereby aligning with the Prudential Banking Regulators.

We do not expect these final rules or the ABproposed rule, if adopted as proposed, to have a material impacteffect on our capital management practices, financial condition or results of operations.

FHFA Final Rule on FHLBank Housing Goals Amendments.  On June 3, 2020, the FHFA issued 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 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 AMA loans in a calendar year must be small members. The final rule provides that an FHLBank may request FHFA 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.

While the we are still analyzing the impact of the final rule, we do not believe these changes will have a material effect on our financial condition or results of operations.

Legislative and Regulatory Developments Related to COVID-19 Pandemic.
FHFA Supervisory Letter on Planning- PPP Loans as Collateral for LIBOR Phase-Out. FHLBank Advances. On September 27, 2019,July 1, 2020, Congress approved an extension of the PPP until August 8, 2020. The April 23, 2020 Supervisory Letter from the FHFA issued a Supervisory Letter (the Supervisory Letter) to the FHLBanks that the FHFA 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 provides 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 should, by December 31, 2019, stop purchasing investments that reference LIBOR and mature after December 31, 2021. These phase-out dates do not apply to collateral accepted by the FHLBanks. The Supervisory Letter also directs theallowing FHLBanks to update their pledgedaccept PPP loans as collateral certification reporting requirementsremains in effect.

Coronavirus Aid, Relief, and Economic Security Act. The CARES Act provisions will begin to expire in July 2020, but some have been extended by March 31, 2020 in an effort to encourage members to distinguish LIBOR-linked collateral maturing after December 31, 2021. Acknowledging that that thereregulatory action:
Additional federal unemployment funds expired July 31, 2020;
Statutory eviction freeze for federally-backed properties expired July 25, 2020; and
Foreclosure moratorium on federally-backed properties was extended by the FHFA on June 17, 2020 to last until “at least” August 31, 2020.

Additional phases of the CARES Act or other COVID-19 pandemic relief legislation may be LIBOR-linked products serving compelling mission, risk mitigating, and/or hedging purposes for the FHLBanks that do not currently have readily available alternatives, the Supervisory Letter permits the FHLBanks to jointly submit a single list of LIBOR-linked products maturing after 2021 that they would like to continue to use after March 31, 2020.enacted by Congress. We continue to evaluate the potential impact of the Supervisory LetterCARES Act on our LIBOR transition planning.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 Legislative and Regulatory Developments. In light of the COVID-19 pandemic, governmental agencies, including the Securities and Exchange Commission, the Office of the Comptroller of the Currency, Federal Reserve, FDIC, National Credit Union Administration, CFTC and the FHFA, 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.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

We measure interest rate risk exposure by various methods, including the calculation of duration of equity (DOE) and market value of equity (MVE) in different interest rate scenarios.

Duration of Equity
DOE aggregates the estimated sensitivity of market value for each of our financial assets and liabilities to changes in interest rates. In essence, DOE indicates the sensitivity of MVE to changes in interest rates. However, MVE should not be considered indicative of our market value as a going concern or our value in a liquidation scenario. A positive DOE results when the duration of assets and designated derivatives is greater than the duration of liabilities and designated derivatives. A positive DOE generally indicates a degree of interest rate risk exposure in a rising interest rate environment. A negative DOE indicates a degree of interest rate risk exposure in a declining interest rate environment. Higher DOE numbers, whether positive or negative, indicate greater volatility of MVE in response to changing interest rates.


