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Federal Home Loan Bank Of Cincinnati (1326771) SEC Filing 10-Q Quarterly report for the period ending Tuesday, June 30, 2020

Federal Home Loan Bank Of Cincinnati

CIK: 1326771

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Contact:
News Release
John Byczkowski, FHLB Cincinnati
FOR IMMEDIATE RELEASE
513.852.7085 (office) or 513.382.7615 (cell)
July 29, 2020
        
FHLB CINCINNATI ANNOUNCES SECOND QUARTER 2020 RESULTS

Cincinnati, Ohio – The Federal Home Loan Bank of Cincinnati (the FHLB) today released unaudited financial results for the second quarter ended June 30, 2020.
Operating Results
For the second quarter, net income was $99 million and return on average equity (ROE) was 7.12 percent. This compares to net income of $64 million and ROE of 5.09 percent for the same period of 2019. For the first six months of 2020, net income was $179 million and ROE was 7.04 percent, compared to net income of $137 million and ROE of 5.34 percent for the same period of 2019.
Net income increased in the year-to-date comparison period primarily due to higher non-interest income as a result of gains on the sale of certain derivatives during the first quarter of 2020. These gains were partially offset by unrealized losses on other instruments held at fair value in response to changes in interest rates. Despite the large reductions in both short- and long-term interest rates, net income increased in the quarter-to-date comparison period primarily due to higher Advance-related activity. Average Advance balances were higher in the second quarter of 2020 as a result of members' increased borrowings in March 2020 as the financial markets reacted to the coronavirus pandemic (COVID-19). Many of these Advances matured or prepaid before the end of the second quarter of 2020.
Balance Sheet Highlights
Total assets at June 30, 2020 were $90.6 billion, a decrease of $2.8 billion (three percent) from year-end 2019.
Mission Asset Activity – comprising major activities with members including Advances, Letters of Credit (off-balance sheet), and the Mortgage Purchase Program – was $82.3 billion at June 30, 2020, an increase of $7.0 billion (nine percent) from year-end 2019. The increase in Mission Asset Activity was primarily driven by growth in Letters of Credit balances.
Total investments at June 30, 2020 were $29.5 billion, a decrease of $4.9 billion (14 percent) from year-end 2019. Total investments included $12.0 billion of mortgage-backed securities and $17.5 billion of liquidity investments. Total investments dropped at June 30, 2020 primarily due to lower liquidity investments. However, the FHLB continued to maintain a robust amount of liquidity in order to meet the borrowing needs of members and to meet all current and anticipated financial commitments.


The following information was filed by Federal Home Loan Bank Of Cincinnati on Wednesday, July 29, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.


 UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
         For the quarterly period ended June 30, 2020
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 No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
Federally chartered corporation31-6000228
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
600 Atrium Two, P.O. Box 598,
 
Cincinnati,OH45201-0598
(Address of principal executive offices)
(Zip Code)
(513) 852-7500
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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.
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).
Yes    No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated Filer 
Accelerated Filer 
Non-accelerated FilerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share. As of July 31, 2020, the registrant had 36,941,953 shares of capital stock outstanding, which included stock classified as mandatorily redeemable.
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Table of Contents
PART I - FINANCIAL INFORMATION
Item 1.Financial Statements (Unaudited):
Statements of Condition - June 30, 2020 and December 31, 2019
Statements of Income - Three and six months ended June 30, 2020 and 2019
Statements of Comprehensive Income - Three and six months ended June 30, 2020 and 2019
Statements of Capital - Three and six months ended June 30, 2020 and 2019
Statements of Cash Flows - Six months ended June 30, 2020 and 2019
Notes to Unaudited Financial Statements
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II - OTHER INFORMATION
Item 1A.Risk Factors
Item 6.Exhibits
Signatures
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PART I – FINANCIAL INFORMATION


Item 1.  Financial Statements.

