Attached files

file filename
EX-99.2 - REPORT OF THE AUDIT COMMITTEE - Federal Home Loan Bank of Pittsburghfhlbpitex99210k2019.htm
EX-99.1 - AUDIT COMMITTEE CHARTER - Federal Home Loan Bank of Pittsburghfhlbpitex99110k2019.htm
EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32310k2019.htm
EX-32.2 - COO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32210k2019.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32110k2019.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31310k2019.htm
EX-31.2 - COO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31210k2019.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31110k2019.htm
EX-24.0 - POWER OF ATTORNEY - Federal Home Loan Bank of Pittsburghfhlbpitex24010k2019.htm
EX-10.4.2 - AMENDED 2020 DIRECTORS' COMPENSATION POLICY - Federal Home Loan Bank of Pittsburghfhlbpitex104210k2019.htm
EX-10.1.2 - 2019 SEVERANCE POLICY - Federal Home Loan Bank of Pittsburghfhlbpitex101210k2019.htm
EX-10.15 - 2020 EXECUTIVE OFFICER INCENTIVE COMPENSATION PLAN - Federal Home Loan Bank of Pittsburgha2020executiveofficerinc.htm
EX-4.2 - DESCRIPTION OF REGISTERED SECURITIES - Federal Home Loan Bank of Pittsburghfhlbpitex4210k2019.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                    to                                   
                     Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
 
(Exact name of registrant as specified in its charter)
 
Federally Chartered Corporation
 
25-6001324
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
601 Grant Street
Pittsburgh, PA
 (Address of principal executive offices)
 
15219
 (Zip Code)
 
(412) 288-3400 
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Capital Stock, putable, par value $100
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. []Yes [x]No

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  [x] Yes [] 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.
o Large accelerated filer
o Accelerated filer
o Emerging growth company
x Non-accelerated filer
o Smaller reporting company
 

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

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

Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2019, the aggregate par value of the stock held by current and former members of the registrant was approximately $3,987.0 million. There were 29,985,999 shares of common stock outstanding at February 28, 2020.



FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

PART I
 
Item 1: Business
 
Item 1A: Risk Factors
 
Item 1B: Unresolved Staff Comments
 
Item 2: Properties
 
Item 3: Legal Proceedings
 
Item 4: Mine Safety Disclosures
 
PART II
 
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6: Selected Financial Data
 
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  Risk Management
 
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
 
Item 8: Financial Statements and Supplementary Financial Data
 
Financial Statements for the Years 2019, 2018, and 2017
 
Notes to Financial Statements
 
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A: Controls and Procedures
 
Item 9B: Other Information
 
PART III
 
Item 10: Directors, Executive Officers and Corporate Governance
 
Item 11: Executive Compensation
 
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13: Certain Relationships and Related Transactions, and Director Independence
 
Item 14: Principal Accountant Fees and Services
 
PART IV
 
Item 15: Exhibits and Financial Statement Schedules
 
Item 16: Form 10-K Summary
 
Glossary
 
Signatures
 






i.


PART I

Forward-Looking Information

Statements contained in this Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of Pittsburgh (the Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that 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. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to, real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; including but not limited to, the possible discontinuance of the London Interbank Offered Rate (LIBOR) and the related effect on the Bank's LIBOR-based financial products, investments and contracts; the occurrence of man-made or natural disasters, global pandemics, conflicts or terrorist attacks or other geopolitical events; political, legislative, regulatory, litigation, or judicial events or actions; risks related to mortgage-backed securities (MBS); changes in the assumptions used to estimate credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; changes in expectations regarding the Bank’s payment of dividends; membership changes; changes in the demand by Bank members for Bank advances; an increase in advance prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the Federal Home Loan Bank (FHLBank) System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

Item 1: Business

The Bank’s mission is to provide its members with readily available liquidity, including serving as a low-cost source of funds for housing and community development. The Bank strives to enhance the availability of credit for residential mortgages and targeted community development. The Bank manages its own liquidity so that funds are available to meet members’ demand for advances (loans to members and eligible nonmember housing associates). By providing needed liquidity and enhancing competition in the mortgage market, the Bank’s lending programs benefit homebuyers and communities. For additional information regarding the Bank’s financial condition and financial statements, refer to Item 7. Management’s Discussion and Analysis and Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. For additional information regarding the Bank’s business risks, refer to Item 1A. Risk Factors in this Form 10-K.

General

History.  The Bank is one of 11 FHLBanks. The FHLBanks operate as separate entities with their own management, employees and board of directors. The 11 FHLBanks, along with the Office of Finance (OF - the FHLBanks’ fiscal agent) comprise the FHLBank System. The FHLBanks were organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (the Act). The FHLBanks are commonly referred to as government-sponsored enterprises (GSEs), which generally means they are a combination of private capital and public sponsorship. The public sponsorship attributes include:

being exempt from federal, state and local taxation, except real estate taxes;
being exempt from registration under the Securities Act of 1933 (the 1933 Act), although the FHLBanks are required by Federal Housing Finance Agency (FHFA or Finance Agency) regulation and the Housing and Economic Recovery Act of 2008 (the Housing Act or HERA) to register a class of their equity securities under the Securities Exchange Act of 1934 (the 1934 Act); and
having a line of credit with the U.S. Treasury. This line represents the U.S. Treasury’s authority to purchase consolidated obligations in an amount up to $4 billion.


1



Cooperative.  The Bank is a cooperative institution, owned by member financial institutions that are also its primary customers. Any building and loan association, savings and loan association, commercial bank, homestead association, insurance company, savings bank, credit union, community development financial institution (CDFI), or insured depository institution that maintains its principal place of business in Delaware, Pennsylvania or West Virginia and that meets varying requirements can apply for membership in the Bank. All members are required to purchase capital stock in the Bank as a condition of membership. The capital stock of the Bank can be purchased only by members.

Mission.  The Bank’s primary mission is to assure the flow of credit to its members to support housing finance and community lending and to provide related services that enhance their businesses and vitalize their communities. The Bank provides credit for housing and community development through two primary programs. First, it provides members with advances secured by residential mortgages and other types of high-quality collateral. Second, the Bank purchases residential mortgage loans originated by or through eligible member institutions. The Bank also offers other credit and noncredit products and services to member institutions. These include letters of credit, affordable housing grants, securities safekeeping, and deposit products and services. The Bank issues debt to the public (consolidated obligation bonds and discount notes) in the capital markets through the OF and uses these funds to provide its member financial institutions with a reliable source of liquidity. The U.S. government does not guarantee the debt securities or other obligations of the Bank or the FHLBank System.

Overview.  As a GSE, the Bank is able to raise funds in the capital markets at narrow spreads to the U.S. Treasury yield curve. This fundamental competitive advantage, coupled with the joint and several liability on FHLBank System debt, enables the Bank to provide attractively priced funding to members. Though chartered by Congress, the Bank is privately capitalized by its member institutions, which are voluntary participants in its cooperative structure. The characterization of the Bank as a voluntary cooperative with the status of a federal instrumentality differentiates the Bank from a traditional banking institution in three principal ways:

 
Financial institutions choose membership in the Bank principally for access to liquidity, the value of the products offered, and the potential to receive dividends.

Because the Bank’s customers and shareholders are predominantly the same institutions, normally there is a need to balance the pricing expectations of customers with the dividend expectations of shareholders. By charging wider spreads on loans to customers, the Bank could potentially generate higher earnings and dividends for shareholders. Yet these same shareholders are also customers who would generally prefer narrower loan spreads. The Bank strives to achieve a balance between the goals of providing liquidity and other services to members at advantageous prices and potentially generating an attractive dividend. The Bank typically does not strive to maximize the dividend yield on the stock, but to produce a dividend that compares favorably to short-term interest rates, thus compensating members for the cost of the capital they have invested in the Bank.

The Bank’s GSE charter is based on a public policy purpose to assure liquidity for its members and to enhance the availability of affordable housing for lower-income households. In upholding its public policy mission, the Bank offers products that consume a portion of its earnings. The cooperative GSE character of this voluntary membership organization leads management to optimize the primary purpose of membership, access to liquidity, as well as the overall value of Bank membership.

Nonmember Borrowers.  In addition to member institutions, the Bank is permitted under the Act to make advances to nonmember housing associates that are approved mortgagees under Title II of the National Housing Act. These eligible housing associates must be chartered under law, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. The Bank must approve each applicant. Housing associates are not subject to certain provisions of the Act that are applicable to members, such as the capital stock purchase requirements. However, they are generally subject to more restrictive lending and collateral requirements than those applicable to members. As of December 31, 2019, the Bank maintains relationships with three approved state housing finance agencies (HFAs). Each is currently eligible to borrow from the Bank and one of the housing associates had an advance balance of $14.9 million as of December 31, 2019.


2



Regulatory Oversight, Audits and Examinations
 

Supervision and Regulation.  The Bank and OF are supervised and regulated by the Finance Agency, which is an independent agency in the executive branch of the United States government. The Finance Agency ensures that the Bank carries out its housing finance mission, remains adequately capitalized and operates in a safe and sound manner. The Finance Agency establishes regulations, issues advisory bulletins (ABs), and otherwise supervises Bank operations primarily via periodic examinations. The Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the Secretary of the U.S. Treasury has the authority to prescribe the form, denomination, maturity, interest rate, and conditions of the obligations; the way and time issued; and the selling price. The U.S. Treasury receives the Finance Agency’s annual report to Congress and other reports on operations. The Bank is also subject to regulation by the Securities and Exchange Commission (SEC).

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

Audit.  The Bank has an internal audit department that reports directly to the Audit Committee of the Bank’s Board of Directors (Board). In addition, an independent Registered Public Accounting Firm (RPAF) audits the annual financial statements and internal controls over financial reporting of the Bank. The independent RPAF conducts these audits following the Standards of the Public Company Accounting Oversight Board (PCAOB) of the United States of America and Government Auditing Standards issued by the Comptroller General. The Bank, the Finance Agency, and Congress all receive the independent RPAF audit reports.


3



Advances

Advance Products. The Bank makes advances on the security of pledged mortgage loans and other eligible types of collateral. The following table summarizes the advance products offered by the Bank as of December 31, 2019.
Product
Description
Maturity
Key Features
RepoPlus
Short-term, fixed-rate advances; principal and interest paid at maturity
1 day to 89 days
The RepoPlus advance products serve member short-term liquidity needs. RepoPlus is typically a short-term, fixed-rate product while the Open RepoPlus is a revolving line of credit which allows members to borrow, repay and re-borrow based on the terms of the line of credit. These balances tend to be extremely volatile as members borrow and repay frequently.
Mid-Term Repo
Mid-term, fixed-rate and adjustable-rate advances(1); principal paid at maturity; interest paid monthly or quarterly
3 months to 3 years (2)
The Mid-Term Repo product assists members with managing intermediate-term interest rate risk. To assist members with managing basis risk, or the risk of a change in the spread relationship between two indices, the Bank offers adjustable-rate Mid-Term Repo advances. The Bank also offers Mid-Term fixed-rate advances. These balances tend to be somewhat unpredictable as these advances are not always replaced as they mature.
Core (Term)
Long-term, fixed-rate and adjustable-rate advances(1); principal paid at maturity; interest paid monthly or quarterly (Note: amortizing loans principal and interest paid monthly)
1 year to 30 years (2)
For managing longer-term interest rate risk and to assist with asset/liability management, the Bank offers long-term fixed-rate and adjustable-rate advances. Amortizing long-term fixed-rate advances can be fully amortized on a monthly basis over the term of the loan or amortized balloon-style, based on an amortization term longer than the maturity of the loan.
Returnable
Short-term and long-term, fixed-rate and adjustable-rate advances with return options owned by member; principal paid at maturity; interest paid monthly or quarterly
2 months to 30 years
These advances permit the member to prepay an advance on certain pre-determined date(s) without a fee.
Notes:
(1) May include loans made under the Community Lending Program (CLP).
(2) Terms dependent upon market conditions.


4



The following chart shows the percentage of advances at par by product type and dollar amount (in billions) as of December 31, 2019.
chart-5ee9e752b8dc50a49d7.jpg

Letters of Credit. Standby letters of credit are issued by the Bank for a fee on behalf of its members and housing associates to support certain obligations to third-party beneficiaries and are backed by an irrevocable, independent obligation from the Bank. These are subject to the same collateralization and borrowing limits that apply to advances. Standby letters of credit can be valuable tools to support community lending activities, including arranging financing to support bond issuances for community and economic development as well as affordable housing projects. The letters of credit offer customizable terms available to meet unique and evolving needs. If the Bank is required to make payment for a beneficiary’s draw, these amounts are withdrawn from the member/housing associates’ demand deposit account (DDA). Any remaining amounts not covered by the DDA withdrawal are converted into a collateralized overnight advance.

Collateral

The Bank protects against credit risk by fully collateralizing all member and nonmember housing associate advances and other credit products. The Act requires the Bank to obtain and maintain a security interest in eligible collateral at the time it originates or renews an advance.

 
Collateral Agreements. All members must enter into either the Advances, Collateral Pledge and Security Agreement or the Advances, Specific Collateral Pledge and Security Agreement with the Bank (both hereafter referred to as Master Agreement) in order to obtain advances or other credit products. In both cases, the Bank perfects its security interest under Article 9 of the Uniform Commercial Code (UCC) by filing a financing statement. The Specific Collateral Pledge and Security Agreement covers only those assets or categories of assets identified; the Bank therefore relies on a specific subset of the member’s total eligible collateral as security for the member’s obligations to the Bank. The Bank requires CDFIs, housing finance agencies (HFAs) and insurance companies to sign a specific collateral pledge agreement. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for a description of blanket and specific agreements.

 
Collateral Status.  The Master Agreement identifies three types of collateral status: undelivered, undelivered detailed listing or specific pledge, and delivered status. All securities pledged must be delivered. A member is assigned a collateral status based on the member’s business needs and on the Bank’s determination of the member’s current financial condition and credit product usage, as well as other available information.

Undelivered Collateral Status. The Bank monitors eligible loan collateral using the Qualifying Collateral Report (QCR), derived from regulatory financial reports which are submitted quarterly (or monthly) to the Bank by the member. For members that submit a QCR on a quarterly basis, lending value is determined based on a percentage of the unpaid principal balance of qualifying collateral (commonly referred to as the collateral weight). Qualifying collateral is determined by deducting ineligible loans from the gross call report amount for each asset category. In addition, members are required to complete an Annual Collateral Certification Report (ACCR).

 

5



Undelivered Collateral Status: Detailed Listing or Specific Pledge. The Bank may require a member to provide a detailed listing of eligible collateral being pledged if the member is under a specific agreement, or if participating in the Bank’s market-value based pricing program, or as determined based on its credit condition. The member typically retains physical possession of collateral pledged to the Bank but provides a listing of assets pledged. In some cases, the member may benefit by choosing to list collateral, in lieu of non-listed status, since it may result in a higher collateral weighting being applied to the collateral. The Bank benefits from detailed listing collateral status because it provides more loan information to calculate a more precise valuation of the collateral.

 
Delivered Collateral Status. In this case, the Bank requires the member to deliver physical possession, or grant control of, eligible collateral in an amount sufficient to fully secure its total credit exposure (TCE) to the Bank. Typically, the Bank takes physical possession/control of collateral if the financial condition of the member is deteriorating. Delivery of collateral also may be required if there is action taken against the member by its regulator. Collateral delivery status is often required for members borrowing under specific pledge agreements as a practical means for maintaining specifically listed collateral. Securities collateral qualifies on a delivered basis only (i.e., held in a Bank restricted account or at an approved third-party custodian and subject to a control agreement in favor of the Bank). The Bank also requires delivery of collateral from de novo members at least until two consecutive quarters of profitability are achieved and for any other new member where a pre-existing blanket lien is in force with another creditor unless an effective subordination agreement is executed with such other creditor.

 
With respect to certain specific collateral pledge agreement borrowers (typically CDFIs, HFAs, and insurance companies), the Bank takes control of all collateral pledged at the time the loan is made through the delivery of securities or, where applicable, mortgage loans to the Bank or its custodian. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for further details on collateral status and types.

 
All eligible collateral securing advances is discounted to protect the Bank from loss in the event of default, including under adverse conditions. These discounts, also referred to as lending value or “haircuts”, vary by collateral type and the value of the collateral. The Bank’s collateral discounted values are presented in the table titled “Lending Value Assigned to the Collateral as a Percentage of Value” at the end of this subsection. The discounts typically include margins for estimated costs to sell or liquidate the collateral and the risk of a decline in the collateral value due to market or credit volatility. The Bank reviews the collateral weightings periodically and may adjust them, as well as the members’ reporting requirements to the Bank, for individual borrowers on a case-by-case basis.

 
The Bank determines the type and amount of collateral each member has available to pledge as security for a member’s obligations to the Bank by reviewing, on a quarterly basis, call reports the members file with their primary regulators. The resulting total value of collateral available to be pledged to the Bank after any collateral weighting is referred to as a member’s maximum borrowing capacity (MBC). Depending on a member’s credit product usage and current financial condition, that member may also be required to file a QCR on a quarterly or monthly basis. At a minimum, all members whose TCE exceeds 20% of their MBC and all members who are not community financial institutions (CFIs) as defined below must file a QCR quarterly.