We manage DOE within ranges approved by our Boardboard of Directorsdirectors as described under Item 7A - "Quantitative and Qualitative Disclosures About Market Risk" in the annual report on Form 10-K, incorporated by reference herein. All our DOE measurements, with the exception of the base case DOE, were in compliance with Boardboard of Directordirector established policy limits and operating ranges as of SeptemberJune 30, 2019.2020. On an ongoing basis, we actively monitor portfolio relationships and overall DOE dynamics as a part of our evaluation processes for determining acceptable future asset/liability management actions. Table 48 presents the DOE in the base case and the up and down 200 basis point interest rate shock scenarios as of the periods noted:

Table 48
Duration of Equity
DateUp 200 Basis PointsBaseDown 200 Basis PointsUp 200 Basis PointsBaseDown 200 Basis Points
06/30/2020-1.5-3.90.4
03/31/2020-0.5-2.30.7
12/31/20190.8-0.92.4
09/30/20191.0-0.72.01.0-0.72.0
06/30/20191.4-0.42.61.4-0.42.6
03/31/20191.60.03.8
12/31/20182.31.32.8
09/30/20182.91.21.9

The absolute value of the DOE of the portfolio as of SeptemberJune 30, 20192020 increased in the base scenarioand up 200 basis point shock scenarios and decreased in the up and down 200 basis point shock scenariosscenario from June 30, 2019.March 31, 2020. The primary factors contributing to these changes in duration during the period were: (1) the general decrease in long-term interest rates and the relative level of mortgage rates during the period; (2) an increase in the weighting of the mortgage loan portfolio as a percent of total assets during the period; and (3) asset/liability actions taken by management throughout the period, including the continued issuance of long-term, unswapped callable consolidated obligation bonds with relatively short lock-out periods, and the continued issuance of discount notes and short-term variable rate consolidated obligations to fund changes in advance balances.


The general decrease in long-term interest rates during the thirdsecond quarter of 20192020 generally indicates a shortening duration profile for both the fixed rate mortgage loan portfolio and the associated unswapped callable consolidated obligation bonds funding these assets. The increasedecline in advance balances and the relatively stable balance of our mortgage loan portfolio during the period, as discussed in Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition – MPF Program,” caused the mortgage loan portfolio to increase slightly as an overall percentage of assets, as the balance sheet expanded, increasing from 15.317.4 percent of total assets as of June 30, 2019March 31, 2020 to 17.220.4 percent as of SeptemberJune 30, 2019.2020. Since the mortgage loan portfolio continues to comprise a considerable percentage of overall assets and has such a sizable duration relative to our other assets, especially with the decrease in the advance portfolio during the period, its behavior is quite visible in the duration risk profile and changes in this portfolio are typically magnified as the composition of assets changes. This magnification occurs when a portfolio market value weighting as a percent of the overall net market value of the balance sheet changes, causing the remaining portfolios to be a smaller or larger component of the total balance sheet composition. For example, if advance balances decrease during a given period, this decrease will cause the mortgage loan portfolio weighting to increase as a total proportion of total assets. Further, if interest rates decrease, the market value gains in the mortgage loan portfolio will cause the mortgage loan portfolio to further increase its sizable percentage of overall market value of assets. This increase in market value of assets will cause the duration for this portfolio to have a greater impact on DOE. In other words, this relationship causes the duration of the mortgage loan portfolio to have a larger contribution impact to the overall DOE since DOE is a market value weighted measurement. With these balance sheet dynamics, we continue to actively manage and monitor the contributing factors of our risk profile, including DOE. As the relationship of the fixed rate mortgage loan assets and the associated callable liabilities vary based on market conditions, we evaluate and manage these market driven sensitivities as both portfolios change in balance level and overall proportion. This evaluation included review of the base DOE result of -3.9 exceeding the operating range of ±2.5. As discussed above, this level is primarily the result of the increased weighting of the mortgage loan portfolio provided the decline in the advance portfolio and the decline in interest rates as well as mortgage rates. Since the weighting increased, causing the mortgage asset portfolio to be a larger percentage of total assets, and with the decline in interest rates, shortening the duration of the mortgage asset portfolio, the impact to the base DOE was an overall increase in liability sensitivity or a more negative DOE.

