Federal Home Loan Bank of Boston 10-Q 2018 Q3 Quarterly report

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 September 30, 2018

OR

o 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: 000-51402

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FEDERAL HOME LOAN BANK OF BOSTON

(Exact name of registrant as specified in its charter) 

Federally chartered corporation (State or other jurisdiction of incorporation or organization)	04-6002575 (I.R.S. employer identification number)
800 Boylston Street Boston, MA (Address of principal executive offices)	02199 (Zip code)

(617) 292-9600

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes  o No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes  o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," "accelerated filer,” "smaller reporting company," and emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x	Smaller reporting company o Emerging growth company o

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

 

		Shares outstanding as of October 31, 2018
Class A Stock, par value	$100	zero
Class B Stock, par value	$100	24,751,377

Federal Home Loan Bank of Boston

Form 10-Q

Table of Contents

PART I.	FINANCIAL INFORMATION	3
Item 1.	Financial Statements (unaudited)	3
	Statements of Condition	3
	Statements of Operations	4
	Statements of Comprehensive Income	5
	Statements of Capital	6
	Statements of Cash Flows	7
	Notes to Financial Statements	9
	Note 1 — Basis of Presentation	9
	Note 2 — Recently Issued and Adopted Accounting Guidance	9
	Note 3 — Trading Securities	11
	Note 4 — Available-for-Sale Securities	12
	Note 5 — Held-to-Maturity Securities	14
	Note 6 — Other-Than-Temporary Impairment	16
	Note 7 — Advances	18
	Note 8 — Mortgage Loans Held for Portfolio	19
	Note 9 — Allowance for Credit Losses	20
	Note 10 — Derivatives and Hedging Activities	23
	Note 11 — Deposits	28
	Note 12 — Consolidated Obligations	29
	Note 13 — Affordable Housing Program	30
	Note 14 — Capital	30
	Note 15 — Accumulated Other Comprehensive Loss	32
	Note 16 — Fair Value	33
	Note 17 — Commitments and Contingencies	38
	Note 18 — Transactions with Shareholders	40
	Note 19 — Subsequent Events	41
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	77
Item 4.	Controls and Procedures	81
PART II.	OTHER INFORMATION	81
Item 1.	Legal Proceedings	81
Item 1A.	Risk Factors	81
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 3.	Defaults Upon Senior Securities	82
Item 4.	Mine Safety Disclosures	82
Item 5.	Other Information	83
Item 6.	Exhibits	84

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CONDITION (dollars and shares in thousands, except par value) (unaudited)
	September 30, 2018			December 31, 2017
ASSETS
Cash and due from banks	$	45,614		$	261,673
Interest-bearing deposits	397,203			246
Securities purchased under agreements to resell	5,499,000			5,349,000
Federal funds sold	5,650,000			3,450,000
Investment securities:
Trading securities	176,113			191,510
Available-for-sale securities - includes $4,734 and $1,414 pledged as collateral at September 30, 2018, and December 31, 2017, respectively that may be repledged	6,227,080			7,324,736
Held-to-maturity securities - includes $7,100 and $6,444 pledged as collateral at September 30, 2018, and December 31, 2017, respectively that may be repledged (a)	1,372,299			1,626,122
Total investment securities	7,775,492			9,142,368
Advances	40,927,639			37,565,967
Mortgage loans held for portfolio, net of allowance for credit losses of $500 at September 30, 2018, and December 31, 2017	4,192,425			4,004,737
Loans to other Federal Home Loan Banks (FHLBanks)	—			400,000
Accrued interest receivable	102,466			94,100
Derivative assets, net	21,956			34,786
Other assets	82,008			59,069
Total Assets	$	64,693,803		$	60,361,946
LIABILITIES
Deposits
Interest-bearing	$	463,349		$	450,922
Non-interest-bearing	21,412			26,147
Total deposits	484,761			477,069
Consolidated obligations (COs):
Bonds	26,741,036			28,344,623
Discount notes	33,431,980			27,720,906
Total consolidated obligations	60,173,016			56,065,529
Mandatorily redeemable capital stock	31,868			35,923
Accrued interest payable	119,242			90,626
Affordable Housing Program (AHP) payable	83,982			81,600
Derivative liabilities, net	228,127			300,450
Other liabilities	52,478			45,619
Total liabilities	61,173,474			57,096,816
Commitments and contingencies (Note 17)
CAPITAL
Capital stock – Class B – putable ($100 par value), 24,769 shares and 22,837 shares issued and outstanding at September 30, 2018, and December 31, 2017, respectively	2,476,876			2,283,721
Retained earnings:
Unrestricted	1,084,538			1,041,033
Restricted	301,928			267,316
Total retained earnings	1,386,466			1,308,349
Accumulated other comprehensive loss	(343,013		)	(326,940		)
Total capital	3,520,329			3,265,130
Total Liabilities and Capital	$	64,693,803		$	60,361,946

_______________________________________

(a)   Fair values of held-to-maturity securities were $1,638,491 and $1,903,227 at September 30, 2018, and December 31, 2017, respectively.

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

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FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF OPERATIONS (dollars in thousands) (unaudited)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
INTEREST INCOME
Advances	$	226,544		$	136,462		$	618,077		$	371,075
Securities purchased under agreements to resell	20,865			8,074			44,494			18,822
Federal funds sold	29,329			16,622			81,126			39,614
Investment securities:
Trading securities	1,934			2,809			6,947			8,200
Available-for-sale securities	35,532			30,625			113,531			78,161
Held-to-maturity securities	19,525			19,754			57,622			60,129
Total investment securities	56,991			53,188			178,100			146,490
Mortgage loans held for portfolio	33,967			31,656			100,774			92,592
Other	1,122			822			2,270			1,549
Total interest income	368,818			246,824			1,024,841			670,142
INTEREST EXPENSE
Consolidated obligations:
Bonds	142,086			109,052			397,843			311,395
Discount notes	147,463			65,120			385,804			157,767
Total consolidated obligations	289,549			174,172			783,647			469,162
Deposits	1,337			1,144			3,600			2,434
Mandatorily redeemable capital stock	472			399			1,427			1,105
Other borrowings	—			—			38			8
Total interest expense	291,358			175,715			788,712			472,709
NET INTEREST INCOME	77,460			71,109			236,129			197,433
Provision (reduction of provision) for credit losses	—			28			6			(148		)
NET INTEREST INCOME AFTER PROVISION (REDUCTION OF PROVISION) FOR CREDIT LOSSES	77,460			71,081			236,123			197,581
OTHER INCOME (LOSS)
Total other-than-temporary impairment losses on investment securities	(65		)	(12		)	(197		)	(102		)
Net amount of impairment losses reclassified from accumulated other comprehensive loss	(6		)	(420		)	(210		)	(1,316		)
Net other-than-temporary impairment losses on investment securities, credit portion	(71		)	(432		)	(407		)	(1,418		)
Litigation settlements	12,769			—			12,769			—
Service fees	2,719			2,228			7,538			6,362
Net unrealized losses on trading securities	(714		)	(1,591		)	(3,702		)	(3,857		)
Net gains (losses) on derivatives and hedging activities	487			(6		)	2,085			(388		)
Other	(82		)	397			340			358
Total other income	15,108			596			18,623			1,057
OTHER EXPENSE
Compensation and benefits	10,309			11,111			31,085			31,065
Other operating expenses	5,818			5,749			17,992			17,704
Federal Housing Finance Agency (the FHFA)	832			934			2,593			2,870
Office of Finance	911			734			2,538			2,321
Other	2,788			2,444			8,090			8,583
Total other expense	20,658			20,972			62,298			62,543
INCOME BEFORE ASSESSMENTS	71,910			50,705			192,448			136,095
AHP assessments	7,238			5,110			19,387			13,720
NET INCOME	$	64,672		$	45,595		$	173,061		$	122,375

 

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

4

FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF COMPREHENSIVE INCOME (dollars in thousands) (unaudited)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Net income	$	64,672		$	45,595		$	173,061		$	122,375
Other comprehensive income:
Net unrealized (losses) gains on available-for-sale securities	(8,690		)	(61		)	(54,280		)	42,439
Net noncredit portion of other-than-temporary impairment losses on held-to-maturity securities	7,133			8,598			22,155			25,909
Net unrealized gains relating to hedging activities	3,526			1,305			17,229			3,938
Pension and postretirement benefits	(392		)	305			(1,177		)	914
Total other comprehensive income (loss)	1,577			10,147			(16,073		)	73,200
Comprehensive income	$	66,249		$	55,742		$	156,988		$	195,575

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

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FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CAPITAL NINE MONTHS ENDED SEPTEMBER 30, 2018 and 2017 (dollars and shares in thousands) (unaudited)
	Capital Stock Class B – Putable					Retained Earnings								Accumulated Other Comprehensive Loss
	Shares		Par Value			Unrestricted			Restricted		Total						Total Capital
BALANCE, DECEMBER 31, 2016	24,113		$	2,411,306		$	987,711		$	229,275	$	1,216,986		$	(383,514	)	$	3,244,778
Comprehensive income						97,900			24,475		122,375			73,200			195,575
Proceeds from sale of capital stock	7,314		731,366														731,366
Repurchase of capital stock	(8,614	)	(861,354		)												(861,354		)
Shares reclassified to mandatorily redeemable capital stock	(87	)	(8,670		)												(8,670		)
Cash dividends on capital stock						(74,079		)			(74,079		)				(74,079		)
BALANCE, SEPTEMBER 30, 2017	22,726		$	2,272,648		$	1,011,532		$	253,750	$	1,265,282		$	(310,314	)	$	3,227,616
BALANCE, DECEMBER 31, 2017	22,837		$	2,283,721		$	1,041,033		$	267,316	$	1,308,349		$	(326,940	)	$	3,265,130
Comprehensive income						138,449			34,612		173,061			(16,073		)	156,988
Proceeds from sale of capital stock	13,115		1,311,464														1,311,464
Repurchase of capital stock	(11,180	)	(1,118,018		)												(1,118,018		)
Shares reclassified to mandatorily redeemable capital stock	(3	)	(291		)												(291		)
Cash dividends on capital stock						(94,944		)			(94,944		)				(94,944		)
BALANCE, SEPTEMBER 30, 2018	24,769		$	2,476,876		$	1,084,538		$	301,928	$	1,386,466		$	(343,013	)	$	3,520,329

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

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FEDERAL HOME LOAN BANK OF BOSTON STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)
	For the Nine Months Ended September 30,
	2018			2017
OPERATING ACTIVITIES
Net income	$	173,061		$	122,375
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	(5,205		)	(5,690		)
Provision (reduction of provision) for credit losses	6			(148		)
Change in net fair-value adjustments on derivatives and hedging activities	62,198			(10,293		)
Net other-than-temporary impairment losses on investment securities, credit portion	407			1,418
Other adjustments	4,057			3,741
Net change in:
Market value of trading securities	3,702			3,857
Accrued interest receivable	(8,366		)	(238		)
Other assets	(19,509		)	(1,522		)
Accrued interest payable	28,618			19,326
Other liabilities	9,183			(1,343		)
Total adjustments	75,091			9,108
Net cash provided by operating activities	248,152			131,483
INVESTING ACTIVITIES
Net change in:
Interest-bearing deposits	(442,598		)	(195,156		)
Securities purchased under agreements to resell	(150,000		)	3,000,000
Federal funds sold	(2,200,000		)	(3,550,000		)
Premises, software, and equipment	(533		)	(1,901		)
Loans to other FHLBanks	400,000			—
Trading securities:
Proceeds	767,897			717,022
Purchases	(749,072		)	(618,051		)
Available-for-sale securities:
Proceeds from long-term	979,365			902,513
Purchases of long-term	(3,150		)	(1,710,033		)
Held-to-maturity securities:
Proceeds from long-term	283,819			376,797
Advances to members:
Repaid	508,490,355			361,435,261
Originated	(511,902,406		)	(359,828,724		)
Mortgage loans held for portfolio:
Proceeds	320,586			352,393
Purchases	(517,010		)	(608,887		)
Proceeds from sale of foreclosed assets	2,440			3,239
Net cash (used in) provided by investing activities	(4,720,307		)	274,473
FINANCING ACTIVITIES
Net change in deposits	9,013			10,348
Net payments on derivatives with a financing element	—			(4,100		)
Net proceeds from issuance of consolidated obligations:

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Discount notes	149,554,769			125,580,345
Bonds	8,128,518			7,821,400
Payments for maturing and retiring consolidated obligations:
Discount notes	(143,869,342		)	(127,600,947		)
Bonds	(9,661,015		)	(6,491,880		)
Proceeds from issuance of capital stock	1,311,464			731,366
Payments for repurchase of capital stock	(1,118,018		)	(861,354		)
Payments for redemption of mandatorily redeemable capital stock	(4,346		)	(5,315		)
Cash dividends paid	(94,947		)	(74,076		)
Net cash provided by (used in) financing activities	4,256,096			(894,213		)
Net decrease in cash and due from banks	(216,059		)	(488,257		)
Cash and due from banks at beginning of the period	261,673			520,031
Cash and due from banks at end of the period	$	45,614		$	31,774
Supplemental disclosures:
Interest paid	$	754,566		$	471,076
AHP payments	$	13,384		$	16,217
Noncash receipt of trading securities	$	7,130		$	—
Noncash transfers of mortgage loans held for portfolio to other assets	$	1,413		$	1,588

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

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FEDERAL HOME LOAN BANK OF BOSTON

NOTES TO FINANCIAL STATEMENTS

Note 1 — Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information. In the opinion of management, all adjustments considered necessary have been included. All such adjustments consist of normal recurring accruals. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending December 31, 2018. These interim financial statements do not include all the information and footnotes required by GAAP for complete annual financial statements and accordingly should be read in conjunction with the Federal Home Loan Bank of Boston's audited financial statements and related notes in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (the SEC) on March 16, 2018 (the 2017 Annual Report). Unless otherwise indicated or the context requires otherwise, all references in this discussion to “the Bank,” "we," "us," "our," or similar references mean the Federal Home Loan Bank of Boston.

Note 2 — Recently Issued and Adopted Accounting Guidance

Effective January 1, 2018

Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. On March 10, 2017, the Financial Accounting Standards Board (FASB) issued amended guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The amendments require that employers disaggregate the service cost component from the other components of net benefit cost. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allow only the service cost component of net benefit cost to be eligible for capitalization. This guidance resulted in the reclassification of $352,000 and $1.1 million, respectively, of non-service cost components of net benefit cost from compensation and benefits expense to other non-interest expense in the statements of operations for the three and nine months ended September 30, 2017.

Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance requires, among other things, that we:

• Present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when we elect to measure the liability at fair value in accordance with the fair value option for financial instruments.

• Present separately financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the statement of condition or the accompanying notes to the financial statements.

• Discontinue the disclosure of the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the statement of condition.

This guidance did not have any effect on our financial condition, results of operations, or cash flows. In accordance with the updated guidance, we have made insignificant revisions to Note 16 — Fair Values to specify the measurement category for each form of financial asset (that is, securities or loans and receivables).

Becoming effective January 1, 2019

Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. On October 25, 2018, the FASB issued amended guidance to permit use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815. This guidance is effective for us for interim and annual periods beginning on January 1, 2019, and while early adoption is permitted, we do not intend to adopt this guidance early. We are currently evaluating the effect this guidance may have on our financial condition, results of operations, and cash flows.

Targeted Improvements to Accounting for Hedging Activities. On August 28, 2017, the FASB issued amended guidance 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

9

hedging instrument included in the assessment of hedge effectiveness be presented in the same income statement line that is used to present the earnings effect of the hedged item. For cash flow hedges, the entire change in the fair value of the hedging instrument included in the assessment of hedge effectiveness must be recorded in other comprehensive income. 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 of only how changes in the benchmark interest rate affect a decision to settle a prepayable instrument before its scheduled maturity in calculating the change in the fair value of the hedged item attributable to interest-rate risk;

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

• For a closed portfolio of prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, an entity can designate an amount that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows (the “last-of-layer” method) into a hedging relationship;

• An entity can perform subsequent assessments of hedge effectiveness qualitatively in instances where initial quantitative testing is required; and

• For financial instruments eligible to be designated as a hedged item under the last-of-layer method, a one-time reclassification of prepayable financial instruments from held-to-maturity to available-for-sale at the date of adoption is permitted.

This guidance becomes effective for us for interim and annual periods beginning on January 1, 2019, and while early adoption is permitted, we do not intend to adopt this guidance early. For all cash flow hedges existing on the date of adoption, this guidance will be applied through a cumulative-effect adjustment to accumulated other comprehensive income with a corresponding adjustment to retained earnings as of the beginning of the year of adoption. The amended presentation and disclosure guidance is required only prospectively. We have evaluated this guidance and it is not expected to affect our application of hedge accounting for existing hedge strategies, with the exception of designation of a fallback long-haul effectiveness testing method for our short-cut hedge strategies. Upon adoption, this guidance will prospectively affect our presentation of fair value hedge relationships on the statement of operations and will require certain new disclosures. We will continue to assess the new strategies and opportunities enabled by this guidance to expand our risk management strategies. We do not anticipate the adoption of this guidance will have a material effect on our financial condition, results of operations, or cash flows.

Premium Amortization on Purchased Callable Debt Securities. On March 30, 2017, the FASB issued amended guidance to shorten the amortization period for certain purchased callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. This guidance affects all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer at the earliest call date (that is, at a premium). This guidance is effective for us for interim and annual periods beginning on January 1, 2019, and while early adoption is permitted, we do not intend to adopt this guidance early. This guidance will be applied using a modified retrospective method through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. We currently do not have any assets that are in scope to be evaluated under the updated guidance. As such, adoption of this guidance is not expected to have a material effect on our financial condition, results of operations, or cash flows.

Leases. On February 25, 2016, the FASB issued guidance that requires recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee of operating or finance leases to recognize on the statement of condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. The guidance becomes effective for us for the interim and annual periods beginning on January 1, 2019, and while early application is permitted, we do not intend to adopt the new guidance early. Upon adoption of the new guidance, we currently estimate that we will recognize right-of-use assets and lease liabilities for our operating leases of approximately

10

$11.8 million and $12.3 million, respectively, on the statement of condition. We do not anticipate the adoption of this guidance will have a material effect on our results of operations or cash flows.

Becoming effective January 1, 2020

Financial Instruments - Credit Losses. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to measure expected credit losses based on relevant information about past events (including historical experience), current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected over the contractual term of the financial asset(s). The guidance also requires, among other things, that we:

• Reflect in the statement of operations 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.

• 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 in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price.

• Record credit losses relating to available-for-sale debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.

• Further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination.

This guidance is effective for us for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018; however, we do not intend to adopt the new guidance early. This guidance is required to be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. While we are in the process of evaluating this guidance, we expect the adoption of the guidance will result in an increase in the allowance for credit losses given the requirement to assess losses for the entire estimated life of the financial asset. The effect on our financial condition, results of operations, and cash flows will depend upon the composition of our financial assets held at the adoption date as well as the economic conditions and forecasts at that time.

Note 3 — Trading Securities

Table 3.1 - Trading Securities by Major Security Type (dollars in thousands)
	September 30, 2018		December 31, 2017
Corporate bonds	$	6,774	$	—
Mortgage backed securities (MBS)
U.S. government-guaranteed – single-family	5,684		6,807
Government-sponsored enterprise (GSE)s – single-family	180		346
GSEs – multifamily	163,475		184,357
	169,339		191,510
Total	$	176,113	$	191,510

Net unrealized losses on trading securities for the nine months ended September 30, 2018 and 2017, amounted to $3.7 million and $3.9 million, respectively.

We do not participate in speculative trading practices and typically hold these investments over a longer time horizon.

11

Note 4 — Available-for-Sale Securities

Table 4.1 - Available-for-Sale Securities by Major Security Type (dollars in thousands)
	September 30, 2018
			Amounts Recorded in Accumulated Other Comprehensive Loss
	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair  Value
State or local housing-finance-agency obligations (HFA securities)	$	45,850	$	—	$	(5,513	)	$	40,337
Supranational institutions	409,784		—		(14,606		)	395,178
U.S. government-owned corporations	286,169		—		(17,545		)	268,624
GSEs	118,173		—		(4,748		)	113,425
	859,976		—		(42,412		)	817,564
MBS
U.S. government guaranteed – single-family	84,742		41		(3,746		)	81,037
U.S. government guaranteed – multifamily	374,986		—		(7,471		)	367,515
GSEs – single-family	3,856,145		962		(125,102		)	3,732,005
GSEs – multifamily	1,227,842		1,444		(327		)	1,228,959
	5,543,715		2,447		(136,646		)	5,409,516
Total	$	6,403,691	$	2,447	$	(179,058	)	$	6,227,080

_______________________

(1) Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.

 

	December 31, 2017
			Amounts Recorded in Accumulated Other Comprehensive Loss
	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair  Value
HFA securities	$	42,700	$	—	$	(5,017	)	$	37,683
Supranational institutions	438,667		—		(20,382		)	418,285
U.S. government-owned corporations	313,985		—		(21,908		)	292,077
GSEs	128,744		—		(7,401		)	121,343
	924,096		—		(54,708		)	869,388
MBS
U.S. government guaranteed – single-family	98,720		55		(2,998		)	95,777
U.S. government guaranteed – multifamily	447,975		—		(4,602		)	443,373
GSEs – single-family	4,625,333		1,194		(63,535		)	4,562,992
GSEs – multifamily	1,350,943		2,263		—			1,353,206
	6,522,971		3,512		(71,135		)	6,455,348
Total	$	7,447,067	$	3,512	$	(125,843	)	$	7,324,736

_______________________

(1) Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, collection of cash, and fair-value hedge accounting adjustments.

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Table 4.2 - Available-for-Sale Securities in a Continuous Unrealized Loss Position by Major Security Type (dollars in thousands)
	September 30, 2018
	Length of Continuous Unrealized Loss Less than 12 Months					Length of Continuous Unrealized Loss 12 Months or More					Total
	Fair  Value		Unrealized  Losses			Fair  Value		Unrealized  Losses			Fair  Value		Unrealized  Losses
HFA securities	$	21,793	$	(3,587	)	$	18,544	$	(1,926	)	$	40,337	$	(5,513	)
Supranational institutions	—		—			395,178		(14,606		)	395,178		(14,606		)
U.S. government-owned corporations	—		—			268,624		(17,545		)	268,624		(17,545		)
GSEs	—		—			113,425		(4,748		)	113,425		(4,748		)
	21,793		(3,587		)	795,771		(38,825		)	817,564		(42,412		)
MBS
U.S. government guaranteed – single-family	—		—			61,434		(3,746		)	61,434		(3,746		)
U.S. government guaranteed – multifamily	—		—			367,515		(7,471		)	367,515		(7,471		)
GSEs – single-family	1,175,912		(32,577		)	2,439,363		(92,525		)	3,615,275		(125,102		)
GSEs – multifamily	339,153		(327		)	—		—			339,153		(327		)
	1,515,065		(32,904		)	2,868,312		(103,742		)	4,383,377		(136,646		)
Total temporarily impaired	$	1,536,858	$	(36,491	)	$	3,664,083	$	(142,567	)	$	5,200,941	$	(179,058	)

	December 31, 2017
	Length of Continuous Unrealized Loss Less than 12 Months					Length of Continuous Unrealized Loss 12 Months or More					Total
	Fair  Value		Unrealized  Losses			Fair  Value		Unrealized  Losses			Fair  Value		Unrealized  Losses
HFA securities	$	29,345	$	(4,005	)	$	8,338	$	(1,012	)	$	37,683	$	(5,017	)
Supranational institutions	—		—			418,285		(20,382		)	418,285		(20,382		)
U.S. government-owned corporations	—		—			292,077		(21,908		)	292,077		(21,908		)
GSEs	—		—			121,343		(7,401		)	121,343		(7,401		)
	29,345		(4,005		)	840,043		(50,703		)	869,388		(54,708		)
MBS
U.S. government guaranteed – single-family	—		—			70,877		(2,998		)	70,877		(2,998		)
U.S. government guaranteed – multifamily	64,219		(571		)	379,154		(4,031		)	443,373		(4,602		)
GSEs – single-family	1,853,323		(12,661		)	2,540,006		(50,874		)	4,393,329		(63,535		)
	1,917,542		(13,232		)	2,990,037		(57,903		)	4,907,579		(71,135		)
Total temporarily impaired	$	1,946,887	$	(17,237	)	$	3,830,080	$	(108,606	)	$	5,776,967	$	(125,843	)

13

Table 4.3 - Available-for-Sale Securities by Contractual Maturity (dollars in thousands)
	September 30, 2018				December 31, 2017
Year of Contractual Maturity	Amortized Cost		Fair  Value		Amortized Cost		Fair  Value
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	42,700		37,640		42,700		37,683
Due after five years through 10 years	457,717		441,968		438,667		418,285
Due after 10 years	359,559		337,956		442,729		413,420
	859,976		817,564		924,096		869,388
MBS (1)	5,543,715		5,409,516		6,522,971		6,455,348
Total	$	6,403,691	$	6,227,080	$	7,447,067	$	7,324,736

_______________________

(1) MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay obligations with or without call or prepayment fees.