 
The Bank also performs periodic on-site collateral reviews of its borrowing members to confirm the amounts and quality of the eligible collateral pledged for the members’ obligations to the Bank. For certain pledged residential and commercial mortgage loan collateral, as well as delivered and Bank-controlled securities, the Bank employs outside service providers to assist in determining market values. In addition, the Bank has developed and maintains an Internal Credit Rating (ICR) system that assigns each member a numerical credit rating on a scale of one to ten, with one being the best rating. Credit availability and term guidelines are based on a member’s ICR and MBC usage. The Bank reserves the right, at its discretion, to refuse certain collateral or to adjust collateral weightings. In addition, the Bank can require additional or substitute collateral while any obligations of a member to the Bank remain outstanding to protect the Bank’s security interest and ensure that it remains fully secured at all times.


See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details of eligible collateral, including amounts and percentages of eligible collateral securing members’ obligations to the Bank as of December 31, 2019.

 
As additional security for each member’s obligations to the Bank, the Bank has a statutory lien on the member’s capital stock in the Bank. In the event of deterioration in the financial condition of a member, the Bank will take possession or control

6



of sufficient eligible collateral to further perfect its security interest in collateral pledged to secure the member’s obligations to the Bank. Members with deteriorating creditworthiness are required to deliver collateral to the Bank or the Bank’s custodian to secure the members’ obligations with the Bank. Furthermore, the Bank requires specific approval of each of such members’ new or renewed advances.

 
Priority.  The Act affords any security interest granted to the Bank by any member, or any affiliate of a member, priority over the claims and rights of any third party, including any receiver, conservator, trustee or similar party having rights of a lien creditor. The only two exceptions are: (1) claims and rights that would be entitled to priority under otherwise applicable law and are held by actual bona fide purchasers for value; and (2) parties that are secured by actual perfected security interests ahead of the Bank’s security interest. The Bank has detailed liquidation plans in place to promptly exercise the Bank’s rights regarding securities, loan collateral, and other collateral upon the failure of a member. Management believes that adequate policies and procedures are in place to effectively manage the Bank’s credit risk associated with lending to members and nonmember housing associates.

 
Types of Collateral.  Single-family, residential mortgage loans may be used to secure members’ obligations to the Bank. The Bank contracts with a leading provider of comprehensive mortgage analytical pricing to provide market valuations of some listed and delivered residential mortgage loan collateral. In determining borrowing capacity for members with non-listed and non-delivered collateral, the Bank utilizes book value as reported on each member's regulatory call report. Loans that do not have a paper-based promissory note with a “wet ink” signature are ineligible for collateral purposes.

 
The Bank also may accept other real estate related collateral (ORERC) as eligible collateral if it has a readily ascertainable value and the Bank is able to perfect its security interest in such collateral. Types of eligible ORERC include commercial mortgage loans, multi-family residential mortgage loans, and second-mortgage installment loans. The Bank uses a leading provider of multi-family and commercial mortgage analytical pricing to provide more precise valuations of listed and delivered multi-family and commercial mortgage loan collateral.

A third category of eligible collateral is high quality investment securities as included in the table below. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for a definition of these securities. Members have the option to deliver such high quality investment securities to the Bank to obtain or increase their MBC. Upon delivery, these securities are valued daily and all non-government or agency securities are subject to weekly ratings reviews.

The Bank also accepts FHLBank cash deposits as eligible collateral. In addition, member CFIs may pledge a broader array of collateral to the Bank, including secured small business, small farm, small agri-business and community development loans. The Housing Act defines member CFIs as Federal Deposit Insurance Corporation (FDIC)-insured institutions with no more than $1.2 billion (the limit during 2019) in average assets over the past three years. This limit may be adjusted by the Finance Agency based on changes in the Consumer Price Index. The determination to accept such collateral is at the discretion of the Bank and is made on a case-by-case basis. Advances to CFIs are also collateralized by sufficient levels of non-CFI collateral. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for the percentage of each type of collateral held by the Bank at December 31, 2019.

The Bank does not accept subprime residential mortgage loans (defined as FICO® score of 660 or below. FICO is a registered trademark of Fair Isaac Corporation) as qualifying collateral unless certain mitigating factors are met. The Bank requires members to identify the amount of subprime and nontraditional mortgage collateral in their QCRs.

Nontraditional residential mortgage loans are defined by the Bank’s Collateral Policy as mortgage loans that allow borrowers to defer payment of principal or interest. These loans exhibit characteristics that may result in increased risk relative to traditional residential mortgage loan products. They may pose even greater risk when granted to borrowers with undocumented or undemonstrated repayment capacity, for example, low or no documentation loans or credit characteristics that would be characterized as subprime. The potential for increased risk is particularly true if the nontraditional residential mortgage loans are not underwritten to the fully indexed rate.

Regarding nontraditional mortgage collateral for the QCR, the Bank requires filing members to stratify their holdings of first lien residential mortgage loans into traditional, qualifying low FICO, and qualifying unknown FICO categories. Under limited circumstances, the Bank allows nontraditional residential mortgage loans that are consistent with Federal Financial Institutions Examination Council (FFIEC) guidance to be pledged as collateral and used to determine a member’s MBC.


7



Management believes that the Bank has limited collateral exposure to subprime and nontraditional loans due to its conservative policies pertaining to collateral and low credit risk due to the design of its mortgage loan purchase programs. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for specific requirements regarding subprime and nontraditional loan collateral.

The various types of eligible collateral and related lending values as of December 31, 2019 are summarized below. The weightings are analyzed on at least a semi-annual basis and adjusted as necessary. At the discretion of the Bank, on a case-by-case basis, the collateral weighting on loan categories may be increased (up to a maximum of 85%) upon completion of specific market valuation of such collateral and authorization from the Bank’s Membership and Credit Committee.
Securities Collateral
Lending Values as a Percentage of Fair Value for All Members
Deposits held by the Bank and pledged to, and under the sole control of, the Bank
100%
U.S. Treasury securities; U.S. Agency securities, including securities of FNMA, FHLMC, FFCB, NCUA, SBA, USDA and FDIC notes; FHLBank consolidated obligations; REFCORP Bonds (1)
97%
MBS, including collateralized mortgage obligations (CMOs) issued or guaranteed by GNMA, FHLMC, and FNMA
95%
U.S. Treasury STRIPs
90%
Non-agency residential MBS, including CMOs, representing a whole interest in such mortgages.
AAA 85%
AA 75%
A 70%
Commercial mortgage-backed securities (CMBS)
AAA 85%
AA 75%
A 70%
Securities issued by a state or local government or its agencies, or authorities or instrumentalities in the United States (municipals) with a real estate nexus.
AAA 92%
AA 90%
A 88%
Loan Collateral
Lending Values
% of Unpaid Principal Balance
% of Fair Value
QCR Filer or Full Collateral Delivery Policy Reasons
Full Collateral Credit Reasons
Market Valuation Program
Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Conventional whole, fully disbursed, first mortgage loans secured by 1-to-4 family residences (Note: Includes first lien HELOCs for listing members only)
80%
70%
85%
Nontraditional mortgage loans and loans with unknown FICO (2) scores
70%
60%
80%
Conventional and FHA whole, fully-disbursed mortgage loans secured by multifamily properties
75%
65%
85%
Farmland loans
70%
60%
n/a
Commercial real estate loans (owner & non-owner occupied)
70%
60%
80%
Low FICO score loans with mitigating factors as defined by the Bank
60%
50%
75%
Conventional, fully disbursed, second-mortgage loans secured by 1-to-4 family residences. Both term loans and HELOCs
60%
50%
CFI Collateral
60%
50%
n/a
Notes:
(1) Defined as Federal National Mortgage Association (Fannie Mae or FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC), Federal Farm Credit Bank (FFCB), Government National Mortgage Association (Ginnie Mae or GNMA), Home Equity Line of Credit (HELOC), National Credit Union Administration (NCUA), Resolution Funding Corporation (REFCORP), Small Business Administration (SBA), and U.S. Department of Agriculture (USDA).
(2) Nontraditional mortgage loan portfolios may be required to be independently identified for collateral review and valuation for inclusion in a member’s MBC. This may include a request for loan-level listing on a periodic basis.

During 2019, the Bank implemented some changes to its collateral policies and practices. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for details regarding these changes.

8




Investments
 
Overview.  The Bank maintains a portfolio of investments for two main purposes: liquidity and additional earnings. The Bank invests in short term instruments for operating liquidity, including interest-bearing deposits, Federal funds, securities purchased under agreements to resell, as well as U.S. Treasury and GSE obligations that are classified as trading. The Bank also maintains a contingency liquidity investment portfolio which consists of certificate of deposits and unencumbered repurchase-eligible assets within its available-for-sale (AFS) and held-to-maturity (HTM) securities portfolio. These securities may also be pledged as collateral for derivative transactions on occasion.
 
The Bank further enhances income by acquiring securities issued by GSEs and state and local government agencies as well as Agency MBS. The Bank's private label MBS portfolio continues to run-off; no private label MBS have been purchased since late 2007. Securities currently in the portfolio were required to carry one of the top two ratings from Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) or Fitch Ratings (Fitch) at the time of purchase.

The long-term investment portfolio is intended to provide the Bank with higher returns than those available in the short-term money markets. See the Credit and Counterparty Risk – Investments discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for discussion of the credit risk of the investment portfolio and further information on these securities’ current ratings.
 
Prohibitions.  Under Finance Agency regulations, the Bank is prohibited from purchasing certain types of securities, including:

instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies or certain investments targeted to low-income persons or communities;
instruments issued by non-U.S. entities, other than those issued by United States branches and agency offices of foreign commercial banks;
non-investment-grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;
whole mortgages or other whole loans, other than: (1) those acquired under the Bank’s mortgage purchase program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local or tribal government units or agencies that are of investment quality; (4) MBS or asset-backed securities (ABS) backed by manufactured housing loans or home equity loans (HELOCs); and (5) certain foreign housing loans authorized under Section 12(b) of the Act; and
non-U.S. dollar denominated securities.
 
The provisions of Finance Agency regulation further limit the Bank’s investment in MBS and ABS. These provisions require that the total book value of MBS owned by the Bank not exceed 300% of the Bank’s previous month-end regulatory capital on the day of purchase of additional MBS. In addition, the Bank is prohibited from purchasing:

interest-only or principal-only strips of MBS;
residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits; and
fixed-rate or floating-rate MBS that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest rate change of 300 basis points.
 
The FHLBanks are prohibited from purchasing an FHLBank consolidated obligation as part of the consolidated obligation’s initial issuance. The Bank’s investment policy is even more restrictive, as it prohibits it from investing in FHLBank consolidated obligations for which another FHLBank is the primary obligor. The Federal Reserve Board (Federal Reserve) requires Federal Reserve Banks (FRBs) to release interest and principal payments on the FHLBank System consolidated obligations only when there are sufficient funds in the FHLBanks’ account to cover these payments. The prohibitions on purchasing FHLBank consolidated obligations noted above will be temporarily waived if the Bank is obligated to accept the direct placement of consolidated obligation discount notes to assist in the management of any daily funding shortfall of another FHLBank.
 
The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.


9



Mortgage Partnership Finance® (MPF®) Program
 
Under the MPF Program, the Bank purchases qualifying 5- to 30-year conventional conforming and government-insured fixed-rate mortgage loans secured by one-to-four family residential properties. The MPF Program provides participating members and eligible housing associates a secondary market alternative that allows for increased balance sheet liquidity and provides a method for removal of assets that carry interest rate and prepayment risks from their balance sheets. In addition, the MPF Program provides a greater degree of competition among mortgage purchasers and allows small and mid-sized community-based financial institutions to participate more effectively in the secondary mortgage market.
 
The Bank currently offers five products under the MPF Program to Participating Financial Institutions (PFIs): MPF Original, MPF 35, MPF Government, MPF Direct and MPF Xtra. The MPF Direct and MPF Xtra products are described below. Further details regarding the credit risk structure for each of the other MPF products, as well as additional information regarding the MPF Program and the products offered by the Bank, is provided in the Financial Condition section and the Credit and Counterparty Risk - Mortgage Loans discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K.
 
PFI. Members and eligible housing associates must specifically apply to become a PFI. The Bank reviews their eligibility including servicing qualifications and ability to supply documents, data and reports required to be delivered under the MPF Program. The Bank added one new PFI in 2019, and as of December 31, 2019, 128 members were approved participants in the MPF Program.

Under the MPF Program, PFIs generally market, originate and service qualifying residential mortgages for sale to the Bank. Member banks have direct knowledge of their mortgage markets and have developed expertise in underwriting and servicing residential mortgage loans. By allowing PFIs to originate mortgage loans, whether through retail or wholesale operations, and to retain or sell servicing of mortgage loans, the MPF Program gives control of the mortgage process to PFIs. PFIs also may earn servicing income if they choose to retain loan servicing or receive a servicing released premium, if they chose to sell servicing rights to a third-party.
 
During the life of the loan, PFIs are paid a credit enhancement (CE) fee for retaining and managing a portion of the credit risk in the conventional mortgage loan portfolios sold to the Bank under the MPF Original and MPF 35 Programs. The CE structure motivates PFIs to minimize loan losses on mortgage loans sold to the Bank. The Bank is responsible for managing the interest rate risk, prepayment risk, liquidity risk and a portion of the credit risk associated with the mortgage loans.

Mortgage Loan Purchases. The Bank and the PFI enter into a Master Commitment which provides the general terms under which the PFI will deliver mortgage loans, including a maximum loan delivery amount, maximum CE amount and expiration date. Mortgage loans are purchased by the Bank directly from a PFI pursuant to a delivery commitment, a binding agreement between the PFI and the Bank.

Mortgage Loan Participations. The Bank may sell participation interests in purchased mortgage loans to other FHLBanks, institutional third party investors approved in writing by the FHLBank of Chicago, the member that provided the CE, and other members of the FHLBank System. The Bank also may purchase mortgage loans from other FHLBanks.

Mortgage Loan Servicing. Under the MPF Program, PFIs may retain or sell servicing to third parties. The Bank does not service loans or own any servicing rights. The FHLBank of Chicago acts as the master servicer for the Bank and has contracted with Wells Fargo Bank, N.A. to fulfill the master servicing duties. The Bank pays the PFI or third-party servicer a servicing fee to perform these duties. The servicing fee is 25 basis points for conventional loans and 44 basis points for government loans.

MPF Xtra. MPF Xtra allows PFIs to sell residential, conforming, fixed-rate mortgages to FHLBank of Chicago, which concurrently sells them to Fannie Mae on a nonrecourse basis. MPF Xtra does not have the CE structure of the traditional MPF Program. Additionally, because these loans are sold from the PFI to FHLBank of Chicago to Fannie Mae, they are not reported on the Bank’s Statement of Condition. With the MPF Xtra product, there is no credit obligation assumed by the PFI or the Bank and no CE fees are paid. PFIs which have completed all required documentation and training are eligible to offer the product. As of December 31, 2019, 39 PFIs were eligible to offer the product. The Bank receives a nominal fee for facilitating these MPF Xtra transactions.

MPF Direct. This is operationally similar to MPF Xtra and allows PFIs to sell residential, jumbo, fixed-rate mortgages to FHLBank Chicago, which concurrently sells them to a third party on a nonrecourse basis. PFIs which have completed all required documentation and training are eligible to offer the product. MPF Direct does not have the credit structure of the traditional MPF Program, and there is no CE obligation assumed by the PFI or the Bank and no CE fees are paid. The Bank

10



receives a nominal fee for facilitating MPF Direct transactions. Given the arrangement, these loans are not reported on the Bank's Statement of Condition.

The FHLBank of Chicago, in its role as MPF Provider, provides the programmatic and operational support for the MPF Program and is responsible for the development and maintenance of the origination, underwriting and servicing guides.
 
“Mortgage Partnership Finance”, “MPF”, “MPF Xtra”, “MPF Direct” and “MPF 35” are registered trademarks of the FHLBank of Chicago.

Specialized Programs
 
For additional information on Affordable Housing Program (AHP) and other similar programs, refer to the Community Investment Products section in Item 7. Management’s Discussion and Analysis in this Form 10-K.


Deposits
 
The Act allows the Bank to accept deposits from its members, from any institution for which it is providing correspondent services, from other FHLBanks, or from other Federal instrumentalities. Deposit programs are low-cost funding resources for the Bank, which also provide members a low-risk earning asset that is used in meeting their regulatory liquidity requirements. The Bank offers several types of deposit programs to its members including demand, overnight and term deposits.