New loans were continually addedUnder the RMP approved by our board of directors, our DOE is generally limited to a range of ±5.0 in the base case, while we typically manage our DOE in the base scenario to remain in the range of ±2.5 as set forth in our Risk Appetite Metrics approved by the board of directors. This lower operating range for DOE is considered prudent and reasonable by management and the board of directors and can change depending upon market conditions and other factors. However, when DOE exceeds either the limits established by the RMP or the more narrowly-defined ranges to which we manage DOE, corrective actions taken may include: (1) the purchase of interest rate caps, interest rate floors, swaptions or other derivatives; (2) the sale of assets; and/or (3) the addition to the balance sheet of assets or liabilities having characteristics that are such that they counterbalance the excessive duration observed. Provided the current unprecedented, historically low and volatile interest rate environment, we continue to evaluate the current balance sheet composition and strategic alternatives to mitigate the excessive duration position that may include: (1) take asset/liability actions to bring the DOE back within the ranges established in our RMP; or (2) review and discuss potential asset/liability management actions with the board of directors at the next regularly scheduled meeting that could bring the DOE back within the ranges established in the RMP and ascertain a course of action, which can include a determination that no asset/liability management actions are necessary. A determination that no asset/liability management actions are necessary can be made only if the board of directors agrees with management’s recommendations. We continue to actively monitor portfolio relationships and overall DOE dynamics as a part of our evaluation processes for determining acceptable future asset/liability management actions.

With respect to the mortgage loan portfolio, new loans were added to replace loans that were prepaid during the period andat a reduced level as we continue to actively manage this ongoing growthportfolio to position the balance sheet sensitivity to perform within our expected risk tolerances. To effectively manage these changes in the mortgage loan portfolio (including new production loans) and related sensitivity to changes in market conditions, we continued to issue unswapped callable consolidated obligation bonds with relatively long maturities and short lock-out periods (generally three months to one year). The issuance of callable bonds and reissuance of new callable bonds to replace called bonds at lower interest rates as rates declined during the period, generally extends the duration profile of this portfolio. This liability extension corresponds with the expected longer duration profile of the new fixed rate mortgage loans, all else being equal.equal, and positions the balance sheet for future changes in rates, including rate increases where the mortgage loan portfolio will likely lengthen in duration as expected prepayments slow. This liability lengthening demonstrates the specific duration sensitivity to changes in interest rates at certain shock scenarios where the unswapped callable bonds are more or less sensitive to certain levels of increasing interest rates, causing the overall DOE to increase or decrease, similar to the factors causing the changes in DOE for all interest rate shock scenarios. This sensitivity, or convexity, is further described under Item 7A – "Quantitative and Qualitative Disclosures About Market Risk" in the annual report on Form 10-K for the year ended December 31, 2018.2019.


In addition, the relative level of mortgage rates generally contributes significantly to the sensitivity of the fixed rate mortgage loan portfolio causing the duration profile to lengthen or shorten based on the relationship between interest rates, mortgage rates and associated mortgage spreads. For instance, the decrease in interest rates during the period caused the mortgage loan portfolio duration to shorten slightly more than the associated liabilities, leading to a more liability sensitive DOE profile in the base and up 200 basis point shock interest rate scenarioscenarios and less asset sensitive DOE profile in the up and down 200 basis point shock interest rate scenarios.scenario. Further, issuance of discount notes continued, as well as increased issuance of variable rate consolidated obligations, in order to provide adequate liquidity sources to appropriately address changes in customer short-term advance balances and associated capital stock activity during the period. The combination of all these factors contributed to the net DOE changes in all interest rate shock scenarios, where the DOE increased in the base scenarioand up 200 basis point shock scenarios and decreased in the up and down 200 basis point shock scenarios.scenario. The down shock scenario continues to provide limited information since interest rates remain at historically low levels. This low interest rate environment essentially generates at or near zero interest rates for the short- and mid-termmajority of interest rates along the down 200 shocked term structure of interest rates, causing valuation changes to be limited, generating DOE results with marginal information.