Note 5 — Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Type (dollars in thousands)
	September 30, 2018
	Amortized Cost		Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss			Carrying Value		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
U.S. agency obligations	$	416	$	—		$	416	$	1	$	—		$	417
HFA securities	124,560		—			124,560		6		(3,542		)	121,024
	124,976		—			124,976		7		(3,542		)	121,441
MBS
U.S. government guaranteed – single-family	8,647		—			8,647		170		—			8,817
GSEs – single-family	444,076		—			444,076		7,369		(2,140		)	449,305
GSEs – multifamily	211,476		—			211,476		1,511		—			212,987
Private-label – residential	712,078		(136,043		)	576,035		264,618		(1,648		)	839,005
Asset-backed securities (ABS) backed by home equity loans	7,108		(19		)	7,089		24		(177		)	6,936
	1,383,385		(136,062		)	1,247,323		273,692		(3,965		)	1,517,050
Total	$	1,508,361	$	(136,062	)	$	1,372,299	$	273,699	$	(7,507	)	$	1,638,491

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	December 31, 2017
	Amortized Cost		Other-Than-Temporary Impairment Recognized in Accumulated Other Comprehensive Loss			Carrying Value		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
U.S. agency obligations	$	1,042	$	—		$	1,042	$	10	$	—		$	1,052
HFA securities	146,410		—			146,410		26		(14,372		)	132,064
	147,452		—			147,452		36		(14,372		)	133,116
MBS
U.S. government guaranteed – single-family	10,097		—			10,097		190		—			10,287
U.S. government guaranteed – multifamily	280		—			280		—		—			280
GSEs – single-family	568,948		—			568,948		10,410		(310		)	579,048
GSEs – multifamily	214,641		—			214,641		6,451		—			221,092
Private-label – residential	835,070		(158,194		)	676,876		278,217		(3,195		)	951,898
ABS backed by home equity loans	7,851		(23		)	7,828		27		(349		)	7,506
	1,636,887		(158,217		)	1,478,670		295,295		(3,854		)	1,770,111
Total	$	1,784,339	$	(158,217	)	$	1,626,122	$	295,331	$	(18,226	)	$	1,903,227

Table 5.2 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position by Major Security Type (dollars in thousands)
	September 30, 2018
	Length of Continuous Unrealized Loss Less than 12 Months					Length of Continuous Unrealized Loss 12 Months or More					Total
	Fair Value		Unrealized Losses			Fair  Value		Unrealized Losses			Fair Value		Unrealized Losses
HFA securities	$	—	$	—		$	110,953	$	(3,542	)	$	110,953	$	(3,542	)
MBS
GSEs – single-family	106,028		(1,650		)	22,748		(490		)	128,776		(2,140		)
Private-label – residential	—		—			117,245		(2,555		)	117,245		(2,555		)
ABS backed by home equity loans	—		—			5,869		(177		)	5,869		(177		)
	106,028		(1,650		)	145,862		(3,222		)	251,890		(4,872		)
Total	$	106,028	$	(1,650	)	$	256,815	$	(6,764	)	$	362,843	$	(8,414	)

15

	December 31, 2017
	Length of Continuous Unrealized Loss Less than 12 Months					Length of Continuous Unrealized Loss 12 Months or More					Total
	Fair Value		Unrealized Losses			Fair  Value		Unrealized Losses			Fair Value		Unrealized Losses
HFA securities	$	—	$	—		$	121,203	$	(14,372	)	$	121,203	$	(14,372	)
MBS
GSEs – single-family	44,759		(52		)	28,771		(258		)	73,530		(310		)
Private-label – residential	—		—			158,963		(5,558		)	158,963		(5,558		)
ABS backed by home equity loans	—		—			7,371		(350		)	7,371		(350		)
	44,759		(52		)	195,105		(6,166		)	239,864		(6,218		)
Total	$	44,759	$	(52	)	$	316,308	$	(20,538	)	$	361,067	$	(20,590	)

Table 5.3 - Held-to-Maturity Securities by Contractual Maturity (dollars in thousands)
	September 30, 2018						December 31, 2017
Year of Maturity	Amortized Cost		Carrying Value (1)		Fair Value		Amortized Cost		Carrying Value (1)		Fair Value
Due in one year or less	$	1,251	$	1,251	$	1,256	$	264	$	264	$	267
Due after one year through five years	9,230		9,230		9,232		11,613		11,613		11,645
Due after five years through 10 years	17,565		17,565		17,458		18,245		18,245		18,226
Due after 10 years	96,930		96,930		93,495		117,330		117,330		102,978
	124,976		124,976		121,441		147,452		147,452		133,116
MBS (2)	1,383,385		1,247,323		1,517,050		1,636,887		1,478,670		1,770,111
Total	$	1,508,361	$	1,372,299	$	1,638,491	$	1,784,339	$	1,626,122	$	1,903,227

_______________________

(1) Carrying value of held-to-maturity securities represents the sum of amortized cost and the amount of noncredit-related other-than-temporary impairment recognized in accumulated other comprehensive loss.

(2) MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers of the underlying loans may have the right to call or prepay their obligations with or without call or prepayment fees.

Note 6 — Other-Than-Temporary Impairment

We evaluate our individual available-for-sale and held-to-maturity securities for other-than-temporary impairment each quarter.

Available-for-Sale Securities

We determined that none of our available-for-sale securities were other-than-temporarily impaired at September 30, 2018. At September 30, 2018, we held certain available-for-sale securities in an unrealized loss position. These unrealized losses reflect the impact of normal yield and spread fluctuations attendant with security markets. We consider these unrealized losses temporary because we expect to recover the entire amortized cost basis on these available-for-sale securities in an unrealized loss position and neither intend to sell these securities nor is it more likely than not that we will be required to sell these securities before the anticipated recovery of each security's remaining amortized cost basis. Additionally, there have been no shortfalls of principal or interest on any available-for-sale security.

Held-to-Maturity Securities

HFA Securities and Agency MBS. We have reviewed our investments in HFA securities and agency MBS and have determined that all unrealized losses are temporary. We do not intend to sell the investments nor is it more likely than not that we will be

16

required to sell the investments before recovery of the amortized cost basis. We do not consider these investments to be other-than-temporarily impaired at September 30, 2018.

Private-Label Residential MBS and ABS Backed by Home Equity Loans. For those securities for which a credit loss was recognized during the nine months ended September 30, 2018, Table 6.1 presents a summary of the average projected values over the remaining lives of the securities for the significant inputs used to measure the amount of the credit loss recognized in earnings, as well as related current credit enhancement. Credit enhancement is defined as the percentage of subordinated tranches, over-collateralization, and other credit enhancement, if any, in a security structure that will generally absorb losses before we will experience a credit loss on the security. The calculated averages represent the dollar-weighted average of Alt-A other-than-temporarily impaired private-label residential MBS.

Table 6.1 - Significant Inputs and Current Credit Enhancement for Securities with a Current Period Credit Loss (dollars in thousands)
			Weighted Average of Significant Inputs						Weighted Average Current Credit Enhancement
Private-label MBS by Classification	Par Value		Projected Prepayment Rates		Projected Default Rates		Projected Loss Severities
Alt-A - Private-label residential MBS (1)	$	6,230	12.6	%	18.5	%	27.3	%	23.6	%

_______________________

(1) Securities are classified based upon the current performance characteristics of the underlying loan pool and therefore the manner in which the loan pool backing the security has been modeled (as prime, Alt-A, or subprime), rather than their classification of the security at the time of issuance.

Table 6.2 - Total MBS Other-than-Temporarily Impaired During the Life of the Security (dollars in thousands)
	September 30, 2018
Other-Than-Temporarily Impaired Investment (1)	Par Value		Amortized Cost		Carrying Value		Fair Value
Private-label residential MBS – Prime	$	25,864	$	22,026	$	17,295	$	24,484
Private-label residential MBS – Alt-A	831,215		597,346		466,033		721,713
ABS backed by home equity loans – Subprime	161		150		132		155
Total other-than-temporarily impaired securities	$	857,240	$	619,522	$	483,460	$	746,352

_______________________

(1) Securities are classified based on their classifications at the time of issuance. We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.

Table 6.3 presents a roll forward of the amounts related to credit losses recognized in earnings. The roll forward is the amount of credit losses on investment securities for which we recognized a portion of other-than-temporary impairment charges into accumulated other comprehensive loss.

17

Table 6.3 - Roll Forward of the Amounts Related to Credit Loss Recognized into Earnings (dollars in thousands)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Balance at beginning of period	$	437,315		$	468,706		$	452,523		$	490,404
Additions:
Additional credit losses for which an other-than-temporary impairment charge was previously recognized(1)	71			432			407			1,418
Reductions:
Securities matured during the period(2)	—			—			—			(5,565		)
Portion of increase in cash flows expected to be collected over the remaining life of the security that are recognized in the current period as interest income	(7,997		)	(8,356		)	(23,541		)	(25,475		)
Balance at end of period	$	429,389		$	460,782		$	429,389		$	460,782

_______________________

(1) For the three months ended September 30, 2018 and 2017, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to July 1, 2018 and 2017. For the nine months ended September 30, 2018 and 2017, additional credit losses for which an other-than-temporary impairment charge was previously recognized relate to securities that were also previously impaired prior to January 1, 2018 and 2017.

(2) Represents reductions related to securities having reached final maturity during the period and, therefore, are no longer held by us at the end of the period.

Note 7 — Advances

General Terms. At both September 30, 2018, and December 31, 2017, we had advances outstanding with interest rates ranging from zero percent to 7.72 percent.

Table 7.1 - Advances Outstanding by Year of Contractual Maturity (dollars in thousands)
	September 30, 2018					December 31, 2017
	Amount			Weighted Average Rate		Amount			Weighted Average Rate
Overdrawn demand-deposit accounts	$	7,887		2.63	%	$	5,698		1.70	%
Due in one year or less	20,964,860			2.20		21,501,397			1.56
Due after one year through two years	12,202,282			2.30		7,462,785			1.65
Due after two years through three years	2,171,439			2.28		2,709,951			1.85
Due after three years through four years	2,130,610			2.32		2,084,105			2.03
Due after four years through five years	2,466,375			2.10		2,071,989			1.56
Thereafter	1,115,924			2.85		1,811,241			2.23
Total par value	41,059,377			2.25	%	37,647,166			1.66	%
Premiums	14,394					17,931
Discounts	(36,356		)			(32,757		)
Fair value of bifurcated derivatives (1)	(221		)			(1,591		)
Hedging adjustments	(109,555		)			(64,782		)
Total	$	40,927,639				$	37,565,967

_________________________

18

(1) At September 30, 2018, and December 31, 2017, we had certain advances with embedded features that met the requirements to be separated from the host contract and designated as stand-alone derivatives.

Table 7.2 - Advances Outstanding by Year of Contractual Maturity or Next Call Date (1)  (dollars in thousands)
	September 30, 2018		December 31, 2017
Overdrawn demand-deposit accounts	$	7,887	$	5,698
Due in one year or less	30,153,735		25,842,572
Due after one year through two years	4,202,282		3,722,785
Due after two years through three years	2,161,439		2,709,951
Due after three years through four years	1,968,910		1,924,105
Due after four years through five years	1,503,175		1,684,789
Thereafter	1,061,949		1,757,266
Total par value	$	41,059,377	$	37,647,166

_______________________

(1) Also includes certain floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

Table 7.3 - Advances Outstanding by Year of Contractual Maturity or Next Put Date (dollars in thousands)
Year of Contractual Maturity or Next Put Date, Par Value	September 30, 2018		December 31, 2017
Overdrawn demand-deposit accounts	$	7,887	$	5,698
Due in one year or less	22,282,660		22,828,547
Due after one year through two years	12,426,982		7,921,035
Due after two years through three years	2,211,439		2,686,951
Due after three years through four years	1,807,610		1,984,705
Due after four years through five years	1,518,375		1,216,989
Thereafter	804,424		1,003,241
Total par value	$	41,059,377	$	37,647,166

Table 7.4 - Advances by Current Interest Rate Terms (dollars in thousands)
Par value of advances	September 30, 2018		December 31, 2017
Fixed-rate	$	30,882,215	$	31,658,293
Variable-rate	10,177,162		5,988,873
Total par value	$	41,059,377	$	37,647,166

Credit-Risk Exposure and Security Terms. Our potential credit risk from advances is principally concentrated in commercial banks, insurance companies, savings institutions, and credit unions. At September 30, 2018, and December 31, 2017, we had $14.3 billion and $12.1 billion, respectively, of advances issued to members with at least $1.0 billion of advances outstanding. These advances were made to five and six borrowers at September 30, 2018, and December 31, 2017, representing 34.8 percent and 32.3 percent, respectively, of total par value of outstanding advances. For information related to our credit risk on advances and allowance for credit losses, see Note 9 — Allowance for Credit Losses.

Note 8 — Mortgage Loans Held for Portfolio

19

We invest in mortgage loans through the Mortgage Partnership Finance® program (MPF® program). These mortgage loans are either guaranteed or insured by federal agencies, as is the case with government mortgage loans, or are credit-enhanced, directly or indirectly, by the related entity that sold the loan (a participating financial institution), as is the case with conventional mortgage loans. All such investments are held for portfolio.

Table 8.1 - Mortgage Loans Held for Portfolio (dollars in thousands)
	September 30, 2018			December 31, 2017
Real estate
Fixed-rate 15-year single-family mortgages	$	410,019		$	466,952
Fixed-rate 20- and 30-year single-family mortgages	3,714,114			3,466,752
Premiums	67,957			70,074
Discounts	(1,730		)	(1,541		)
Deferred derivative gains, net	2,565			3,000
Total mortgage loans held for portfolio	4,192,925			4,005,237
Less: allowance for credit losses	(500		)	(500		)
Total mortgage loans, net of allowance for credit losses	$	4,192,425		$	4,004,737

Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (dollars in thousands)
	September 30, 2018		December 31, 2017
Conventional mortgage loans	$	3,787,412	$	3,568,473
Government mortgage loans	336,721		365,231
Total par value	$	4,124,133	$	3,933,704

See Note 9 — Allowance for Credit Losses for information related to our credit risk from our investments in mortgage loans and allowance for credit losses based on these investments.

"Mortgage Partnership Finance," and "MPF" are registered trademarks of the Federal Home Loan Bank of Chicago.

Note 9 — Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment, if necessary, to provide for probable losses inherent in our portfolio as of the statement of condition date. To the extent necessary, an allowance for credit losses for off-balance-sheet credit exposure is recorded as a liability.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Secured Member Credit Products

We manage our credit exposure to secured member credit products through an integrated approach that generally includes establishing a credit limit for each borrower. This approach includes an ongoing review of each borrower's financial condition, and collateral and lending policies that are intended to limit risk of loss while balancing borrowers' needs for a reliable source of funding.

At September 30, 2018, and December 31, 2017, none of our secured member credit products outstanding were past due, on nonaccrual status, or considered impaired. In addition, there were no troubled debt restructurings related to credit products during the nine months ended September 30, 2018, and 2017.

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Based upon the collateral held as security, our credit extension and collateral policies, management's credit analysis, and the repayment history on secured member credit products, we have not recorded any allowance for credit losses on our secured member credit products at September 30, 2018, and December 31, 2017. At September 30, 2018, and December 31, 2017, no liability to reflect an allowance for credit losses for off-balance-sheet credit exposures was recorded. See Note 17 — Commitments and Contingencies for additional information on our off-balance-sheet credit exposure.

Government Mortgage Loans Held for Portfolio

Due to government guarantees or insurance on our government loans, there is no allowance for credit losses for the government mortgage loan portfolio as of September 30, 2018, and December 31, 2017. Additionally, these mortgage loans are not placed on nonaccrual status due to the government guarantee or insurance on these loans and the contractual obligation of the loan servicers to repurchase their related loans when certain criteria are met.

For additional information see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Conventional Mortgage Loans Held for Portfolio

For information on our conventional mortgage loans held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Credit Quality Indicators. Key credit quality indicators for mortgage loans include past due loans, nonaccrual loans, loans in process of foreclosure, and impaired loans. Table 9.1 sets forth certain key credit quality indicators for our investments in mortgage loans at September 30, 2018, and December 31, 2017 (dollars in thousands):

Table 9.1 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
	September 30, 2018
	Recorded Investment in Conventional Mortgage Loans			Recorded Investment in Government Mortgage Loans			Total
Past due 30-59 days delinquent	$	24,591		$	10,264		$	34,855
Past due 60-89 days delinquent	4,963			3,742			8,705
Past due 90 days or more delinquent	9,813			4,849			14,662
Total past due	39,367			18,855			58,222
Total current loans	3,828,656			326,644			4,155,300
Total mortgage loans	$	3,868,023		$	345,499		$	4,213,522
Other delinquency statistics
In process of foreclosure, included above (1)	$	4,223		$	1,446		$	5,669
Serious delinquency rate (2)	0.28		%	1.40		%	0.37		%
Past due 90 days or more still accruing interest	$	—		$	4,849		$	4,849
Loans on nonaccrual status (3)	$	10,138		$	—		$	10,138

_______________________

(1) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.

(2) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.

(3) Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

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	December 31, 2017
	Recorded Investment in Conventional Mortgage Loans			Recorded Investment in Government Mortgage Loans			Total
Past due 30-59 days delinquent	$	28,622		$	13,862		$	42,484
Past due 60-89 days delinquent	6,617			4,142			10,759
Past due 90 days or more delinquent	13,310			4,831			18,141
Total past due	48,549			22,835			71,384
Total current loans	3,601,952			352,249			3,954,201
Total mortgage loans	$	3,650,501		$	375,084		$	4,025,585
Other delinquency statistics
In process of foreclosure, included above (1)	$	6,389		$	1,306		$	7,695
Serious delinquency rate (2)	0.38		%	1.29		%	0.46		%
Past due 90 days or more still accruing interest	$	—		$	4,831		$	4,831
Loans on nonaccrual status (3)	$	13,598		$	—		$	13,598

_______________________

(1) Includes loans where the decision of foreclosure or similar alternative such as pursuit of deed-in-lieu of foreclosure has been reported.

(2) Loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the recorded investment in the total loan portfolio class.

(3) Includes conventional mortgage loans with contractual principal or interest payments 90 days or more past due and not accruing interest as well as loans modified within the previous six months under our temporary loan modification plan.

Individually Evaluated Impaired Loans.

Table 9.2 - Individually Evaluated Impaired Conventional Mortgage Loans (dollars in thousands)
	September 30, 2018				December 31, 2017
	Recorded Investment		Par Value		Recorded Investment		Par Value
Individually evaluated impaired mortgage loans with no related allowance	$	15,671	$	15,632	$	17,668	$	17,630

Table 9.3 - Average Recorded Investment of Individually Evaluated Impaired Mortgage Loans and Related Interest Income (dollars in thousands)
	For the Three Months Ended September 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance	$	15,641	$	116	$	18,645	$	91

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Table 9.3 - Average Recorded Investment of Individually Evaluated Impaired Mortgage Loans and Related Interest Income (dollars in thousands)
	For the Nine Months Ended September 30,
	2018				2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Individually evaluated impaired mortgage loans with no related allowance	$	16,226	$	334	$	19,614	$	314

Credit Enhancements.

For information on our credit enhancements held for portfolio see Item 8 — Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses in the 2017 Annual Report.

Roll-Forward of Allowance for Credit Losses on Mortgage Loans. Table 9.4 presents a roll forward of the allowance for credit losses on conventional mortgage loans for the three and nine months ended September 30, 2018 and 2017, as well as the recorded investment in mortgage loans by impairment methodology at September 30, 2018 and 2017. The recorded investment in a loan is the par amount of the loan, adjusted for accrued interest, unamortized premiums or discounts, deferred derivative gains and losses, and direct write-downs. The recorded investment is net of any valuation allowance.

Table 9.4 - Allowance for Credit Losses on Conventional Mortgage Loans (dollars in thousands)
	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2018		2017			2018			2017
Allowance for credit losses
Balance, beginning of period	$	500	$	500		$	500		$	650
Charge-offs, net of recoveries	—		(28		)	(6		)	(2		)
Provision (reduction of provision) for credit losses	—		28			6			(148		)
Balance, end of period	$	500	$	500		$	500		$	500
Ending balance, individually evaluated for impairment	$	—	$	—		$	—		$	—
Ending balance, collectively evaluated for impairment	$	500	$	500		$	500		$	500
Recorded investment, end of period (1)
Individually evaluated for impairment	$	15,671	$	18,786		$	15,671		$	18,786
Collectively evaluated for impairment	$	3,852,352	$	3,562,789		$	3,852,352		$	3,562,789

_________________________

(1) These amounts exclude government mortgage loans because we make no allowance for credit losses based on our investments in government mortgage loans, as discussed above under — Government Mortgage Loans Held for Portfolio.

Note 10 — Derivatives and Hedging Activities

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Table 10.1 - Fair Value of Derivative Instruments (dollars in thousands)
	September 30, 2018							December 31, 2017
	Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities			Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as hedging instruments
Interest-rate swaps	$	12,340,429	$	15,169	$	(291,922	)	$	14,118,994	$	52,557		$	(332,830	)
Forward-start interest-rate swaps	376,200		—		(403		)	481,200		—			(9,807		)
Total derivatives designated as hedging instruments	12,716,629		15,169		(292,325		)	14,600,194		52,557			(342,637		)
Derivatives not designated as hedging instruments
Economic hedges:
Interest-rate swaps	1,164,300		2,753		(1,536		)	1,166,900		3,512			(4,688		)
Mortgage-delivery commitments (1)	41,397		27		(80		)	42,918		169			(27		)
Total derivatives not designated as hedging instruments	1,205,697		2,780		(1,616		)	1,209,818		3,681			(4,715		)
Total notional amount of derivatives	$	13,922,326						$	15,810,012
Total derivatives before netting and collateral adjustments			17,949		(293,941		)			56,238			(347,352		)
Netting adjustments and cash collateral, including related accrued interest (2)			4,007		65,814					(21,452		)	46,902
Derivative assets and derivative liabilities			$	21,956	$	(228,127	)			$	34,786		$	(300,450	)

_______________________

(1) Mortgage-delivery commitments are classified as derivatives with changes in fair value recorded in other income.

(2) Amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions with the same counterparty. Cash collateral and related accrued interest posted was $71.5 million and $25.8 million at September 30, 2018, and December 31, 2017, respectively. The change in cash collateral posted is included in the net change in interest-bearing deposits in the statement of cash flows. Cash collateral and related accrued interest received was $1.7 million and $350,000 at September 30, 2018, and December 31, 2017.