Debt Financing — Consolidated Obligations
 
The primary source of funds for the Bank is the issuance of debt securities, known as consolidated obligations, which are then sold by dealers to investors. These consolidated obligations are issued as both bonds and discount notes, depending on maturity. Consolidated obligations are the joint and several obligations of the 11 FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them. Moody’s has rated consolidated obligations Aaa with stable outlook/P-1, and S&P has rated them AA+ with stable outlook/A-1+. The following table presents the total par value of the consolidated obligations of the Bank and the FHLBank System at December 31, 2019 and 2018.
 
(in millions)
December 31, 2019
December 31, 2018
Consolidated obligation bonds
$
66,704.2

$
64,368.4

Consolidated obligation discount notes
23,211.5

36,985.0

Total Bank consolidated obligations
89,915.7

101,353.4

Total FHLBank System combined consolidated obligations
$
1,025,894.7

$
1,031,617.5

 
OF.  The OF has responsibility for facilitating the issuance and servicing of consolidated obligations on behalf of the FHLBanks. The OF also serves as a source of information for the Bank on capital market developments, markets the FHLBank System’s consolidations obligations on behalf of the FHLBanks, selects and evaluates underwriters, prepares combined financial statements, and manages the Banks’ relationship with the rating agencies and the U.S. Treasury with respect to the consolidated obligations.
 
Consolidated Obligation Bonds.  On behalf of the Bank, the OF issues bonds that the Bank uses to fund advances, the MPF Program and its investment portfolio. Generally, the maturity of these bonds ranges from one year to ten years, although the maturity is not subject to any statutory or regulatory limit. Bonds can be issued and distributed through negotiated or competitively bid transactions with approved underwriters or selling group members. In some instances, the Bank swaps its term fixed-rate debt issuance to floating rates through the use of interest rate swaps. Bonds can be issued through:

a daily auction for both bullet (non-callable and non-amortizing) and American-style (callable daily after lockout period expires) callable bonds
a selling group, which typically has multiple lead investment banks on each issue
a negotiated transaction with one or more dealers

The process for issuing bonds under the three methods above can vary depending on whether the bonds are non-callable or callable. For example, the Bank can request funding through the TAP auction program (quarterly debt issuances that reopen or “tap” into the same CUSIP number) for fixed-rate non-callable (bullet) bonds. This program uses specific maturities that may be reopened daily during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.
 

11



Consolidated Obligation Discount Notes.  The OF also issues discount notes to provide short-term funds for advances for seasonal and cyclical fluctuations in deposit flows, mortgage financing, short-term investments and other funding needs. Discount notes are sold at a discount and mature at par. These securities have maturities of up to 365 days. There are three methods for issuing discount notes:

The OF auctions one-, two-, three- and six-month discount notes twice per week and any FHLBank can request an amount to be issued. The market sets the price for these securities.
Via the OF’s window program, through which any FHLBank can offer a specified amount of discount notes at a maximum rate and a specified term up to 365 days. These securities are offered daily through a consolidated discount note selling group of broker-dealers.
Via reverse inquiry, wherein a dealer requests a specified amount of discount notes be issued for a specific date and price. The OF presents reverse inquiries to the FHLBanks, which may or may not choose to issue those particular discount notes.

See the Liquidity and Funding Risk discussion in the Risk Management section in Item 7. Management’s Discussion and Analysis in this Form 10-K for further information regarding consolidated obligations and related liquidity risk.

Capital Resources

Capital Plan.  The Bank currently has two subclasses of capital stock: B1 membership and B2 activity. The Capital Plan generally sets the calculation of the annual Membership Asset Value (MAV) stock purchase requirement based on the member’s assets as set forth in its prior December 31 call report data. Membership assets include, but are not limited to, the following: U.S. Treasury securities; U.S. Agency securities; U.S. Agency MBS; non-Agency MBS; 1-4 family residential first mortgage loans; multi-family mortgage loans; 1-4 family residential second mortgage loans; home equity lines of credit; and commercial real estate loans. A factor is applied to each membership asset category and the resulting MAV is determined by summing the products of the membership asset categories and the respective factor. Adjustments to the amount of membership and activity stock that each member must hold can be made periodically by the Bank's Board in accordance with the terms of the Capital Plan. Ranges have been built into the Capital Plan to allow the Bank to adjust the stock purchase requirement to meet its regulatory capital requirements, if necessary. Currently, these are the stock purchase requirements for each class of stock.

Each member is required to purchase and maintain membership stock equal to the following:
 
Range of membership stock requirement according to the Capital Plan
 
 
Minimum
Maximum
Current requirement
% of membership assets
0.05%
1.0%
0.1%
Membership stock cap
$5 million
$100 million
$45 million
Membership stock floor
 
 
$10 thousand

Each member is required to purchase and maintain activity stock equal to the percentage of the book value of the following transactions as shown in the table below:
 
Range of activity stock requirement according to the Capital Plan
 
 
Minimum
Maximum
Current requirement
Outstanding advances
2.0%
6.0%
4.0%
Acquired member assets (AMA)
0.0%
6.0%
4.0%
Letters of credit
0.0%
4.0%
0.75%
Outstanding advance commitments (settling more than 30 days after trade date)
0.0%
6.0%
0.0%

Bank capital stock is not publicly traded; it may be issued, redeemed and repurchased at its stated par value of $100 per share. Under the Capital Plan, capital stock is redeemed upon five years’ notice, subject to certain conditions. In addition, the Bank has the discretion to repurchase excess stock from members. The Bank's current practice is to repurchase all excess capital stock on a weekly basis.


12



Dividends and Retained Earnings.  As prescribed in the Capital Plan, the Bank may pay dividends on its capital stock only out of unrestricted retained earnings or current net income, subject to certain limitations and conditions. The Bank’s Board may declare and pay dividends in either cash or capital stock. The Bank’s practice has been to pay only a cash dividend. The amount of dividends the Board determines to pay out is affected by, among other factors, the level of retained earnings recommended under the Bank’s retained earnings policy. In addition, as set forth in the Capital Plan, the dividends paid on subclass B2 activity stock will be equal to or higher than the dividends being paid on subclass B1 membership stock at that time. For further information on dividends, see Note 15 - Capital in the Notes to Financial Statements in Item 8. of this Form 10-K.

As of December 31, 2019, the balance in retained earnings was $1,326.0 million, of which $415.3 million was deemed restricted. Refer to the Capital Resources section and the Risk Governance discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K for additional discussion of the Bank’s capital-related metrics, retained earnings, dividend payments, capital levels and regulatory capital requirements.

Derivatives and Hedging Activities
 
The Bank may enter into interest rate swaps, swaptions, to-be-announced (TBAs), and interest rate cap and floor agreements (collectively, derivatives) to manage its exposure to changes in interest rates and prepayment risk. The Bank uses these derivatives to adjust the effective maturity, repricing frequency, or option characteristics of financial instruments to achieve its risk management objectives. The Bank may use derivative financial instruments in the following ways: (1) by designating them as a fair value hedge of an underlying financial instrument or a firm commitment; or (2) in asset/liability management (i.e., an economic hedge).

The Finance Agency regulates the Bank’s use of derivatives. The regulations prohibit the trading in or speculative use of these instruments and limit credit risk arising from these instruments. All derivatives are recorded in the Statement of Condition at fair value. See Note 11- Derivatives and Hedging Activities to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for additional information.

Competition
 
Advances.  The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including the FRBs, commercial banks, investment banking divisions of commercial banks, and brokered deposits, largely on the basis of interest rates as well as types and weightings of collateral. Competition is often more significant when originating advances to larger members, which have greater access to the capital markets. Competition within the FHLBank System is somewhat limited; however, there may be some members of the Bank that have affiliates that are members of other FHLBanks. The Bank's ability to compete successfully with other suppliers of wholesale funding for business depends primarily on pricing, dividends, capital stock requirements, credit and collateral terms, and products offered.

Purchase of Mortgage Loans.  Members have several alternative outlets for their mortgage loan production including Fannie Mae, Freddie Mac, and other secondary market conduits. The MPF Program competes with these alternatives on the basis of price and product attributes. Additionally, a member may elect to hold all or a portion of its mortgage loan production in portfolio, potentially funded by an advance from the Bank.

Issuance of Consolidated Obligations.  The Bank competes with the U.S. Treasury, Fannie Mae, Freddie Mac and other GSEs as well as corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt cost. The Bank’s status as a GSE affords certain preferential treatment for its debt obligations under the current regulatory scheme for depository institutions operating in the U.S. as well as preferential tax treatment in a number of state and municipal jurisdictions. Any change in these regulatory conditions as they affect the holders of Bank debt obligations would likely alter the relative competitive position of such debt issuance and result in potentially higher costs to the Bank.

Major Customers

Ally Bank, JP Morgan Chase Bank, N.A., PNC Bank, N.A. and Santander Bank, each had advance balances in excess of 10% of the Bank’s total portfolio as of December 31, 2019. See further discussion in Item 1A. Risk Factors and the Credit and Counterparty Risk - TCE and Collateral discussion in the Risk Management section in Item 7. Management’s Discussion and Analysis, both in this Form 10-K.


13



Personnel

As of December 31, 2019, the Bank had 224 full-time employee positions and four part-time employee positions, for a total of 226 full-time equivalents. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good.

Taxation

The Bank is exempt from all Federal, state and local taxation with the exception of real estate property taxes and certain employer payroll taxes.

AHP

The FHLBanks must set aside for the AHP annually, on a combined basis, the greater of $100 million or 10% of current year’s net income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP). If the Bank experienced a full year net loss, as defined in Note 14 - Affordable Housing Program (AHP) to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K, the Bank would have no obligation to the AHP for the year except in the following circumstance: if the result of the combined 10% calculation described above is less than $100 million for all 11 FHLBanks, then the Act requires that each FHLBank contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equal $100 million. The proration would be made on the basis of an FHLBank’s net income in relation to the income of all FHLBanks for the previous year. Each FHLBank’s required annual AHP contribution is limited to its annual net income. If an FHLBank finds that its required contributions are negatively impacting the financial stability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. As allowed by AHP regulations, an FHLBank can elect to allot fundings based on future periods’ required AHP contributions to be awarded during a year (referred to as Accelerated AHP). Accelerated AHP allows an FHLBank to commit and disburse AHP funds to meet the FHLBank’s mission when it would otherwise be unable to do so, based on its normal funding mechanism.
 
For additional details regarding the AHP assessment, please see the Earnings Performance discussion in Item 7. Management’s Discussion and Analysis and Note 14 - Affordable Housing Program (AHP) in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

SEC Reports and Corporate Governance Information

The Bank is subject to the informational requirements of the 1934 Act and, in accordance with the 1934 Act, files annual, quarterly and current reports with the SEC. The Bank’s SEC File Number is 000-51395. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including the Bank’s filings. The Bank’s financial information is also filed in eXtensible Business Reporting Language (XBRL) as required by the SEC. The SEC’s website address is www.sec.gov.
 
The Bank also makes the Annual Reports filed on Form 10-K, Quarterly Reports filed on Form 10-Q, certain Current Reports filed on Form 8-K, and amendments to those reports filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the 1934 Act available free of charge on or through its internet website as soon as reasonably practicable after such material is filed with or furnished to the SEC. The Bank’s internet website address is www.fhlb-pgh.com. The Bank filed the certifications of the President and Chief Executive Officer, Chief Operating Officer (principal financial officer), and the Chief Accounting Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with respect to the Bank’s 2019 Annual Report on Form 10-K as exhibits to this Report.
 
Information about the Bank’s Board and its committees and corporate governance, as well as the Bank’s Code of Conduct, is available in the corporate governance section of the “About Us” dropdown on the Bank’s website at www.fhlb-pgh.com. Printed copies of this information may be requested without charge by written request to the Bank’s Legal Department.

Item 1A: Risk Factors

There are many factors - including those beyond the Bank's control - that could cause financial results to differ significantly from the Bank's expectations. The following discussion summarizes some of the more important factors that should be considered carefully in evaluating the Bank's business. This discussion is not exhaustive and there may be other factors not described or factors, such as business, credit, market/liquidity and operational risks, which are described elsewhere in this report (see the Risk Management discussion in Item 7. Management's Discussion and Analysis in this Form 10-K),

14


which could cause results to differ materially from the Bank's expectations. However, management believes that these risks represent the material risks relevant to the Bank, its business and industry. Any factor described in this report could by itself, or together with one or more other factors, adversely affect the Bank's business operations, future results of operations, financial condition or cash flows.

BUSINESS RISK

The Bank is subject to legislative and regulatory actions, including a complex body of Finance Agency regulations, which may be amended in a manner that may affect the Bank's business, operations and financial condition and members' investment in the Bank. Additionally, legislation and regulations applicable to Bank members may affect the Bank’s business as well.

The FHLBanks' business operations, funding costs, rights, obligations, and the environment in which FHLBanks carry out their liquidity mission continue to be impacted by the evolving regulations impacting the finance industry. The Housing Act or HERA was intended to, among other things, expand the Finance Agency's authority and address GSE reform issues. Over the last few years, there have been several legislative efforts and policy proposals regarding reform of the Housing Enterprises, Fannie Mae and Freddie Mac, and the federal government’s ongoing role in the mortgage market. Congress continues to consider GSE reform legislation. Depending on the terms of any such legislation, it could have a material effect on the Bank including debt issuance, financial condition and results of operations. In addition, future legislative changes to the Act or HERA may affect the Bank's business, risk profile, results of operations and financial condition. Recently, there have been legislative efforts and discussions regarding allowing non-banks such as captive insurers, mortgage banks, fintech companies and other financial companies to become members of the FHLBank System. Such entities are subject to different regulatory requirements and may have different risk appetites than the Bank’s current members and, if such entities were to become members of the Bank, it could materially impact the Bank’s risk profile and results of financial condition.

The FHLBanks are also governed by regulations as adopted by the Finance Agency pursuant to their authority under federal laws. The Finance Agency's extensive statutory and regulatory authority over the FHLBanks includes, without limitation, the authority to liquidate, merge or consolidate FHLBanks, redistrict or adjust equities among the FHLBanks. The Bank cannot predict if or how the Finance Agency could exercise such authority in regard to any FHLBank or the potential impact of such action on members' investment in the Bank. The Finance Agency also has authority over the scope of permissible FHLBank products and activities, including the authority to impose limits on those products and activities. The Finance Agency supervises the Bank and establishes the regulations governing the Bank. Changes in Finance Agency leadership may also impact the nature and extent of any new or revised regulations on the Bank.

The Bank cannot predict new guidance or the effect of any new regulations on the Bank's operations. Regulatory requirements on the Bank’s members may affect their capacity and demand for Bank products, and as a result, impact the Bank’s operations and financial condition. Changes in Finance Agency regulations and other Finance Agency regulatory actions could result in, among other things, changes in the Bank's capital composition, an increase in the Banks' cost of funding, a change in permissible business activities, a decrease in the size, scope, or nature of the Banks' lending, investment or mortgage purchase program activities, or a decrease in demand for the Bank's products and services, which could negatively affect its financial condition and results of operations and members' investment in the Bank.

Regulatory changes drive updates to the Bank's computer information systems to support these requirements. Heightened regulatory focus on technology operations including cyber-security, cloud computing and vendor oversight influence the Bank’s operations. Legislation and regulation regarding enhanced cyber-security standards and requirements necessitates additional work to appropriately mitigate the risks and align with requirements. The Finance Agency has issued guidance for the FHLBanks regarding information security and cyber risk management, business resiliency, vendor risk management and cloud. These are all areas of operational risk that are expected to have an ongoing area of regulatory focus. See the Legislative and Regulatory Developments section of Item 7. Management’s Discussion and Analysis in this Form 10-K regarding recent Finance Agency guidance in these areas.

The intention of the United Kingdom’s Financial Conduct Authority (FCA) is to cease sustaining LIBOR after 2021. The introduction of alternative interest rates could adversely affect the Bank’s business, financial condition, and results of operations and increase operational risk.

In July 2017, the Chief Executive of the FCA announced the FCA’s intention to cease sustaining LIBOR after 2021. The Federal Reserve convened the Alternative Reference Rates Committee (ARRC) to identify a set of alternative reference interest rates for possible use as market benchmarks. The ARRC identified the Secured Overnight Financing Rate (SOFR) as such an alternative rate, and the FRB of New York began publishing SOFR rates in the second quarter of 2018.

15



The Bank is not able to predict with certainty that LIBOR will cease to be available after 2021. While the Bank is planning for LIBOR to cease to exist, the market’s transition from LIBOR to alternative rates (e.g., SOFR) is expected to be complicated. Risks relating to the market demand for the Bank’s products, changes in legacy contractual terms on the Bank’s financial assets, liabilities and derivatives, and critical vendors being able to adjust systems to properly process and account for alternative rates are examples of the risks. Additionally, the introduction of alternative rates also may create additional basis risk and increased volatility for market participants including the Bank, as alternative indices are utilized along with LIBOR. Alternative rates and other market changes related to the replacement of LIBOR, including the introduction of financial products and changes in market practices, may lead to risk modeling and valuation challenges. For further details regarding LIBOR/SOFR transition, refer to the Operational and Business Risks section in Item 7: Management’s Discussion and Analysis in this Form 10-K.