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(Unaudited)

(In thousands, except par value)
 June 30, 2020 December 31, 2019
ASSETS   
Cash and due from banks $22,930   $20,608  
Interest-bearing deposits905,037   550,160  
Securities purchased under agreements to resell963,844   2,348,584  
Federal funds sold3,525,000   4,833,000  
Investment securities:
Trading securities 11,977,641   11,615,693  
Available-for-sale securities293,582   1,542,185  
Held-to-maturity securities (includes $0 and $0 pledged as collateral at June 30, 2020 and December 31, 2019, respectively, that may be repledged) (a)
11,868,005   13,499,319  
Total investment securities24,139,228  26,657,197  
Advances (includes $5,415 and $5,238 at fair value under fair value option at June 30, 2020 and December 31, 2019, respectively)
48,912,975   47,369,573  
Mortgage loans held for portfolio, net of allowance for credit losses of $264 and $711 at June 30, 2020 and December 31, 2019, respectively
11,703,351   11,235,353  
Accrued interest receivable145,910   182,252  
Derivative assets 302,601   267,165  
Other assets23,803   27,667  
TOTAL ASSETS$90,644,679   $93,491,559  
LIABILITIES   
Deposits $1,235,918   $951,296  
Consolidated Obligations:    
Discount Notes (includes $649,883 and $12,386,974 at fair value under fair value option at June 30, 2020 and December 31, 2019, respectively)
44,323,911   49,084,219  
Bonds (includes $2,651,563 and $4,757,177 at fair value under fair value option at June 30, 2020 and December 31, 2019, respectively)
39,339,109   38,439,724  
Total Consolidated Obligations83,663,020   87,523,943  
Mandatorily redeemable capital stock 19,050   21,669  
Accrued interest payable89,266   126,091  
Affordable Housing Program payable 121,200   115,295  
Derivative liabilities 1,622   1,310  
Other liabilities470,681   307,499  
Total liabilities85,600,757   89,047,103  
Commitments and contingencies
CAPITAL    
Capital stock Class B putable ($100 par value); issued and outstanding shares: 38,131 shares at June 30, 2020 and 33,664 shares at December 31, 2019
3,813,110   3,366,428  
Retained earnings:
Unrestricted765,084  648,374  
Restricted481,861  446,048  
Total retained earnings1,246,945   1,094,422  
Accumulated other comprehensive loss (16,133)  (16,394) 
Total capital5,043,922   4,444,456  
TOTAL LIABILITIES AND CAPITAL$90,644,679   $93,491,559  
(a)Fair values: $12,023,183 and $13,501,207 at June 30, 2020 and December 31, 2019, respectively.

The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(Unaudited)
(In thousands)Three Months Ended June 30,Six Months Ended June 30,
 2020 201920202019
INTEREST INCOME:   
Advances$158,437   $320,763  $330,604  $723,540  
Prepayment fees on Advances, net13,320   165  17,594  180  
Interest-bearing deposits410   3,737  3,760  5,281  
Securities purchased under agreements to resell236   22,223  10,390  41,048  
Federal funds sold554   59,192  29,080  123,021  
Investment securities:
Trading securities67,691   45,389  135,595  50,560  
Available-for-sale securities619   4,854  4,015  18,413  
Held-to-maturity securities48,379  103,979  116,683  210,452  
Total investment securities116,689  154,222  256,293  279,425  
Mortgage loans held for portfolio74,151   85,587  163,408  174,252  
Loans to other FHLBanks—   50  60  70  
Total interest income363,797   645,939  811,189  1,346,817  
INTEREST EXPENSE:   
Consolidated Obligations:
Discount Notes83,332   244,185  259,456  555,895  
Bonds129,808   300,060  315,795  562,923  
Total Consolidated Obligations213,140  544,245  575,251  1,118,818  
Deposits198   3,973  3,174  7,671  
Mandatorily redeemable capital stock864   293  1,054  642  
Total interest expense214,202   548,511  579,479  1,127,131  
NET INTEREST INCOME149,595   97,428  231,710  219,686  
NON-INTEREST INCOME (LOSS):   
Net gains (losses) on investment securities(10,404) 171,461  362,002  193,587  
Net gains (losses) on financial instruments held under fair value option
25,741  (24,753) (25,089) (41,934) 
Net gains (losses) on derivatives and hedging activities(33,972)  (152,126) (327,938) (178,085) 
Other, net3,610   2,759  6,689  5,374  
Total non-interest income (loss)(15,025)  (2,659) 15,664  (21,058) 
NON-INTEREST EXPENSE:   
Compensation and benefits11,951   11,376  25,291  24,035  
Other operating expenses4,968   5,468  11,071  10,945  
Finance Agency1,629   1,695  3,257  3,391  
Office of Finance1,445   1,114  2,703  2,480  
Other4,025   3,725  5,976  4,950  
Total non-interest expense24,018   23,378  48,298  45,801  
INCOME BEFORE ASSESSMENTS110,552   71,391  199,076  152,827  
Affordable Housing Program assessments11,142   7,168  20,013  15,347  
NET INCOME$99,410   $64,223  $179,063  $137,480  
The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