With respect to the variable rate GSE MBS portfolio, we generally purchase interest rate caps to offset the impact of embedded caps in this portfolio in rising interest rate scenarios. As expected, these interest rate caps are a satisfactory interest rate risk hedge to rising interest rates and provide an off-setting risk response to the risk profile changes in variable rate GSE MBS with embedded caps. We periodically assess derivative strategies to ensure that overall balance sheet risk is appropriately hedged within established risk appetite metrics and make adjustments to the derivative portfolio as needed. This evaluation is completed considering not only the par value of the variable rate MBS with embedded caps being hedged with purchased caps, but the composition of the purchased cap portfolio and expected prepayments of the variable rate MBS with embedded caps. This evaluation of the relative relationship between the variable rate investment portfolio and the purchased cap portfolio continues to indicate a sufficient hedging relationship. During the quarter ended September 30, 2019, we had no additional purchases of variable rate single-family GSE MBS. We also did not purchase additional interest rate caps during the third quarter of 2019 based on current interest rate cap exposure.

In calculating DOE, we also calculate our duration gap, which is the difference between the duration of our assets and the duration of our liabilities. Our base duration gap was -0.4 months for September 30, 2019 and -0.2-2.5 months for June 30, 2019.2020 and -1.3 months for March 31, 2020. As discussed previously, the performance was primarily the result of the changes in the fixed rate mortgage loan portfolio and the associated funding decisions made by management in response to changes in the interest rate environment and balance sheet during the thirdsecond quarter of 2019.2020. All FHLBanks are required to submit this base duration gap number to the Office of Finance as part of the quarterly reporting process created by the FHFA.

Market Value of Equity
MVE is the net value of our assets and liabilities. Estimating sensitivity of MVE to changes in interest rates is another measure of interest rate risk. We generally maintain an MVE within limits specified by the Boardboard of Directorsdirectors in the RMP. The RMP measures our market value risk in terms of the MVE in relation to total regulatory capital stock outstanding (TRCS). TRCS includes all capital stock outstanding, including stock subject to mandatory redemption. As a cooperative, we believe using the TRCS results is an appropriate measure because it reflects our market value relative to the book value of our capital stock. Our RMP stipulates MVE shall not be less than: (1) 100 percent of TRCS under the base case scenario; or (2) 90 percent of TRCS under a ±200 basis point instantaneous parallel shock in interest rates. Table 49 presents MVE as a percent of TRCS. As of SeptemberJune 30, 20192020, all scenarios are well above the specified limits and much of the relative level in the ratios during the periods covered by the table can be attributed to the relative level of the fixed rate mortgage loan market values as rates have continued to remain historically low along with the relative level of outstanding capital.


The MVE to TRCS ratios can be greatly impacted by the level of capital outstanding based on our capital management approach. Typically, as advances increase and the associated capital level increases, the ratio will generally decline since the new advances are primarily short-term with market values at or near par. Conversely, as advance balances decrease and the capital level decreases as capital stock is repurchased, the ratio will generally increase.increase, as represented by the June 30, 2020 results. However, if excess capital stock is not repurchased, the capital level remains higher thereby causing a decrease in the ratio. The relative level of advance balances, required stock and excess stock as of SeptemberJune 30, 20192020 (see Table 37 under Item 2 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources - Capital”) contributed to the MVE levels as of SeptemberJune 30, 2019.2020. These relationships primarily generate the changes in the MVE/TRCS levels and produce the changes in the ratios in all interest rate scenarios in the table below.

Table 49
Market Value of Equity as a Percent of Total Regulatory Capital Stock
DateUp 200 Basis PointsBaseDown 200 Basis PointsUp 200 Basis PointsBaseDown 200 Basis Points
06/30/2020231210209
03/31/2020184173177
12/31/2019175174176
09/30/2019174179174179
06/30/2019171174176171174176
03/31/2019172176
12/31/2018167173174
09/30/2018167174175