The Bank's business is dependent upon its computer information systems. An inability to process or physically secure information or implement technological changes, or an interruption in the Bank's systems, may result in lost business or increased operational risk. The Bank's dependence on computer systems and technologies to engage in business transactions and to communicate with its stakeholders has increased the Bank's exposure to cyber-security risks.

Cyber threats include computer viruses, malicious or destructive code, phishing attacks, brute force attacks, ransomware attacks, denial of service or information or other security breaches. They could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information of the Bank, its employees, its members or other third parties, or otherwise materially disrupt the Bank’s or its members’ or other third parties’ network access, business operations or ability to provide services. For example, the Bank provides on-line banking transactional capability to enable its members to execute borrowing and other transactions with the Bank. The Bank like many financial institutions and others businesses faces cyber attack attempts routinely, for example, from phishing campaigns and denial of service attempts. Although the Bank has both information and physical security measures in place and devotes significant resources to secure the Bank's computer systems and networks, it might not be able to anticipate or implement effective preventive measures against all security breaches, particularly given that such attacks have significantly evolved in scale and maliciousness during the past few years. Additionally, cyber vulnerabilities and/or attacks could go undetected for a period of time. During such time, the Bank may not necessarily know the extent of the harm and certain actions could be compounded before they are discovered and remediated, any or all of which could further increase the consequences of a cyber attack.

As cyber threats continue to evolve, the Bank may be required to expend significant additional resources to continue to modify or enhance its layers of defense or to investigate and remediate any information security vulnerabilities. Previously, the Bank had experienced a limited number of successful desktop (e.g., malware) security incidents. However, these incidents were limited and did not involve any breaches of data such as those that trigger notice requirements under applicable law. Each of these incidents was responded to appropriately which prevented material impact on the Bank’s operations. The Bank’s technology control environment, along with security policies and standards, incident response procedures, security controls testing and dedicated information security resources, have protected the Bank against material cyber-security attacks. In addition, the Bank completes periodic independent assessments that leverage industry recognized frameworks in order to continually improve the Bank’s control environment against cyber-security attacks. If a successful penetration were to occur, it might result in unauthorized access to digital systems for purposes of misappropriating assets (including loss of funds), or sensitive information (including confidential information of the Bank, members, counterparties or mortgage loan borrowers), corrupt data or cause operational disruption. This may result in financial loss or a violation of privacy or other laws. The Bank could incur substantial costs and suffer other negative consequences as a result, including but not limited to remediation costs, increased security costs, litigation, penalties, and reputational damage.

In addition, the Bank's business is dependent upon its ability to effectively exchange and process information using its computer information systems. The Bank's products and services require a complex and sophisticated computing environment, which includes licensed or purchased, custom-developed software, and software-as-a-service (SaaS). Maintaining the effectiveness and efficiency of the Bank's operations is dependent upon the continued timely implementation of technology solutions and systems, which may require ongoing expenditures, as well as the ability to sustain ongoing operations during technology solution implementations or upgrades. If the Bank were unable to sustain its technological capabilities, it may not be able to remain competitive, and its business, financial condition and profitability may be significantly compromised. To advance its disaster recovery and continuous operations, the Bank continues to take steps to review and improve its recovery facilities and processes through its Business Continuity Plan and testing those plans annually. Nonetheless, the Bank cannot guarantee the effectiveness of its Business Continuity Plan or other related policies, procedures and systems to protect the Bank in any particular future situation.


16


Global financial market disruptions could result in uncertainty and unpredictability for the Bank in managing its business. Geopolitical conditions, widespread health emergencies or a natural disaster, especially those affecting the Bank or the Bank's district, customers or counterparties, could also adversely affect the Bank's business, results of operations or financial condition.

The Bank's business, earnings and risk profile are affected by international, domestic and district-specific business and economic conditions and disruptions, including for example, U.S. government shutdowns, any increasing U.S. debt burden, uncertainty around Brexit outcomes, and tariffs. These economic conditions, which may also affect counterparty and members' business, include real estate values, residential mortgage originations, short-term and long-term interest rates, inflation and inflation expectations, unemployment levels, money supply, fluctuations in both debt and equity markets, and the strength of the foreign, domestic and local economies in which the Bank operates. These are examples of potential market disruptions that could increase the Bank’s credit, market, liquidity and operational risk beyond what is currently reported and measured. Widespread health emergencies or pandemics, including the recent outbreak of coronavirus, could also adversely affect the Bank’s results of operations or financial condition by negatively impacting the global markets or by softening the economy in general, creating a reduced demand for the Bank’s products and services. Additionally, climate change may cause natural disasters, which could damage the facilities of the Bank’s members, increase lending losses at its members, damage or destroy collateral that members have pledged to secure advances or mortgages that the Bank holds for its portfolio, and which could cause the Bank to experience losses or be exposed to a greater risk that pledged collateral would be inadequate in the event of a default.

CREDIT RISK

The loss of significant Bank members or borrowers may have a negative impact on the Bank's advances and capital stock outstanding and could result in lower demand for its products and services, lower dividends paid to members and higher borrowing costs for remaining members, all of which may affect the Bank's results of operations and financial condition.

One or more significant Bank borrowing members could choose to decrease their business activities with the Bank, move their business to another FHLBank district, merge into a nonmember, withdraw their membership, or fail which could lead to a significant decrease in the Bank's total assets. In the event the Bank would lose one or more large borrowers that represent a significant proportion of its business, the Bank could, depending on the magnitude of the impact, compensate for the loss by suspending, or otherwise restricting, dividend payments and repurchases of excess capital stock, raising advance rates, attempting to reduce operating expenses (which could cause a reduction in service levels or products offered) or by undertaking some combination of these actions. The magnitude of the impact would depend, in part, on the Bank's size and profitability at the time the financial institution ceases to be a borrower.

At December 31, 2019, the Bank's five largest customers, Ally Bank, JP Morgan Chase Bank, N.A. (a non-member borrower), PNC Bank, N.A., Santander Bank, N.A. and TD Bank, N.A., accounted for 70% of its total credit exposure (TCE) and owned 65% of its outstanding capital stock. Of these, Ally Bank, JP Morgan Chase Bank, N.A., Santander Bank, N.A. and PNC Bank N.A. each had outstanding advance balances in excess of 10% of the total portfolio. If any of the Bank’s five largest customers paid off their outstanding advances, reduced their letter of credit activity with the Bank or, if applicable, withdrew from membership, the Bank could experience a material adverse effect on its outstanding advance levels and TCE, which would impact the Bank's financial condition and results of operations. Effective May 18, 2019, the Bank’s member, Chase Bank USA, N.A., merged with and into JP Morgan Chase Bank, N.A. and ceased being a member. JP Morgan Chase Bank, N.A.’s outstanding advance balance as of December 31, 2019 was $8.0 billion.

The Bank faces competition for advances, mortgage loan purchases and access to funding, which could negatively impact earnings.

The Bank's primary business is making advances to its members. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including commercial banks and their investment banking divisions, the FRBs, providers of brokered deposits and, in some circumstances, other FHLBanks. Members have access to alternative funding sources, which may offer more favorable terms than the Bank offers on its advances, including more flexible credit or collateral standards. In addition, many of the Bank's competitors are not subject to the same body of regulations applicable to the Bank, which enables those competitors to offer products and terms that the Bank is not able to offer.

In connection with the MPF Program, the Bank is subject to competition regarding the purchase of conventional, conforming fixed-rate mortgage loans. In this regard, the Bank faces competition in the areas of customer service, purchase prices for the MPF loans and ancillary services such as automated underwriting. The Bank's strongest competitors are large mortgage aggregators, non-depository mortgage entities, and the other housing GSEs, Fannie Mae and Freddie Mac. The Bank

17


may also compete with other FHLBanks with which members have a relationship through affiliates. Most of the FHLBanks participate in the MPF Program or similar programs. Competition among FHLBanks for MPF business may be affected by the requirement that a member and its affiliates can sell loans into the MPF Program through only one FHLBank relationship at a time. Some of these mortgage loan competitors have greater resources, larger volumes of business, longer operating histories and more product offerings. In addition, because the volume of conventional, conforming fixed-rate mortgages fluctuates depending on the level of interest rates, the demand for MPF Program products could diminish. Increased competition can result in a reduction in the amount of mortgage loans the Bank is able to purchase and consequently lower net income.

The FHLBanks also compete with the U.S. Treasury and GSEs as well as corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the national and global debt markets. Increases in the supply of competing debt products may, in the absence of increases in demand, result in higher debt costs or lower amounts of debt issued at the same cost than otherwise would be the case. Increased competition could adversely affect the Bank's ability to have access to funding, reduce the amount of funding available or increase the cost of funding. Any of these effects could adversely affect the Bank's financial condition and results of operations.

The Bank is subject to credit risk due to default, including failure or ongoing instability of any of the Bank's member, derivative, money market or other counterparties, which could adversely affect the Bank's results of operations or financial condition.

The Bank faces credit risk on advances, mortgage loans, investment securities, money market investments, derivatives, certificates of deposit, and other financial instruments. A member failure without liquidation proceeds satisfying the amount of the failed institution’s obligations and the operational cost of liquidating the collateral could impact the Bank’s ability to issue debt. The Bank protects against credit risk on advances through credit underwriting standards and collateralization which includes blanket lien and specific collateral pledge agreements. In addition, the Bank has the right to obtain additional or substitute collateral during the life of an advance to protect its security interest. The Act defines eligible collateral as certain investment securities, residential mortgage loans, deposits with the Bank, and other real estate related assets. All capital stock of the Bank owned by the borrower is also available as supplemental collateral. In addition, members that qualify as CFIs may pledge secured small-business, small-farm, and small-agribusiness and community development loans as collateral for advances. The Bank is also allowed to make advances to nonmember housing associates and requires them to deliver adequate collateral.

The types of collateral pledged by members are evaluated and assigned a borrowing capacity, generally based on a percentage of its value. This value can be based on either book value or market value, depending on the nature and form of the collateral being pledged. The volatility of market prices and interest rates could affect the value of the collateral held by the Bank as security for the obligations of Bank members as well as the ability of the Bank to liquidate the collateral in the event of a default by the obligor. Volatility within collateral indices may affect the method used in determining collateral weightings, which would ultimately affect the eventual collateral value. With respect to TCE, including advances, the Bank's policies require the Bank to be over-collateralized. In addition, all advances are current and no loss has ever been incurred in the portfolio. Based on these factors, no allowance for credit losses on advances is required. The Bank has policies and procedures in place to manage the collateral positions; these are subject to ongoing review, evaluation and enhancements as necessary.

Member institution failures may reduce the number of current and potential members in the Bank's district. The resulting loss of business could negatively impact the Bank's financial condition and results of operations. Additionally, if a Bank member fails and the FDIC or the member (or another applicable entity) does not either (1) promptly repay all of the failed institution's obligations to the Bank or (2) assume the outstanding advances, the Bank may be required to liquidate the collateral pledged by the failed institution to satisfy its obligations to the Bank. If that were the case, the proceeds realized from the liquidation of pledged collateral may not be sufficient to fully satisfy the amount of the failed institution's obligations and the operational cost of liquidating the collateral.

There are several unique risks the Bank may be exposed to regarding members in the insurance industry. To the extent the Bank determines that the risk it faces regarding an insurance company or insurance company members in a specific state requires additional mitigation, the Bank takes steps to mitigate this risk. These steps may include limits on eligible collateral and establishing over-collateralization levels to address risk of collateral volatility.

The Bank currently has two CDFI members, which are not generally subject to banking or insurance regulations. The Bank takes steps to mitigate this risk, which may include requiring specific over-collateralization levels or limits on eligible collateral. For all CDFI members, the Bank requires delivery of collateral pledged to secure the Bank’s advances and other credit products provided to such members.


18


The Bank follows Board-established guidelines on unsecured extensions of credit which limit the amounts and terms of unsecured credit exposure to investment grade counterparties, the U.S. government and other FHLBanks. The Bank's primary unsecured credit exposure includes Federal funds and other liquid transactions. Unsecured credit exposure to any counterparty is limited by the credit quality and capital level of the counterparty and by the capital level of the Bank. Nevertheless, the insolvency of a major counterparty or the inability of a major counterparty to meet its obligations under such transactions or other agreement could cause the Bank to incur losses and have an adverse effect on the Bank's financial condition and results of operations.

In addition, the Bank's ability to engage in routine derivatives, funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial institutions are interrelated as a result of trading, clearing, repos, or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide disruptions in which it may be difficult for the Bank to find counterparties for such transactions.

If the number of high quality counterparties available for uncleared hedging transactions decreases, the Bank's ability to enter into hedging transactions may be constrained. As a result, the Bank may not be able to effectively manage interest rate risk, which could negatively affect its results of operations and financial condition. In addition, the Bank may be limited in the number of counterparties available with which it can conduct business with respect to money market investments, liquidity positions and other business transactions. It may also affect the Bank's credit risk position and the advance products the Bank can offer to members. For additional discussion regarding the Bank's credit and counterparty risk, see the Credit and Counterparty Risk discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank invests in mortgages and is subject to the risk of credit deterioration, which could adversely impact the Bank's results of operations and could impact the Bank’s capital position.

The Bank currently invests in Agency and other U.S. obligation MBS, which support the Bank’s mission. The Bank still has an investment in its legacy private label MBS portfolio, however, none have been purchased since 2007 and it continues to run off. The Bank has incurred credit losses on this portfolio in previous years and cannot estimate future amounts of additional credit losses in future periods.

MBS are backed by residential mortgage loans, the properties of which are geographically diverse. The MBS portfolio is also subject to interest rate risk, prepayment risk, operational risk, servicer risk and originator risk, all of which can have a negative impact on the underlying collateral of the MBS investments. The rate and timing of unscheduled payments and collections of principal on mortgage loans serving as collateral for these securities are difficult to predict and can be affected by a variety of factors, including the level of prevailing interest rates, restrictions on voluntary prepayments contained in the mortgage loans, the availability of lender credit, loan modifications and other economic, demographic, geographic, tax and legal factors.

The MPF Program has different risks than those related to the Bank's traditional advance business, which could adversely impact the Bank's profitability.

The Bank participates in the MPF Program with the FHLBank of Chicago as MPF provider. Net mortgage loans held for portfolio accounted for 5.3% of the Bank's total assets as of December 31, 2019 and approximately 6.3% of the Bank's total interest income in 2019. During 2019, the Bank purchased 66% of the mortgage loans from one member. This member also held 46% of the total outstanding portfolio. The loss of this member could adversely affect the Banks’ future results of operations.

In contrast to the Bank's traditional member advance business, the MPF Program is highly subject to competitive pressures, more susceptible to loan losses, and also carries more interest rate risk, prepayment risk and operational complexity. The residential mortgage loan origination business historically has been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. General changes in market conditions could have a negative effect on the mortgage loan market. These would include, but are not limited to: rising interest rates slowing mortgage loan originations; an economic downturn creating increased defaults and lowered housing prices; innovative products that do not currently meet the criteria of the MPF Program; and new government programs or mandates. Any of these changes could have a negative impact on the profitability of the MPF Program. While many governmental loan modification programs are ending due to regulatory, business and customer expectations, servicers are expected to continue to offer other loan modification programs. The Bank offers a loan modification program for its MPF Program loans as well. To date, the Bank has not experienced any significant impact on its portfolio levels from the Bank's MPF loan modification program or

19


other foreclosure prevention programs. However, program execution and related changes, as well as any new programs in the market may change that experience.

The rate and timing of unscheduled payments and collections of principal on mortgage loans are difficult to predict and can be affected by a variety of factors, including the level of prevailing interest rates, the availability of lender credit, and other economic, demographic, geographic, tax and legal factors. The Bank manages prepayment risk through a combination of consolidated obligation issuance and, to a lesser extent, derivatives. If the level of actual prepayments is higher or lower than expected, the Bank may experience a mismatch with a related consolidated obligation issuance, which could have an adverse impact on net interest income. Also, increased prepayment levels will cause premium amortization to increase, reducing net interest income, and increase the potential for debt overhang. In certain MPF Program products, increased prepayments may also reduce credit enhancements available to absorb credit losses. To the extent one or more of the geographic areas in which the Bank's MPF loan portfolio is concentrated experiences considerable declines in the local housing market, declining economic conditions or a natural disaster, the Bank could experience an increase in the required allowance for loan losses on this portfolio.

The MPF Program is subject to risk that the borrower becomes delinquent or defaults on the Bank’s MPF loans. In addition, changes in real estate values could impact borrower repayment behavior. If delinquency and default rates on MPF loans increase, or there are additional declines in residential real estate values, the Bank will likely experience additional credit losses on its MPF loan portfolio. To mitigate some of this risk, the MPF Program has established a credit sharing structure with its members, referred to as MPF credit enhancements, which may reduce the impact of borrower defaults.