(In thousands)Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Net income$99,410  $64,223  $179,063  $137,480  
Other comprehensive income adjustments:
Net unrealized gains (losses) on available-for-sale securities
22  (437) (883) (250) 
Pension and postretirement benefits581  516  1,144  917  
Total other comprehensive income (loss) adjustments
603  79  261  667  
Comprehensive income$100,013  $64,302  $179,324  $138,147  

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

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FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(Unaudited)
(In thousands)Capital Stock
Class B - Putable
Retained EarningsAccumulated Other ComprehensiveTotal
 SharesPar ValueUnrestrictedRestrictedTotalLossCapital
BALANCE, MARCH 31, 201940,590  $4,058,981  $625,103  $405,481  $1,030,584  $(12,455) $5,077,110  
Comprehensive income (loss)51,379  12,844  64,223  79  64,302  
Proceeds from sale of capital stock1,477  147,687  147,687  
Repurchase of capital stock(4,000) (400,000) (400,000) 
Net shares reclassified to mandatorily
redeemable capital stock
(2) (138) (138) 
Cash dividends on capital stock(57,848) (57,848) (57,848) 
BALANCE, JUNE 30, 201938,065  $3,806,530  $618,634  $418,325  $1,036,959  $(12,376) $4,831,113  
BALANCE, MARCH 31, 202047,394  $4,739,413  $690,615  $461,979  $1,152,594  $(16,736) $5,875,271  
Comprehensive income (loss)  79,528  19,882  99,410  603  100,013  
Proceeds from sale of capital stock313  31,339   31,339  
Repurchase of capital stock(9,500) (950,000) (950,000) 
Net shares reclassified to mandatorily
redeemable capital stock
(76) (7,642)  (7,642) 
Partial recovery of prior capital distribution to Financing Corporation
16,533  16,533  16,533  
Cash dividends on capital stock  (21,592) (21,592)  (21,592) 
BALANCE, JUNE 30, 202038,131  $3,813,110  $765,084  $481,861  $1,246,945  $(16,133) $5,043,922  
(In thousands)Capital Stock
Class B - Putable
Retained EarningsAccumulated Other ComprehensiveTotal
 SharesPar ValueUnrestrictedRestrictedTotalLossCapital
BALANCE, DECEMBER 31, 201843,205  $4,320,459  $631,971  $390,829  $1,022,800  $(13,043) $5,330,216  
Comprehensive income (loss)109,984  27,496  137,480  667  138,147  
Proceeds from sale of capital stock3,758  375,793  375,793  
Repurchase of capital stock(8,886) (888,544) (888,544) 
Net shares reclassified to mandatorily
redeemable capital stock
(12) (1,178) (1,178) 
Cash dividends on capital stock(123,321) (123,321) (123,321) 
BALANCE, JUNE 30, 201938,065  $3,806,530  $618,634  $418,325  $1,036,959  $(12,376) $4,831,113  
BALANCE, DECEMBER 31, 201933,664  $3,366,428  $648,374  $446,048  $1,094,422  $(16,394) $4,444,456  
Adjustment for cumulative effect of
accounting change
366  366  366  
Comprehensive income (loss)  143,250  35,813  179,063  261  179,324  
Proceeds from sale of capital stock21,042  2,104,201   2,104,201  
Repurchase of capital stock(11,000) (1,100,000) (1,100,000) 
Net shares reclassified to mandatorily
redeemable capital stock
(5,575) (557,519)  (557,519) 
Partial recovery of prior capital distribution to Financing Corporation
16,533  16,533  16,533  
Cash dividends on capital stock  (43,439) (43,439)  (43,439) 
BALANCE, JUNE 30, 202038,131  $3,813,110  $765,084  $481,861  $1,246,945  $(16,133) $5,043,922  