Detail of Derivative Instruments by Type of Instrument by Type of Risk
Various types of derivative instruments are utilized to mitigate the interest rate risks described in the preceding sections as well as to better match the terms of assets and liabilities. Generally, we designate derivative instruments as either: (1) a fair value hedge of an underlying financial instrument or a forecasted transaction;instrument; or (2) an economic hedge used in asset/liability management. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities or firm commitments that either does not qualify for hedge accounting, or for which we have not elected hedge accounting, but is an acceptable hedging strategy under our RMP. For hedging relationships that are not designated for shortcut hedge accounting, we formally assess (both at the hedge’s inception and monthly on an ongoing basis) whether the derivatives used have been highly effective in offsetting changes in the fair values or cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. We typically use regression analyses or similar statistical analyses to assess the quantitative effectiveness of our long haul hedges. We determine the hedge accounting to be applied when the hedge is entered into by completing detailed documentation, which includes a checklist setting forth criteria that must be met to qualify for hedge accounting.


Tables 50 and 51 present the notional amount and fair value amount (fair value includes net accrued interest receivable or payable on the derivative) for derivative instruments by hedged item, hedging instrument, hedging objective and accounting designation (in thousands):

Table 50
09/30/2019
06/30/202006/30/2020
Hedged ItemHedging InstrumentHedging ObjectiveAccounting DesignationNotional AmountFair Value AmountHedging InstrumentHedging ObjectiveAccounting DesignationNotional AmountFair Value Amount
Advances    
Fixed rate non-callable advancesPay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexFair Value Hedge $3,132,648
$895
Pay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexFair Value Hedge $3,816,792
$(3,903)
Fixed rate convertible advancesPay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate index and offset option risk in the advanceFair Value Hedge 1,312,850
(44,515)Pay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate index and offset option risk in the advanceFair Value Hedge 1,775,900
(141,821)
Firm commitment to issue a fixed rate advanceForward settling interest rate swapProtect against fair value riskFair Value Hedge65,504
(48)Forward settling interest rate swapProtect against fair value riskEconomic Hedge33,312
(1,795)
Firm commitment to issue a fixed rate advanceForward settling interest rate swapProtect against fair value riskEconomic Hedge35,077
(1,066)Forward settling interest rate swapProtect against fair value riskFair Value Hedge28,504
6
Fixed rate non-callable advancesPay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexEconomic Hedge6,000
(95)Pay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexEconomic Hedge13,255
(1,005)
Investments    
Fixed rate non-MBS available-for-sale investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexFair Value Hedge4,200,000
(312)
Fixed rate MBS available-for-sale investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexFair Value Hedge2,915,976
(166,049)
Fixed rate non-MBS trading investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 1,898,500
409
Pay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 1,898,500
(102)
Fixed rate MBS trading investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 809,214
(37,412)Pay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 786,654
(76,416)
Fixed rate MBS available-for-sale investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexFair Value Hedge2,438,761
(79,255)
Fixed rate non-MBS available-for-sale investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexFair Value Hedge3,450,000
645
Adjustable rate MBS with embedded capsInterest rate capOffset the interest rate cap embedded in a variable rate investmentEconomic Hedge 1,248,200
170
Interest rate capOffset the interest rate cap embedded in a variable rate investmentEconomic Hedge 762,500
104
Mortgage Loans Held for Portfolio    
Fixed rate mortgage purchase commitmentsMortgage purchase commitmentProtect against fair value riskEconomic Hedge 375,772
(452)Mortgage purchase commitmentProtect against fair value riskEconomic Hedge 107,916
411
Consolidated Obligation Discount Notes    
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 monthsReceive fixed, pay variable interest rate swapConvert the discount note's fixed rate to a variable rateFair Value Hedge 2,755,678
91
Fixed rate non-callable consolidated obligation discount notes with tenors less than 6 monthsReceive fixed, pay variable interest rate swapConvert the discount note's fixed rate to a variable rateEconomic Hedge 298,515
5
Receive fixed, pay variable interest rate swapConvert the discount note's fixed rate to a variable rateEconomic Hedge 2,249,124
(5)
Consolidated Obligation Bonds    
Fixed rate non-callable consolidated obligation bondsReceive fixed, pay variable interest rate swapConvert the bond’s fixed rate to a variable rate indexFair Value Hedge 2,468,500
15,888
Receive fixed, pay variable interest rate swapConvert the bond’s fixed rate to a variable rate indexFair Value Hedge 2,383,500
21,039
Fixed rate callable consolidated obligation bondsReceive fixed, pay variable interest rate swapConvert the bond’s fixed rate to a variable rate index and offset option risk in the bondFair Value Hedge 880,000
(31)
Complex consolidated obligation bondsReceive variable with embedded features, pay variable interest rate swapReduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bondFair Value Hedge10,000
66
Callable step-up/step-down consolidated obligation bondsReceive variable interest rate with embedded features, pay variable interest rate swapReduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bondFair Value Hedge 340,000
336
Variable rate consolidated obligation bondsReceive variable interest rate, pay variable interest rate swapReduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate indexEconomic Hedge 590,000
175
TOTAL $19,359,541
$(144,285) $23,727,611
$(369,757)