If FHLBank of Chicago changes or ceases to operate the MPF Program, this could have a negative impact on the Bank's mortgage purchase business, and, consequently, a related decrease in the Bank's financial condition and results of operations. Additionally, if FHLBank of Chicago or any of its third party vendors experiences operational difficulties, such difficulties could have a negative impact on the Bank's financial condition and results of operations.

For a description of the MPF Program, the obligations of the Bank with respect to loan losses and a PFI's obligation to provide credit enhancement, see the Mortgage Partnership Finance Program discussion in Item 1. Business, and Item 7. Management's Discussion and Analysis in this Form 10-K. See additional details regarding Supplemental Mortgage Insurance (SMI) exposure in the Credit and Counterparty Risk - Mortgage Loans, BOB Loans and Derivatives discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K.

MARKET/LIQUIDITY RISK

The Bank may be limited in its ability to access the capital markets, which could adversely affect the Bank's liquidity. In addition, if the Bank's ability to access the long-term debt markets would be limited, this may have a material adverse effect on its results of operations and financial condition, as well as its ability to fund operations, including advances.

The Bank's ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of debt frequently, with a variety of maturities and call features and at attractive rates. The Bank actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member credit demand for short-and long-term advances, investment opportunities and the maturity profile of the Bank's assets and liabilities. The Bank recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the Bank is required to maintain a level of liquidity in accordance with policies established by management and the Board and Finance Agency guidance.

The ability to obtain funds through the sale of consolidated obligations depends in part on current conditions in the capital markets and the short-term capital markets in particular. Accordingly, the Bank may not be able to obtain funding on acceptable terms (interest rate risk), if at all (refunding risk). If the Bank cannot access funding when needed, its ability to support and continue its operations, including providing term funding to members, would be adversely affected, which would negatively affect its financial condition and results of operations. The Bank’s exposure to interest rate risk and refunding risk may be impacted by the asset/liability maturity profile of the Bank. See the Liquidity and Funding discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for additional information.

The U.S. Treasury has the authority to prescribe the form, denomination, maturity, interest rate and conditions of consolidated obligations issued by the FHLBanks. In addition, the Finance Agency could require the Bank to hold additional liquidity, which could adversely impact the type, amount and profitability of various advance products the Bank could make available to its members.


20


The Bank is jointly and severally liable for the consolidated obligations of other FHLBanks. Additionally, the Bank may receive from or provide financial assistance to the other FHLBanks. Changes in the Bank's, other FHLBanks' or other GSEs' credit ratings, as well as the rating of the U.S. Government, may adversely affect the Bank's ability to issue consolidated obligations and enter into derivative transactions on acceptable terms.

Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for all consolidated obligations issued, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of consolidated obligations. As of December 31, 2019, out of a total of $1,025.9 billion in par value of consolidated obligations outstanding, the Bank was the primary obligor on $89.9 billion, or approximately 8.8% of the total.

The Finance Agency at its discretion may also require any FHLBank to make principal or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. For example, the Finance Agency could simply allocate the outstanding liability of an FHLBank among the other FHLBanks on a pro-rata or other basis. Accordingly, the Bank could incur significant liability beyond its primary obligation under consolidated obligations which could negatively affect the Bank's financial condition and results of operations.

FHLBank System consolidated obligation bonds have been assigned Aaa/stable outlook and AA+/stable outlook ratings by Moody's and S&P, respectively. Consolidated obligation discount notes have been assigned a P-1 and A-1+ rating by Moody's and S&P, respectively. In addition, all FHLBanks have been assigned a long-term rating of Aaa/stable outlook and AA+/stable outlook by Moody’s and S&P, respectively. All FHLBanks have been assigned a short-term rating of P-1 and A-1+ by Moody’s and S&P, respectively. These ratings reflect an opinion held by certain third parties that the FHLBanks have a strong capacity to meet their commitments to pay principal of and interest on consolidated obligations and that the consolidated obligations are judged to be of high quality with minimal credit risk. The ratings also reflect the FHLBanks' status as GSEs.

Additional ratings actions or negative guidance may adversely affect the Bank's cost of funds and ability to issue consolidated obligations and enter into derivative transactions on acceptable terms, which could negatively affect financial condition and results of operations. In some states, acceptance of the Bank's letters of credit as collateral for public funds deposits requires an AAA rating from at least one rating agency. If all of the NRSROs downgrade their ratings, the Bank's letters of credit business in those states may be affected and the amount of the Bank's letters of credit may be reduced, both of which could negatively affect financial condition and results of operations. The Bank's costs of doing business and ability to attract and retain members could also be adversely affected if the credit ratings assigned to the consolidated obligations were lowered from AA+.

The Bank may be unable to optimally manage its market risk due to unexpected sizable adverse market movements that threaten the Bank's interest rate risk/market risk profile faster than Bank strategies can offset. In addition, the Bank’s mortgage related portfolio introduces specific interest rate and prepayment risk, which may impact the value of and income associated with those investments. Not prudently managing this risk may adversely affect the Bank's results of operations.

The Bank is subject to various market risks, including interest rate risk and prepayment risk. The Bank realizes income primarily from the spread between interest earned on advances, MPF loans and investment securities and interest paid on debt and other liabilities, known as net interest income. The Bank's financial performance is affected by fiscal and monetary policies of the Federal government and its agencies and in particular by the policies of the Federal Reserve. The Federal Reserve's policies, which are difficult to predict, directly and indirectly influence the yield on the Bank's interest-earning assets and the cost of interest-bearing liabilities. Although the Bank uses various methods and procedures to monitor and manage exposures due to changes in interest rates, the Bank will experience instances when the timing of the re-pricing of interest-bearing liabilities does not coincide with the timing of re-pricing of interest-earning assets, or when the timing of the maturity or paydown of interest-bearing liabilities does not coincide with the timing of the maturity or paydown of the interest-earning assets. The Bank’s profitability and the market value of its equity are significantly affected by its ability to manage interest rate risk.

The Bank's ability to anticipate changes regarding the direction and speed of interest rate changes, or to hedge the related exposures, significantly affects the success of the asset and liability management activities and the level of net interest income. The Bank uses derivative instruments to reduce interest rate risk. The Bank has strategies which reduce the amount of one-sided fair value adjustments and the resulting impact to the Bank's income. However, market movements and volatility affecting the valuation of instruments in hedging relationships can also cause income volatility to the degree that the change in the value of the derivative does not perfectly offset the change in the value of the hedged item.. Should the use of derivatives be

21


limited, with that activity being replaced with a higher volume of long-term debt funding, the Bank may still experience income volatility driven by the market and interest rate sensitivities.

The Bank uses a number of measures and analyses to monitor and manage interest rate risk. Given the unpredictability of the financial markets, capturing all potential outcomes in these analyses is not practical. Key assumptions include, but are not limited to, advance volumes and pricing, market conditions for the Bank's consolidated obligations, interest rate spreads and prepayment speeds and cash flows on mortgage-related assets. These assumptions are inherently uncertain and, as a result, the measures cannot precisely predict the impact of higher or lower interest rates on net interest income or the market value of equity. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

With respect to the Bank’s MBS and MPF portfolios, increases in interest rates may slow prepayments and extend mortgage cash flows. If the debt funding the mortgage assets matures, it could be re-issued at a higher rate and decrease the Bank's net interest income. Decreases in interest rates may cause an increase in mortgage prepayments and may result in increased premium amortization expense and substandard performance in the Bank's mortgage portfolio as the Bank experiences a return of principal that it must re-invest in a lower rate environment, adversely affecting net interest income over time, if associated debt remains outstanding (i.e., debt overhang).

See additional discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank may fail to maintain a sufficient level of retained earnings, fail to meet its minimum regulatory capital requirements, or be otherwise designated by the Finance Agency as undercapitalized, which would impact the Bank's ability to conduct business “as usual,” result in prohibitions on dividends, excess capital stock repurchases and capital stock redemptions and potentially impact the value of Bank membership. This designation may also negatively impact the Bank's high credit rating provided by certain NRSROs and could hinder the achievement of the Bank's economic/community development mission.

The Bank may fail to have enough permanent capital, defined as the sum of capital stock and retained earnings, to meet its risk based capital (RBC) requirements. These requirements include components for credit risk, market risk and operational risk. Each of the Bank's investments carries a credit RBC requirement that is based on the rating of the investment. As a result, ratings downgrades or credit deterioration of individual investments would cause an increase in the total credit RBC requirement. The Bank is also required to maintain certain regulatory capital and leverage ratios, which it has done. Any violation of these requirements will result in prohibitions on stock redemptions and repurchases and dividend payments.

Under the Finance Agency's Prompt Corrective Action (PCA) Regulation, if the Bank becomes undercapitalized by failing to meet its regulatory capital requirements, by the Finance Agency exercising its discretion to categorize an FHLBank as undercapitalized or by the Bank failing to meet any additional Finance Agency-imposed minimum capital requirements, it will also be subject to asset growth limits. This is in addition to the capital stock redemption, excess capital stock repurchase and dividend prohibitions noted above. If the Bank becomes significantly undercapitalized, it could be subject to additional actions such as replacement of its Board and management, required capital stock purchase increases and required asset divestiture. The regulatory actions applicable to an FHLBank in a significantly undercapitalized status may also be imposed on an FHLBank by the Finance Agency at its discretion on an undercapitalized FHLBank. Violations could also result in changes in the Bank's member lending, investment or MPF Program purchase activities and changes in permissible business activities, as well as restrictions on dividend payments and capital stock redemptions and repurchases.

Declines in market conditions could also result in a violation of regulatory or statutory capital requirements and may impact the Bank's ability to redeem capital stock at par value. For example, this could occur if: (1) a member were to withdraw from membership (or seek to have its excess capital stock redeemed) at a time when the Bank is not in compliance with its minimum capital requirements or is deemed to be undercapitalized despite being in compliance with its minimum capital requirements; or (2) it is determined the Bank's capital stock is or is likely to be impaired as a result of losses in, or the depreciation of, assets which may not be recoverable in future periods. The Bank's primary business is making advances to its members, which in turn creates capital for the Bank. As members increase borrowings, the Bank's capital grows. As advance demand declines, so does the amount of capital required to support those balances. Ultimately, this capital would be returned to the member. Without new borrowing activity to offset the run-off of existing borrowings, capital levels could eventually decline. The Bank has the ability to increase the capital requirements on existing borrowings to boost capital levels; however, this may deter new borrowings and reduce the value of membership as the return on that investment may not be as profitable to the member as other investment opportunities.


22


Under Finance Agency regulation, the Bank may pay dividends on its capital stock only out of unrestricted retained earnings or current net income. The payment of dividends is subject to certain statutory and regulatory restrictions (including that the Bank shall be in compliance with all minimum capital requirements and shall not have been designated undercapitalized by the Finance Agency) and is highly dependent on the Bank's ability to continue to generate future net income and maintain adequate retained earnings and capital levels.

OPERATIONAL RISK

Failures of critical vendors and other third parties could disrupt the Bank’s ability to conduct business.

The Bank relies on third party vendors and service providers for many of its communications and information systems needs. Any failure or interruption of these systems, or any disruption of service, including as a result of a security breach, cyber attack, natural disaster, terrorist attack, widespread health emergency or pandemic, could result in failures or interruptions in the Bank's ability to conduct and manage its business effectively. While the Bank has implemented a Business Continuity Plan, there is no assurance that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by the Bank or the third parties on which the Bank relies. Any failure or interruption could significantly harm the Bank's reputation, customer relations and business operations, which could negatively affect its financial condition, profitability and cash flows. Additionally, any breach of sensitive Bank data stored at a third party could result in financial loss, damage to the Bank’s reputation, litigation, potential legal or regulatory actions and penalties, increased regulatory scrutiny and increased expense in terms of incident response costs and damages. While the Bank regularly assesses the adequacy of security controls for its significant third parties, there is no assurance that a breach will not occur. Additionally, the use of vendors, including cloud service providers and other third parties, could expose the Bank to the risk of a financial loss, loss of intellectual property or confidential information or other harm. Even though the Bank has enhanced its third party vendor management process, including an on-going vendor cyber-security review and cyber monitoring, the Bank could be adversely affected if the Bank’s vendors (including, but not limited to, software as a service (SaaS) vendors) are impacted by security breaches or cyber attacks.

The Bank relies on both internally and externally developed models and end user computing tools to manage market and other risks, to make business decisions and for financial accounting and reporting purposes. The Bank's business could be adversely affected if these models fail to produce reliable results or if the results are not used appropriately.

The Bank makes significant use of business and financial models and end user computing tools for making business decisions, managing risk and financial reporting. For example, the Bank uses models to measure and monitor exposures to market risks and credit and collateral risks. A credit scoring model is used in part as a basis for credit decisions. The Bank also uses models in determining the fair value of certain financial instruments and estimating credit losses.

Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Estimations produced by the Bank's models may be different from actual results, which could adversely affect the Bank's business results. If the models or end user computing tools are not reliable or the Bank does not use them appropriately, the Bank could make poor business decisions, including risk management decisions, or other decisions, which could result in an adverse financial impact. Further, any controls, such as a model risk management function, that the Bank employs to attempt to manage the risks associated with the use of models may not be effective.

Changes in any models or in any of the inputs, assumptions, judgments or estimates used in the models may cause the results generated by the model to be materially different. Changes to the Bank’s models could occur due to changes in market participants’ practices, including the use of alternative rates.

The loss of key employees or lack of a diverse and inclusive workforce and Bank activities may have an adverse effect on the Bank's business and operations.

A skilled, diverse and inclusive workforce is important to the continued successful operation of the Bank. Failure to attract or retain this type of workforce may adversely affect the Bank's business operations. It may result in increased operating expenses (i.e., consultant expense to address new hire) and operational risks as responsibilities are transitioned between employees. The loss of a key employee or not having a diverse and inclusive workforce may also result in incremental regulatory scrutiny of the quality of the Bank's overall corporate governance.

Item 1B: Unresolved Staff Comments

None

23



Item 2: Properties

The Bank leases 96,240 square feet of office space at 601 Grant Street, Pittsburgh, Pennsylvania, 15219 and additional office space at the following locations: (1) 1325 G Street, Washington, D.C. 20005; (2) 2300 Computer Avenue, Willow Grove, Pennsylvania, 19090; (3) 435 N. DuPont Highway, Dover, Delaware 19904; (4) 1137 Branchton Road, Boyers, Pennsylvania 16020, (5) 609 Hamilton Street, Allentown, Pennsylvania 18101 and (6) 580 Vista Park Drive, Pittsburgh, Pennsylvania 15205. The Washington, D.C. office space is shared with the FHLBanks of Atlanta and Des Moines. Essentially all of the Bank’s operations are housed at the Bank’s headquarters at the Grant Street location.

Item 3: Legal Proceedings

The Bank may be subject to various legal proceedings arising in the normal course of business. After consultation with legal counsel, management is not aware of any such proceedings that might result in the Bank’s ultimate liability in an amount that will have a material effect on the Bank’s financial condition or results of operations.

Item 4: Mine Safety Disclosures

Not applicable.

PART II

Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The capital stock of the Bank can be purchased only by members and may be held by nonmembers due to out of district mergers. There is no established marketplace for the Bank’s stock; the Bank’s stock is not publicly traded and may be repurchased or redeemed by the Bank at par value. The Bank has two subclasses of capital stock: B1 membership and B2 activity.

The members may request that the Bank redeem all or part of the common stock they hold in the Bank five years after the Bank receives a written request by a member. This is referred to as mandatorily redeemable capital stock. The Bank reclassifies stock subject to redemption from capital stock to a liability after a member provides written notice of redemption, gives notice of intention to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination or other involuntary termination from membership. In addition, the Bank, at its discretion, may repurchase shares held by members in excess of their required stock holdings upon one business day’s notice. Excess stock is Bank capital stock not required to be held by the member to meet its minimum stock purchase requirement under the Bank’s Capital Plan. The Bank's current practice is to repurchase all excess capital stock, including excess capital stock that is classified as mandatorily redeemable, on a weekly basis.

The members’ minimum stock purchase requirement is subject to change from time to time at the discretion of the Board of Directors of the Bank in accordance with the Capital Plan. Par value of each share of capital stock is $100. As of December 31, 2019, the total mandatorily redeemable capital stock reflected the balance for five institutions, four of which were merged out of district and considered to be nonmembers. One institution relocated and became a member of another FHLBank at which time the membership with the Bank terminated.

In February 2020, the Bank paid quarterly dividends of 7.75% annualized on activity stock and 4.5% annualized on membership stock. The dividends were based on average member capital stock held for the fourth quarter of 2019. The amount of any future dividends will depend on economic and market conditions and the Bank’s financial condition and operating results.

The total number of shares of capital stock outstanding as of December 31, 2019 was 33,985,713 of which members held 30,549,963 shares and nonmembers held 3,435,750 shares. As of February 28, 2020, a total of 290 members and nonmembers held shares of the Bank’s stock.


24



See Note 15 - Capital to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for further information regarding statutory and regulatory restrictions on capital stock redemption.