The accompanying notes are an integral part of these financial statements.
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FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)Six Months Ended June 30,
 2020 2019
OPERATING ACTIVITIES:   
Net income$179,063   $137,480  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
   
Depreciation and amortization40,466   23,241  
Net change in derivative and hedging activities
(224,019)  (151,533) 
Net change in fair value adjustments on trading securities(362,002)  (193,587) 
Net change in fair value adjustments on financial instruments held under fair value option
25,089  41,934  
Other adjustments569   386  
Net change in:  
Accrued interest receivable36,565   (31,419) 
Other assets3,172   4,813  
Accrued interest payable(40,551)  29,128  
Other liabilities20,018   3,694  
Total adjustments(500,693)  (273,343) 
Net cash provided by (used in) operating activities(321,630)  (135,863) 
INVESTING ACTIVITIES:   
Net change in:   
Interest-bearing deposits(590,355)  (554,112) 
Securities purchased under agreements to resell1,384,740   1,101,023  
Federal funds sold1,308,000   (2,887,000) 
Premises, software, and equipment(863)  (1,244) 
Trading securities:   
Proceeds from maturities54   74  
Purchases—  (8,344,204) 
Available-for-sale securities:   
Proceeds from maturities1,810,000   3,300,000  
Purchases(400,000) (1,886,000) 
Held-to-maturity securities:   
Proceeds from maturities1,659,909   1,385,566  
Purchases(34,234)  (945,214) 
Advances:   
Repaid359,827,848   756,877,187  
Originated(360,969,150)  (744,759,498) 
Mortgage loans held for portfolio:   
Principal collected1,667,502   653,475  
Purchases(2,161,320)  (801,061) 
Net cash provided by (used in) investing activities3,502,131   3,138,992  
The accompanying notes are an integral part of these financial statements.
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(continued from previous page)
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)Six Months Ended June 30,
2020 2019
FINANCING ACTIVITIES:   
Net change in deposits and pass-through reserves$281,252   $39,939  
Net proceeds (payments) on derivative contracts with financing elements(689)  (221) 
Net proceeds from issuance of Consolidated Obligations:   
Discount Notes180,208,634   295,761,694  
Bonds20,341,399   19,473,745  
Payments for maturing and retiring Consolidated Obligations:   
Discount Notes(184,963,367)  (301,226,879) 
Bonds(19,462,565)  (16,401,800) 
Proceeds from issuance of capital stock2,104,201   375,793  
Payments for repurchase of capital stock
(1,100,000) (888,544) 
Payments for repurchase/redemption of mandatorily redeemable capital stock
(560,138)  (1,801) 
Cash dividends paid(43,439)  (123,321) 
Partial recovery of prior capital distribution to Financing Corporation
16,533  —  
Net cash provided by (used in) financing activities(3,178,179)  (2,991,395) 
Net increase (decrease) in cash and due from banks2,322   11,734  
Cash and due from banks at beginning of the period20,608   10,037  
Cash and due from banks at end of the period$22,930   $21,771  
Supplemental Disclosures:   
Interest paid$643,599   $1,096,849  
Affordable Housing Program payments, net$14,108   $14,277  


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

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FEDERAL HOME LOAN BANK OF CINCINNATI

NOTES TO UNAUDITED FINANCIAL STATEMENTS


Background Information 

The Federal Home Loan Bank of Cincinnati (the FHLB), a federally chartered corporation, is one of 11 District Federal Home Loan Banks (FHLBanks). The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLB is regulated by the Federal Housing Finance Agency (Finance Agency).

Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates. These assumptions and estimates affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates. The interim financial statements presented are unaudited, but they include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, and cash flows for such periods. These financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the audited financial statements and notes included in the FHLB's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (SEC). Results for the six months ended June 30, 2020 are not necessarily indicative of operating results for the full year.