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Table 10.2 - Net Gains and Losses on Derivatives and Hedging Activities Recorded in Other Income (Loss) (dollars in thousands)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Derivatives designated as hedging instruments
Interest-rate swaps	$	557		$	(876	)	$	2,140		$	(2,287	)
Forward-start interest-rate swaps	83			(18		)	244			213
Total net gains (losses) related to derivatives designated as hedging instruments	640			(894		)	2,384			(2,074		)
Derivatives not designated as hedging instruments:
Economic hedges:
Interest-rate swaps	7			14			729			(208		)
CO Bond firm commitments	—			56			—			56
Mortgage-delivery commitments	131			692			(336		)	1,556
Total net gains related to derivatives not designated as hedging instruments	138			762			393			1,404
Other(1)	(291		)	126			(692		)	282
Net gains (losses) on derivatives and hedging activities	$	487		$	(6	)	$	2,085		$	(388	)

______________

(1) Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

Table 10.3 - Effect of Fair Value Hedge Relationships (dollars in thousands)
	For the Three Months Ended September 30, 2018
	Gain/(Loss) on Derivative			(Loss)/Gain on Hedged Item			Net Fair-Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income (1)
Hedged Item:
Advances	$	(1,975	)	$	1,667		$	(308	)	$	15,769
Investments	19,287			(18,832		)	455			(6,200		)
COs – bonds	(3,069		)	3,479			410			(8,787		)
Total	$	14,243		$	(13,686	)	$	557		$	782
	For the Three Months Ended September 30, 2017
	Gain/(Loss) on Derivative			(Loss)/Gain on Hedged Item			Net Fair-Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income (1)
Hedged Item:
Advances	$	9,382		$	(8,881	)	$	501		$	(2,878	)
Investments	5,007			(4,503		)	504			(7,879		)
COs – bonds	2,018			(3,899		)	(1,881		)	242
Total	$	16,407		$	(17,283	)	$	(876	)	$	(10,515	)

______________

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(1) The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

	For the Nine Months Ended September 30, 2018
	Gain/(Loss) on Derivative			(Loss)/Gain on Hedged Item			Net Fair-Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income (1)
Hedged Item:
Advances	$	46,793		$	(44,773	)	$	2,020		$	36,001
Investments	68,878			(67,270		)	1,608			(19,975		)
COs – bonds	(51,171		)	49,683			(1,488		)	(20,317		)
Total	$	64,500		$	(62,360	)	$	2,140		$	(4,291	)
	For the Nine Months Ended September 30, 2017
	Gain/(Loss) on Derivative			(Loss)/Gain on Hedged Item			Net Fair-Value Hedge Ineffectiveness			Effect of Derivatives on Net Interest Income (1)
Hedged Item:
Advances	$	19,150		$	(18,780	)	$	370		$	(24,566	)
Investments	8,412			(7,047		)	1,365			(24,319		)
COs – bonds	19,813			(23,835		)	(4,022		)	6,965
Total	$	47,375		$	(49,662	)	$	(2,287	)	$	(41,920	)

______________

(1) The net interest on derivatives in fair-value hedge relationships is presented in the statement of operations as interest income or interest expense of the respective hedged item.

Table 10.4 - Effect of Cash Flow Hedge Relationships (dollars in thousands)
Derivatives and Hedged Items in Cash Flow Hedging Relationships	Gains (Losses) Recognized in Other Comprehensive Loss on Derivatives (Effective Portion)			Location of Losses Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion)	Losses Reclassified from Accumulated Other Comprehensive Loss into Net Income (Effective Portion)			Gains (Losses) Recognized in Net Losses on Derivatives and Hedging Activities (Ineffective Portion)
Forward-start Interest-rate swaps - CO bonds
For the Three Months Ended September 30, 2018	$	2,985		Interest expense	$	(537	)	$	83
For the Three Months Ended September 30, 2017	(856		)	Interest expense	(2,158		)	(18		)
For the Nine Months Ended September 30, 2018	14,733			Interest expense	(2,485		)	244
For the Nine Months Ended September 30, 2017	(5,937		)	Interest expense	(9,865		)	213

For the nine months ended September 30, 2018 and 2017, there were no reclassifications from accumulated other comprehensive loss into earnings as a result of the discontinuance of cash-flow hedges because the original forecasted transactions were not expected to occur by the end of the originally specified time period or within a two-month period thereafter. As of September 30, 2018, the maximum length of time over which we are hedging our exposure to the variability in future cash flows for forecasted transactions is three years.

As of September 30, 2018, the amount of deferred net losses on derivatives accumulated in other comprehensive loss related to cash flow hedges expected to be reclassified to earnings during the next 12 months is $3.5 million.

Managing Credit Risk on Derivatives. We enter into derivatives that we clear (cleared derivatives) with a DCO, our counterparty for such derivatives. We also enter into derivatives that are not cleared (uncleared derivatives) under master-netting agreements. Certain of our uncleared derivatives master-netting agreements contain provisions that require us to post

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additional collateral with our uncleared derivatives counterparties if our credit ratings are lowered. Under the terms that govern such agreements, if our credit rating is lowered by Moody's or S&P to a certain level, we are required to deliver additional collateral on uncleared derivatives in a net liability position. In the event of a split between such credit ratings, the lower rating governs. The aggregate fair value of all uncleared derivatives with these provisions that were in a net-liability position (before cash collateral and related accrued interest) at September 30, 2018, was $276.8 million for which we had delivered collateral with a post-haircut value of $258.0 million in accordance with the terms of the master-netting agreements. Securities collateral is subject to valuation haircuts in accordance with the terms of the master-netting arrangements. Table 10.5 sets forth the post-haircut value of incremental collateral that certain uncleared derivatives counterparties could have required us to deliver based on incremental credit rating downgrades at September 30, 2018.

Table 10.5 - Post Haircut Value of Incremental Collateral to be Delivered as of September 30, 2018 (dollars in thousands)
Ratings Downgrade (1)		Incremental
From	To	Collateral
AA+	AA or AA-	$	1,142
AA-	A+, A or A-	13,584
A-	below A-	14,723

_______________________

(1) Ratings are expressed in this table according to S&P's conventions but include the equivalent of such rating by Moody's. If there is a split rating, the lower rating is used.

Cleared Derivatives. For cleared derivatives, the DCO is our counterparty. The DCO notifies the clearing member of the required initial and variation margin and our agent (clearing member) in turn notifies us. We utilize two DCOs for all cleared derivative transactions, CME Inc. and LCH Ltd. Based upon certain amendments, effective January 3, 2017, made by CME Inc. to its rulebook, we began to characterize variation margin payments related to CME Inc. contracts as daily settlement payments, rather than collateral. However, throughout 2017, we continued to characterize our variation margin related to LCH Ltd. contracts as cash collateral. We began to characterize variation margin payments related to LCH Ltd. contracts as daily settlement payments, rather than cash collateral, based upon a change effective January 16, 2018, to LCH Ltd.’s rulebook. At both DCOs, initial margin has been, and continues to be, considered cash collateral. We post initial margin and exchange variation margin through a clearing member who acts as our agent to the DCO and who guarantees our performance to the DCO, subject to the terms of relevant agreements. These arrangements expose us to credit risk in the event that one of our clearing members or one of the DCOs fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because the DCO, which is fully secured at all times through margin received from its clearing members, is substituted for the credit risk exposure of individual counterparties in uncleared derivatives, and collateral is posted at least once daily for changes in the fair value of cleared derivatives through a clearing member.

For cleared derivatives, the DCO determines initial margin requirements. We clear our trades via clearing members of the DCOs. These clearing members who act as our agent to the DCOs are CFTC-registered futures commission merchants. Our clearing members may require us to post margin in excess of DCO requirements based on our credit or other considerations, including but not limited to, credit rating downgrades. We were not required to post any such excess margin by our clearing members based on credit considerations at September 30, 2018.

Offsetting of Certain Derivatives. We present derivatives, any related cash collateral, including initial and certain variation margin, received or pledged, and associated accrued interest, on a net basis by counterparty.

We have analyzed the rights, rules, and regulations governing our cleared derivatives and determined that those rights, rules, and regulations should result in a net claim through each of our clearing members with the related DCO upon an event of default including a bankruptcy, insolvency or similar proceeding involving the DCO or one of our clearing members, or both. For this purpose, net claim generally means a single net amount reflecting the aggregation of all amounts indirectly owed by us to the relevant DCO and indirectly payable to us from the relevant DCO.

Table 10.6 presents separately the fair value of derivatives that are subject to netting due to a legal right of offset based on the terms of our master netting arrangements or similar agreements as of September 30, 2018, and December 31, 2017, and the fair value of derivatives that are not subject to such netting. Derivatives subject to netting include any related cash collateral

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received from or pledged to counterparties.

Table 10.6 - Netting of Derivative Assets and Derivative Liabilities (dollars in thousands)
	September 30, 2018
	Derivative Instruments Meeting Netting Requirements												Non-cash Collateral Received or Pledged Not Offset(2)
	Gross Recognized Amount			Gross Amounts of Netting Adjustments (1)			Mortgage Delivery Commitments			Total Derivative Assets and Total Derivative Liabilities			Can Be Sold or Repledged		Cannot Be Sold or Repledged		Net Amount
Derivative Assets
Uncleared	$	17,319		$	(15,542	)	$	27		$	1,804		$	—	$	—	$	1,804
Cleared	603			19,549						20,152			—		—		20,152
Total										$	21,956						$	21,956
Derivative Liabilities
Uncleared	$	(292,034	)	$	63,987		$	(80	)	$	(228,127	)	$	10,809	$	206,680	$	(10,638	)
Cleared	(1,828		)	1,828						—			—		—		—
Total										$	(228,127	)					$	(10,638	)

_______________________

(1) Includes gross amounts of netting adjustments and cash collateral.

(2) Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At September 30, 2018, we had additional net credit exposure of $220,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

	December 31, 2017
	Derivative Instruments Meeting Netting Requirements												Non-cash Collateral Received or Pledged Not Offset(2)
	Gross Recognized Amount			Gross Amounts of Netting Adjustments (1)			Mortgage Delivery Commitments			Total Derivative Assets and Total Derivative Liabilities			Can Be Sold or Repledged		Cannot Be Sold or Repledged		Net Amount
Derivative Assets
Uncleared	$	15,587		$	(13,481	)	$	169		$	2,275		$	—	$	—	$	2,275
Cleared	40,482			(7,971		)				32,511			—		—		32,511
Total										$	34,786						$	34,786
Derivative Liabilities
Uncleared	$	(335,289	)	$	34,866		$	(27	)	$	(300,450	)	$	7,627	$	280,486	$	(12,337	)
Cleared	(12,036		)	12,036						—			—		—		—
Total										$	(300,450	)					$	(12,337	)

_______________________

(1) Includes gross amounts of netting adjustments and cash collateral.

(2) Includes non-cash collateral at fair value. Any overcollateralization with a counterparty is not included in the determination of the net amount. At December 31, 2017, we had additional net credit exposure of $502,000 due to instances where our collateral pledged to a counterparty exceeded our net derivative liability position.

Note 11 — Deposits

We offer demand, overnight and term deposits for members and qualifying nonmembers. Members that service mortgage loans may deposit funds collected in connection with mortgage loans pending disbursement of such funds to the owners of the mortgage loans, which we classify as "other" in the following table.

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Table 11.1 - Deposits (dollars in thousands)
	September 30, 2018		December 31, 2017
Interest-bearing
Demand and overnight	$	460,636	$	447,700
Term	800		—
Other	1,913		3,222
Noninterest-bearing
Other	21,412		26,147
Total deposits	$	484,761	$	477,069

The aggregate amount of time deposits with a denomination of $100,000 or more was $800,000 as of September 30, 2018.

Note 12 — Consolidated Obligations

CO Bonds. CO bonds for which we have received issuance proceeds and are primarily liable were as follows:

Table 12.1 - CO Bonds Outstanding by Contractual Maturity (dollars in thousands)
	September 30, 2018					December 31, 2017
Year of Contractual Maturity	Amount			Weighted Average Rate (1)		Amount			Weighted Average Rate (1)
Due in one year or less	$	10,123,250		1.80	%	$	12,186,510		1.35	%
Due after one year through two years	6,283,295			2.15		5,288,470			1.63
Due after two years through three years	3,073,605			2.19		3,128,240			1.81
Due after three years through four years	2,395,865			1.98		2,759,460			1.74
Due after four years through five years	1,410,655			2.30		1,572,775			2.00
Thereafter	3,482,710			3.06		3,389,695			2.76
Total par value	26,769,380			2.13	%	28,325,150			1.70	%
Premiums	92,653					90,836
Discounts	(15,637		)			(15,685		)
Hedging adjustments	(105,360		)			(55,678		)
	$	26,741,036				$	28,344,623

_______________________

(1) The CO bonds' weighted-average rate excludes concession fees.

Table 12.2 - CO Bonds Outstanding by Call Feature (dollars in thousands)
Par Value of CO bonds	September 30, 2018		December 31, 2017
Noncallable and nonputable	$	21,867,380	$	23,931,150
Callable	4,902,000		4,394,000
Total par value	$	26,769,380	$	28,325,150

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Table 12.3 - CO Bonds Outstanding by Contractual Maturity or Next Call Date (dollars in thousands)
Year of Contractual Maturity or Next Call Date	September 30, 2018		December 31, 2017
Due in one year or less	$	13,698,250	$	15,309,510
Due after one year through two years	6,392,295		5,580,470
Due after two years through three years	2,491,605		3,020,240
Due after three years through four years	1,485,865		1,542,460
Due after four years through five years	1,140,655		1,107,775
Thereafter	1,560,710		1,764,695
Total par value	$	26,769,380	$	28,325,150

Table 12.4 - CO Bonds by Interest Rate-Payment Type (dollars in thousands)
Par Value of CO bonds	September 30, 2018		December 31, 2017
Fixed-rate	$	20,954,380	$	21,416,150
Simple variable-rate	3,983,000		5,432,000
Step-up	1,832,000		1,477,000
Total par value	$	26,769,380	$	28,325,150

CO Discount Notes. Outstanding CO discount notes for which we were primarily liable, all of which are due within one year, were as follows:

Table 12.5 - CO Discount Notes Outstanding (dollars in thousands)
	Book Value		Par Value		Weighted Average Rate (1)
September 30, 2018	$	33,431,980	$	33,501,223	2.07	%
December 31, 2017	$	27,720,906	$	27,752,860	1.25	%

_______________________

(1) The CO discount notes' weighted-average rate represents a yield to maturity excluding concession fees.

Note 13 — Affordable Housing Program

Table 13.1 - AHP Liability (dollars in thousands)
	September 30, 2018			December 31, 2017
Balance at beginning of year	$	81,600		$	81,627
AHP expense for the period	19,387			21,307
AHP direct grant disbursements	(13,384		)	(18,628		)
AHP subsidy for AHP advance disbursements	(3,707		)	(2,782		)
Return of previously disbursed grants and subsidies	86			76
Balance at end of period	$	83,982		$	81,600

Note 14 — Capital

30

We are subject to capital requirements under our capital plan, the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), and FHFA regulations:

1. Risk-based capital. We are required to maintain at all times permanent capital, defined as Class B stock, including Class B stock classified as mandatorily redeemable capital stock, and retained earnings, in an amount at least equal to the sum of our credit-risk capital requirement, market-risk capital requirement, and operations-risk capital requirement, calculated in accordance with FHFA rules and regulations, referred to herein as the risk-based capital requirement. Only permanent capital satisfies the risk-based capital requirement.

2. Total regulatory capital. We are required to maintain at all times a total capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, the amount paid-in for Class A stock, the amount of 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. We have never issued Class A stock.

3. Leverage capital. We are required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.

The FHFA may require us to maintain a greater amount of permanent capital than is required as defined by the risk-based capital requirements.

Table 14.1 demonstrates our compliance with our regulatory capital requirements at September 30, 2018, and December 31, 2017.

Table 14.1 - Regulatory Capital Requirements (dollars in thousands)
Risk-Based Capital Requirements	September 30, 2018		December 31, 2017
Permanent capital
Class B capital stock	$	2,476,876	$	2,283,721
Mandatorily redeemable capital stock	31,868		35,923
Retained earnings	1,386,466		1,308,349
Total permanent capital	$	3,895,210	$	3,627,993
Risk-based capital requirement
Credit-risk capital	$	320,819	$	328,557
Market-risk capital	253,082		170,102
Operations-risk capital	172,170		149,598
Total risk-based capital requirement	$	746,071	$	648,257
Permanent capital in excess of risk-based capital requirement	$	3,149,139	$	2,979,736

	September 30, 2018						December 31, 2017
	Required			Actual			Required			Actual
Capital Ratio
Risk-based capital	$	746,071		$	3,895,210		$	648,257		$	3,627,993
Total regulatory capital	$	2,587,752		$	3,895,210		$	2,414,478		$	3,627,993
Total capital-to-asset ratio	4.0		%	6.0		%	4.0		%	6.0		%
Leverage Ratio
Leverage capital	$	3,234,690		$	5,842,815		$	3,018,097		$	5,441,990
Leverage capital-to-assets ratio	5.0		%	9.0		%	5.0		%	9.0		%

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Note 15 — Accumulated Other Comprehensive Loss

Table 15.1 - Accumulated Other Comprehensive Loss (dollars in thousands)
	Net Unrealized Loss on Available-for-sale Securities			Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities			Net Unrealized Loss Relating to Hedging Activities			Pension and Postretirement Benefits			Total Accumulated Other Comprehensive Loss
Balance, June 30, 2017	$	(94,309	)	$	(175,068	)	$	(45,554	)	$	(5,530	)	$	(320,461	)
Other comprehensive income (loss) before reclassifications:
Net unrealized losses	(61		)	—			(856		)	—			(917		)
Accretion of noncredit loss	—			8,178			—			—			8,178
Net actuarial gain	—			—			—			112			112
Reclassifications from other comprehensive income to net income
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)	—			420			—			—			420
Amortization - hedging activities (2)	—			—			2,161			—			2,161
Amortization - pension and postretirement benefits (3)	—			—			—			193			193
Other comprehensive (loss) income	(61		)	8,598			1,305			305			10,147
Balance, September 30, 2017	$	(94,370	)	$	(166,470	)	$	(44,249	)	$	(5,225	)	$	(310,314	)
Balance, June 30, 2018	$	(167,921	)	$	(143,196	)	$	(26,733	)	$	(6,740	)	$	(344,590	)
Other comprehensive income (loss) before reclassifications:
Net unrealized (losses) gains	(8,690		)	—			2,985			—			(5,705		)
Accretion of noncredit loss	—			7,127			—			—			7,127
Net actuarial loss	—			—			—			(729		)	(729		)
Reclassifications from other comprehensive income to net income
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)	—			6			—			—			6
Amortization - hedging activities (4)	—			—			541			—			541
Amortization - pension and postretirement benefits (3)	—			—			—			337			337
Other comprehensive (loss) income	(8,690		)	7,133			3,526			(392		)	1,577
Balance, September 30, 2018	$	(176,611	)	$	(136,063	)	$	(23,207	)	$	(7,132	)	$	(343,013	)

_______________________

(1) Recorded in net amount of impairment losses reclassified to accumulated other comprehensive loss in the statement of operations.

(2) Amortization of hedging activities includes $2.2 million recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

(3) Recorded in other non-interest expenses in the statement of operations.

(4) Amortization of hedging activities includes $537,000 recorded in CO bond interest expense and $4,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

32

Table 15.1 - Accumulated Other Comprehensive Loss (dollars in thousands)
	Net Unrealized Loss on Available-for-sale Securities			Noncredit Portion of Other-than-temporary Impairment Losses on Held-to-maturity Securities			Net Unrealized Loss Relating to Hedging Activities			Pension and Postretirement Benefits			Total Accumulated Other Comprehensive Loss
Balance, December 31, 2016	$	(136,809	)	$	(192,379	)	$	(48,187	)	$	(6,139	)	$	(383,514	)
Other comprehensive income (loss) before reclassifications:
Net unrealized gains (losses)	42,439			—			(5,937		)	—			36,502
Accretion of noncredit loss	—			24,593			—			—			24,593
Net actuarial gain	—			—			—			336			336
Reclassifications from other comprehensive income to net income
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)	—			1,316			—			—			1,316
Amortization - hedging activities (2)	—			—			9,875			—			9,875
Amortization - pension and postretirement benefits (3)	—			—			—			578			578
Other comprehensive income	42,439			25,909			3,938			914			73,200
Balance, September 30, 2017	$	(94,370	)	$	(166,470	)	$	(44,249	)	$	(5,225	)	$	(310,314	)
Balance, December 31, 2017	$	(122,331	)	$	(158,218	)	$	(40,436	)	$	(5,955	)	$	(326,940	)
Other comprehensive income (loss) before reclassifications:
Net unrealized (losses) gains	(54,280		)	—			14,733			—			(39,547		)
Accretion of noncredit loss	—			21,945			—			—			21,945
Net actuarial loss	—			—			—			(2,189		)	(2,189		)
Reclassifications from other comprehensive income to net income
Noncredit other-than-temporary impairment losses reclassified to credit loss (1)	—			210			—			—			210
Amortization - hedging activities (4)	—			—			2,496			—			2,496
Amortization - pension and postretirement benefits (3)	—			—			—			1,012			1,012
Other comprehensive (loss) income	(54,280		)	22,155			17,229			(1,177		)	(16,073		)
Balance, September 30, 2018	$	(176,611	)	$	(136,063	)	$	(23,207	)	$	(7,132	)	$	(343,013	)

_______________________

(1) Recorded in net amount of impairment losses reclassified to accumulated other comprehensive loss in the statement of operations.

(2) Amortization of hedging activities includes $9.9 million recorded in CO bond interest expense and $11,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

(3) Recorded in other non-interest expenses in the statement of operations.

(4) Amortization of hedging activities includes $2.5 million recorded in CO bond interest expense and $11,000 recorded in net losses on derivatives and hedging activities in the statement of operations.

Note 16 — Fair Values

A fair-value hierarchy is used to prioritize the inputs of valuation techniques used to measure fair value. A description of the application of the fair-value hierarchy, valuation techniques, and significant inputs is disclosed in Item 8 — Financial Statements and Supplementary Data — Note 18 — Fair Values in the 2017 Annual Report. There have been no material

33

changes in the fair-value hierarchy classification of financial assets and liabilities, valuation techniques, or significant inputs during the nine months ended September 30, 2018.

Table 16.1 - Fair Value Summary (dollars in thousands)
	September 30, 2018
	Carrying Value			Total Fair Value			Level 1			Level 2			Level 3		Netting Adjustments and Cash Collateral(2)
Financial instruments
Assets:
Cash and due from banks	$	45,614		$	45,614		$	45,614		$	—		$	—	$	—
Interest-bearing deposits	397,203			397,203			397,203			—			—		—
Securities purchased under agreements to resell	5,499,000			5,498,962			—			5,498,962			—		—
Federal funds sold	5,650,000			5,650,001			—			5,650,001			—		—
Trading securities(1)	176,113			176,113			—			176,113			—		—
Available-for-sale securities(1)	6,227,080			6,227,080			—			6,186,743			40,337		—
Held-to-maturity securities	1,372,299			1,638,491			—			671,526			966,965		—
Advances	40,927,639			40,880,159			—			40,880,159			—		—
Mortgage loans, net	4,192,425			4,076,278			—			4,056,143			20,135		—
Accrued interest receivable	102,466			102,466			—			102,466			—		—
Derivative assets(1)	21,956			21,956			—			17,949			—		4,007
Other assets (1)	26,036			26,036			11,189			14,847			—		—
Liabilities:
Deposits	(484,761		)	(484,750		)	—			(484,750		)	—		—
COs:
Bonds	(26,741,036		)	(26,508,907		)	—			(26,508,907		)	—		—
Discount notes	(33,431,980		)	(33,428,979		)	—			(33,428,979		)	—		—
Mandatorily redeemable capital stock	(31,868		)	(31,868		)	(31,868		)	—			—		—
Accrued interest payable	(119,242		)	(119,242		)	—			(119,242		)	—		—
Derivative liabilities(1)	(228,127		)	(228,127		)	—			(293,941		)	—		65,814
Other:
Commitments to extend credit for advances	—			(4,946		)	—			(4,946		)	—		—
Standby letters of credit	(1,179		)	(1,179		)	—			(1,179		)	—		—

_______________________

(1) Carried at fair value and measured on a recurring basis.