Item 6: Selected Financial Data

The following should be read in conjunction with the financial statements and Item 7. Management’s Discussion and Analysis, each included in this Form 10-K. The Condensed Statements of Income data for 2019, 2018 and 2017, and the Condensed Statements of Condition data as of December 31, 2019 and 2018 are derived from the financial statements included in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. The Condensed Statements of Income data for 2016 and 2015 and the Condensed Statements of Condition data as of December 31, 2017 and 2016 are derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2017 Form 10-K. The Condensed Statements of Condition data as of December 31, 2015 is derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2016 Form 10-K.

Condensed Statements of Income
 
Year Ended December 31,
(in millions)
2019
2018
2017
2016
2015
Net interest income
$
453.8

$
470.1

$
435.5

$
348.9

$
317.8

Provision (benefit) for credit losses
1.3

3.1

0.2

1.2

(0.2
)
Other noninterest income
3.0

11.0

32.2

25.0

44.5

Other expense
101.5

92.1

90.1

83.8

77.5

Income before assessments
354.0

385.9

377.4

288.9

285.0

AHP assessment (1)
37.1

38.7

37.8

28.9

28.5

Net income
$
316.9

$
347.2

$
339.6

$
260.0

$
256.5

Dividends (in millions)
$
266.8

$
229.1

$
168.0

$
155.0

$
212.8

Dividends per share
7.82

6.33

4.71

4.65

6.67

Weighted average dividend rate
7.45
%
6.42
%
4.70
%
4.71
%
5.22
%
Dividend payout ratio(2)
84.19
%
66.00
%
49.46
%
59.64
%
82.96
%
Return on average equity
6.58
%
7.03
%
7.17
%
5.96
%
6.16
%
Return on average assets
0.31
%
0.36
%
0.35
%
0.28
%
0.29
%
Net interest margin (3)
0.45
%
0.49
%
0.46
%
0.38
%
0.36
%
Regulatory capital ratio (4)
4.94
%
4.95
%
4.84
%
4.69
%
4.60
%
GAAP capital ratio(5)
4.67
%
5.00
%
4.94
%
4.73
%
4.67
%
Total average equity to average assets
4.70
%
5.11
%
4.90
%
4.72
%
4.66
%
Notes:
(1) Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund the AHP.
(2) Represents dividends paid as a percentage of net income for the respective periods presented.
(3) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(4) Regulatory capital ratio is the sum of capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(5) GAAP capital ratio is sum of capital stock, retained earnings and accumulated other comprehensive income (AOCI) as a percentage of total assets at period-end.


25



Condensed Statements of Condition
 
December 31,
(in millions)
2019
2018
2017
2016
2015
Cash and due from banks
$
21.5

$
71.3

$
3,415.0

$
3,587.6

$
2,377.0

Investments(1)
24,572.0

20,076.6

17,757.1

17,227.3

16,144.0

Advances
65,610.1

82,475.5

74,279.8

76,808.7

74,504.8

Mortgage loans held for portfolio, net
5,114.6

4,461.6

3,923.1

3,390.7

3,086.9

Total assets
95,724.1

107,486.5

99,663.0

101,260.0

96,329.8

Consolidated obligations:
 
 
 
 
 
  Discount notes
23,141.4

36,896.6

36,193.3

28,500.3

42,275.5

  Bonds
66,807.8

64,298.6

57,533.7

67,156.0

48,600.8

Total consolidated obligations
89,949.2

101,195.2

93,727.0

95,656.3

90,876.3

Deposits
573.4

387.0

538.1

558.9

686.0

Total liabilities
91,251.3

102,110.2

94,735.5

96,466.1

91,828.2

Capital stock - putable
3,055.0

4,027.3

3,658.7

3,755.4

3,539.7

Retained earnings
1,326.0

1,275.9

1,157.9

986.2

881.2

Total capital
4,472.8

5,376.3

4,927.5

4,793.9

4,501.6

Notes:
(1) Includes interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell and trading, AFS and HTM investment securities.

Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

Statements contained in this Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the future of the Bank, may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that 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. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; including but not limited to, the possible discontinuance of LIBOR and the related effect on the Bank's LIBOR-based financial products, investments and contracts; the occurrence of man-made or natural disasters, global pandemics, conflicts or terrorist attacks or other geopolitical events; political, legislative, regulatory, litigation, or judicial events or actions; risks related to MBS; changes in the assumptions used to estimate credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; changes in expectations regarding the Bank’s payment of dividends; membership changes; changes in the demand by Bank members for Bank advances; an increase in advance prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the FHLBank System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

This Management’s Discussion and Analysis (MD&A) should be read in conjunction with the Bank’s audited financial statements in Item 8. Financial Statements and Supplementary Data and all risks and uncertainties addressed throughout this report, as well as those discussed under Item 1A. Risk Factors included herein.


26


Executive Summary

Overview. The Bank's financial condition and results of operations are influenced by global and national economies, local economies within its three-state district, and the conditions in the financial, housing and credit markets, all of which impact the interest rate environment.

The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk in connection with advances and debt, the Bank executes interest-rate exchange agreements. Short-term interest rates also directly affect the Bank's earnings on invested capital. Finally, the Bank's mortgage-related assets make it sensitive to changes in mortgage rates. The Bank earns relatively narrow spreads between yields on assets (particularly advances, its largest asset) and the rates paid on corresponding liabilities.

The Bank's earnings are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. The flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products.

Results of Operations. The Bank’s net income for 2019 totaled $316.9 million, compared to $347.2 million for 2018. This $30.3 million decrease was primarily driven by lower net interest income, higher other expenses, and lower other noninterest income. Net interest income was $453.8 million for 2019, a decrease of $16.3 million compared to $470.1 million in 2018. Lower net interest income was primarily due to increased interest expense on mandatorily redeemable capital stock. Total other expenses in 2019 totaled $101.5 million versus $92.1 million in 2018, reflecting increases in compensation and benefits and technology-related costs. Noninterest income in 2019 was $3.0 million, an $8.0 million decrease compared to $11.0 million in 2018. Lower noninterest income was primarily due to net losses on derivatives and hedging activities, which were partially offset by net gains on investment securities. The net interest margin was 45 basis points and 49 basis points for 2019 and 2018, respectively.

For the fourth quarter of 2019, net income was $80.9 million, an increase of $2.7 million compared to $78.2 million in the fourth quarter of 2018. Higher net income was primarily due to net gains on derivatives and hedging activities, which was partially offset by net losses on investment activities and lower net interest income in the fourth quarter of 2019.

Financial Condition. Advances. Advances totaled $65.6 billion at December 31, 2019, a decrease of $16.9 billion compared to $82.5 billion at December 31, 2018. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. While the advance portfolio decreased compared to December 31, 2018, the term of advances also decreased. At December 31, 2019, approximately 37% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 54% at December 31, 2018.

The ability to grow and/or maintain the advance portfolio is affected by, among other things, the following: (1) the liquidity demands of the Bank’s borrowers; (2) the composition of the Bank's membership; (3) members’ regulatory requirements; (4) current and future credit market conditions; (5) housing market trends; (6) the shape of the yield curve and (7) advance pricing.

Liquidity. The Bank maintains liquidity to meet member borrowing needs and regulatory standards. Liquidity is comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and U.S. Treasury obligations classified as trading or AFS. At December 31, 2019, the Bank held $10.9 billion of liquid assets compared to $9.2 billion at December 31, 2018. The $1.7 billion increase was primarily due to changes in the liquidity regulations issued by the Finance Agency in 2019, which lead to the increased investment in U.S. Treasury obligations.

Investments. To enhance earnings, the Bank also maintains investments classified as AFS and HTM as well as certain trading securities. The Bank held $13.7 billion in its investment portfolio at December 31, 2019, compared with $10.9 billion at December 31, 2018, an increase of $2.8 billion. The increase reflects the addition of GSE MBS to the AFS portfolio in response to widening mortgage spreads.


27


Consolidated Obligations. The Bank's consolidated obligations totaled $89.9 billion at December 31, 2019, a decrease of $11.3 billion from December 31, 2018. At December 31, 2019, bonds represented 74% of the Bank's consolidated obligations, compared with 64% at December 31, 2018. Discount notes represented 26% of the Bank's consolidated obligations at December 31, 2019 compared with 36% at year-end 2018. The overall decrease in consolidated obligations is largely consistent with the change in total assets.

Capital Position and Regulatory Requirements. Total capital at December 31, 2019 was $4.5 billion, compared to $5.4 billion at December 31, 2018. Total retained earnings at December 31, 2019 were $1.3 billion, up $50.1 million from year-end 2018, reflecting the Bank's net income for 2019 which was largely offset by dividends paid. AOCI was $91.8 million at December 31, 2019, an increase of $18.7 million from December 31, 2018. This increase was primarily due to changes in the fair values of securities within the AFS portfolio.

In February, April, July and October 2019, the Bank paid quarterly dividends of 7.75% annualized on activity stock and 4.5% annualized on membership stock. These dividends were based on stockholders' average balances for the fourth quarter of 2018 (February dividend), the first quarter of 2019 (April dividend), the second quarter of 2019 (July dividend) and the third quarter of 2019 (October dividend).

In February 2020, the Bank paid quarterly dividends of 7.75% annualized on activity stock and 4.5% annualized on membership stock. The dividends were based on average member capital stock held for the fourth quarter of 2019. The amount of any future dividends will depend on economic and market conditions and the Bank’s financial condition and operating results.

The Bank met all of its capital requirements as of December 31, 2019, and in the Finance Agency’s most recent determination, as of September 30, 2019, the Bank was deemed "adequately capitalized."


28


2020 Outlook

The Bank expects that members will continue to utilize advances to meet liquidity needs during 2020. The Bank, however, anticipates that advances will decline in 2020, including $5.0 billion of advances to JP Morgan Chase Bank, N.A. that have a contractual maturity during 2020. JP Morgan Chase Bank, N.A. is one of the Bank’s top five borrowers as of December 31, 2019 and became a non-member when its charter was merged with an entity outside of the Bank’s district. The borrowing activities of a few larger members have been the predominant driver of change in the Bank’s advance balances, and it is expected that some short-term advances will be not be renewed at maturity.

Also, the Bank expects lower interest income due to the low level of interest rates and the Federal Reserve’s actions to provide additional liquidity to stimulate economic growth. Even with the anticipated decline in advances, the Bank expects strong but lower financial performance. As the Bank is a cooperative, it is designed to meet the liquidity and other needs of its members, whether those needs increase or decrease.

Access to debt markets has been reliable. Going forward, as the Bank prepares for the cessation of LIBOR and transition to an alternative rate, the Bank expects more of its adjustable-rate funding to be indexed to SOFR. The SOFR market has developed rapidly, and the trend is expected to accelerate as the Bank positions its consolidated obligations to meet bond investor appetite for an alternative to LIBOR indexed debt.

Recent market volatility, interest rate adjustments and any widespread health emergencies or pandemics, including the recent outbreak of coronavirus, could negatively impact financial markets and the demand for liquidity. Additionally, future opportunities and challenges may arise with potential changes in the Bank's operating landscape including various legislative actions and changes in the Bank’s regulatory compliance requirements. However, the Bank has been, and will continue to be, mission driven. Advances are central to the Bank’s mission and, along with other key activities, are crucial to the Bank continuing to meet the needs of its membership and communities.

Earnings Performance

The following should be read in conjunction with the Bank's audited financial statements included in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income for 2019 totaled $316.9 million, compared to $347.2 million for 2018. This $30.3 million decrease was primarily driven by lower net interest income, higher other expenses and lower other noninterest income. Net interest income was $453.8 million for 2019, a decrease of $16.3 million compared to $470.1 million in 2018. Lower net interest income was primarily due to increased interest expense on mandatorily redeemable capital stock. Total other expenses in 2019 totaled $101.5 million versus $92.1 million in 2018, reflecting increases in compensation and benefits and technology-related costs. Noninterest income in 2019 was $3.0 million, an $8.0 million decrease compared to $11.0 million in 2018. Lower noninterest income was primarily due to net losses on derivatives and hedging activities, which were partially offset by net gains on investment securities. The Bank’s return on average equity for 2019 was 6.58% compared to 7.03% for 2018.

2018 vs 2017. For discussion of this year-to-year comparison, refer to the Summary of Financial Results disclosure included in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Bank’s 2018 Form 10-K.

29


Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications and the net interest margin for 2019 and 2018. For discussion related to 2018 compared to 2017, refer to the Net Interest Income disclosure included in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Bank’s 2018 Form 10-K.

Average Balances and Interest Yields/Rates Paid
 
2019
2018


(dollars in millions)

Average
Balance
Interest
Income/
Expense (1)
Avg.
Yield/
Rate
(%)

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell(2)
$
8,498.4

$
185.9

2.19
$
6,985.1

$
128.1

1.83
Interest-bearing deposits(3)
1,708.3

38.6

2.26
869.2

16.7

1.93
Investment securities(4)
14,338.9

421.2

2.94
11,378.7

317.1

2.79
Advances(5) 
72,172.7

1,871.2

2.59
72,373.5

1,648.5

2.28
Mortgage loans held for portfolio(6)
4,716.2

170.1

3.61
4,193.0

151.0

3.60
Total interest-earning assets
101,434.5

2,687.0

2.65
95,799.5

2,261.4

2.36
Other assets(7)
1,030.5

 
 
818.1

 
 
Total assets
$
102,465.0

 
 
$
96,617.6

 
 
Liabilities and capital:
 
 
 
 
 
 
Deposits (3)
$
578.6

$
11.3

1.95
$
477.3

$
7.9

1.65
Consolidated obligation discount notes
26,717.4

601.2

2.25
26,463.9

494.2

1.87
Consolidated obligation bonds(8)
69,155.0

1,603.4

2.32
64,032.7

1,288.2

2.01
Other borrowings
224.3

17.3

7.74
14.5

1.0

6.91
Total interest-bearing liabilities
96,675.3

2,233.2

2.31
90,988.4

1,791.3

1.97
Other liabilities
973.6

 
 
693.4

 
 
Total capital
4,816.1

 
 
4,935.8

 
 
Total liabilities and capital
$
102,465.0

 
 
$
96,617.6

 
 
Net interest spread
 
 
0.34
 
 
0.39
Impact of noninterest-bearing funds
 
 
0.11
 
 
0.10
Net interest income/net interest margin
 
$
453.8

0.45
 
$
470.1

0.49
Average interest-bearing assets to interest-bearing liabilities
104.9
%
 
 
105.3
%
 
 
Notes:
(1) On January 1, 2019, the Bank adopted ASU 2017-12. Changes in fair value of derivative instruments and the related hedged item for designated fair value hedges are now included in net interest income for reporting purposes. Prior to adoption, these amounts were reported in other noninterest income.
(2) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(3) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(4) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost.
(5) Average balances reflect noninterest-earning hedge accounting adjustments of $93.6 million and $(249.7) million in 2019 and 2018, respectively.
(6) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(7) The allowance for credit losses and the noncredit portion of other-than-temporary-impairment (OTTI) losses on investment securities is reflected in other assets for this presentation.
(8) Average balances reflect noninterest-bearing hedge accounting adjustments of $(14.1) million and $(212.7) million in 2019 and 2018, respectively.

Net interest income decreased $16.3 million in 2019 compared to 2018 due to an increase in interest expense, partially offset by an increase in interest income. The rate paid on interest-bearing liabilities increased 34 basis points due to higher funding costs on consolidated obligations bonds and discount notes. In addition, interest expense was higher due to increased

30


interest expense on mandatorily redeemable capital stock. Interest-earning assets increased 6% primarily due to higher amount of investments and increased purchases in the Bank’s liquidity portfolio. The rate earned on interest-earning assets increased 29 basis points primarily due to a higher yield on advances. Interest income increased across all categories. The increase was driven by an increase in yield on advances and both higher volume and an increase in yield in all other categories. The impact of noninterest-bearing funds increased one basis point due to higher interest rates.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between 2019 and 2018.
 
Increase (Decrease) in Interest Income/Expense Due to Changes in
Rate/Volume
 
2019 Compared to 2018
(in millions)
Volume
Rate
Total
Federal funds sold
$
30.6

$
27.2

$
57.8

Interest-bearing deposits
18.5

3.4

21.9

Investment securities
86.2

17.9

104.1

Advances
(4.6
)
227.3

222.7

Mortgage loans held for portfolio
18.9

0.2

19.1

 Total interest-earning assets
$
149.6

$
276.0

$
425.6

 
 
 
 
Interest-bearing deposits
$
1.8

$
1.6

$
3.4

Consolidated obligation discount notes
4.8

102.2

107.0

Consolidated obligation bonds
108.5

206.7

315.2

Other borrowings
16.2

0.1

16.3

 Total interest-bearing liabilities
$
131.3

$
310.6

$
441.9

Total increase in net interest income
$
18.3

$
(34.6
)
$
(16.3
)

Interest income and interest expense increased in 2019 compared to 2018. Higher rates drove the increases in both interest income and interest expense augmented by higher volumes. The rate increase was primarily due to an increase in market interest rates as the Federal funds target rate increased in 2018 and the first half of 2019, before falling again in the second half of 2019.