Table 51
12/31/2018
12/31/201912/31/2019
Hedged ItemHedging InstrumentHedging ObjectiveAccounting DesignationNotional AmountFair Value AmountHedging InstrumentHedging ObjectiveAccounting DesignationNotional AmountFair Value Amount
Advances    
Fixed rate non-callable advancesPay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexFair Value Hedge $2,647,704
$(1,102)Pay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexFair Value Hedge $3,160,580
$953
Fixed rate convertible advancesPay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate index and offset option risk in the advanceFair Value Hedge 1,150,850
10,028
Pay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate index and offset option risk in the advanceFair Value Hedge 1,607,500
(24,784)
Firm commitment to issue a fixed rate advanceForward settling interest rate swapProtect against fair value riskFair Value Hedge140,475
(670)Forward settling interest rate swapProtect against fair value riskFair Value Hedge35,504
28
Firm commitment to issue a fixed rate advanceForward settling interest rate swapProtect against fair value riskEconomic Hedge 9,136
(38)Forward settling interest rate swapProtect against fair value riskEconomic Hedge 35,077
(532)
Fixed rate non-callable advancesPay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexEconomic Hedge 2,000
(10)Pay fixed, receive variable interest rate swapConvert the advance’s fixed rate to a variable rate indexEconomic Hedge 6,000
(62)
Investments    
Fixed rate non-MBS available-for-sale investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexFair Value Hedge4,200,000
(352)
Fixed rate MBS available-for-sale investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexFair Value Hedge2,822,646
(49,571)
Fixed rate non-MBS trading investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 648,500
(1,199)Pay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 1,898,500
248
Adjustable rate MBS with embedded capsInterest rate capOffset the interest rate cap embedded in a variable rate investmentEconomic Hedge 1,130,000
117
Fixed rate MBS trading investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 847,284
12,238
Pay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexEconomic Hedge 790,045
(24,861)
Fixed rate MBS available-for-sale investmentsPay fixed, receive variable interest rate swapConvert the investment’s fixed rate to a variable rate indexFair Value Hedge1,752,493
40,197
Adjustable rate MBS with embedded capsInterest rate capOffset the interest rate cap embedded in a variable rate investmentEconomic Hedge 1,373,200
1,044
Mortgage Loans Held for Portfolio    
Fixed rate mortgage purchase commitmentsMortgage purchase commitmentProtect against fair value riskEconomic Hedge 101,551
549
Mortgage purchase commitmentProtect against fair value riskEconomic Hedge 221,800
470
Consolidated Obligation Discount Notes    
Fixed rate non-callable consolidated obligation discount notes with tenors of 6 to 12 monthsReceive fixed, pay variable interest rate swapConvert the discount note's fixed rate to a variable rateFair Value Hedge 49,403

Receive fixed, pay variable interest rate swapConvert the discount note's fixed rate to a variable rateFair Value Hedge 1,383,782
47
Firm commitments to issue discount notesDiscount note commitmentProtect against fair value riskEconomic Hedge 525,000