(2) These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

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	December 31, 2017
	Carrying Value			Total Fair Value			Level 1			Level 2			Level 3		Netting Adjustments and Cash Collateral(2)
Financial instruments
Assets:
Cash and due from banks	$	261,673		$	261,673		$	261,673		$	—		$	—	$	—
Interest-bearing deposits	246			246			246			—			—		—
Securities purchased under agreements to resell	5,349,000			5,348,898			—			5,348,898			—		—
Federal funds sold	3,450,000			3,449,981			—			3,449,981			—		—
Trading securities(1)	191,510			191,510			—			191,510			—		—
Available-for-sale securities(1)	7,324,736			7,324,736			—			7,287,053			37,683		—
Held-to-maturity securities	1,626,122			1,903,227			—			811,759			1,091,468		—
Advances	37,565,967			37,591,048			—			37,591,048			—		—
Mortgage loans, net	4,004,737			4,035,928			—			4,013,704			22,224		—
Loans to other FHLBanks(3)	400,000			399,997			—			399,997			—		—
Accrued interest receivable	94,100			94,100			—			94,100			—		—
Derivative assets(1)	34,786			34,786			—			56,238			—		(21,452		)
Other assets(1)	22,351			22,351			9,726			12,625			—		—
Liabilities:
Deposits	(477,069		)	(477,060		)	—			(477,060		)	—		—
COs:
Bonds	(28,344,623		)	(28,353,945		)	—			(28,353,945		)	—		—
Discount notes	(27,720,906		)	(27,719,598		)	—			(27,719,598		)	—		—
Mandatorily redeemable capital stock	(35,923		)	(35,923		)	(35,923		)	—			—		—
Accrued interest payable	(90,626		)	(90,626		)	—			(90,626		)	—		—
Derivative liabilities(1)	(300,450		)	(300,450		)	—			(347,352		)	—		46,902
Other:
Commitments to extend credit for advances	—			(3,817		)	—			(3,817		)	—		—
Standby letters of credit	(1,100		)	(1,100		)	—			(1,100		)	—		—

_______________________

(1) Carried at fair value and measured on a recurring basis.

(2) These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

(3) The Fair Value Summary table for December 31, 2017, has been revised to correct the omission of Loans to Other FHLBanks. This revision had no impact on the Statements of Condition, Statements of Operations, or Statements of Cash Flows.

Fair Value Measured on a Recurring Basis.

35

Table 16.2 - Fair Value of Assets and Liabilities Measured at Fair Value on a Recurring Basis (dollars in thousands)
	September 30, 2018
	Level 1		Level 2			Level 3		Netting Adjustments and Cash Collateral (1)		Total
Assets:
Trading securities:
Corporate bonds	$	—	$	6,774		$	—	$	—	$	6,774
U.S. government-guaranteed – single-family MBS	—		5,684			—		—		5,684
GSEs – single-family MBS	—		180			—		—		180
GSEs – multifamily MBS	—		163,475			—		—		163,475
Total trading securities	—		176,113			—		—		176,113
Available-for-sale securities:
State or local HFA securities	—		—			40,337		—		40,337
Supranational institutions	—		395,178			—		—		395,178
U.S. government-owned corporations	—		268,624			—		—		268,624
GSEs	—		113,425			—		—		113,425
U.S. government guaranteed – single-family MBS	—		81,037			—		—		81,037
U.S. government guaranteed – multifamily MBS	—		367,515			—		—		367,515
GSEs – single-family MBS	—		3,732,005			—		—		3,732,005
GSEs – multifamily	—		1,228,959			—		—		1,228,959
Total available-for-sale securities	—		6,186,743			40,337		—		6,227,080
Derivative assets:
Interest-rate-exchange agreements	—		17,922			—		4,007		21,929
Mortgage delivery commitments	—		27			—		—		27
Total derivative assets	—		17,949			—		4,007		21,956
Other assets	11,189		14,847			—		—		26,036
Total assets at fair value	$	11,189	$	6,395,652		$	40,337	$	4,007	$	6,451,185
Liabilities:
Derivative liabilities
Interest-rate-exchange agreements	$	—	$	(293,861	)	$	—	$	65,814	$	(228,047	)
Mortgage delivery commitments	—		(80		)	—		—		(80		)
Total liabilities at fair value	$	—	$	(293,941	)	$	—	$	65,814	$	(228,127	)

_______________________

(1) These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

36

	December 31, 2017
	Level 1		Level 2			Level 3		Netting Adjustments and Cash Collateral  (1)			Total
Assets:
Trading securities:
U.S. government-guaranteed – single-family MBS	$	—	$	6,807		$	—	$	—		$	6,807
GSEs – single-family MBS	—		346			—		—			346
GSEs – multifamily MBS	—		184,357			—		—			184,357
Total trading securities	—		191,510			—		—			191,510
Available-for-sale securities:
State or local HFA securities	—		—			37,683		—			37,683
Supranational institutions	—		418,285			—		—			418,285
U.S. government-owned corporations	—		292,077			—		—			292,077
GSEs	—		121,343			—		—			121,343
U.S. government guaranteed – single-family MBS	—		95,777			—		—			95,777
U.S. government guaranteed – multifamily MBS	—		443,373			—		—			443,373
GSEs – single-family MBS	—		4,562,992			—		—			4,562,992
GSEs – multifamily MBS	—		1,353,206			—		—			1,353,206
Total available-for-sale securities	—		7,287,053			37,683		—			7,324,736
Derivative assets:
Interest-rate-exchange agreements	—		56,069			—		(21,452		)	34,617
Mortgage delivery commitments	—		169			—		—			169
Total derivative assets	—		56,238			—		(21,452		)	34,786
Other assets	9,726		12,625			—		—			22,351
Total assets at fair value	$	9,726	$	7,547,426		$	37,683	$	(21,452	)	$	7,573,383
Liabilities:
Derivative liabilities
Interest-rate-exchange agreements	$	—	$	(347,325	)	$	—	$	46,902		$	(300,423	)
Mortgage delivery commitments	—		(27		)	—		—			(27		)
Total liabilities at fair value	$	—	$	(347,352	)	$	—	$	46,902		$	(300,450	)

_______________________

(1) These amounts represent the effect of master-netting agreements intended to allow us to settle positive and negative positions and also cash collateral and related accrued interest held or placed with the same clearing member and/or counterparty.

Table 16.3 presents a reconciliation of available-for-sale securities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three and nine months ended September 30, 2018 and 2017.

37

Table 16.3 - Roll Forward of Level 3 Available-for-Sale Securities (dollars in thousands)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Balance at beginning of period	$	37,600		$	15,414		$	37,683		$	8,146
Purchases	3,150			3,520			3,150			11,120
Unrealized gains (losses) included in other comprehensive income	(413		)	(391		)	(496		)	(723		)
Balance at end of period	$	40,337		$	18,543		$	40,337		$	18,543

Fair Value on a Nonrecurring Basis

We measure certain held-to-maturity investment securities, mortgage loans held for portfolio, and real-estate-owned property (REO) at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair-value adjustments only in certain circumstances (for example, upon recognizing an other-than-temporary impairment on a held-to-maturity security).

Table 16.4 - Fair Value of Assets Measured at Fair Value on a Nonrecurring Basis (1)  (dollars in thousands)
	September 30, 2018
	Level 1		Level 2		Level 3		Total
Held-to-maturity securities:
Private-label residential MBS	$	—	$	—	$	1,736	$	1,736
Mortgage loans held for portfolio	—		—		1,122		1,122
REO	—		—		361		361
Total assets recorded at fair value on a nonrecurring basis	$	—	$	—	$	3,219	$	3,219

	December 31, 2017
	Level 1		Level 2		Level 3		Total
Held-to-maturity securities:
Private-label residential MBS	$	—	$	—	$	1,970	$	1,970
Mortgage loans held for portfolio	—		—		4,608		4,608
REO	—		—		784		784
Total assets recorded at fair value on a nonrecurring basis	$	—	$	—	$	7,362	$	7,362

_______________________

(1) The fair values presented are as of the date the fair value adjustment was recorded during the nine months ended September 30, 2018, and year ended December 31, 2017.

Note 17 — Commitments and Contingencies

Joint and Several Liability. COs are backed by the financial resources of the FHLBanks. The FHFA has authority to require any FHLBank to repay all or a portion of the principal and interest on COs for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any CO on behalf of another FHLBank. We evaluate the financial condition of the other FHLBanks primarily based on known regulatory actions, publicly available financial information, and individual long-term credit-rating action as of each period-end presented. Based on this

38

evaluation, as of September 30, 2018, and through the filing of this report, we believe that the likelihood is only remote that we will be required to repay the principal or interest on any CO on behalf of another FHLBank.

We have considered applicable FASB guidance and determined it is not necessary to recognize a liability for the fair value of our joint and several liability for all of the COs. The joint and several obligation is mandated by the FHLBank Act, as implemented by FHFA regulations, and is not the result of an arms-length transaction among the FHLBanks. 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 obligation. 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 the FHLBanks' COs, the FHLBanks' joint and several obligation is excluded from the initial recognition and measurement provisions. Accordingly, we have not recognized a liability for our joint and several obligation related to other FHLBanks' COs at September 30, 2018, and December 31, 2017. The par amounts of other FHLBanks' outstanding COs for which we are jointly and severally liable totaled $958.8 billion and $978.2 billion at September 30, 2018, and December 31, 2017, respectively. See Note 12 — Consolidated Obligations for additional information.

Off-Balance-Sheet Commitments

Table 17.1 - Off-Balance Sheet Commitments (dollars in thousands)
	September 30, 2018						December 31, 2017
	Expire within one year		Expire after one year		Total		Expire within one year		Expire after one year		Total
Standby letters of credit outstanding (1)	$	6,086,259	$	231,611	$	6,317,870	$	5,034,725	$	223,167	$	5,257,892
Commitments for unused lines of credit - advances (2)	1,213,453		—		1,213,453		1,216,592		—		1,216,592
Commitments to make additional advances	20,880		37,527		58,407		18,851		63,488		82,339
Commitments to invest in mortgage loans	41,397		—		41,397		42,918		—		42,918
Unsettled CO bonds, at par	138,800		—		138,800		52,550		—		52,550

__________________________

(1) The amount of standby letters of credit outstanding excludes commitments to issue standby letters of credit that expire within one year. At September 30, 2018, and December 31, 2017, these amounts totaled $29.3 million and $1.4 million, respectively. Also excluded are commitments to issue standby letters of credit that expire after one year totaling $543,000 at December 31, 2017.

(2) Commitments for unused line-of-credit advances are generally for periods of up to 12 months. Since many of these commitments are not expected to be drawn upon, the total commitment amount does not necessarily indicate future liquidity requirements.

Standby Letters of Credit. We issue standby letters of credit on behalf of our members to support certain obligations of the members to third-party beneficiaries. These standby letters of credit are subject to the same collateralization and borrowing limits that are applicable to advances. Standby letters of credit may be offered to assist members in facilitating residential housing finance, community lending, and asset-liability management, and to provide liquidity. In particular, members often use standby letters of credit as security for deposits from federal, state, and municipal government agencies. Standby letters of credit are executed for members for a fee. If we are required to make payment for a beneficiary's draw, our strategy is to take prompt action to recover the funds paid to the third-party beneficiary, including converting the payment amount into a collateralized advance to the primary obligor, withdrawing the payment amount from the primary obligor's demand deposit account with us, or selling collateral pledged by the primary obligor in a commercially reasonable manner to offset the payment amount. Historically, standby letters of credit usually expire without being drawn upon. The original terms of these standby letters of credit have original expiration periods of up to 20 years, currently expiring no later than 2027. Currently, we offer new standby letters of credit with expiration periods of up to 10 years. Our unearned fees for the value of the guarantees related to standby letters of credit are recorded in other liabilities and totaled $1.2 million and $1.1 million, respectively, at September 30, 2018, and December 31, 2017.

39

Commitments to Invest in Mortgage Loans. Commitments to invest in mortgage loans are generally for periods not to exceed 45 business days. Such commitments are recorded as derivatives at their fair values on the statement of condition.

Pledged Collateral. We have pledged securities as collateral related to derivatives. See Note 10 — Derivatives and Hedging Activities for additional information about our pledged collateral and other credit-risk-related contingent features.

Legal Proceedings. We are subject to various legal proceedings arising in the normal course of business from time to time. We would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on our financial condition, results of operations, or cash flows.

Note 18 — Transactions with Shareholders

Shareholder Concentrations. We consider shareholder concentrations as members or nonmembers whose capital stock holdings (including mandatorily redeemable capital stock) are in excess of 10 percent of total capital stock outstanding at any time during the year.

Table 18.1 - Shareholder Concentrations, Balance Sheet (dollars in thousands)
	Capital Stock Outstanding		Percent of Total		Par Value of Advances		Percent of Total Par Value of Advances		Total Accrued Interest Receivable		Percent of Total Accrued Interest Receivable on Advances
As of September 30, 2018
Citizens Bank, N.A.	$	354,645	14.1	%	$	8,009,938	19.5	%	$	5,692	10.0	%
As of December 31, 2017
Citizens Bank, N.A.	$	227,287	9.8	%	$	4,858,592	12.9	%	$	2,558	6.0	%

We held sufficient collateral to support the advances to the above institution such that we do not expect to incur any credit losses on these advances.

We recognized interest income on outstanding advances and fees on letters of credit from Citizens Bank, N.A. during the three and nine months ended September 30, 2018, and 2017, as follows (dollars in thousands):

Table 18.2 - Shareholder Concentrations, Income Statement (dollars in thousands)
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
Citizens Bank, N.A.	2018		2017		2018		2017
Interest income on advances	$	33,144	$	14,316	$	89,228	$	46,968
Fees on letters of credit	1,257		1,002		3,338		2,448

Transactions with Directors' Institutions. We provide, in the ordinary course of business, products and services to members whose officers or directors serve on our board of directors. In accordance with FHFA regulations, transactions with directors' institutions are conducted on the same terms as those with any other member.

Table 18.3 presents the outstanding balances of capital stock, advances, and accrued interest receivable with members whose officers or directors serve on our board of directors, and those balances as a percentage of our total balance as reported on our statement of condition:

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Table 18.3 - Transactions with Directors' Institutions (dollars in thousands)
	Capital Stock Outstanding		Percent of Total		Par Value of Advances		Percent of Total Par Value of Advances		Total Accrued Interest Receivable		Percent of Total Accrued Interest Receivable on Advances
As of September 30, 2018	$	106,932	4.3	%	$	2,002,884	4.9	%	$	2,960	5.2	%
As of December 31, 2017	114,498		4.9		2,133,374		5.7		2,466		5.8

Note 19 — Subsequent Events

On October 19, 2018, the board of directors declared a cash dividend at an annualized rate of 5.87 percent based on capital stock balances outstanding during the third quarter of 2018. The dividend, including dividends classified as interest on mandatorily redeemable capital stock, amounted to $35.6 million and was paid on November 2, 2018.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Index to Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements	43
Executive Summary	43
Economic Conditions	44
Selected Financial Data	45
Results of Operations	47
Financial Condition	56
Liquidity and Capital Resources	67
Critical Accounting Estimates	75
Recent Accounting Developments	75
Legislative and Regulatory Developments	75

42

Forward-Looking Statements

This report includes statements describing anticipated developments, projections, estimates, or predictions of ours that are “forward-looking statements.” These statements may involve matters related to, but not limited to, projections of revenues, income, earnings, capital expenditures, dividends, capital structure, or other financial items; repurchases of excess stock, our minimum retained earnings target, or the interest-rate environment in which we do business; statements of management’s plans or objectives for future operations; expectations of future economic performance; or statements of assumptions underlying certain of the foregoing types of statements. These statements may use forward-looking terminology such as, but not limited to, “anticipates,” “believes,” “expects,” “plans,” “intends,” “may,” “could,” “estimates,” “assumes,” “should,” “will,” “likely,” or their negatives or other variations on these terms. We caution that, by their nature, forward-looking statements are subject to a number of risks or uncertainties, including the risk factors set forth in Item 1A — Risk Factors in the 2017 Annual Report and Part II — Item 1A — Risk Factors of this quarterly report along with the risks set forth below. Actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These forward-looking statements speak only as of the date they are made, and we do not undertake to update any forward-looking statement herein or that may be made from time to time on our behalf.

Some of the risks and uncertainties that could affect our forward-looking statements include the following:

• the effects of economic, financial, credit, and market conditions on our financial and regulatory condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, employment rates, interest rates, interest rate spreads, interest rate volatility, changes in benchmark interest rates, mortgage originations, prepayment activity, housing prices, asset delinquencies, members’ deposit flows, liquidity needs, and loan demand; changes in the general economy, including changes resulting from changes in U.S. fiscal policy or ratings of the U.S. federal government; the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments; the condition of the capital markets on our COs;

• issues and events across the FHLBank System and in the political arena that may lead to executive branch, legislative, regulatory, judicial, or other developments impacting the scope of our business, investor demand for COs, our financial obligations with respect to COs, our ability to access the capital markets, our members, our counterparties, the manner in which we operate, or the organization and structure of the FHLBank System;

• our ability to declare and pay dividends consistent with past practices as well as any plans to repurchase excess capital stock;

• competitive forces including, without limitation, other sources of funding available to our members and other entities borrowing funds in the capital markets;

• changes in the value and liquidity of collateral we hold as security for obligations of our members and counterparties;

• the impact of new accounting standards and the application of accounting rules, including the impact of regulatory guidance on our application of such standards and rules;

• changes in the fair value and economic value of, impairments of, and risks, including risks related to changes in or cessation of benchmark interest rates, associated with the Bank’s investments in mortgage loans and MBS or other assets and the related credit enhancement protections;

• membership conditions and changes, including changes resulting from member failures, mergers or changing financial health, changes due to member eligibility, changes in the principal place of business of members, or the addition of new members;

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

• our ability to attract and retain skilled employees.

The Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our interim financial statements and notes, which begin on page three, and the 2017 Annual Report.

EXECUTIVE SUMMARY

For the three months ended September 30, 2018, net income increased to $64.7 million, from $45.6 million for the three months ended September 30, 2017. The improvements in net income were largely the result of litigation settlement income in the third quarter of 2018 of $12.8 million, while there were no litigation settlements in the third quarter of 2017, as well as a

43

$6.4 million increase in net interest income after provision for credit losses. Our return on average equity was 7.56 percent for the three months ended September 30, 2018, compared with 5.64 percent for the three months ended September 30, 2017, an increase of 192 basis points. The increase in return on average equity was largely a result of the aforementioned increases in litigation settlements and net interest income after provision for credit losses. Our financial condition continued to strengthen with retained earnings growing to $1.4 billion at September 30, 2018, a surplus of $686.5 million over our minimum retained earnings target, and our regulatory capital ratio stood at 6.0 percent. We continue to satisfy all regulatory capital requirements as of September 30, 2018. On October 19, 2018, our board of directors declared a cash dividend that was equivalent to an annual yield of 5.87 percent, the approximate daily average three-month London Interbank Offered Rate (LIBOR) yield for the third quarter of 2018 plus 350 basis points.

Net Interest Margin

For the three months ended September 30, 2018, net interest margin was 0.50 percent, an increase of one basis point from the three months ended September 30, 2017. The net interest margin benefited from an increase in interest rates, as the economy continued to strengthen as discussed under — Economic Conditions — Interest-Rate Environment, and an increase in average earning assets of $2.9 billion.

Advances Balances

We continue to deliver on our primary mission, supplying liquidity to our members. Advances balances totaled $40.9 billion at September 30, 2018, compared to $37.6 billion at December 31, 2017. The increase in advances was primarily in variable-rate advances. The daily average balance of advances for the quarter ending September 30, 2018 was $38.2 billion, compared to $35.8 billion for the quarter ending September 30, 2017.

Accretable yields from investments in private-label MBS

For the three months ended September 30, 2018 and 2017, we recognized $8.0 million and $8.4 million, respectively, in interest income resulting from the increased accretable yields of certain private-label MBS for which we had previously recognized credit losses. For a discussion of this accounting treatment, see Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Investment Securities — Other-than-Temporary Impairment — Interest Income Recognition in the 2017 Annual Report.

The amortized cost of our total investments in private-label residential MBS and ABS backed by home-equity loans has declined to $719.2 million at September 30, 2018. Other-than-temporary impairment credit losses were $71,000 for the three months ended September 30, 2018.

Regulatory Developments

The FHFA and other regulators with authority over us or our way of doing business have proposed regulations or guidance during the quarter as described in — Legislative and Regulatory Developments. Such developments affect the way we conduct business and could impact the way we satisfy our mission as well as the value of our membership.

ECONOMIC CONDITIONS

Economic Environment

The labor market continued to strengthen in the third quarter of 2018. The national unemployment rate decreased from 4.0 percent in June 2018 to 3.7 percent in September 2018. Jobs gains were strong and averaged a net gain of 190,000 jobs per month during the third quarter. The New England region also continued to see improvements in the labor market. The September 2018 unemployment rate for the six New England states as a whole was 3.6 percent, a 0.1 percent decrease from September 2017.

Interest-Rate Environment

On September 26, 2018, the Federal Open Market Committee (FOMC) announced an increase of the target range for the federal funds rate by 25 basis points to 2 percent to 2.25 percent. Projections by FOMC participants in September 2018 suggest a further increase in the target range for the federal funds rate of approximately 25 basis points by the end of 2018.

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Long-term interest rates have risen since the beginning of 2018, reaching multi-year highs on expectations that the continuing economic expansion may result in stronger inflation. Increases in long-term interest rates, especially the increase in mortgage rates, led to higher income from MBS as actual and projected mortgage prepayment speeds slowed down, resulting in lower amortization of purchase premiums. At the same time, short-term interest rates, the 3-month LIBOR rate in particular, increased by a larger magnitude than long-term rates, resulting in a flattening yield curve. Higher short-term interest rates enabled the Bank to earn higher income from investing the Bank’s capital in short-term, money market investments.

Table 1 - Key Interest Rates
	Three Month Average		Nine Month Average		Ending Rate
	September 30, 2018	September 30, 2017	September 30, 2018	September 30, 2017	September 30, 2018	December 31, 2017
Federal funds effective rate	1.92%	1.15%	1.70%	0.94%	2.18%	1.33%
3-month LIBOR	2.34%	1.31%	2.20%	1.20%	2.40%	1.69%
3-month U.S. Treasury yield	2.06%	1.04%	1.83%	0.84%	2.20%	1.38%
2-year U.S. Treasury yield	2.66%	1.36%	2.43%	1.29%	2.82%	1.88%
5-year U.S. Treasury yield	2.80%	1.81%	2.70%	1.85%	2.95%	2.21%
10-year U.S. Treasury yield	2.92%	2.24%	2.87%	2.31%	3.06%	2.41%

________________

Source: Bloomberg

SELECTED FINANCIAL DATA

The following financial highlights for the statement of condition and statement of operations for December 31, 2017, have been derived from our audited financial statements. Financial highlights for the quarter-ends have been derived from our unaudited financial statements.