Interest expense on the average consolidated obligations portfolio increased in 2019 compared to 2018. Rates paid on both discount notes and bonds rose due to the rise in market interest rates. Average discount note and bond balances both increased year-over-year. A portion of the bond portfolio is currently swapped to a variable rate; therefore, as the variable rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Interest Income Derivatives Effects” discussion below.


The following table presents the average par balances of the Bank's advance portfolio for 2019 and 2018 . These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Product
2019
2018
RepoPlus /Mid-Term Repo
$
20,581.7

$
22,112.1

Core (Term)
51,477.9

50,486.0

Convertible Select
20.0

25.3

Total par value
$
72,079.6

$
72,623.4


Derivative Effects on Interest Income. On January 1, 2019, the Bank adopted ASU 2017-12. Changes in fair value of derivative instruments and the related hedged item for designated fair value hedges are now included in net interest income for reporting purposes. Prior to adoption, these amounts were reported in other noninterest income. See Note 2 - Changes in Accounting Principle and Recently Issued Accounting Standards and Interpretations and Note 11 - Derivatives and Hedging Activities in this Form 10-K for additional information.

31



The following tables quantify the effects of the Bank’s derivative activities on interest income and interest expense for 2019 and 2018. Derivative and hedging activities are discussed below.
2019

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
72,172.7

$
1,871.2

2.59
$
1,826.4

2.53
$
44.8

0.06

Mortgage loans held for
 portfolio
4,716.2

170.1

3.61
173.3

3.68
(3.2
)
(0.07
)
All other interest-earning
 assets
24,545.6

645.7

2.63
648.0

2.64
(2.3
)
(0.01
)
Total interest-earning
 assets
$
101,434.5

$
2,687.0

2.65
$
2,647.7

2.61
$
39.3

0.04

Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
69,155.0

$
1,603.4

2.32
$
1,541.3

2.23
$
62.1

0.09

All other interest-bearing
 liabilities
27,520.3

629.8

2.29
629.8

2.29


Total interest-bearing
 liabilities
$
96,675.3

$
2,233.2

2.31
$
2,171.1

2.25
$
62.1

0.06

Net interest income/net
 interest spread
 
$
453.8

0.34
$
476.6

0.36
$
(22.8
)
(0.02
)
2018

(dollars in millions)

Average Balance
Interest Inc./
 Exp. with Derivatives
Avg.
Yield/
Rate (%)
Interest Inc./ Exp. without
Derivatives
Avg.
Yield/
Rate (%)

Impact of
Derivatives
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
72,373.5

$
1,648.5

2.28
$
1,610.2

2.22
$
38.3

0.06

Mortgage loans held for
 portfolio
4,193.0

151.0

3.60
154.0

3.67
(3.0
)
(0.07
)
All other interest-earning
 assets
19,233.0

461.9

2.40
465.8

2.42
(3.9
)
(0.02
)
Total interest-earning
 assets
$
95,799.5

$
2,261.4

2.36
$
2,230.0

2.33
$
31.4

0.03

Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
64,032.7

$
1,288.2

2.01
$
1,205.8

1.88
$
82.4

0.13

All other interest-bearing
 liabilities
26,955.7

503.1

1.87
503.1

1.87


Total interest-bearing
 liabilities
$
90,988.4

$
1,791.3

1.97
$
1,708.9

1.88
$
82.4

0.09

Net interest income/net
 interest spread
 
$
470.1

0.39
$
521.1

0.45
$
(51.0
)
(0.06
)

The use of derivatives negatively impacted both net interest income and net interest spread in 2019 and 2018. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

The Bank uses derivatives to hedge the fair market value changes attributable to the change in the benchmark interest rates. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations which convert the interest rates on those instruments from a fixed rate to a variable rate. The purpose of this strategy is to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.

32



The Bank uses many different funding and hedging strategies. These strategies involve closely match-funding bullet advances with bullet debt. This is designed in part to avoid the use of derivatives where prudent and reduce the Bank's reliance on short-term funding.

Provision for Credit Losses. The provision for credit losses on mortgage loans held for portfolio and Banking on Business (BOB) loans for 2019 was $1.3 million compared to $3.1 million in 2018. The decrease was primarily attributable to a non-recurring adjustment to the MPF Plus product which was made in the first quarter of 2018.

Other Noninterest Income
(in millions)
2019
2018
Net OTTI losses
$
(0.6
)
$
(1.0
)
Net gains (losses) on trading securities
18.7

(9.7
)
Net gains (losses) on derivatives and hedging activities
(39.8
)
(4.5
)
Standby letters of credit fees
21.8

23.6

Other, net
2.9

2.6

Total other noninterest income
$
3.0

$
11.0


The Bank's lower total other noninterest income for 2019 compared to 2018 was due primarily to higher net losses on derivatives and hedging activities, partially offset by the positive variance in net gains (losses) on trading securities. The activity related to derivatives and hedging activities is discussed in more detail below. The net gains on trading securities reflects the impact of fair market value changes on Agency and U.S. Treasury investments held in the Bank’s trading portfolio.

2018 vs 2017.  For discussion of this year-to-year comparison, refer to the Other Noninterest Income disclosure included in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Bank’s 2018 Form 10-K.

Derivatives and Hedging Activities. The Bank enters into interest rate swaps, TBAs, interest rate caps and floors and swaption agreements, referred to as derivatives transactions. The Bank enters into derivatives transactions to offset all or portions of the financial risk exposures inherent in its member lending, investment and funding activities. All derivatives are recorded on the balance sheet at fair value. Changes in derivatives’ fair values are recorded in the Statements of Income.

The Bank's hedging strategies consist of fair value accounting hedges and economic hedges. For 2019, due to the Bank's adoption of ASU 2017-12, fair value hedges impact net interest income and are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but either they do not qualify for hedge accounting or the Bank does not elect to apply hedge accounting. As a result, income recognition on the derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes nor does it have any cash flow hedges.

Regardless of the hedge strategy employed, the Bank's predominant hedging instrument is an interest rate swap. At the time of inception, the fair market value of an interest rate swap generally equals or is close to zero. Notwithstanding the exchange of interest payments made during the life of the swap, which are recorded as either interest income/expense or as a gain (loss) on derivatives, depending upon the accounting classification of the hedging instrument, the fair value of an interest rate swap returns to zero at the end of its contractual term. Therefore, although the fair value of an interest rate swap is likely to change over the course of its full term, upon maturity any unrealized gains and losses generally net to zero.


33


On January 1, 2019, the Bank adopted ASU 2017-12. Changes in fair value of the derivative instruments and the related hedged item for designated fair value hedges are now included in net interest income for reporting purposes. Prior to adoption, these amounts were reported in other noninterest income. The following tables detail the net effect of derivatives and hedging activities on non-interest income 2019 and 2018.
 
2019
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
$
(12.9
)
$
(29.3
)
$
(29.6
)
$
32.1

$
(0.4
)
$

$
(40.1
)
Other (1)





0.3

0.3

Total net gains (losses) on derivatives and hedging activities
$
(12.9
)
$
(29.3
)
$
(29.6
)
$
32.1

$
(0.4
)
$
0.3

$
(39.8
)
 
2018
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Other
Total
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
0.3

$
1.3

$

$
(1.2
)
$

$

$
0.4

Gains (losses) on derivatives not receiving hedge accounting, including net interest settlements
0.6

13.3

3.3

(17.8
)
(0.8
)

(1.4
)
Other (1)





(3.5
)
(3.5
)
Total net gains (losses) on derivatives and hedging activities
$
0.9

$
14.6

$
3.3

$
(19.0
)
$
(0.8
)
$
(3.5
)
$
(4.5
)
Notes:
(1) Represents the price alignment amount on derivatives for which variation margin is characterized as a daily settled contract. Refer to Note 11 - Derivatives and Hedging Activities in this Form 10-K.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as economic hedges, the Bank includes the net interest settlements and the fair value changes in the “Net gains (losses) on derivatives and hedging activities” financial statement line item. For economic hedges, the Bank recorded net losses of $(40.1) million in 2019 compared to net losses of $(1.4) million in 2018. The losses during 2019 were primarily on the Bank's asset swaps due to decreases in interest rates throughout the year. In contrast, the smaller loss amount during 2018 was due to more frequent periods of rising interest rates during the year. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $11.8 billion at December 31, 2019 and $7.7 billion at December 31, 2018.

2018 vs 2017.  For discussion of this year-to-year comparison, refer to the Derivatives and Hedging Activities disclosure included in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Bank’s 2018 Form 10-K.

Other Expense
(in millions)
2019
2018
Compensation and benefits
$
50.6

$
46.3

Other
38.5

34.9

Finance Agency
6.7

5.9

Office of Finance
5.7

5.0

Total other expenses
$
101.5

$
92.1


The Bank's total other expenses increased $9.4 million to $101.5 million for 2019 compared to $92.1 million for 2018. The increase was primarily due to higher compensation and benefits, increases in technology-related costs and higher fees paid

34


to the Finance Agency and the OF. Collectively, the 11 FHLBanks are responsible for the operating expenses of the Finance Agency and the OF. These payments are allocated among the FHLBanks according to a cost-sharing formula.

2018 vs 2017.  For discussion of this year-to-year comparison, refer to the Other Expense disclosure included in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Bank’s 2018 Form 10-K.

Community Investment Products

The Bank helps members meet their Community Reinvestment Act (CRA) responsibilities. Through community investment cash advance products such as AHP and CLP, members have access to subsidized and other low-cost funding. Members use the funds from these products to create affordable rental and homeownership opportunities, and for community and economic development activities that benefit low- and moderate-income neighborhoods and help revitalize their communities.

The Bank’s mission includes the important public policy goal of making funds available for housing and economic development in the communities served by the Bank’s member financial institutions. In support of this goal, the Bank administers a number of products, some mandated and some voluntary, which make Bank funds available through member financial institutions. In all of these products, the Bank’s funding flows through member financial institutions into areas of need throughout the region.

AHP. The AHP, mandated by the Act, is the largest and primary public policy product of the Bank. The AHP funds, which are offered on a competitive basis, provide grants and below-market loans for both rental and owner-occupied housing for households at 80% or less of the area median income. The Bank is required to contribute approximately 10% of its income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP) to AHP and makes these funds available for use in the subsequent year. Each year, the Bank’s Board adopts an implementation plan that defines the structure of the product pursuant to the AHP regulations. The Bank’s contribution was $37.1 million and $38.7 million for 2019 and 2018, respectively. The following table details the funding rounds the Bank conducted and the distribution of AHP funds for 2019 and 2018.
 
2019
2018
Funding rounds
1
1
Eligible applications
165
156
Grants
$33.9 million
$34.2 million
Projects
64
68
Project development costs
$334.9 million
$250.8 million
Units of affordable housing
1,727
1,714

In addition, the First Front Door product (FFD) offers grants to first time homebuyers up to $5,000 to assist with the purchase of a home. FFD grants are available to households earning 80% or less of the area median income. The FFD grants disbursed were $8.5 million and $7.9 million during 2019 and 2018, respectively.

In 2016, the Bank initiated a Disaster Relief Program (DRP) which was made available to members to assist households affected by historic flooding in 12 West Virginia counties. The funds for this product were set-aside from the overall 2016 AHP subsidy pool and were used for owner-occupied rehabilitation up to $15,000 per household or for home purchase assistance of up to $7,500 per household. The DRP closed in June 2019 and had disbursed grants of $555,000.

Other Products. The CLP offers advances at the Bank’s cost of funds providing the full advantage of a low-cost funding source. CLP loans help member institutions finance housing construction and rehabilitation, infrastructure improvement, and economic and community development projects that benefit targeted neighborhoods and households. At December 31, 2019, the CLP loan balance totaled $1,339.7 million compared to $1,191.7 million at December 31, 2018, reflecting an increase of $148 million, or 12%.

The Bank’s BOB loan product to members is targeted to small businesses to assist in the growth and development of small business, including both the start-up and expansion. The Bank makes funds available to members to extend credit to approved small business borrowers, enabling small businesses to qualify for credit that would otherwise not be available. For both 2019 and 2018, the Bank made $6.0 million available for each year, to assist small businesses through the BOB loan product.


35


In addition, the Bank has a homeless initiative called Home4Good. Home4Good is designed to support activities or actions that lead to stable housing for individuals and families who are homeless or who are at risk of becoming homeless. It is offered in partnership with state housing finance agencies in Pennsylvania, West Virginia, and Delaware. The Bank contributed $4.8 million to this initiative for both 2019 and 2018.

Financial Condition

The following should be read in conjunction with the Bank’s audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

Assets

Total assets were $95.7 billion at December 31, 2019, compared with $107.5 billion at December 31, 2018, a decrease of $11.8 billion. The decrease was primarily due to lower advances activity. Advances totaled $65.6 billion at December 31, 2019, a decrease of $16.9 billion, compared to $82.5 billion at December 31, 2018.

The Bank's core mission activities include the issuance of advances and acquiring member assets through the MPF® program. The core mission asset ratio, defined as the ratio of par amount of advances and MPF loans relative to consolidated obligations adjusted for high quality liquid assets using full year average balances, was 82.2% and 84.6% for 2019 and 2018, respectively.

Advances. Advances (par) totaled $65.4 billion at December 31, 2019 compared to $82.6 billion at December 31, 2018. At December 31, 2019, the Bank had advances to 161 borrowing members, compared to 184 borrowing members at December 31, 2018. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Advances outstanding to the Bank’s five largest borrowers increased to 77.7% of total advances as of December 31, 2019, compared to 77.2% at December 31, 2018. In the second quarter of 2019, Chase Bank USA, N.A. (Chase), one of the Bank’s five largest borrowers, became a non-member as its charter was merged with an entity outside of the Bank’s district (JP Morgan Chase Bank, N.A). J.P. Morgan Chase Bank, N.A's outstanding advance balance as of December 31, 2019, was $8.0 billion.


36


The following table provides information on advances at par by redemption terms at December 31, 2019 and December 31, 2018.
 
December 31,
(in millions)
2019
2018
Fixed-rate
 
 
Due in 1 year or less (1)
$
21,783.1

$
22,556.5

Due after 1 year through 3 years
13,523.4

11,897.9

Due after 3 years through 5 years
2,012.5

4,973.7

Thereafter
594.4

632.6

Total par value
$
37,913.4

$
40,060.7

 
 
 
Fixed-rate, callable or prepayable (1)
 
 
Due after 1 year through 3 years
$
20.0

$

Total par value
$
20.0

$

 
 
 
Variable-rate
 
 
Due in 1 year or less (1)
$
14,129.5

$
8,813.9

Due after 1 year through 3 years
5,025.0

17,313.0

Due after 3 years through 5 years
53.1

100.0

Thereafter

3.1

Total par value
$
19,207.6

$
26,230.0

 
 
 
Variable-rate, callable or prepayable (2)
 
 
Due in 1 year or less
$
5,225.0

$
6,115.0

Due after 1 year through 3 years
2,635.0

9,725.0

Due after 3 years through 5 years
40.0

10.0

Total par value
$
7,900.0

$
15,850.0

 
 
 
Other (3)
 
 
Due in 1 year or less
$
123.7

$
147.1

Due after 1 year through 3 years
147.4

161.0

Due after 3 years through 5 years
69.7

75.0

Thereafter
57.3

73.8

Total par value
$
398.1

$
456.9

Total par balance
$
65,439.1

$
82,597.6

Notes:
(1) Includes overnight advances.
(2) Prepayable advances are those advances that may be contractually prepaid by the borrower on specified dates without incurring prepayment or termination fees.
(3) Includes fixed-rate amortizing/mortgage matched, convertible, and other advances.

The Bank had no putable advances at December 31, 2019 or December 31, 2018.


37


The following table provides a distribution of the number of members, categorized by individual member asset size (as reported quarterly) that had an outstanding advance balance during the years ended 2019 and 2018. Commercial Bank, Savings Institution, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 billion to $25 billion), Mid-size ($1.2 billion to $4 billion) and CFI (under $1.2 billion).
 
December 31,
Member Classification
2019
2018
Large
6

7

Regional
15

17

Mid-size
28

29

CFI (1)
176

177

Insurance
24

17

Total borrowing members during the period
249

247

Total membership
286

291

Percentage of members borrowing during the period
87.1
%
84.9
%
Note:
(1) For purposes of this member classification reporting, the Bank groups CDFIs with CFIs.

The following table provides information at par on advances by member classification at December 31, 2019 and December 31, 2018.
(in millions)
December 31, 2019
December 31, 2018
Member Classification
Large
$
43,165.0

$
63,675.0

Regional
5,256.1

8,835.7

Mid-size
4,197.7

4,062.9

CFI
2,887.3

3,739.0

Insurance
1,416.5

1,783.2

Non-member
8,516.5

501.8

Total
$
65,439.1

$
82,597.6


As of December 31, 2019, total advances decreased 21% compared with balances at December 31, 2018. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. In addition, in the second quarter of 2019, Chase Bank USA, N.A. (Chase) became a non-member as its charter was merged with an entity outside of the Bank’s district (JP Morgan Chase Bank, N.A). Advances of $8.0 billion to J.P. Morgan Chase Bank, N.A. moved from the Large member classification to Non-member in the table above.