Consolidated Obligation Bonds    
Fixed rate non-callable consolidated obligation bondsReceive fixed, pay variable interest rate swapConvert the bond’s fixed rate to a variable rate indexFair Value Hedge 1,440,000
9,443
Receive fixed, pay variable interest rate swapConvert the bond’s fixed rate to a variable rate indexFair Value Hedge 2,628,500
14,013
Fixed rate callable consolidated obligation bondsReceive fixed, pay variable interest rate swapConvert the bond’s fixed rate to a variable rate index and offset option risk in the bondFair Value Hedge 680,000
(2,729)Receive fixed, pay variable interest rate swapConvert the bond’s fixed rate to a variable rate index and offset option risk in the bondFair Value Hedge 500,000
2,635
Complex consolidated obligation bondsReceive variable with embedded features, pay variable interest rate swapReduce interest rate sensitivity and re-pricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bondFair Value Hedge15,000
(1,050)
Variable rate consolidated obligation bondsReceive variable interest rate, pay variable interest rate swapReduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate indexEconomic Hedge 370,000
(342)
Callable step-up/step-down consolidated obligation bondsReceive variable interest rate with embedded features, pay variable interest rate swapReduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bondFair Value Hedge 470,000
(4,325)Receive variable interest rate with embedded features, pay variable interest rate swapReduce interest rate sensitivity and repricing gaps by converting the bond’s variable rate to a different variable rate index and/or to offset embedded options risk in the bondFair Value Hedge 110,000
95
Variable rate consolidated obligation bondsReceive variable interest rate, pay variable interest rate swapReduce basis risk by converting an undesirable variable rate index in the bond to a more desirable variable rate indexEconomic Hedge 645,000
(15,406)
TOTAL $12,497,596
$46,970
 $20,899,934
$(81,898)


Item 4: Controls and Procedures

Disclosure Controls and Procedures
Senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our disclosure controls and procedures are designed to provide a reasonable level of assurance in achieving their desired objectives; however, in designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management, with the participation of the President and Chief Executive Officer (CEO), our principal executive officer, and Chief Financial Officer (CFO), our officer/principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of SeptemberJune 30, 2019.2020. Based upon that evaluation, the CEO and CFO havehas concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of SeptemberJune 30, 2019.2020.

Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended SeptemberJune 30, 20192020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1: Legal Proceedings
We are subject to various pending legal proceedings arising in the normal course of business. 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 our financial condition or results of operations. Additionally, management does not believe that we are subject to any material pending legal proceedings outside of ordinary litigation incidental to our business.

Item 1A: Risk Factors
An economic downturn or natural disaster in the FHLBank’s region, or a pandemic, could adversely affect our profitability and financial condition. Economic recession over a prolonged period or other unfavorable economic conditions in our region (including on a state or local level) could have an adverse effect on our business, including the demand for our products and services, and the value of the collateral securing advances, investments, and mortgage loans held in portfolio. Portions of our region also are subject to risks from tornadoes, floods, or other natural disasters. These natural disasters, including those resulting from significant climate changes, could damage or dislocate the facilities of our members, may damage or destroy collateral that members have pledged to secure advances or mortgages, or the livelihood of borrowers of members, or otherwise could cause significant economic dislocation in the affected areas of our region. Additionally, the impact of widespread health emergencies may adversely impact our financial condition and results of operations.

The impact of the COVID-19 pandemic on our members and our business could adversely affect our profitability and financial condition. As of the date of the filing of this report, the full effects of the COVID-19 pandemic are evolving and not fully known. The COVID-19 pandemic has to date caused significant economic and financial turmoil both in the U.S. and around the world, and has fueled concerns that it will lead to a global recession. These conditions are expected to continue in the near term. Many businesses in our district and across the U.S. have been forced to suspend operations for an indefinite period of time in an attempt to slow the spread of the virus, and unemployment claims have increased dramatically as more employers lay off or furlough workers. Ultimately, the significant slowdown in economic activity caused by the COVID-19 pandemic could reduce demand at our member institutions, which could impact members’ demand for our products and services. It could also lead to a devaluation of our assets and/or the collateral pledged by our members to secure advances and other extensions of credit, all of which have had and could continue to have an adverse impact on our financial condition and results of operations, including as a result of reduced business volumes, reduced income or increased credit losses.