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Table 2 - Selected Financial Data (dollars in thousands)
	September 30, 2018			June 30, 2018			March 31, 2018			December 31, 2017			September 30, 2017
Statement of Condition at period end
Total assets	$	64,693,803		$	63,676,080		$	60,958,111		$	60,361,946		$	60,975,455
Investments(1)	19,321,695			18,045,099			18,730,532			17,941,614			19,340,597
Advances	40,927,639			41,311,480			37,987,775			37,565,967			37,467,404
Mortgage loans held for portfolio, net(2)	4,192,425			4,077,414			4,026,998			4,004,737			3,942,776
Deposits and other borrowings	484,761			551,940			527,832			477,069			492,631
Consolidated obligations:
Bonds	26,741,036			27,853,975			27,125,212			28,344,623			28,492,595
Discount notes	33,431,980			31,259,182			29,467,314			27,720,906			28,047,762
Total consolidated obligations	60,173,016			59,113,157			56,592,526			56,065,529			56,540,357
Mandatorily redeemable capital stock	31,868			31,868			36,113			35,923			36,042
Class B capital stock outstanding-putable(3)	2,476,876			2,480,110			2,323,891			2,283,721			2,272,648
Unrestricted retained earnings	1,084,538			1,067,943			1,057,195			1,041,033			1,011,532
Restricted retained earnings	301,928			288,994			278,327			267,316			253,750
Total retained earnings	1,386,466			1,356,937			1,335,522			1,308,349			1,265,282
Accumulated other comprehensive loss	(343,013		)	(344,590		)	(340,845		)	(326,940		)	(310,314		)
Total capital	3,520,329			3,492,457			3,318,568			3,265,130			3,227,616
Results of Operations for the quarter ended
Net interest income	$	77,460		$	78,758		$	79,911		$	79,570		$	71,109
(Reduction of) provision for credit losses	—			(3		)	9			52			28
Net impairment losses on held-to-maturity securities recognized in earnings	(71		)	(257		)	(79		)	(36		)	(432		)
Litigation settlements	12,769			—			—			20,761			—
Other gains, net	2,410			1,978			1,873			1,130			1,028
Other expense	20,658			21,172			20,468			25,958			20,972
AHP assessments	7,238			5,978			6,171			7,587			5,110
Net income	$	64,672		$	53,332		$	55,057		$	67,828		$	45,595
Other Information
Dividends declared	$	35,143		$	31,917		$	27,884		$	24,761		$	25,637
Dividend payout ratio	54.34		%	59.85		%	50.65		%	36.51		%	56.23		%
Weighted-average dividend rate(4)	5.87			5.46			4.99			4.33			4.22
Return on average equity(5)	7.56			6.30			6.65			8.46			5.64
Return on average assets	0.42			0.34			0.36			0.45			0.31
Net interest margin(6)	0.50			0.51			0.52			0.53			0.49
Average equity to average assets	5.55			5.44			5.41			5.37			5.50
Total regulatory capital ratio at period end(7)	6.02			6.08			6.06			6.01			5.86

_______________________

(1) Investments include available-for-sale securities, held-to-maturity securities, trading securities, interest-bearing deposits, securities purchased under agreements to resell and federal funds sold.

(2) The allowance for credit losses amounted to $500,000 for each of the quarters ended September 30, 2018, June 30, 2018, March 31, 2018, December 31, 2017, and September 30, 2017.

(3) Capital stock is putable at the option of a member upon five years' written notice, subject to applicable restrictions. We also initiated daily repurchases of excess stock from members on June 1, 2017. See below under Liquidity and Capital Resources - Internal Capital Practices and Policies.

(4) Weighted-average dividend rate is the dividend amount declared divided by the average daily balance of capital stock eligible for dividends during the preceding quarter.

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(5) Return on average equity is net income divided by the total of the average daily balance of outstanding Class B capital stock, accumulated other comprehensive loss and total retained earnings.

(6) Net interest margin is net interest income before provision for credit losses as a percentage of average earning assets.

(7) Total regulatory capital ratio is capital stock (including mandatorily redeemable capital stock) plus total retained earnings as a percentage of total assets.

RESULTS OF OPERATIONS

Net Income

Third Quarter of 2018 Compared with Third Quarter of 2017

Net income increased to $64.7 million for three months ended September 30, 2018, from $45.6 million for the same period in 2017. The reasons for the increase are discussed under — Executive Summary.

Nine Months Ended September 30, 2018, Compared with Nine Months Ended September 30, 2017

Net income increased to $173.1 million for the nine months ended September 30, 2018, from $122.4 million for the nine months ended September 30, 2017, primarily due to a $38.5 million increase in net interest income after provision for credit losses and a $12.8 million increase in litigation settlement income.

Net Interest Income

Third Quarter of 2018 Compared with Third Quarter of 2017

Net interest income after provision for credit losses for the quarter ending September 30, 2018, was $77.5 million, compared with $71.1 million for the same period in 2017. The $6.4 million improvement was mainly a result of a higher interest-rate environment, which led to higher income on capital and lower premium amortization on U.S Agency mortgage-backed securities, and a $2.9 billion increase in average earning assets. Average earning assets increased from $58.1 billion for the three months ended September 30, 2017, to $60.9 billion for the three months ended September 30, 2018. The increase in average earning assets was driven by increases of $2.4 billion in average advances balances, $255.7 million in average mortgage loans and $205.4 million in average investments. For additional information see — Rate and Volume Analysis.

Net interest spread was 0.38 percent for the quarter ending September 30, 2018, a three basis point decrease from the same period in 2017, and net interest margin was 0.50 percent, a one basis point increase from the same period in 2017. The decrease in net interest spread reflects a 71 basis point increase in the average yield on earning assets and a 74 basis point increase in the average yield on interest-bearing liabilities. The decrease in net interest spread was primarily attributable to a $947.3 million decrease in the average balance of mortgage-backed securities and higher funding costs for short- term investments. The increase in net interest margin was primarily attributable to the impact of higher interest rates on earning assets, which are partly funded by non-interest-bearing capital, and the increase in average earning assets.

Nine Months Ended September 30, 2018, Compared with Nine Months Ended September 30, 2017

Net interest income after provision for credit losses for the nine months ended September 30, 2018, was $236.1 million, compared with $197.6 million for the same period in 2017. The $38.5 million increase in net interest income after provision for credit losses was primarily attributable to the higher interest rate environment, as well as to a higher net interest spread and $2.6 billion increase in average earning assets. Net interest income was also affected by the increase in accretion on Agency MBS, resulting from the increase in 30-year mortgage rates, that positively impacted our retrospective amortization adjustments. In addition, average earning assets increased from $59.1 billion for the nine months ended September 30, 2017, to $61.7 billion for the nine months ended September 30, 2018. The increase in average earning assets was driven by increases of $1.7 billion in average advances balances and $558.1 million in average investments balances. For additional information see — Rate and Volume Analysis.

Net interest spread was 0.40 percent for the nine months ended September 30, 2018, a two basis point increase from the same period in 2017, and net interest margin was 0.51 percent, a six basis point increase from the nine months ended September 30, 2017. The increase in net interest spread reflects a 70 basis point increase in the average yield on earning assets and a 68 basis point increase in the average yield on interest-bearing liabilities.

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Table 3 presents major categories of average balances, related interest income/expense, and average yields for interest-earning assets and interest-bearing liabilities. Our primary source of earnings is net interest income, which is the interest earned on advances, mortgage loans, and investments less interest paid on COs, deposits, and other sources of funds.

Table 3 - Net Interest Spread and Margin (dollars in thousands)
	For the Three Months Ended September 30,
	2018							2017
	Average Balance			Interest Income / Expense		Average Yield(1)		Average Balance		Interest Income / Expense		Average Yield(1)
Assets
Advances	$	38,229,447		$	226,544	2.35	%	$	35,810,374	$	136,462	1.51	%
Securities purchased under agreements to resell	4,211,500			20,865		1.97		3,028,348		8,074		1.06
Federal funds sold	5,973,043			29,329		1.95		5,645,848		16,622		1.17
Investment securities(2)	8,147,357			56,991		2.78		9,402,709		53,188		2.24
Mortgage loans	4,135,495			33,967		3.26		3,879,748		31,656		3.24
Other earning assets	237,482			1,122		1.87		287,032		822		1.14
Total interest-earning assets	60,934,324			368,818		2.40		58,054,059		246,824		1.69
Other non-interest-earning assets	279,700							278,801
Fair-value adjustments on investment securities	(117,303		)					4,384
Total assets	$	61,096,721		$	368,818	2.39	%	$	58,337,244	$	246,824	1.68	%
Liabilities and capital
Consolidated obligations
Discount notes	$	29,484,044		$	147,463	1.98	%	$	24,962,389	$	65,120	1.03	%
Bonds	27,064,773			142,086		2.08		28,964,110		109,052		1.49
Deposits	506,073			1,337		1.05		501,179		1,144		0.91
Mandatorily redeemable capital stock	31,867			472		5.87		36,601		399		4.32
Total interest-bearing liabilities	57,086,757			291,358		2.02		54,464,279		175,715		1.28
Other non-interest-bearing liabilities	617,491							666,221
Total capital	3,392,473							3,206,744
Total liabilities and capital	$	61,096,721		$	291,358	1.89	%	$	58,337,244	$	175,715	1.20	%
Net interest income				$	77,460					$	71,109
Net interest spread						0.38	%					0.41	%
Net interest margin						0.50	%					0.49	%

_________________________

(1) Yields are annualized.

(2) The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

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	For the Nine Months Ended September 30,
	2018							2017
	Average Balance			Interest Income / Expense		Average Yield(1)		Average Balance			Interest Income / Expense		Average Yield(1)
Assets
Advances	$	39,047,542		$	618,077	2.12	%	$	37,333,691		$	371,075	1.33	%
Securities purchased under agreements to resell	3,423,542			44,494		1.74		3,024,824			18,822		0.83
Federal funds sold	6,302,960			81,126		1.72		5,618,242			39,614		0.94
Investment securities(2)	8,639,490			178,100		2.76		9,131,332			146,490		2.14
Mortgage loans	4,066,300			100,774		3.31		3,762,675			92,592		3.29
Other earning assets	182,585			2,270		1.66		216,100			1,549		0.96
Total interest-earning assets	61,662,419			1,024,841		2.22		59,086,864			670,142		1.52
Other non-interest-earning assets	276,428							329,834
Fair-value adjustments on investment securities	(102,651		)					(23,843		)
Total assets	$	61,836,196		$	1,024,841	2.22	%	$	59,392,855		$	670,142	1.51	%
Liabilities and capital
Consolidated obligations
Discount notes	$	29,809,249		$	385,804	1.73	%	$	26,468,987		$	157,767	0.80	%
Bonds	27,477,005			397,843		1.94		28,454,655			311,395		1.46
Deposits	507,186			3,600		0.95		468,524			2,434		0.69
Mandatorily redeemable capital stock	33,333			1,427		5.72		35,058			1,105		4.21
Other borrowings	3,022			38		1.68		1,099			8		0.97
Total interest-bearing liabilities	57,829,795			788,712		1.82		55,428,323			472,709		1.14
Other non-interest-bearing liabilities	625,328							676,974
Total capital	3,381,073							3,287,558
Total liabilities and capital	$	61,836,196		$	788,712	1.71	%	$	59,392,855		$	472,709	1.06	%
Net interest income				$	236,129						$	197,433
Net interest spread						0.40	%						0.38	%
Net interest margin						0.51	%						0.45	%

_________________________

(1) Yields are annualized.

(2) The average balances of held-to-maturity securities and available-for-sale securities are reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized other-than-temporary impairment reflected in accumulated other comprehensive loss.

Rate and Volume Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income and net interest margin. Table 4 summarizes changes in interest income and interest expense for the three and nine months ended September 30, 2018 and 2017. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

49

Table 4 - Rate and Volume Analysis (dollars in thousands)
	For the Three Months Ended  September 30, 2018 vs. 2017							For the Nine Months Ended  September 30, 2018 vs. 2017
	Increase (Decrease) due to							Increase (Decrease) due to
	Volume			Rate		Total		Volume			Rate		Total
Interest income
Advances	$	9,773		$	80,309	$	90,082	$	17,760		$	229,242	$	247,002
Securities purchased under agreements to resell	4,001			8,790		12,791		2,773			22,899		25,672
Federal funds sold	1,015			11,692		12,707		5,341			36,171		41,512
Investment securities	(7,707		)	11,510		3,803		(8,248		)	39,858		31,610
Mortgage loans	2,099			212		2,311		7,520			662		8,182
Other earning assets	(161		)	461		300		(271		)	992		721
Total interest income	9,020			112,974		121,994		24,875			329,824		354,699
Interest expense
Consolidated obligations
Discount notes	13,580			68,763		82,343		22,178			205,859		228,037
Bonds	(7,553		)	40,587		33,034		(11,031		)	97,479		86,448
Deposits	11			182		193		214			952		1,166
Mandatorily redeemable capital stock	(57		)	130		73		(57		)	379		322
Other borrowings	—			—		—		21			9		30
Total interest expense	5,981			109,662		115,643		11,325			304,678		316,003
Change in net interest income	$	3,039		$	3,312	$	6,351	$	13,550		$	25,146	$	38,696

Average Balance of Advances Outstanding

The average balance of total advances increased $1.7 billion, or 4.6 percent, for the nine months ended September 30, 2018, compared with the same period in 2017, with short-term fixed-rate advances as the most significant contributor. We cannot predict whether this trend will continue.

50

Table 5 - Average Balance of Advances Outstanding by Product Type (dollars in thousands)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Fixed-rate advances—par value
Long-term	$	13,563,127		$	13,833,016		$	13,839,440		$	13,535,505
Short-term	12,940,498			12,297,210			13,306,034			12,037,843
Overnight	1,997,777			1,188,930			2,029,183			1,366,174
Putable	1,013,440			1,995,574			1,193,247			2,343,896
Amortizing	954,096			925,847			953,251			895,765
All other fixed-rate advances	28,938			40,000			25,900			45,018
	30,497,876			30,280,577			31,347,055			30,224,201
Variable-rate indexed advances—par value
Simple variable (1)	7,054,214			4,866,698			7,017,835			6,476,560
Putable	794,526			645,006			785,987			614,478
All other variable-rate indexed advances	12,330			39,967			21,093			41,954
	7,861,070			5,551,671			7,824,915			7,132,992
Total average par value	38,358,946			35,832,248			39,171,970			37,357,193
Net discounts	(21,000		)	(11,293		)	(18,539		)	(8,152		)
Market value of bifurcated derivatives	(67		)	2,224			(1,762		)	889
Hedging adjustments	(108,432		)	(12,805		)	(104,127		)	(16,239		)
Total average balance of advances	$	38,229,447		$	35,810,374		$	39,047,542		$	37,333,691

_____________________

(1) Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

In addition, the average balance of fixed-rate advances that were hedged with interest-rate swaps to yield an effective floating rate totaled $6.6 billion for the nine months ended September 30, 2018. Therefore, a significant portion of our advances, including overnight advances, short-term fixed-rate advances, fixed-rate putable advances, certain fixed-rate bullet advances, and variable-rate advances, either earn a short-term interest rate or are swapped to a short-term index, resulting in yields that closely follow short-term market interest-rate trends. The average balance of all such advances totaled $29.9 billion for the nine months ended September 30, 2018, representing 76.6 percent of the total average balance of advances outstanding during that period. The average balance of all such advances totaled $29.4 billion for the nine months ended September 30, 2017, representing 78.8 percent of the total average balance of advances outstanding during that period.

Average Balance of Investments

Average short-term money-market investments, consisting of interest-bearing deposits, securities purchased under agreements to resell, and federal funds sold, increased $1.0 billion, or 11.9 percent, for the nine months ended September 30, 2018, compared with the same period in 2017. The yield earned on short-term money-market investments is highly correlated to short-term market interest rates. As a result of the FOMC’s target range for the federal funds rate, average yields on overnight federal funds sold increased from 0.94 percent during the nine months ended September 30, 2017 to 1.72 percent during the nine months ended September 30, 2018, while average yields on securities purchased under agreements to resell increased from 0.83 percent for the nine months ended September 30, 2017 to 1.74 percent for the nine months ended September 30, 2018. These investments are used for liquidity management and to manage our leverage ratio in response to fluctuations in other asset balances. For the nine months ended September 30, 2018, average balances of federal funds sold increased $684.7 million and average balances of securities purchased under agreements to resell increased $398.7 million in comparison to the nine months ended September 30, 2017.

Average investment-securities balances decreased $491.8 million, or 5.4 percent for the nine months ended September 30, 2018, compared with the same period in 2017.

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Average Balance of COs

Average CO balances increased $2.4 billion, or 4.3 percent, for the nine months ended September 30, 2018, compared with the same period in 2017, resulting from our increased funding needs principally due to the increase in our average advances balances. This overall increase consisted of an increase of $3.3 billion in CO discount notes offset by a decrease of $977.7 million in CO bonds.

The average balance of CO discount notes represented approximately 52.0 percent of total average COs during the nine months ended September 30, 2018, compared with 48.2 percent of total average COs during the same period in 2017. The average balance of CO bonds represented 48.0 percent and 51.8 percent of total average COs outstanding during the nine months ended September 30, 2018 and 2017, respectively.

Impact of Derivatives and Hedging Activities

Net interest income includes interest accrued on interest-rate-exchange agreements that are associated with advances, investments, and debt instruments that qualify for hedge accounting. We generally use derivative instruments that qualify for hedge accounting as interest-rate risk-management tools. These derivatives serve to stabilize net interest income and net interest margin when interest rates fluctuate. Accordingly, the impact of derivatives on net interest income and net interest margin should be viewed in the overall context of our risk-management strategy.

Table 6 - Effect of Derivative and Hedging Activities (dollars in thousands)
	For the Three Months Ended September 30, 2018
Net Effect of Derivatives and Hedging Activities	Advances			Investments			Mortgage Loans			CO Bonds			Other			Total
Net interest income
Amortization / accretion of hedging activities in net interest income (1)	$	(343	)	$	—		$	(102	)	$	466		$	—		$	21
Net interest settlements included in net interest income (2)	15,769			(6,200		)	—			(8,787		)	—			782
Total net interest income	15,426			(6,200		)	(102		)	(8,321		)	—			803
Net gains (losses) on derivatives and hedging activities
(Losses) gains on fair-value hedges	(308		)	455			—			410			—			557
Gains on cash-flow hedges	—			—			—			83			—			83
Gains (losses) on derivatives not receiving hedge accounting	17			(10		)	—			—			—			7
Mortgage delivery commitments	—			—			131			—			—			131
Other(3)	—			—			—			—			(291		)	(291		)
Net (losses) gains on derivatives and hedging activities	(291		)	445			131			493			(291		)	487
Subtotal	15,135			(5,755		)	29			(7,828		)	(291		)	1,290
Net losses on trading securities(4)	—			(1,006		)	—			—			—			(1,006		)
Total net effect of derivatives and hedging activities	$	15,135		$	(6,761	)	$	29		$	(7,828	)	$	(291	)	$	284

_____________________

(1) Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.

(2) Represents interest income/expense on derivatives included in net interest income.

52

(3) Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

(4) Includes only those gains (losses) on trading securities that have an assigned economic derivative.

	For the Three Months Ended September 30, 2017
Net Effect of Derivatives and Hedging Activities	Advances			Investments			Mortgage Loans			CO Bonds			Other		Total
Net interest income
Amortization / accretion of hedging activities in net interest income (1)	$	(507	)	$	—		$	(60	)	$	786		$	—	$	219
Net interest settlements included in net interest income (2)	(2,878		)	(7,879		)	—			242			—		(10,515		)
Total net interest income	(3,385		)	(7,879		)	(60		)	1,028			—		(10,296		)
Net gains (losses) on derivatives and hedging activities
Gains (losses) gains on fair-value hedges	501			504			—			(1,881		)	—		(876		)
Losses on cash-flow hedges	—			—			—			(18		)	—		(18		)
(Losses) gains on derivatives not receiving hedge accounting	(5		)	75			—			—			—		70
Mortgage delivery commitments	—			—			692			—			—		692
Other (3)	—			—			—			—			126		126
Net gains (losses) on derivatives and hedging activities	496			579			692			(1,899		)	126		(6		)
Subtotal	(2,889		)	(7,300		)	632			(871		)	126		(10,302		)
Net losses on trading securities(4)	—			(1,591		)	—			—			—		(1,591		)
Total net effect of derivatives and hedging activities	$	(2,889	)	$	(8,891	)	$	632		$	(871	)	$	126	$	(11,893	)

_____________________

(1) Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.

(2) Represents interest income/expense on derivatives included in net interest income.

(3) Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

(4) Includes only those gains (losses) on trading securities that have an assigned economic derivative.

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	For the Nine Months Ended September 30, 2018
Net Effect of Derivatives and Hedging Activities	Advances			Investments			Mortgage Loans			CO Bonds			Other			Total
Net interest income
Amortization / accretion of hedging activities in net interest income (1)	$	(1,161	)	$	—		$	(294	)	$	839		$	—		$	(616	)
Net interest settlements included in net interest income (2)	36,001			(19,975		)	—			(20,317		)	—			(4,291		)
Total net interest income	34,840			(19,975		)	(294		)	(19,478		)	—			(4,907		)
Net gains (losses) on derivatives and hedging activities
Gains (losses) on fair-value hedges	2,020			1,608			—			(1,488		)	—			2,140
Gains on cash-flow hedges	—			—			—			244			—			244
(Losses) gains on derivatives not receiving hedge accounting	(22		)	751			—			—			��			729
Mortgage delivery commitments	—			—			(336		)	—			—			(336		)
Other(3)	—			—			—			—			(692		)	(692		)
Net gains (losses) on derivatives and hedging activities	1,998			2,359			(336		)	(1,244		)	(692		)	2,085
Subtotal	36,838			(17,616		)	(630		)	(20,722		)	(692		)	(2,822		)
Net losses on trading securities(4)	—			(3,753		)	—			—			—			(3,753		)
Total net effect of derivatives and hedging activities	$	36,838		$	(21,369	)	$	(630	)	$	(20,722	)	$	(692	)	$	(6,575	)

_____________________

(1) Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.

(2) Represents interest income/expense on derivatives included in net interest income.

(3) Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

(4) Includes only those gains (losses) on trading securities that have an assigned economic derivative.

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	For the Nine Months Ended September 30, 2017
Net Effect of Derivatives and Hedging Activities	Advances			Investments			Mortgage Loans			CO Bonds			Other		Total
Net interest income
Amortization / accretion of hedging activities in net interest income (1)	$	(1,676	)	$	—		$	(223	)	$	1,033		$	—	$	(866	)
Net interest settlements included in net interest income (2)	(24,566		)	(24,319		)	—			6,965			—		(41,920		)
Total net interest income	(26,242		)	(24,319		)	(223		)	7,998			—		(42,786		)
Net gains (losses) on derivatives and hedging activities
Gains (losses) on fair-value hedges	370			1,365			—			(4,022		)	—		(2,287		)
Gains on cash-flow hedges	—			—			—			213			—		213
(Losses) gains on derivatives not receiving hedge accounting	(16		)	(140		)	—			4			—		(152		)
Mortgage delivery commitments	—			—			1,556			—			—		1,556
Other(3)	—			—			—			—			282		282
Net gains (losses) on derivatives and hedging activities	354			1,225			1,556			(3,805		)	282		(388		)
Subtotal	(25,888		)	(23,094		)	1,333			4,193			282		(43,174		)
Net losses on trading securities(4)	—			(3,857		)	—			—			—		(3,857		)
Total net effect of derivatives and hedging activities	$	(25,888	)	$	(26,951	)	$	1,333		$	4,193		$	282	$	(47,031	)

_____________________

(1) Represents the amortization/accretion of hedging fair-value adjustments and cash-flow hedge amortization reclassified from accumulated other comprehensive loss.

(2) Represents interest income/expense on derivatives included in net interest income.

(3) Amount in Other includes the price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

(4) Includes only those gains (losses) on trading securities that have an assigned economic derivative.

Interest paid and received on interest-rate-exchange agreements that are economic hedges is classified as net losses on derivatives and hedging activities in other income. As shown under — Other Income (Loss) below, interest accruals on derivatives classified as economic hedges totaled a net expense of $2.1 million and $3.6 million for the nine months ended September 30, 2018 and 2017, respectively.