See the Credit and Counterparty Risk -TCE and Collateral discussion in the Risk Management section of this Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of December 31, 2019.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses was $5.1 billion and $4.5 billion at December 31, 2019 and December 31, 2018, respectively.

The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status. In addition, the Bank records cash payments received as a reduction of principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by the recording of interest income. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to government guarantees or insurance. The Bank has a loan modification program for PFIs under the MPF Program. The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged and not reaffirmed under the MPF Program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank.


38


Foregone interest represents income the Bank would have recorded if the loan was paying according to its contractual terms. Foregone interest for years 2015 through 2019 was immaterial for both the Bank’s mortgage loans and BOB loans. Balances regarding the Bank’s loan products are summarized below.
 
December 31,
(in millions)
2019
2018
2017
2016
2015
Advances(1)
$
65,610.1

$
82,475.5

$
74,279.8

$
76,808.7

$
74,504.8

Mortgage loans held for portfolio, net(2)
5,114.6

4,461.6

3,923.1

3,390.7

3,086.9

Nonaccrual mortgage loans(3)
15.6

16.6

22.8

26.6

32.5

Mortgage loans 90 days or more delinquent and still accruing interest(4)
3.3

4.1

4.8

4.0

4.2

BOB loans, net
19.7

17.3

14.1

12.3

11.3

Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and do not include performing TDRs.
(4) Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable, and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. The Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.4% of the MPF Original portfolio and 2.2% of the MPF Plus portfolio for both December 31, 2019 and December 31, 2018. The MPF 35 portfolio delinquency remains minimal at 0.03% and 0.02% at December 31, 2019, and December 31, 2018, respectively.

Allowance for Credit Losses (ACL).  The Bank has not incurred any losses on advances since its inception in 1932. Due to the collateral held as security and the repayment history for advances, specifically in cases where a member fails, management has determined that a zero ACL for advances is supportable under GAAP. This assessment also includes letters of credit, which have the same collateral requirements as advances. For additional information, see discussion regarding collateral policies and standards on the advances portfolio in the Advance Products and Collateral discussion in Item 1. Business in this Form 10-K.

The ACL on mortgage loans is based on the losses inherent in the Bank's mortgage loan portfolio after taking into consideration the CE structure of the MPF Program. The losses inherent in the portfolio are based on either an individual or collective assessment of the mortgage loans. The Bank purchases government-guaranteed and/or -insured and conventional fixed-rate residential mortgage loans. Because the credit risk on the government-guaranteed/insured loans is predominantly assumed by other entities, only conventional mortgage loans are evaluated for an ACL.

The Bank’s conventional mortgage loan portfolio is comprised of large groups of smaller-balance homogeneous loans made to borrowers of PFIs that are secured by residential real estate. A mortgage loan is considered impaired when it is probable that all contractual principal and interest payments will not be collected as scheduled based on current information and events. The Bank evaluates certain conventional mortgage loans for impairment individually and the related credit loss is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. The CE receivable is evaluated for collectibility, and a reserve, included as part of the allowance for credit losses, is established, if required.

The remainder of the portfolio's incurred loss is estimated using a collective assessment, which is based on probability of default and loss given default. Probability of default and loss given default are based on the prior 12 month historical performance of the Bank's mortgage loans. Probability of default is based on a migration analysis, and loss given default is based on realized losses incurred on the sale of mortgage loan collateral including a factor that reduces estimated proceeds from primary mortgage insurance (PMI) given the credit deterioration experienced by those companies.
 


39


The following table presents the rollforward of ACL on the mortgage loans held for portfolio for the years 2015 through 2019.
(in millions)
2019
2018
2017
2016
2015
Balance, beginning of year
$
7.3

$
6.0

$
6.2

$
5.7

$
7.3

(Charge-offs) Recoveries, net
(0.2
)
(1.3
)
(0.1
)
(0.2
)
(0.8
)
Provision (benefit) for credit losses
0.7

2.6

(0.1
)
0.7

(0.8
)
Balance, end of year
$
7.8

$
7.3

$
6.0

$
6.2

$
5.7

As a % of mortgage loans held for portfolio
0.2
%
0.2
%
0.2
%
0.2
%
0.2
%

Mortgage loans are assessed by a third party's credit model at acquisition and a CE is calculated based on loan attributes and the Bank’s risk tolerance on its entire MPF portfolio. Credit losses on a mortgage loan may only be absorbed by the CE amount in the master commitment related to the loan. In addition, the CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the First Loss Account (FLA). Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF 35 and MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank.

The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at December 31, 2019 and December 31, 2018.
 
MPF CE structure
December 31, 2019
ACL
December 31, 2019
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge -offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
6.1

$
82.6

$
3.9

$
(1.3
)
$
(2.2
)
$
0.4

MPF 35
10.3

107.1

0.7


(0.7
)

MPF Plus
15.6

5.6

9.0


(1.6
)
7.4

Total
$
32.0

$
195.3

$
13.6

$
(1.3
)
$
(4.5
)
$
7.8

 
MPF CE structure
December 31, 2018
ACL
December 31, 2018
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge -offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
5.4

$
80.0

$
4.5

$
(1.2
)
$
(2.9
)
$
0.4

MPF 35
7.0

74.3

0.3


(0.3
)

MPF Plus
16.5

7.6

8.9


(2.0
)
6.9

Total
$
28.9

$
161.9

$
13.7

$
(1.2
)
$
(5.2
)
$
7.3


The ACL on mortgage loans increased $0.5 million during 2019. The increase is primarily due to an increase in the ACL associated with the MPF Plus product due to lower CE fee recovery resulting from a shorter weighted average life of the portfolio. The ACL associated with MPF Original remained consistent, and the ACL associated with the MPF 35 program remained zero due to the nature of its credit structure and performance.

Real Estate Owned (REO). When a PFI or servicer forecloses on a delinquent mortgage loan, the Bank reclassifies the carrying value of the loan to other assets as REO at fair value less estimated selling expenses. If the fair value of the REO property is lower than the carrying value of the loan, then the difference to the extent such amount is not expected to be recovered through recapture of performance-based CE fees is recorded as a charge-off to the ACL. The fair value less estimated costs to sell the property becomes the new cost basis for subsequent accounting. If the fair value of the REO property is higher than the carrying value of the loan, then the REO property is recorded at fair value less estimated selling costs. This is rare as the Bank believes this situation would require additional validation of the fair value. The servicer is charged with the responsibility for disposing of real estate on defaulted mortgage loans on behalf of the Bank. Once a property has been sold, the

40


servicer presents a summary of the gain or loss for the individual mortgage loan to the master servicer for reimbursement of any loss. Gains on the sale of REO property are held and offset by future losses in the pool of loans, ahead of any remaining balances in the FLA. Losses are deducted from the FLA, if it has not been fully used. The Bank held $2.0 million and $2.9 million of REO at December 31, 2019 and December 31, 2018, respectively.

Cash and Investments. The Bank’s strategy is to maintain its short-term liquidity position in part to be able to meet members’ loan demand and regulatory liquidity requirements. Excess cash is typically invested in overnight investments. The Bank also maintains an investment portfolio to enhance earnings. These investments may be classified as trading, AFS or HTM.

The Bank maintains a liquidity portfolio comprised of cash, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, and U.S. Treasury obligations classified as trading or AFS. The liquidity portfolio at December 31, 2019 increased by $1.7 billion compared to December 31, 2018, primarily due to increased investment in U.S. Treasury obligations and as a result of changes in the liquidity regulations issued by the Finance Agency, effective March 31, 2019. At December 31, 2018, liquidity also included GSE and Tennessee Valley Authority (TVA) obligations classified as trading.

The Bank's investment portfolio is comprised of trading, AFS and HTM investments (excluding those investments included in the liquidity portfolio). The investments must meet the Bank's risk guidelines and certain other requirements, such as yield. The Bank's investment portfolio totaled $13.7 billion and $10.9 billion at December 31, 2019 and December 31, 2018, respectively.

Investment securities, including all trading, AFS, and HTM securities, totaled $17.1 billion at December 31, 2019, compared to $12.2 billion at December 31, 2018. Details of the investment securities follow.
 
Carrying Value
 
December 31,
(in millions)
2019
2018
Trading securities:
 
 
 Non-MBS:
 
 
  U.S. Treasury obligations
$
3,390.7

$
997.1

  GSE and TVA obligations
240.9

284.0

Total trading securities
$
3,631.6

$
1,281.1

AFS securities:
 
 
  GSE and TVA obligations
$
1,550.7

$
1,785.3

  State or local agency obligations
247.9

245.9

  MBS:
 
 
     U.S. obligations single-family MBS
807.6

218.5

     GSE single-family MBS
4,055.8

2,581.5

     GSE multifamily MBS
4,109.6

2,605.5

     Private label MBS
326.2

409.6

Total AFS securities
$
11,097.8

$
7,846.3

HTM securities:
 
 
  Certificates of deposit
$

$
700.0

  State or local agency obligations
94.3

102.7

  MBS:
 
 
     U.S. obligations single-family MBS
250.2

325.2

     GSE single-family MBS
1,156.6

899.9

     GSE multifamily MBS
770.8

853.0

     Private label MBS
123.8

205.2

Total HTM securities
$
2,395.7

$
3,086.0

Total investment securities
$
17,125.1

$
12,213.4


41



The following table presents the composition of investment securities and investments, assuming no principal prepayments, as of December 31, 2019. Contractual maturity of MBS is not a reliable indicator of their expected life because borrowers generally have the right to prepay their obligation at any time.
(dollars in millions)
Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
Carrying Value
Trading securities:
 
 
 
 
 
 Non-MBS:
 
 
 
 
 
  U.S. Treasury obligations
$
1,072.8

$
2,317.9

$

$

$
3,390.7

  GSE and TVA obligations

73.5

139.9

27.5

240.9

Total trading securities
$
1,072.8

$
2,391.4

$
139.9

$
27.5

$
3,631.6

Yield on trading securities
1.82
%
2.04
%
3.13
%
3.28
%
2.02
%
AFS securities:
 
 
 
 
 
  GSE and TVA obligations
$

$
533.6

$
704.5

$
312.6

$
1,550.7

  State or local agency obligations

1.0

15.2

231.7

247.9

  MBS:
 
 
 
 
 
    U.S. obligations single-family MBS



807.6

807.6

    GSE single-family MBS

7.3

100.2

3,948.3

4,055.8

    GSE multifamily MBS
5.7

608.0

3,495.9


4,109.6

    Private label MBS



326.2

326.2

Total AFS securities
$
5.7

$
1,149.9

$
4,315.8

$
5,626.4

$
11,097.8

Yield on AFS Securities
2.57
%
2.66
%
2.33
%
2.74
%
2.58
%
HTM securities:
 
 
 
 
 
  State or local agency obligations
$

$

$
31.9

$
62.4

$
94.3

  MBS:
 
 
 
 
 
    U.S. obligations single-family MBS
75.7



174.5

250.2

    GSE single-family MBS


24.8

1,131.8

1,156.6

    GSE multifamily MBS
195.9

322.9

252.0


770.8

    Private label MBS
0.5



123.3

123.8

Total HTM securities
$
272.1

$
322.9

$
308.7

$
1,492.0

$
2,395.7

Yield on HTM securities
3.25
%
2.79
%
3.59
%
3.23
%
3.22
%
Total investment securities
$
1,350.6

$
3,864.2

$
4,764.4

$
7,145.9

$
17,125.1

Yield on investment securities
2.11
%
2.28
%
2.44
%
2.85
%
2.55
%
Interest-bearing deposits
$
1,476.9

$

$

$

$
1,476.9

Federal funds sold
3,770.0




3,770.0

Securities purchased under agreements to resell
2,200.0




2,200.0

Total investments
$
8,797.5

$
3,864.2

$
4,764.4

$
7,145.9

$
24,572.0


As of December 31, 2019, the Bank held securities from the following issuers with a book value greater than 10% of Bank total capital.
 
Total
Book Value
Total
Fair Value
(in millions)
Fannie Mae
$
6,960.5

$
6,975.6

U.S. Treasury
3,390.8

3,390.8

Freddie Mac
3,157.7

3,189.2

Federal Farm Credit Banks
1,682.2

1,682.2

Ginnie Mae
982.1

983.1

Total
$
16,173.3

$
16,220.9



42


For additional information on the credit risk of the investment portfolio, see the Credit and Counterparty Risk - Investments discussion in the Risk Management section of this Item 7. Management’s Discussion and Analysis in this Form 10-K.

Liabilities and Capital

For discussion of the 2018 to 2017 comparison, refer to the Liabilities and Capital disclosure included in Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Bank’s 2018 Form 10-K.

Deposits. The Bank offers demand, overnight and term deposits for members and qualifying nonmembers. Total deposits at December 31, 2019 increased to $573.4 million from $387.0 million at December 31, 2018. Interest-bearing deposits classified as demand and overnight pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The weighted-average interest rates paid on interest bearing deposits were 1.95% and 1.65% during 2019 and 2018, respectively.

Factors that generally influence deposit levels include turnover in members’ investment securities portfolios, changes in member demand for liquidity driven by member institution deposit growth, the slope of the yield curve and the Bank’s deposit pricing compared to other short-term money market rates. Fluctuations in this source of the Bank’s funding are typically offset by changes in the issuance of consolidated obligation discount notes. The Act requires the Bank to have assets, referred to as deposit reserves, invested in obligations of the United States, deposits in eligible banks or trust companies or loans with a maturity not exceeding five years, totaling at least equal to the current deposit balance. As of December 31, 2019 and 2018, excess deposit reserves were $69.4 billion and $84.6 billion, respectively.

Time Deposits. At December 31, 2019 and December 31, 2018, the Bank had no time deposits.

Consolidated Obligations. Consolidated obligations consist of bonds and discount notes. The Bank's consolidated obligations totaled $89.9 billion at December 31, 2019, a decrease of $11.3 billion from December 31, 2018. At December 31, 2019, the Bank’s consolidated obligation bonds outstanding increased to $66.8 billion compared to $64.3 billion at December 31, 2018. However, discount notes outstanding at December 31, 2019 decreased to $23.1 billion from $36.9 billion at December 31, 2018. The decreases in consolidated obligations reflect the decrease in advances at year end.

Consolidated obligations bonds often have investor-determined features. The decision to issue a bond using a particular structure is based upon the desired amount of funding, and the ability of the Bank to hedge the risks. The issuance of a bond with a simultaneously-transacted interest-rate exchange agreement usually results in a funding vehicle with a lower cost than the Bank could otherwise achieve. The continued attractiveness of such debt/swap transactions depends on price relationships in both the consolidated bond and interest-rate exchange markets. If conditions in these markets change, the Bank may alter the types or terms of the bonds issued. The increase in funding alternatives available to the Bank through negotiated debt/swap transactions is beneficial to the Bank because it may reduce funding costs and provide additional asset/liability management tools. The types of consolidated obligations bonds issued can fluctuate based on comparative changes in their cost levels, supply and demand conditions, advance demand, and the Bank’s balance sheet management strategy.

The Bank primarily uses noncallable bonds as a source of funding but also utilizes structured notes such as callable bonds. Unswapped callable bonds primarily fund the Bank’s mortgage portfolio while swapped callable bonds fund other floating rate assets. For additional information on the Bank’s consolidated obligations, refer to Note 13 to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.


43


Short-term Borrowings. For the table below, borrowings with original maturities of one year or less are classified as short-term. The following is a summary of key statistics for the Bank’s short-term borrowings at par.
 
Consolidated Obligations - Discount Notes
Consolidated Obligations -Bonds with original maturities of one year or less
(dollars in millions)
2019
2018
2019
2018
Outstanding at the end of the period
$
23,211.5

$
36,985.0

$
29,526.2

$
14,301.0

Weighted average rate at end of the period
1.61
%
2.36
%
1.71
%
2.34
%
Daily average outstanding for the period
$
26,793.8

$
26,532.8

$
23,570.4

$
19,216.4

Weighted average rate for the period
2.23
%
1.85
%
2.18
%
1.84
%
Highest outstanding at any month-end
$
37,483.2

$
36,985.0

$
29,526.2

$
26,069.4


Contractual Obligations. The following table summarizes the expected payment of significant contractual obligations by due date or stated maturity date at December 31, 2019.
(in millions)
Total
Less than
1 Year
1 to 3
Years
4 to 5
Years
Thereafter
Consolidated obligations (at par):
 
 
 
 
 
     Bonds (1)
$
66,704.2

$
50,306.9

$
9,974.1

$
2,416.8

$
4,006.4

     Discount notes
23,211.5

23,211.5




Mandatorily redeemable capital stock
343.6

3.3


340.0

0.3

Operating leases
10.7

2.1

4.1

3.9

0.6

Pension and post-retirement contributions
21.8

1.7

2.9