Our ability to obtain funds through the issuance of consolidated obligations depends in part on prevailing conditions in the capital markets (including investor demand), such as the effects of any reduced liquidity in financial markets, which are beyond our control. Volatility in the capital markets caused by the COVID-19 pandemic can impact demand for FHLBank debt and the cost of the debt the FHLBanks issue, which could impact our liquidity and profitability. Our business and results of operations are affected by the fiscal and monetary policies of the U.S. government, foreign governments and their agencies. The Federal Reserve Board’s policies directly and indirectly influence the yield on our interest-earning assets and the cost of our interest-bearing liabilities. In response to COVID-19, the FOMC lowered the target range for Federal funds to a target range of zero to 0.25 percent. The outlook for the remainder of 2020 is uncertain, and there is a possibility that the FOMC may keep interest rates low or use other policies if economic conditions warrant, each of which could further impact the efficiency of our asset and liability management activities and continue to negatively affect our financial condition and results of operations.

Most of our employees have been working remotely since mid-March. Management began bringing employees back to work in our offices in early August and plans to continue this process in phases but is prepared to continue remote operations if local infection trends continue to rise. With most of our employees working remotely, we could face operational difficulties or disruptions that could impair our ability to conduct and manage our business effectively. In addition, some of our employees, executive management team, or board of directors could become infected with the COVID-19 virus which, depending upon the number and the severity of their cases, could similarly affect our ability to conduct and manage our business effectively. Counterparties, vendors and other third parties upon which we rely to conduct our business could be adversely impacted by the COVID-19 pandemic which could, in turn, lead to operational challenges for us. These potential difficulties, disruptions and challenges could increase the likelihood that our financial condition and results of operations could be impacted.

Significant borrower defaults on loans made by our members could occur as a result of reduced economic activity and these defaults could cause members to fail. We could be adversely impacted by the reduction in business volume that would arise from the failure of one or more of our members. Further, counterparty default, whether as a result of the operational or financial impacts of the COVID-19 pandemic, could adversely impact our financial condition and results of operations.

There have been no other material changes to the risk factors previously disclosed in our annual report on Form 10-K filed on March 18, 2019,20, 2020, and such risk factors are incorporated by reference herein.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.

Item 3: Defaults Upon Senior Securities
Not applicable.

Item 4: Mine Safety Disclosures
Not applicable.

Item 5: Other Information
None.



Item 6: Exhibits
Exhibit
No.
Description
Exhibit 3.1 to the FHLBank’s registration statement on Form 10, filed May 15, 2006, and made effective on July 14, 2006 (File No. 000-52004), Federal Home Loan Bank of Topeka Articles and Organization Certificate, is incorporated herein by reference as Exhibit 3.1.
Exhibit 3.1 to the Current Report on Form 8-K, filed December 18, 2018, Federal Home Loan Bank of Topeka Amended and Restated Bylaws, is incorporated herein by reference as Exhibit 3.2.
Exhibit 99.24.1 to the CurrentAnnual Report on Form 8-K,10-K, filed August 5, 2011,March 20, 2020, Federal Home Loan Bank of Topeka Capital Plan, is incorporated herein by reference as Exhibit 4.1.Plan.
Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Senior Vice President andInterim Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of President and PrincipalChief Executive Officer (Principal Executive Officer) and Senior Vice President and PrincipalInterim Chief Financial Officer (Principal Financial Officer) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
*     Represents a management contract or a compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 Federal Home Loan Bank of Topeka
  
  
November 12, 2019August 11, 2020By: /s/ Mark E. Yardley
DateMark E. Yardley
 President and Chief Executive Officer


107108