Other Income (Loss)

55

Table 7 - Other Income (Loss) (dollars in thousands)
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2018			2017			2018			2017
Gains (losses) on derivatives and hedging activities:
Net gains (losses) related to fair-value hedge ineffectiveness	$	557		$	(875	)	$	2,140		$	(2,286	)
Net gains (losses) related to cash-flow hedge ineffectiveness	83			(18		)	244			213
Net unrealized gains (losses) related to derivatives not receiving hedge accounting associated with:
Advances	17			(6		)	(22		)	(16		)
Trading securities	524			1,187			2,803			3,459
CO Bonds	—			—			—			29
Mortgage delivery commitments	131			692			(336		)	1,556
Net interest-accruals related to derivatives not receiving hedge accounting	(534		)	(1,112		)	(2,052		)	(3,625		)
Other (1)	(291		)	126			(692		)	282
Net gains (losses) on derivatives and hedging activities	487			(6		)	2,085			(388		)
Net other-than-temporary impairment credit losses on held-to-maturity securities recognized in income	(71		)	(432		)	(407		)	(1,418		)
Litigation settlements	12,769			—			12,769			—
Service-fee income	2,719			2,228			7,538			6,362
Net unrealized losses on trading securities	(714		)	(1,591		)	(3,702		)	(3,857		)
Other	(82		)	397			340			358
Total other income	$	15,108		$	596		$	18,623		$	1,057

______________

(1) Consists of price alignment amount on derivatives for which variation margin is characterized as a daily settlement amount.

FINANCIAL CONDITION

Advances

At September 30, 2018, the par value of our advances portfolio totaled $41.1 billion, an increase of $3.4 billion compared with $37.6 billion at December 31, 2017.

56

 

Table 8 - Advances Outstanding by Product Type (dollars in thousands)
	September 30, 2018				December 31, 2017
	Par Value		Percent of Total		Par Value		Percent of Total
Fixed-rate advances
Long-term	$	13,582,315	33.1	%	$	14,188,347	37.7	%
Short-term	12,805,105		31.2		13,533,417		35.9
Overnight	2,521,549		6.1		1,717,823		4.6
Putable	995,950		2.4		1,242,750		3.3
Amortizing	944,196		2.3		943,956		2.5
All other fixed-rate advances	33,100		0.1		32,000		0.1
	30,882,215		75.2		31,658,293		84.1
Variable-rate advances
Simple variable (1)	9,378,875		22.9		5,143,175		13.7
Putable	748,300		1.8		775,400		2.0
All other variable-rate indexed advances	49,987		0.1		70,298		0.2
	10,177,162		24.8		5,988,873		15.9
Total par value	$	41,059,377	100.0	%	$	37,647,166	100.0	%

_____________________

(1) Includes floating-rate advances that may be contractually prepaid by the borrower on a floating-rate reset date without incurring prepayment or termination fees.

See Item 1 — Notes to the Financial Statements — Note 7 — Advances for disclosures relating to redemption terms of the advances portfolio.

At September 30, 2018, we had advances outstanding to 315, or 70.9 percent of our 444 members. At December 31, 2017, we had advances outstanding to 314, or 70.9 percent, of our 443 members.

Advances Credit Risk

We endeavor to minimize credit risk on advances by monitoring the financial condition of our borrowers and by holding sufficient collateral to protect the Bank from credit losses. All pledged collateral is subject to collateral discounts, or haircuts, to the market value or unpaid principal balance of the collateral, as applicable, based on our opinion of the risk that such collateral presents. We are prohibited by Section 10(a) of the FHLBank Act from making advances without sufficient collateral to secure the advance. We have never experienced a credit loss on an advance.

We assign each non-insurance company borrower to one of the following three credit status categories based primarily on our assessment of the borrower's overall financial condition and other factors:

• Category-1: members that are generally in satisfactory financial condition;

• Category-2: members that show financial weakness or weakening financial trends in key financial indices and/or regulatory findings; and

• Category-3: members with financial weaknesses that present an elevated level of concern. We also place housing associates and nonmember borrowers in Category-3.

We monitor the financial condition of our insurance company members quarterly. We lend to them based on our assessment of their financial condition and their pledge of sufficient amounts of eligible collateral.

57

Table 9 - Advances Outstanding by Borrower Credit Status Category (dollars in thousands)
	As of September 30, 2018
	Number of Borrowers	Par Value of Advances Outstanding		Discounted Collateral		Ratio of Discounted Collateral to Advances
Category-1	268	$	36,423,900	$	92,612,505	254.3	%
Category-2	12	378,784		775,316		204.7
Category-3	21	496,717		682,837		137.5
Insurance companies	23	3,759,976		5,067,434		134.8
Total	324	$	41,059,377	$	99,138,092	241.5	%

The method by which a borrower pledges collateral is dependent upon the category to which it is assigned and on the type of collateral that the borrower pledges. Moreover, borrowers in Category-1 are permitted to specifically list and identify single-family owner-occupied residential mortgage loans at a lower discount than is allowed if the collateral is not specifically listed and identified.

The Bank may adjust the credit status category of a member at any time based on the financial reviews and other conditions of the members. Due to their weaker profile, the Bank requires Category-3 members to deliver collateral to the Bank or its custodian, and all securities collateral is delivered, regardless of member category. Table 10 shows the total potential lending value of the collateral that borrowers have pledged, based upon the method by which borrowers pledge collateral to us, net of our collateral valuation discounts as of September 30, 2018.

Table 10 - Collateral by Pledge Type (dollars in thousands)
	Discounted Collateral
Collateral not specifically listed and identified	$	26,794,129
Collateral specifically listed and identified	64,274,123
Collateral delivered to us	12,682,785

We have not recorded any allowance for credit losses on advances at September 30, 2018, and December 31, 2017, for the reasons discussed in Item 1 — Notes to the Financial Statements — Note 9 — Allowance for Credit Losses.

Table 11 - Top Five Advance-Borrowing Institutions (dollars in thousands)
	September 30, 2018
Name	Par Value of Advances		Percent of Total Par Value of Advances		Weighted Average Rate (1)		Advances Interest Income for the Three Months Ended September 30, 2018		Advances Interest Income for the Nine Months Ended September 30, 2018
Citizens Bank, N.A.	$	8,009,938	19.5	%	2.43	%	$	33,144	$	89,228
People's United Bank, N.A.	2,354,667		5.7		2.25		13,306		36,806
Berkshire Bank	1,447,607		3.5		2.26		6,443		16,954
Webster Bank, N.A.	1,441,884		3.5		2.19		6,161		18,780
Massachusetts Mutual Life Insurance Company	1,050,000		2.6		2.10		5,719		16,994
Total of top five advance-borrowing institutions	$	14,304,096	34.8	%			$	64,773	$	178,762

_______________________

58

(1) Weighted-average rates are based on the contract rate of each advance without taking into consideration the effects of interest-rate-exchange agreements that we may use as hedging instruments.

Investments

At September 30, 2018, investment securities and short-term money-market instruments totaled $19.3 billion, an increase of $1.4 billion from December 31, 2017.

Short-term money-market investments increased $2.7 billion to $11.5 billion at September 30, 2018, compared with December 31, 2017. The increase was attributable to a $2.2 billion increase in federal funds sold, a $397.0 million increase in interest-bearing deposits, and a $150.0 million increase in securities purchased under agreements to resell.

Investment securities declined $1.4 billion to $7.8 billion at September 30, 2018, compared with December 31, 2017. The decrease was primarily attributable to an $1.3 billion decrease in MBS.

Table 12 - Mortgage-Backed Securities (percentage based on carrying value)
	September 30, 2018		December 31, 2017
Single-family MBS - U.S. government-guaranteed and GSE	62.6	%	64.6	%
Multifamily MBS - U.S. government-guaranteed and GSE	28.9		27.0
Private-label residential MBS	8.4		8.3
ABS backed by home-equity loans	0.1		0.1
Total MBS	100.0	%	100.0	%

Investments Credit Risk

We are subject to credit risk on unsecured investments consisting primarily of short-term (meaning under one year to maturity and currently only consisting of overnight risk) money-market instruments issued by high-quality financial institutions and long-term (original maturity in excess of one year) debentures issued or guaranteed by U.S. agencies, U.S government-owned corporations, GSEs, and supranational institutions. Currently we place short-term funds with large, high-quality financial institutions with long-term credit ratings no lower than single-A (or equivalent) on an unsecured basis. All of these placements currently expire within one day.

In addition to these unsecured short-term investments, we also make secured investments in the form of securities purchased under agreements to resell secured by U.S. Treasury and agency obligations, whose terms to maturity are up to 35 days. We have also invested in and are subject to secured credit risk related to MBS, ABS, and HFA securities that are directly or indirectly supported by underlying mortgage loans.

We actively monitor our investments' credit exposures and the credit quality of our counterparties, including assessments of each counterparty's financial performance, capital adequacy, and sovereign support as well as related market signals such as credit default swap spreads. We may reduce or suspend credit limits and/or seek to reduce existing exposures, as appropriate, as a result of these monitoring activities.

59

Table 13 - Credit Ratings of Investments at Carrying Value (dollars in thousands)
	As of September 30, 2018
	Long-Term Credit Rating (1)
Investment Category	Triple-A		Double-A		Single-A		Triple-B		Below Triple-B		Unrated
Money-market instruments: (2)
Interest-bearing deposits	$	—	$	175	$	397,028	$	—	$	—	$	—
Securities purchased under agreements to resell	—		1,250,000		2,250,000		1,999,000		—		—
Federal funds sold	—		1,200,000		4,450,000		—		—		—
Total money-market instruments	—		2,450,175		7,097,028		1,999,000		—		—
Investment securities:
Non-MBS:
U.S. agency obligations	—		416		—		—		—		—
Corporate bonds	—		—		—		—		—		6,774
U.S. government-owned corporations	—		268,624		—		—		—		—
GSEs	—		113,425		—		—		—		—
Supranational institutions	395,178		—		—		—		—		—
HFA securities	32,318		57,644		38,820		36,115		—		—
Total non-MBS	427,496		440,109		38,820		36,115		—		6,774
MBS:
U.S. government guaranteed - single-family (2)	—		95,368		—		—		—		—
U.S. government guaranteed - multifamily(2)	—		367,515		—		—		—		—
GSE – single-family (2)	—		4,176,261		—		—		—		—
GSE – multifamily (2)	—		1,603,910		—		—		—		—
Private-label – residential	2,124		5,220		9,895		40,947		490,054		27,795
ABS backed by home-equity loans	598		1,136		3,025		1,998		332		—
Total MBS	2,722		6,249,410		12,920		42,945		490,386		27,795
Total investment securities	430,218		6,689,519		51,740		79,060		490,386		34,569
Total investments	$	430,218	$	9,139,694	$	7,148,768	$	2,078,060	$	490,386	$	34,569

_______________________

(1) Ratings are obtained from Moody's, Fitch, Inc. (Fitch), and S&P and are each as of September 30, 2018. If there is a split rating, the lowest rating is used.

(2) The issuer rating is used for these investments, and if a rating is on negative credit watch, the rating in the next lower rating category is used and then the lowest rating is determined.

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Table 14 - Unsecured Money-Market Instruments and Debentures by Carrying Value (dollars in thousands)
	September 30, 2018		December 31, 2017
Federal funds sold	$	5,650,000	$	3,450,000
Interest-bearing deposits	397,203		246
Supranational institutions	395,178		418,285
U.S. government-owned corporations	268,624		292,077
GSEs	113,425		121,343
Corporate bonds	6,774		—
U.S. agency obligations	416		1,042
Loans to other FHLBanks	—		400,000

Private-Label MBS

Table 15 - Unpaid Principal Balance of Private-Label Residential MBS and ABS Backed by Home Equity Loans (dollars in thousands)
	September 30, 2018						December 31, 2017
Private-label MBS(1)	Fixed Rate (2)		Variable Rate (2)		Total		Fixed Rate (2)		Variable Rate (2)		Total
Private-label residential MBS
Prime	$	6,027	$	66,376	$	72,403	$	7,363	$	79,424	$	86,787
Alt-A	13,808		864,775		878,583		15,473		982,860		998,333
Total private-label residential MBS	19,835		931,151		950,986		22,836		1,062,284		1,085,120
ABS backed by home equity loans
Subprime	—		7,119		7,119		—		7,864		7,864
Total par value of private-label MBS	$	19,835	$	938,270	$	958,105	$	22,836	$	1,070,148	$	1,092,984

_______________________

 (1) We have instituted litigation related to certain of the private-label MBS in which we invested. Our complaint asserts, among others, claims for untrue or misleading statements in the sale of securities. It is possible that classifications of private-label MBS as provided herein when based on classification at the time of issuance as disclosed by those securities' issuance documents, as well as other statements about the securities, are inaccurate.

 (2) The determination of fixed or variable rate is based upon the contractual coupon type of the security.

Table 16 provides additional information related to our investments in MBS issued by private trusts and ABS backed by home equity loans. The table sets forth the credit ratings and summary credit enhancements associated with our private-label MBS and ABS. Average current credit enhancements as of September 30, 2018, reflect the percentage of subordinated class outstanding balances as of September 30, 2018, to our senior class outstanding balances as of September 30, 2018, weighted by the par value of our respective senior class securities. Average current credit enhancements as of September 30, 2018, are indicative of the ability of subordinated classes to absorb loan collateral lost principal and interest shortfall before senior classes are impacted.

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Table 16 - Private-Label Residential MBS and ABS Backed by Home Equity (dollars in thousands)
	September 30, 2018
Par value by credit rating
Triple-A	$	2,722
Double-A	6,357
Single-A	12,920
Triple-B	42,945
Below Investment Grade
Double-B	15,116
Single-B	33,689
Triple-C	476,475
Double-C	288,771
Single-C	12,435
Single-D	27,694
Unrated	38,981
Total par value	$	958,105
Amortized cost	$	719,187
Gross unrealized gains	129,485
Gross unrealized losses	(2,732		)
Fair value	$	845,940
Weighted average percentage of fair value to par value	88.29		%
Original weighted average credit support	27.60
Weighted average credit support	7.75
Weighted average collateral delinquency (1)	17.50

_______________________

 (1) Represents loans that are 60 days or more delinquent.

Mortgage Loans

We invest in mortgages through the MPF program. The MPF program is further described under — Mortgage Loans Credit Risk and in Item 1 — Business — Business Lines — Mortgage Loan Finance in the 2017 Annual Report.

As of September 30, 2018, our mortgage loan investment portfolio totaled $4.2 billion, an increase of $187.7 million from December 31, 2017. We expect continued competition from Fannie Mae and Freddie Mac, as well as from private mortgage loan acquirers, for loan investment opportunities. We also expect slower net growth in our mortgage loan investment portfolio as originations and prepayments of mortgage loans slow as a result of the higher interest rate environment.

Mortgage Loans Credit Risk

We are subject to credit risk from the mortgage loans in which we invest due to our exposure to the credit risk of the underlying borrowers and the credit risk of the participating financial institutions when the participating financial institutions retain credit-enhancement and/or servicing obligations. For additional information on the credit risks arising from our participation in the MPF program, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Mortgage Loans — Mortgage Loans Credit Risk in the 2017 Annual Report.

Although our mortgage loan portfolio includes loans throughout the U.S., concentrations of five percent or greater of the outstanding principal balance of our conventional mortgage loan portfolio are shown in Table 17.

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Table 17 - State Concentrations by Outstanding Principal Balance
	Percentage of Total Outstanding Principal Balance of Conventional Mortgage Loans
	September 30, 2018		December 31, 2017
Massachusetts	57	%	56	%
Maine	10		11
Connecticut	9		8
Wisconsin	6		7
New Hampshire	5		6
All others	13		12
Total	100	%	100	%

Allowance for Credit Losses on Mortgage Loans. The allowance for credit losses on mortgage loans was $500,000 at both September 30, 2018, and December 31, 2017, respectively.

For information on the determination of the allowance at September 30, 2018, see Item 1 — Notes to the Financial Statements — Note 9 — Allowance for Credit Losses.

We place conventional mortgage loans on nonaccrual status when the contractual principal or interest is 90 days or more past due. Accrued interest on nonaccrual loans is excluded from interest income. We monitor the delinquency levels of the mortgage loan portfolio on a monthly basis.

Table 18 - Delinquent Mortgage Loans (dollars in thousands)
	September 30, 2018		December 31, 2017
Total par value of government loans past due 90 days or more and still accruing interest	$	4,684	$	4,664
Nonaccrual loans, par value	10,034		13,450
Troubled debt restructurings (not included above)	7,120		6,637

Mortgage Insurance Companies. We are exposed to credit risk from supplemental mortgage insurance (SMI) companies that provide credit enhancement in place of the participating financial institution and from primary mortgage insurance coverage (PMI) on individual loans. As of September 30, 2018, we were the beneficiary of PMI coverage of $119.9 million on $464.9 million of conventional mortgage loans, and SMI coverage of $15.3 million on mortgage pools with a total unpaid principal balance of $83.9 million.

We have analyzed our potential loss exposure to all of the mortgage insurance companies and do not expect incremental losses based on these exposures at this time.

Deposits

At September 30, 2018, and December 31, 2017, deposits totaled $484.8 million and $477.1 million, respectively.

Term deposits issued in amounts of $100,000 or greater at September 30, 2018, amounted to a par amount of $800,000, with a maturity date in December 2018, and a weighted average rate of 1.93 percent.

Consolidated Obligations

See — Liquidity and Capital Resources for information regarding our COs.

Derivative Instruments

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All derivatives are recorded on the statement of condition at fair value and classified as either derivative assets or derivative liabilities. Bilateral and cleared derivatives outstanding are classified as assets or liabilities according to the net fair value of derivatives aggregated by each counterparty. Derivative assets' net fair value, net of cash collateral and accrued interest, totaled $22.0 million and $34.8 million as of September 30, 2018, and December 31, 2017, respectively. Derivative liabilities' net fair value, net of cash collateral and accrued interest, totaled $228.1 million and $300.5 million as of September 30, 2018, and December 31, 2017, respectively.

The following table presents a summary of the notional amounts and estimated fair values of our outstanding derivatives, excluding accrued interest, and related hedged item by product and type of accounting treatment as of September 30, 2018 and December 31, 2017. The notional amount represents the hypothetical principal basis used to determine periodic interest payments received and paid. However, the notional amount does not represent an actual amount exchanged or our overall exposure to credit and market risk.

Table 19 - Hedged Item and Hedge-Accounting Treatment (dollars in thousands)
			September 30, 2018					December 31, 2017
Hedged Item	Derivative	Designation(2)	Notional Amount		Fair  Value			Notional Amount		Fair Value
Advances (1)	Swaps	Fair value	$	5,650,579	$	16,187		$	7,293,414	$	52,244
	Swaps	Economic	996,300		178			974,900		1,570
Total associated with advances			6,646,879		16,365			8,268,314		53,814
Available-for-sale securities	Swaps	Fair value	611,915		(203,575		)	611,915		(271,182		)
Trading securities	Swaps	Economic	168,000		(978		)	192,000		(4,183		)
COs	Swaps	Fair value	6,077,935		(89,259		)	6,213,665		(45,446		)
	Forward starting swaps	Cash Flow	376,200		(403		)	481,200		(9,807		)
Total associated with COs			6,454,135		(89,662		)	6,694,865		(55,253		)
Total			13,880,929		(277,850		)	15,767,094		(276,804		)
Mortgage delivery commitments			41,397		(53		)	42,918		142
Total derivatives			$	13,922,326	(277,903		)	$	15,810,012	(276,662		)
Accrued interest					1,911					(14,452		)
Netting adjustments, cash collateral, and variation margin for daily settled contracts including related accrued interest					69,821					25,450
Net derivatives					$	(206,171	)			$	(265,664	)
Derivative asset					$	21,956				$	34,786
Derivative liability					(228,127		)			(300,450		)
Net derivatives					$	(206,171	)			$	(265,664	)

 _______________________

(1) As of September 30, 2018, and December 31, 2017, embedded derivatives separated from the advance contract with notional amounts of $1.0 billion and $974.9 million, respectively, and fair values of $(221,000) and $(1.6) million, respectively, are not included in the table.

(2) The hedge designation “fair value” represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge changes in fair value attributable to changes in the designated benchmark interest rate, which is LIBOR. The hedge designation "cash flow" represents the hedge classification for transactions that qualify for hedge-accounting treatment and hedge the exposure to variability in expected future cash flows. The hedge designation “economic” represents derivative hedging specific or nonspecific assets, liabilities, or firm commitments that do not qualify or were not designated for fair-value or cash-flow hedge accounting but are acceptable hedging strategies under our risk-management policy.

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Tables 20 and 21 provide a summary of our hedging relationships for fair-value hedges of advances and COs that qualify for hedge accounting by year of contractual maturity. Interest accruals on interest-rate-exchange agreements in qualifying hedge relationships are recorded as interest income on advances and interest expense on COs in the statement of operations. The notional amount of derivatives in qualifying fair-value hedge relationships of advances and COs totals $11.7 billion, representing 84.2 percent of all derivatives outstanding as of September 30, 2018. Economic hedges and cash-flow hedges are not included within the two tables below.

Table 20 - Fair-Value Hedge Relationships of Advances By Year of Contractual Maturity (dollars in thousands)
	As of September 30, 2018
										Weighted-Average Yield (4)
	Derivatives				Advances(2)							Derivatives
Maturity	Notional		Fair Value(1)		Hedged Amount		Fair-Value Adjustment(3)			Advances		Receive Floating Rate		Pay Fixed Rate		Net Receive Result
Due in one year or less	$	1,530,461	$	8,113	$	1,530,461	$	(8,149	)	1.68	%	2.34	%	1.44	%	2.58	%
Due after one year through two years	1,480,590		28,829		1,480,590		(28,703		)	1.68		2.34		1.48		2.54
Due after two years through three years	981,713		27,467		981,713		(27,201		)	2.13		2.34		1.74		2.73
Due after three years through four years	997,365		29,630		997,365		(29,447		)	2.14		2.35		1.78		2.71
Due after four years through five years	331,700		4,201		331,700		(4,155		)	2.31		2.34		1.98		2.67
Thereafter	328,750		12,131		328,750		(11,900		)	1.73		2.34		1.18		2.89
Total	$	5,650,579	$	110,371	$	5,650,579	$	(109,555	)	1.88	%	2.34	%	1.58	%	2.64	%

_______________________

(1) Not included in the fair value is $94.2 million of variation margin received for daily settled contracts.

(2) Included in the advances hedged amount are $864.0 million of putable advances, which would accelerate the termination date of the derivative and the hedged item if the put option is exercised.

(3) The fair-value adjustment of hedged advances represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR.

(4) The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2018.

Table 21 - Fair-Value Hedge Relationships of Consolidated Obligations By Year of Contractual Maturity (dollars in thousands)
	As of September 30, 2018
										Weighted-Average Yield (4)
	Derivatives					CO Bonds (2)						Derivatives
Year of Maturity	Notional		Fair Value(1)			Hedged Amount		Fair-Value Adjustment(3)		CO Bonds		Receive Fixed Rate		Pay Floating  Rate		Net Pay Result
Due in one year or less	$	1,586,240	$	(8,233	)	$	1,586,240	$	8,199	1.30	%	1.28	%	2.24	%	2.26	%
Due after one year through two years	1,367,485		(12,810		)	1,367,485		12,663		2.04		2.09		2.21		2.16
Due after two years through three years	1,236,990		(19,977		)	1,236,990		19,704		1.71		1.73		2.18		2.16
Due after three years through four years	982,220		(27,719		)	982,220		27,573		1.80		1.80		2.20		2.20
Due after four years through five years	365,000		(7,188		)	365,000		6,977		2.07		2.07		2.14		2.14
Thereafter	540,000		(30,536		)	540,000		30,062		1.82		1.82		2.20		2.20
Total	$	6,077,935	$	(106,463	)	$	6,077,935	$	105,178	1.73	%	1.73	%	2.20	%	2.20	%

_______________________

(1) Not included in the fair value is $17.2 million of variation margin paid for daily settled contracts.

(2) Included in the CO bonds hedged amount are $3.3 billion of callable CO bonds, which would accelerate the termination date of the derivative and the hedged item if the call option is exercised.

(3)  The fair-value adjustment of hedged CO bonds represents the amounts recorded for changes in the fair value attributable to changes in the designated benchmark interest rate, LIBOR, plus remaining unamortized premiums or discounts on hedged CO bonds where applicable.

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(4) The yield for floating-rate instruments and the floating-rate leg of interest-rate swaps is the coupon rate in effect as of September 30, 2018.

We may engage in derivatives directly with affiliates of certain of our members that act as derivatives dealers to us. These derivatives are entered into for our own risk-management purposes and are not related to requests from our members to enter into such contracts.

Derivative Instruments Credit Risk. We are subject to credit risk on derivatives. This risk arises from the risk of counterparty default on the derivative contract. The amount of unsecured credit exposure to derivative counterparty default is the amount by which the replacement cost of the defaulted derivative contract exceeds the value of any collateral held by us (if the counterparty is the net obligor on the derivative contract) or is exceeded by the value of collateral pledged by us to counterparties (if we are the net obligor on the derivative contract). We accept cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives (principal-to-principal derivatives that are not centrally cleared) from counterparties with whom we are in a current positive fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty. The resulting net exposure at fair value is reflected in Table 22 below. We pledge cash and securities collateral in accordance with the terms of the applicable master netting agreement for uncleared derivatives to counterparties with whom we are in a current negative fair-value position by an amount that exceeds an exposure threshold (if any) defined in our master netting agreement with the counterparty.

From time to time, due to timing differences or derivatives valuation differences between our calculated derivatives values and those of our counterparties, and to the contractual haircuts applied to securities, we pledge to counterparties cash or securities collateral whose fair value is greater than the current net negative fair-value of derivatives positions outstanding with them adjusted for any applicable exposure threshold. Similarly, from time to time, due to timing differences or derivatives valuation differences, we receive from counterparties cash or securities collateral whose fair value is less than the current net positive fair-value of derivatives positions outstanding with them adjusted for any applicable exposure threshold. We pledge only cash collateral, including initial and variation margin, for cleared derivatives, but may also pledge securities for initial margin as allowed by the applicable DCO and clearing member.

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Table 22 - Credit Exposure to Derivatives Counterparties (dollars in thousands)
	As of September 30, 2018
Credit Rating (1)	Notional Amount		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged to Counterparty		Non-cash Collateral Pledged to Counterparty			Net Credit Exposure to Counterparties
Asset positions with credit exposure:
Uncleared derivatives
Single-A	$	2,726,300	$	(45,776	)	$	47,553	$	(682	)	$	1,095
Liability positions with credit exposure:
Uncleared derivatives
Single-A	1,332,000		(5,872		)	—		5,981			109
Triple-B	474,000		(9,670		)	—		10,023			353
Cleared derivatives	7,065,874		(1,225		)	21,377		—			20,152
Total derivative positions with nonmember counterparties to which we had credit exposure	11,598,174		(62,543		)	68,930		15,322			21,709
Mortgage delivery commitments (2)	41,397		27			—		—			27
Total	$	11,639,571	$	(62,516	)	$	68,930	$	15,322		$	21,736
Derivative positions without credit exposure: (3)
Double-A	$	357,000
Single-A	985,050
Triple-B	940,705
Total derivative positions without credit exposure	$	2,282,755

_______________________

(1) Uncleared derivatives counterparty ratings are obtained from Moody's, Fitch, and S&P. Each rating classification includes all rating levels within that category. If there is a split rating, the lowest rating is used. In the case where the obligations are unconditionally and irrevocably guaranteed, the rating of the guarantor is used.

(2) Total fair-value exposures related to commitments to invest in mortgage loans are offset by certain pair-off fees. Commitments to invest in mortgage loans are reflected as derivatives. We do not collateralize these commitments. However, should the participating financial institution fail to deliver the mortgage loans as agreed, the participating financial institution is charged a fee to compensate us for the nonperformance.

(3) Represents derivatives positions with counterparties for which we are in a net liability position and for which we have delivered collateral to the counterparty in an amount equal to or less than the net derivative liability, or derivative positions with counterparties for which we are in a net asset position and for which the counterparty has delivered collateral to us in an amount that exceeds our net derivative asset.

For information on our approach to the credit risks arising from our use of derivatives, see Item 7 — Management’s Discussion and Analysis and Results of Operations — Financial Condition — Derivative Instruments — Derivative Instruments Credit Risk in the 2017 Annual Report.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We are required to maintain liquidity in accordance with the FHLBank Act, FHFA regulations and guidance, and policies established by our management and board of directors. We seek to be in a position to meet the credit and liquidity needs of our

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members and to meet all current and future financial commitments by managing liquidity positions to maintain stable, reliable, and cost-effective sources of funds while taking into account market conditions, member demand, and the maturity profile of our assets and liabilities.

We may not be able to predict future trends in member credit needs because they are driven by complex interactions among a number of factors, including members' asset growth or reductions, deposit growth or reductions, and the attractiveness of advances compared to other wholesale borrowing alternatives. We regularly monitor current trends and anticipate future debt issuance needs and maintain a portfolio of highly liquid assets in an effort to be prepared to fund our members' credit needs and our investment opportunities. We are able to expand our CO debt issuance in response to our members' increased credit needs for advances and mortgage loans. Alternatively, in response to reduced member credit needs, we may allow our COs to mature without replacement, or repurchase and retire outstanding COs, allowing our balance sheet to shrink.

Sources and Uses of Liquidity. Our sources of liquidity are proceeds from the issuance of COs and advance repayments, as well as cash and investment holdings that are primarily high-quality, short-, and intermediate-term financial instruments.

During the nine months ended September 30, 2018, we maintained continual access to funding and adapted our debt issuance to meet the needs of our members. During the nine months ended September 30, 2018, our short-term funding was generally driven by member demand and was achieved primarily through the issuance of discount notes and short-term CO bonds. Access to short-term debt markets has been reliable because investors continue to view our short-term debt as an asset of choice, which has led to consistently low funding costs compared to those of other high-quality issuers and increased utilization of debt maturing in one year or less.

We may use a portion of the short-term COs issued to fund both short- and long-term floating-rate assets. Funding longer-term floating-rate assets with shorter-term liabilities generally does not expose us to significant interest rate risk because the rates on both the floating-rate assets and liabilities reset similarly (either through rate resets or re-issuance of the obligations). However, deviations in the cost of our short-term liabilities relative to resetting assets can cause fluctuations in our net interest margin. Accordingly, we have established funding gap limits designed to limit our exposure to refinancing risk. See — Balance Sheet Funding Gap Policy for additional information. Also, we measure and monitor interest rate risk with commonly used methods and metrics, which include the calculations of market value of equity, duration of equity, duration gap, and earnings at risk. See Item 3 — Quantitative and Qualitative Disclosures About Market Risk for additional information.

Our primary uses of liquidity are advance originations and consolidated obligation payments. Other uses of liquidity are mortgage loan and investment purchases, dividend payments, and other contractual payments. We also maintain liquidity to redeem or repurchase excess capital stock, at our discretion, upon the request of a member or under our capital plan. We currently conduct daily repurchases of excess capital stock as discussed under Internal Capital Practices and Policies — Repurchases of Excess Stock.

Secondary sources of liquidity include payments collected on mortgage loans, proceeds from the issuance of capital stock, and deposits from members. In addition, under the FHLBank Act, the U.S. Treasury may purchase up to $4 billion of COs of the FHLBanks. The terms, conditions, and interest rates in such a purchase would be determined by the U.S. Treasury. This authority may be exercised at the discretion of the U.S. Treasury with the agreement of the FHFA only if alternative means cannot be effectively employed to permit the FHLBanks to continue to supply reasonable amounts of funds to the mortgage market, and the ability to supply such funds is substantially impaired because of monetary stringency and a high level of interest rates. There were no such purchases by the U.S. Treasury during the nine months ended September 30, 2018.

Our contingency liquidity plans are intended to ensure that we are able to meet our obligations and the liquidity needs of members in the event of operational disruptions at the Bank or the Office of Finance or short-term disruptions of the capital markets.

Internal Liquidity Sources / Liquidity Management

We have developed a methodology and policies by which we measure and manage the Bank’s short-term liquidity needs based on projected net cash flow and contingent obligations.

Projected Net Cash Flow. We define projected net cash flow as projected sources of funds less projected uses of funds based on contractual maturities or expected option exercise periods, and settlement of committed assets and liabilities, as applicable. For mortgage-related cash flows and callable debt, we incorporate projected prepayments and call exercise.

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Structural Liquidity. We define structural liquidity as projected net cash flow (defined above) less assumed secondary uses of funds, for which we assume the following:

• all maturing advances are renewed;

• member overnight deposits are withdrawn at a rate of 50 percent per day;

• outstanding standby letters of credit are drawn down at a rate of 50 percent spread equally over 86 days;

• uncommitted lines of credit are drawn upon at a rate of 10 percent of the previous day's balance; and

• MPF master commitments are funded at a rate of 10 percent of the previous day's total amount on the first day and at a rate of one percent on each day thereafter.

The above assumptions for secondary uses of funds are in excess of our ordinary experience, and therefore represent a more stressful scenario than we expect to experience. We review these assumptions periodically.

This methodology for measuring projected net cash flow and structural liquidity has been established by management to monitor our liquidity position on a daily basis, to help ensure that we meet all of our obligations as they come due, and to meet our members' potential demand for liquidity from us in all cases. We may adjust the amount of liquidity maintained as market conditions change from time to time using projected net cash flow and structural liquidity measurements.

Liquidity Management Action Triggers. We maintain two liquidity management action triggers:

• if structural liquidity is less than negative $1.0 billion on or before the fifth business day following the measurement date; and

• if projected net cash flow falls below zero on or before the 21^st day following the measurement date.

If either of these thresholds is exceeded, then management of the Bank is notified and determines whether any corrective action is necessary. We did not exceed either of these thresholds at any time during the nine months ended September 30, 2018.

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Table 23 - Projected Net Cash Flow and Structural Liquidity (dollars in thousands)
	As of September 30, 2018
	5 Business Days		21 Days
Uses of funds
Interest payable	$	17,017	$	42,894
Maturing liabilities	4,339,702		13,020,962
Committed asset settlements	7,000		7,000
Capital outflow	113,441		113,441
MPF delivery commitments	41,397		41,397
Other	2,731		2,731
Gross uses of funds	4,521,288		13,228,425
Sources of funds
Interest receivable	62,595		108,689
Maturing or projected amortization of assets	14,904,286		20,601,153
Committed liability settlements	75,562		90,525
Cash and due from banks and interest bearing deposits	442,554		442,554
Gross sources of funds	15,484,997		21,242,921
Projected net cash flow	10,963,709		$	8,014,496
Less: Secondary uses of funds
Deposit runoff	401,233
Drawdown of standby letters of credit and lines of credit	680,582
Rollover of all maturing advances	4,718,724
Projected funding of MPF master commitments	174,995
Total secondary uses of funds	5,975,534
Structural liquidity	$	4,988,175

Contingency Liquidity. FHFA regulations require that we hold contingency liquidity in an amount sufficient to enable us to cover our operational requirements for a minimum of five business days without access to the CO debt markets. The FHFA defines contingency liquidity as projected sources of funds less uses of funds, excluding reliance on access to the CO debt markets and including funding a portion of outstanding standby letters of credit. For this purpose, outstanding standby letters of credit are assumed to be drawn down at a rate of 50 percent spread equally over 86 days following the measurement date. As defined by FHFA regulations, additional contingent sources of liquidity include the following:

• marketable securities with a maturity greater than one week and less than one year that can be sold;

• self-liquidating assets with a maturity of seven days or less;

• assets that are generally accepted as collateral in the repurchase agreement market, for which we include 50 percent of unencumbered marketable securities with a maturity greater than one year; and

• irrevocable lines of credit from financial institutions rated not lower than the second highest rating category by an NRSRO.

We complied with this regulatory requirement at all times during the nine months ended September 30, 2018. As of September 30, 2018, and December 31, 2017, we held a surplus of $15.4 billion and $13.2 billion, respectively, of contingency liquidity for the following five business days, exclusive of access to the proceeds of CO issuance.

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Table 24 - Contingency Liquidity (dollars in thousands)
	As of September 30, 2018
	5 Business Days
Cumulative uses of funds
Interest payable	$	17,017
Maturing liabilities	4,339,702
Committed asset settlements	7,000
Drawdown of standby letters of credit	183,659
Other	2,731
Gross uses of funds	4,550,109
Cumulative sources of funds
Interest receivable	62,595
Maturing or amortizing advances	4,718,724
Committed liability settlements	75,562
Gross sources of funds	4,856,881
Plus: sources of contingency liquidity
Marketable securities	1,000,416
Self-liquidating assets	10,149,002
Cash and due from banks and interest bearing deposits	442,554
Marketable securities available for repo	3,533,412
Total sources of contingency liquidity	15,125,384
Net contingency liquidity	$	15,432,156

Additional Liquidity Requirements. The FHFA requires us to have available at all times an amount greater than or equal to the current deposits received from our members invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. The FHFA also requires us to maintain, in the aggregate, qualifying assets free from any lien or pledge in an amount at least equal to the amount of our participation in total COs outstanding.

In addition, certain FHFA guidance requires us to maintain sufficient liquidity through short-term investments in an amount at least equal to our anticipated cash outflows under two different scenarios.

• The first scenario assumes that we cannot borrow funds from the capital markets for a period of between 10 to 20 days, with initial guidance set at 15 business days, and that during that time we do not renew any maturing, prepaid, and put or called advances.

• The second scenario assumes that we cannot raise funds in the capital markets for a period of between three to seven days, with initial guidance set at five business days, and that during that period we will renew maturing and called advances for all members except very large, highly rated members.

We were in compliance with these additional liquidity requirements at all times during the nine months ended September 30, 2018. For information on new liquidity guidance issued by the FHFA, see Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.

Balance Sheet Funding Gap Policy. The Bank is exposed to refinancing risk due to the fact that over certain time horizons, it has more liabilities than assets maturing. To adequately fund assets the maturing liabilities must be replaced by new liabilities, which may occur at higher cost, putting spread at risk. In order to manage the Bank’s refinancing risk, we maintain an appropriate funding balance between financial assets and financial liabilities and maintain a policy that limits the potential difference between the amount of financial assets and the amount of financial liabilities expected to mature within three-month

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and one-year time horizons inclusive of projected prepayment and call activity. We measure this difference, or gap, as a percentage of total assets under two alternative formats. One funding gap format effectively assumes that all floating rate advances indexed to the discount note auction rate that both mature beyond the three-month or one-year time horizon and are prepayable without fees on coupon reset dates mature within the three-month or one-year time horizon; this assumption results in an adjustment that reduces the funding gap measurement. (Such advances are not subject to margin compression because the cost of the refinanced debt defines the reset rate on the advance coupon.) The other funding gap format includes no such adjustment. The Bank has instituted a limit and management action trigger framework around these metrics as follows:

Table 25 - Funding Gap Metric
Funding Gap Metric (1)	Limit	Management Action Trigger	Actual as of September 30, 2018		Actual as of December 31, 2017
3-month Funding Gap
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction	35%	25%	12.4	%	8.7	%
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than three-month maturity	20%	10%	(1.7	)%	0.6	%
1-year Funding Gap
No Adjustment for Floating Rate Advances Indexed to Discount Note Auction	35%	25%	14.0	%	10.9	%
Floating Rate Advances Indexed to Discount Note Auction assumed to have less than one-year maturity	20%	10%	0.0	%	3.9	%

 _______________________

(1) The funding gap metric is a positive value when maturing liabilities exceed maturing assets, as defined, within the given time period.

Funding Concentration Policy. To limit the liquidity risk potentially associated with a high volume of short-term debt refinancing we have a funding concentration policy that limits the volume of discount notes outstanding as a proportion of total assets. The policy establishes a management action trigger when discount notes (excluding the amount of discount notes matched to short-term advances) exceed 40 percent of total assets. In addition, we have adopted a separate management action trigger that is triggered when total discount notes exceed 55 percent of assets. Finally, discount notes are limited to no more than 65 percent of total assets. We were in compliance with these internal policies during the nine months ended September 30, 2018.

External Sources of Liquidity

Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. We have a source of emergency external liquidity through the Amended and Restated FHLBanks P&I Funding Contingency Plan Agreement. Under the terms of that agreement, in the event we do not fund our principal and interest payments due with respect to any CO within deadlines established in the agreement, the other FHLBanks will be obligated to fund any shortfall to the extent that any of the other FHLBanks has a net positive settlement balance (that is, the amount by which end-of-day proceeds received by such FHLBank from the sale of COs on that day exceeds payments by such FHLBank on COs on the same day) in its account with the Office of Finance on the day the shortfall occurs. We would then be required to repay the funding FHLBanks. We have never drawn funding under this agreement.

Debt Financing — Consolidated Obligations

At September 30, 2018, and December 31, 2017, outstanding COs for which we are primarily liable, including both CO bonds and CO discount notes, totaled $60.2 billion and $56.1 billion, respectively. CO bonds outstanding for which we are primarily liable include issued callable bonds totaling $4.9 billion and $4.4 billion at September 30, 2018, and December 31, 2017, respectively.

CO discount notes comprised 55.6 percent and 49.4 percent of the outstanding COs for which we are primarily liable at September 30, 2018, and December 31, 2017, respectively, but accounted for 94.8 percent and 94.1 percent of the proceeds from the issuance of such COs during the nine months ended September 30, 2018 and 2017, respectively.

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Market Conditions for Consolidated Obligations

Overall, we continued to experience continuous demand for COs among investors and our issuance costs during the period covered by this report were consistent with those of recent quarters, reflecting continued high demand for all tenors of COs with the strongest demand for short-term COs. We have been able to issue debt in the amounts and structures required to meet our funding and risk-management needs. Throughout 2017 and the first nine months of 2018, COs continued to be issued at yields that were generally at or below equivalent-maturity LIBOR swap yields for debt maturing in less than five years, while longer-term issues bore funding costs that were typically higher than equivalent maturity LIBOR swap yields. During the period covered by this report, CO yields continued generally to move with U.S. dollar interest rate swaps and comparable U.S. Treasury yields, though minor spread fluctuations occurred between these series. We believe that the market’s reaction to recent and expected changes in FOMC monetary policies, including the decision to increase the target rate for Interest on Excess Reserves by less than the increase in the policy range for the target rate federal funds rate, is potentially an important factor that could shape investor demand for debt, including COs, in 2018. Moreover, potential increases in U.S. Treasury security issuance in response to the fiscal policy implications of the Tax Cut and Jobs Act of 2017 or any change or roll back of regulations governing money market investors may also have an impact on our funding costs.

Capital

Total capital at September 30, 2018, was $3.5 billion compared with $3.3 billion at December 31, 2017.

Capital stock increased by $193.2 million during the nine months ended September 30, 2018, resulting from the issuance of $1.3 billion of capital stock to support new advances borrowings by members offset by capital stock repurchases of $1.1 billion.

The FHLBank Act and FHFA regulations specify that each FHLBank is required to satisfy certain minimum regulatory capital requirements. We were in compliance with these requirements at September 30, 2018, as discussed in Item 1 — Notes to the Financial Statements — Note 14 — Capital.

Subject to applicable law, following the expiry of the stock redemption period (which is five years for Class B stock), we redeem capital stock for any member that requests redemption of its excess stock, gives notice of intent to withdraw from membership, or becomes a nonmember due to merger, acquisition, charter termination, or involuntary termination of membership. Capital stock subject to a stock redemption period is reclassified to mandatorily redeemable capital stock in the liability section of the statement of condition. Mandatorily redeemable capital stock totaled $31.9 million and $35.9 million at September 30, 2018, and December 31, 2017, respectively. For additional information on the redemption of our capital stock, see Item 1 — Business — Capital Resources — Redemption of Excess Stock and Item 8 — Financial Statements and Supplementary Data —Notes to the Financial Statements — Note 1 — Summary of Significant Accounting Policies — Mandatorily Redeemable Capital Stock in the 2017 Annual Report.

Table 26 - Mandatorily Redeemable Capital Stock by Expiry of Redemption Notice Period (dollars in thousands)
	September 30, 2018		December 31, 2017
Past redemption date (1)	$	4,076	$	420
Due in one year or less	128		4,018
Due after one year through two years	27,250		27,379
Due after two years through three years	—		54
Due after three years through four years	93		—
Due after four years through five years	301		4,022
Thereafter (2)	20		30
Total	$	31,868	$	35,923

_______________________

(1) Amount represents mandatorily redeemable capital stock that has reached the end of the five-year redemption-notice period but the member-related activity (for example, advances) remains outstanding. Accordingly, these shares of stock will not be redeemed until the activity is no longer outstanding.

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(2) Amount represents reclassifications to mandatorily redeemable capital stock resulting from an FHFA rule effective February 19, 2016, that makes captive insurance companies ineligible for membership. Captive insurance company members that were admitted as members prior to September 12, 2014, will have their memberships terminated no later than February 19, 2021.

Capital Rule

The FHFA’s regulation on FHLBank capital classification and critical capital levels (the Capital Rule), among other things, establishes criteria for four capital classifications and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. The Capital Rule requires the Director of the FHFA to determine on no less than a quarterly basis the capital classification of each FHLBank. By letter dated March 20, 2018, the Director of the FHFA notified us that, based on December 31, 2017 financial information, we met the definition of adequately capitalized under the Capital Rule.

For additional information on the Capital Rule, see Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Capital Rule in the 2017 Annual Report.

Internal Capital Practices and Policies

We also take steps as we believe prudent beyond legal or regulatory requirements in an effort to protect our capital, reflected in our targeted capital ratio operating range, internal minimum capital requirement in excess of regulatory requirements, minimum retained earnings target, and limitations on dividends.

Targeted Capital Ratio Operating Range

We target an operating capital ratio range as required by FHFA regulations. Currently, this range is set at 4.0 percent to 7.5 percent. Our capital ratio was 6.0 percent at September 30, 2018.

Internal Minimum Capital Requirement in Excess of Regulatory Requirements

To provide further protection for our capital base, we maintain an internal minimum capital requirement whereby the amount of paid-in capital stock and retained earnings (together, our actual regulatory capital) must be at least equal to the sum of four percent of our total assets plus an amount we measure as our risk exposure with 99 percent confidence using our economic capital model (together, our internal minimum capital requirement). As of September 30, 2018, this internal minimum capital requirement equaled $3.1 billion, which was satisfied by our actual regulatory capital of $3.9 billion.

Minimum Retained Earnings Target

At September 30, 2018, we had total retained earnings of $1.4 billion compared with our minimum retained earnings target of $700.0 million. We generally view our minimum retained earnings target as a floor for retained earnings rather than as a retained earnings limit and expect to continue to grow our retained earnings modestly even though we exceed the target.

For information on limitations on dividends, including limitations when we are under our minimum retained earnings target, see Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities in the 2017 Annual Report.

Repurchases of Excess Stock

We have the authority, but are not obligated, to repurchase excess stock, as discussed under Item 1 — Business — Capital Resources — Repurchase of Excess Stock in the 2017 Annual Report as well as below.

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Table 27 - Capital Stock Requirements and Excess Capital Stock (dollars in thousands)
	Membership Stock Investment Requirement		Activity-Based Stock Investment Requirement		Total Stock Investment Requirement (1)		Outstanding Class B Capital Stock (2)		Excess Class B Capital Stock
September 30, 2018	$	757,211	$	1,633,847	$	2,391,081	$	2,508,745	$	117,664
December 31, 2017	705,924		1,502,996		2,208,942		2,319,644		110,702

_______________________

(1) TSIR is rounded up to the nearest $100 on an individual member basis.

(2)  Class B capital stock outstanding includes mandatorily redeemable capital stock.

We currently conduct daily repurchases of excess stock held by any shareholder whose excess stock exceeds the lesser of $10.0 million or 10 percent of the shareholder’s total stock investment requirement, subject to a minimum repurchase of $100,000. Excess stock repurchases for the nine months ended September 30, 2018 amounted to $1.1 billion.

Off-Balance-Sheet Arrangements and Aggregate Contractual Obligations

Our significant off-balance-sheet arrangements consist of the following:

• commitments that obligate us for additional advances;

 • standby letters of credit;

 • commitments for unused lines-of-credit advances; and

 • unsettled COs.

Off-balance-sheet arrangements are more fully discussed in Item 8 — Financial Statements and Supplementary Data — Notes to the Financial Statements — Note 19 — Commitments and Contingencies in the 2017 Annual Report.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with GAAP requires management to make a number of judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes these judgments, estimates, and assumptions to be reasonably accurate, actual results may differ.

We have identified three accounting estimates that we believe are critical because they require us to make subjective or complex judgments about matters that are inherently uncertain, and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. These estimates include accounting for derivatives, the use of fair-value estimates, and accounting for deferred premiums and discounts on prepayable assets. The Audit Committee of our board of directors has reviewed these estimates. The assumptions involved in applying these policies are discussed in Item 7 — Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates in the 2017 Annual Report.

As of September 30, 2018, we have not made any significant changes to the estimates and assumptions used in applying our critical accounting policies and estimates from those used to prepare our audited financial statements.

RECENT ACCOUNTING DEVELOPMENTS

See Item 1 — Notes to the Financial Statements — Note 2 — Recently Issued and Adopted Accounting Guidance for a discussion of recent accounting developments impacting or that could impact us.

LEGISLATIVE AND REGULATORY DEVELOPMENTS

Significant regulatory actions and developments for the period covered by this report are summarized below.

Advisory Bulletin (AB) 2018-07 Federal Home Loan Bank Liquidity Guidance (Liquidity Guidance AB). On August 23, 2018, the FHFA issued a final AB on FHLBank liquidity that communicates the FHFA’s expectations with respect to the maintenance

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of sufficient liquidity to enable the FHLBanks to provide advances and letters of credit for members for a specified time without access to the capital markets or other unsecured funding sources. As of March 31, 2019, the Liquidity Guidance AB rescinds 2009 liquidity guidance issued by the FHFA. Contemporaneously with the issuance of the Liquidity Guidance AB, the FHFA issued a supervisory letter that identifies initial thresholds for measures of liquidity.

The Liquidity Guidance AB provides guidance on the level of on-balance sheet liquid assets related to base case liquidity. As part of the base case liquidity measure, the guidance also includes a separate provision covering off-balance sheet commitments from standby letters of credit (SLOC). In addition, the Liquidity Guidance AB provides guidance related to asset/liability maturity funding gap limits.

With respect to base case liquidity, the FHFA revised previous guidance that required the FHLBanks to assume a 5-day period without access to capital markets and rollover of maturing advances to members with total assets less than $100 million

due to a change in certain assumptions underlying that guidance. Under the Liquidity Guidance AB, FHLBanks will be required to hold positive cash flow while rolling over maturing advances to all members and assuming no access to capital markets for an increased period of between ten and thirty calendar days, with a specific measurement period set forth in the supervisory letter. The Liquidity Guidance AB also sets forth the initial cash flow assumptions and formula to calculate base case liquidity. With respect to SLOC, the guidance states that FHLBanks should maintain a liquidity reserve of between one percent and 20 percent of its outstanding SLOC commitments, as specified in the supervisory letter.

With respect to funding gaps and possible asset and liability mismatches, the Liquidity Guidance AB provides guidance on maintaining appropriate funding gaps for three-month (-10 to -20 percent) and one-year (-25 to -35 percent) maturity horizons, with specific initial percentages within these ranges identified in the supervisory letter. The Liquidity Guidance AB provides for these limits to reduce the liquidity risks associated with a mismatch in asset and liability maturities, including an undue reliance on short term debt funding, which may increase debt rollover risk.

The Liquidity Guidance AB also addresses liquidity stress testing, contingency funding plans and an adjustment to the FHLBank’s core mission achievement calculation. Portions of the Liquidity Guidance AB will be implemented beginning December 31, 2018, with further implementation on March 31, 2019, and full implementation on December 31, 2019. While the Bank is still analyzing the impact of the Liquidity Guidance AB, it may hold an additional amount of liquid assets to meet the new guidance, which could impact net interest margin depending on relative cost of funding. The Bank does not believe these changes will have a material effect on the Bank’s results of operations or the Bank’s dividend rate.

Proposed Amendment to Rule Regarding Golden Parachute and Indemnification Payments. On August 28, 2018, the FHFA proposed amending its rule on golden parachute payments (Golden Parachute Rule) to better align the Golden Parachute Rule with areas of the FHFA’s concern and reduce administrative and compliance burdens. The Golden Parachute Rule sets forth the standards that the FHFA would take into consideration when limiting or prohibiting golden parachute and indemnification payments by an FHLBank or the Office of Finance to an entity-affiliated party when such entity is in troubled condition, in conservatorship or receivership, or insolvent. The proposed amendments would:

• Focus these standards on payments to and agreements with executive officers, broad-based plans, such as severance plans, covering large numbers of employees, and payments made to non-executive-officer employees who may have engaged in certain types of wrongdoings;

• Revise and clarify definitions, exemptions and procedures to implement the FHFA’s supervisory approach; and

• Align procedures and outcomes of review with requirements of the FHFA’s rule on executive compensation.

Comments on the proposed rule were due by October 12, 2018. Ten of the FHLBanks and the Office of Finance provided a joint comment letter on October 12 related to clarifying certain provisions of the proposed amendment. The Bank is currently assessing the effect of the proposed rule but does not anticipate that, if adopted, it would materially impact the Bank.

Final Rule on Indemnification Payments. On October 4, 2018, the FHFA published a final rule establishing standards for identifying when an indemnification payment by an FHLBank or the Office of Finance to an officer, director, employee, or other affiliated party in connection with an administrative proceeding or civil action instituted by the FHFA is prohibited or permissible. The rule generally prohibits these payments except in the following circumstances:

• premiums for any commercial insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the FHFA or a civil money penalty imposed by the FHFA;

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• expenses of defending an action, subject to the FHLBank or the Office of Finance’s board of directors conducting a due investigation and making a written determination that the affiliated party acted in good faith and in a manner that he or she reasonably believed to be in the best interest of the FHLBank or Office of Finance and such payments will not materially adversely affect the safety and soundness of the FHLBank or the Office of Finance (as the case may be) and the affiliated party agreeing to repay those expenses in certain instances; and

• amounts due under an indemnification agreement entered into with a named affiliated party on or prior to September 20, 2016 (the date the rule was proposed).

The Bank does not expect that the rule, which became effective on November 5, 2018, will materially impact the Bank.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sources and Types of Market and Interest-Rate Risk

Our balance sheet is comprised of different portfolios that require different types of market- and interest-rate-risk management strategies. Sources and types of market and interest-rate risk are described in Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Sources and Types of Market and Interest-Rate Risk in the 2017 Annual Report.

Strategies to Manage Market and Interest-Rate Risk

General

We use various strategies and techniques in an effort to manage our market and interest-rate risk including the following and combinations of the following:

• the issuance of COs that can be used to match interest-rate-risk exposures of our assets (at September 30, 2018, fixed-rate noncallable debt, not hedged by interest-rate swaps, amounted to $15.1 billion, compared with $15.5 billion at December 31, 2017);

• the use of derivatives and/or COs with embedded call options to hedge the interest-rate risk of our debt (at September 30, 2018, fixed-rate callable debt not hedged by interest-rate swaps amounted to $1.6 billion compared with $1.2 billion at December 31, 2017);

• the issuance of CO bonds together with interest-rate swaps that receive a coupon that offsets the bond coupon and any optionality embedded in the bond, thereby effectively creating a floating-rate liability (total CO bond debt used in conjunction with interest-rate-exchange agreements was $6.0 billion, or 22.5 percent of our total outstanding CO bonds at September 30, 2018, compared with $6.2 billion, or 21.9 percent of total outstanding CO bonds, at December 31, 2017);

• contractual provisions for certain advances that require borrowers to pay us prepayment fees, to make us financially indifferent if the borrower prepays such advances prior to maturity; and

• the use of callable debt for a portion of our investments in mortgage loans to manage the interest-rate and prepayment risks from these investments.

Each of the foregoing strategies and techniques is more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Strategies to Manage Market and Interest-Rate Risk in the 2017 Annual Report.

Measurement of Market and Interest-Rate Risk and Related Policy Constraints

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We measure our exposure to market and interest-rate risk using several techniques applied to the balance sheet and to certain portfolios within the balance sheet. Principal among these measurements as applied to the balance sheet is the potential future change in market value of equity (MVE) and interest income due to potential changes in interest rates, interest-rate volatility, spreads, and market prices. We also measure Value at Risk (VaR), duration of equity, MVE sensitivity, and the other metrics discussed below.

MVE is the net economic value of total assets and liabilities, including any off-balance-sheet items. In contrast to the GAAP-based shareholder's equity account, MVE represents the shareholder's equity account in present-value terms. Specifically, MVE equals the difference between the estimated market value of our assets and the estimated market value of our liabilities.

MVE, and in particular, the ratio of MVE to the book value of equity (BVE), is a measure of the current value of shareholder investment based on market rates, spreads, prices, and volatility at the reporting date. However, these valuations may not be fully representative of future realized prices. Valuations are based on market curves and prices of individual assets, liabilities, and derivatives, and therefore embed elements of option, credit, and liquidity risk which may not be representative of future net income to be earned from the spread between asset yields and funding costs. Further, MVE does not consider future new business activities, or income or expense derived from sources other than financial assets or liabilities.

We measure our exposure to market and interest-rate risk using several metrics, including:

• the ratio of MVE to BVE;

• the ratio of MVE to the par value of our Class B Stock (Par Stock), which we refer to as the MVE to Par Stock ratio;

• the ratio of MVE to the market value of assets, which we refer to as the economic capital ratio;

• VaR, which measures the change in our MVE to a 99th percent confidence interval, based on a set of stress scenarios (VaR Stress Scenarios) using historical interest-rate and volatility movements that have been observed over six-month intervals starting at the most recent month-end and going back monthly to 1992;

• duration of equity, which is calculated as the estimated percentage change to MVE for a 100 basis point parallel shift in rates;

• MVE sensitivity, which is the estimated percent change in MVE in various shocked interest rate scenarios vs. base case MVE;

• the duration gap of our assets and liabilities, which is the difference between the estimated durations (percentage change in market value for a 100 basis point shift in rates) of assets and liabilities (including the effect of related hedges) and reflects the extent to which estimated sensitivities to market changes, including, but not limited to, maturity and repricing cash flows for assets and liabilities are matched; and

• the use of an income-simulation model that projects net interest income over a range of potential interest-rate scenarios, including parallel interest-rate shocks, nonparallel interest-rate shocks, and basis changes to our funding curve and LIBOR.

We maintain limits and management action triggers in connection with some of the foregoing metrics. Those limits, management action triggers, and the foregoing market and interest-rate risk metrics are more fully discussed under Item 7A — Quantitative and Qualitative Disclosures About Market Risk — Measurement of Market and Interest-Rate Risk and Related Policy Constraints in the 2017 Annual Report.

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Table 28 - Interest Rate / Market-Rate Risk Metrics
Interest/Market-Rate Risk Metric	September 30, 2018	December 31, 2017	Target, Limit or Management Action Trigger
MVE	$3.9 billion	$3.6 billion	None
MVE/BVE	100%	100%	None
MVE/Par Stock	155%	156%	Maintain above 130% (management action trigger) with a floor of 125%
Economic Capital Ratio	6.0%	6.0%	Maintain above 4.5% (management action trigger) and 4.0% (limit)
VaR	$253.1 million	$170.1 million	Maintain below $275.0 million (management action trigger) and $350.0 million (limit)
Duration of Equity	+0.63 years	-0.46 years	Maintain between +/- 3.5 years (management action trigger) and +/- 4.0 years (limit)
MVE Sensitivity in a +/- 200 basis point parallel rate shock	(3.7)%	(7.8)%	Maintain above -10% (management action trigger) and -15% (limit)
Duration Gap	+0.46 months	-0.33 months	None
Income Simulation based on an instantaneous rise in interest rates of 300 basis points	Return on regulatory capital is 164 basis points above the average yield on three-month LIBOR	Return on regulatory capital is 141 basis points above the average yield on three-month LIBOR	Maintain projected return on regulatory capital above three-month LIBOR over the following 12 month horizon (management action trigger)

Value at Risk. Table 29 presents the historical simulation VaR estimate as of September 30, 2018, and December 31, 2017, and represents the estimates of potential reduction to our MVE from potential future changes in interest rates and other market factors. Estimated potential market value loss exposures are expressed as a percentage of the current MVE and are based on the historical relative behavior of interest rates and other market factors over a 6-month time horizon that is measured monthly beginning with the most current month-end and going back to 1992.

 

Table 29 - Value-at-Risk (dollars in millions)
	Value-at-Risk Loss Exposure (1)
	September 30, 2018				December 31, 2017
Confidence Level	% of MVE (2)		Amount		% of MVE (2)		Amount
50%	0.05	%	$	1.9	0.17	%	$	6.1
75%	1.08		42.2		1.13		41.1
95%	3.72		144.9		3.51		127.5
99%	6.50		253.1		4.69		170.1

_______________________

(1) To be consistent with FHFA guidance, we have excluded VaR stress scenarios prior to 1992 because market-risk stress conditions are effectively captured in those scenarios beginning in 1992 and therefore properly present our current VaR exposure.

(2) Loss exposure is expressed as a percentage of base MVE.

Certain Market and Interest-Rate Risk Metrics under Potential Interest-Rate Scenarios

We also monitor the sensitivities of MVE and the duration of equity to potential interest-rate scenarios. The following table presents certain market and interest-rate risk metrics under different interest-rate scenarios (dollars in millions).

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Table 30 - Market and Interest-Rate Risk Metrics (dollars in millions)
	September 30, 2018
	Down 300(1)	Down 200(1)	Down 100(1)	Base	Up 100	Up 200	Up 300
MVE	$3,603	$3,749	$3,878	$3,894	$3,841	$3,764	$3,673
Percent change in MVE from base	(7.5)%	(3.7)%	(0.4)%	—%	(1.4)%	(3.3)%	(5.7)%
MVE/BVE	93%	96%	100%	100%	99%	97%	94%
MVE/Par Stock	144%	149%	155%	155%	153%	150%	146%
Duration of Equity	-1.57 years	-3.67 years	-1.77 years	+0.63 years	+1.79 years	+2.22 years	+2.68 years
Return on Regulatory Capital less 3-month LIBOR	1.24%	1.48%	1.85%	1.98%	1.94%	1.81%	1.64%
Net income percent change from base	(74.11)%	(51.46)%	(23.22)%	—%	19.90%	37.93%	55.15%

____________________________

(1) In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.

	December 31, 2017
	Down 300(1)	Down 200(1)	Down 100(1)	Base	Up 100	Up 200	Up 300
MVE	$3,362	$3,345	$3,534	$3,628	$3,585	$3,484	$3,365
Percent change in MVE from base	(7.3)%	(7.8)%	(2.6)%	—%	(1.2)%	(4.0)%	(7.2)%
MVE/BVE	93%	92%	97%	100%	99%	96%	93%
MVE/Par Stock	145%	144%	152%	156%	155%	150%	145%
Duration of Equity	+0.75 years	-2.58 years	-4.67 years	-0.46 years	+2.26 years	+3.15 years	+3.76 years
Return on Regulatory Capital less 3-month LIBOR	1.62%	1.73%	2.17%	2.42%	2.23%	1.87%	1.41%
Net income percent change from base	(63.21)%	(59.42)%	(28.50)%	—%	18.56%	32.98%	44.98%

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(1) In an environment of low interest rates, downward rate shocks are floored as they approach zero, and therefore may not be fully representative of the indicated rate shock.

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Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our senior management is responsible for establishing and maintaining a system of disclosure controls and procedures designed to ensure that information required to be disclosed by us in the reports filed or submitted under the Securities Exchange Act of 1934 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 by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of controls and procedures.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures, with the participation of the president and chief executive officer and chief financial officer, as of the end of the period covered by this report. Based on that evaluation, our president and chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the fiscal year covered by this report.

Changes in Internal Control over Financial Reporting

During the quarter ended September 30, 2018, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We describe our private-label MBS litigation in Item 3 — Legal Proceedings in the 2017 Annual Report.

We continue our private-label MBS litigation against the following entities and/or their affiliates and subsidiaries and/or entities under their control or controlled by affiliates or subsidiaries thereof: Credit Suisse (USA), Inc.; Nomura Holding America, Inc.; and RBS Holdings USA Inc. In addition, we continue related complaints against Moody’s Investors Service, Inc. and Moody’s Corporation.

From time to time, we are subject to various pending legal proceedings arising in the normal course of business. After consultation with legal counsel, we do 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.

ITEM 1A. RISK FACTORS

In addition to the risk factor provided below and other risks described herein, readers should carefully consider the risk factors set forth in the 2017 Annual Report, which could materially affect our business, financial condition, or future results. The risks described below, elsewhere in this report, and in the 2017 Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also materially impact us.

Changes to and replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations.

In July 2017, the United Kingdom’s Financial Conduct Authority (FCA), which regulates LIBOR, announced its intention to stop persuading or compelling the group of major banks that sustains LIBOR to submit rate quotations after 2021. The FCA and the submitting LIBOR banks have indicated that they will support the LIBOR indices through 2021 to allow for an orderly transition to alternative reference rates. In April 2018, the Federal Reserve Bank of New York began publishing the Secured Overnight Financing Rate (SOFR), which the Alternative Reference Rates Committee recommended as the alternative reference rate to U.S. dollar LIBOR. During the third quarter of 2018, certain market participants began moving more aggressively towards the use of SOFR as a possible LIBOR replacement by issuing debt securities indexed to SOFR. There can

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be no guarantee that SOFR will become widely used and that alternatives may or may not be developed with additional complications. As noted throughout this report, many of our assets and liabilities are indexed to LIBOR. The market transition away from LIBOR and towards SOFR, which will include the development of term and credit adjustments to accommodate differences between LIBOR and SOFR, is expected to be gradual and complicated. Introduction of an alternative reference rate may create additional basis risk for market participants, including us, as an alternative rate is used along with LIBOR. Risks relating to the market demand for our products, the effect of changes in legacy contractual terms on our financial assets and liabilities, and critical vendors being able to adjust systems to properly process and account for an alternative rate are additional examples of the risks. We are evaluating the potential impact of the eventual replacement of the LIBOR benchmark interest rate, including the possibility of SOFR as the dominant replacement. Transition in the markets and in our systems could be disruptive. We are not able to predict whether LIBOR publication will be discontinued after 2021, whether SOFR will become a widely accepted reference rate in place of LIBOR, or what impact the transition from LIBOR may have on our business, financial condition, and results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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ITEM 5. OTHER INFORMATION

On November 7, 2018, the Bank adopted an Executive Change in Control Severance Plan (the Severance Plan) applicable to the Bank’s principal executive officer, principal financial officer, named executive officers, and certain other executive officers.

The Severance Plan provides certain protection and benefits in the event of a Qualifying Termination (as defined below) following a Change in Control (as defined below). The Severance Plan applies to employees or officers of the Bank who are designated as participants by the Bank’s board of directors. The board of directors has designated the following officers as participants in the Severance Plan: President and Chief Executive Officer Edward A. Hjerpe III, Executive Vice President and Chief Risk Officer George H. Collins, Executive Vice President and Chief Business Officer M. Susan Elliott, Executive Vice President and Chief Financial Officer Frank Nitkiewicz, Senior Vice President and Treasurer Timothy J. Barrett, and Senior Vice President, General Counsel and Corporate Secretary Carol Hempfling Pratt (the foregoing, other than Mr. Hjerpe, the “Other Named Executive Officer Participants”) in addition to certain other executive officers.

Under the terms of the Severance Plan, if there is a Qualifying Termination during the period beginning on the earliest of 180 days prior to the date a definitive agreement or order for a Change in Control has been entered into, or the effective date of a Change in Control as prescribed by the Federal Housing Finance Agency, and ending, in all cases, 24 months following the effective date of the Change in Control, the participant becomes entitled to certain severance payments and benefits.

These payments and benefits include the following:

• Mr. Hjerpe would receive a cash payment equal to 2.99 times his annual base salary and annual target bonus amount.

• The Other Named Executive Officer Participants would receive a cash payment equal to 2.00 times their annual base salary and annual target bonus amount.

• Participants would receive a lump sum cash payment equal to the amount that would have been payable pursuant to the participant’s annual incentive compensation award for the year in which the date of a Qualifying Termination occurs based on actual Bank performance, prorated based on the number of days the participant was employed that year.

• Participants would receive a lump sum cash payment for outplacement assistance in the amount of $25,000 for Mr. Hjerpe and $15,000 for the Other Named Executive Officer Participants.

• Mr. Hjerpe would receive a cash payment equivalent to 24 months of health insurance continuation coverage, and the Other Named Executive Officer Participants would receive a cash payment equivalent to 18 months of health insurance continuation coverage.

The Severance Plan defines a “Qualifying Termination” as a termination of the participant’s employment with the Bank, (i) by the Bank, other than for “cause” (as defined in the Severance Plan); or (ii) by the participant, for “good reason” (as defined in the Severance Plan), but does not include a termination resulting from the participant’s death or disability.

The Severance Plan defines “good reason” to include:

• A material diminution in the participant’s base salary or in his or her duties or authority;

• The Bank requiring the participant to be based at any office or location more than 50 miles from the current location in Boston, Massachusetts, provided that such a move results in a material increase in the cost or time of the participant’s commute; or

• A material breach of the Severance Plan by the Bank.

The Severance Plan defines a “Change in Control” as:

• the merger, reorganization, or consolidation of the Bank with or into, or acquisition of the Bank by, another Federal Home Loan Bank or other entity;

• the sale or transfer of all or substantially all of the business or assets of the Bank to another Federal Home Loan Bank or other entity;

• a change in the composition of the Bank’s board of directors that causes the combined number of member directors from the jurisdictions of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont to cease to constitute a majority of the Bank’s directors; or

• the Bank’s liquidation or dissolution.

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The payments described above are payable in a lump sum within sixty (60) days following the participant’s employment termination date, except the prorated incentive compensation award, which is payable at the time such incentive compensation awards are paid to other senior executives. All payments and benefits are conditioned on the participant having delivered an irrevocable general release of claims against the Bank before payment occurs. In addition, all payments and benefits remain subject to the Bank’s compliance with any applicable statutory and regulatory requirements relating to the payment of amounts under the Severance Plan. Payments will be reduced to the extent necessary to avoid being subject to the excise tax imposed by Section 4999 of the Internal Revenue Code, unless payment of the unreduced benefit would provide the participant with a higher net after tax benefit after payment of such excise tax. The Severance Plan requires that an individual execute a participation agreement to become a participant in the Severance Plan.

ITEM 6. EXHIBITS

Number	Exhibit Description	Reference
10.1	2019 Director Compensation Policy	Exhibit 10.1 to our Form 8-K filed with the SEC on October 19, 2018
31.1	Certification of the president and chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-Q
31.2	Certification of the chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-Q
32.1	Certification of the president and chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-Q
32.2	Certification of the chief financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed within this Form 10-Q
101.INS	XBRL Instance Document	The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Taxonomy Extension Schema Document	Filed within this Form 10-Q
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed within this Form 10-Q
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed within this Form 10-Q
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed within this Form 10-Q
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed within this Form 10-Q

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date	FEDERAL HOME LOAN BANK OF BOSTON (Registrant)
November 8, 2018	By:	/s/	Edward A. Hjerpe III
			Edward A. Hjerpe III President and Chief Executive Officer
November 8, 2018	By:	/s/	Frank Nitkiewicz
			Frank Nitkiewicz Executive Vice President and Chief Financial Officer

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