The FHLB presents certain financial instruments, including derivative instruments and securities purchased under agreements to resell, on a net basis when it has a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). For these instruments, the FHLB has elected to offset its asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements. The FHLB did not have any offsetting liabilities related to its securities purchased under agreements to resell for the periods presented.

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 6. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. For more information about the FHLB's investments in securities purchased under agreements to resell, see “Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies” in the FHLB's 2019 Annual Report on Form 10-K.

The FHLB did not hold any equity securities as of June 30, 2020 and December 31, 2019.

Subsequent Events

The FHLB has evaluated subsequent events for potential recognition or disclosure through the issuance of these financial statements and believes there have been no material subsequent events requiring additional disclosure or recognition in these financial statements.

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Significant Accounting Policies

Beginning January 1, 2020, the FHLB adopted new accounting guidance related to the measurement of credit losses on financial instruments, which requires a financial asset or group of financial assets measured at amortized cost to be presented at the net amount expected to be collected. The new guidance also requires credit losses relating to these financial instruments and available-for-sale securities to be recorded through the allowance for credit losses. Key changes from prior accounting guidance are detailed below. Consistent with the modified retrospective method of adoption, the prior period has not been revised to conform to the new basis of accounting. See “Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies” in the FHLB's 2019 Annual Report on Form 10-K for information on the prior accounting treatment.

Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold. These investments provide short-term liquidity and are carried at amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition.

These investments are evaluated quarterly for expected credit losses. If applicable, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The FHLB applies the collateral maintenance provision practical expedient when evaluating securities purchased under agreements to resell for credit losses. Consequently, a credit loss would be recognized if there is a collateral shortfall which the FHLB does not believe the counterparty will replenish in accordance with its contractual terms. The credit loss would be limited to the difference between the fair value of the collateral and the investment’s amortized cost.

See Note 3 - Investments for details on the allowance methodologies relating to these investments.

Investment Securities.

Available for Sale. For securities classified as available-for-sale, the FHLB evaluates an individual security for impairment on a quarterly basis by comparing the security’s fair value to its amortized cost. Accrued interest receivable is recorded separately on the Statements of Condition. Impairment exists when the fair value of the investment is less than its amortized cost (i.e., in an unrealized loss position). In assessing whether a credit loss exists on an impaired security, the FHLB considers whether there would be a shortfall in receiving all cash flows contractually due. When a shortfall is considered possible, the FHLB compares the present value of cash flows to be collected from the security with the amortized cost basis of the security. If the present value of cash flows is less than amortized cost, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance is limited by the amount of the unrealized loss. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately.

If management intends to sell an impaired security classified as available-for-sale, or more likely than not will be required to sell the security before expected recovery of its amortized cost basis, any allowance for credit losses is written off and the amortized cost basis is written down to the security’s fair value at the reporting date with any incremental impairment reported in earnings as net gains (losses) on investment securities. If management does not intend to sell an impaired security classified as available-for-sale and it is not more likely than not that management will be required to sell the debt security, then the credit portion of the difference is recognized as an allowance for credit losses and any remaining difference between the security’s fair value and amortized cost is recorded to net unrealized gains (losses) on available-for-sale securities within other comprehensive income (loss).

Prior to January 1, 2020, credit losses were recorded as a direct write-down of the available-for-sale security carrying value. As of December 31, 2019, the FHLB had not recorded any direct write-downs to the carrying value of its available-for-sale securities.

Held-to-Maturity. Securities that the FHLB has both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost, which is original cost net of periodic principal repayments and amortization of premiums and accretion of discounts. Accrued interest receivable is recorded separately on the Statements of Condition.

Held-to-maturity securities are evaluated quarterly for expected credit losses on a pool basis unless an individual assessment is deemed necessary because the securities do not possess similar risk characteristics. An allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. The allowance for credit losses excludes uncollectible accrued interest receivable, which is measured separately. Prior to January 1, 2020, credit losses were recorded as a direct write-down of the held-to-maturity security carrying value. As of December 31, 2019, the FHLB had not recorded any direct write-downs to the carrying value of its held-to-maturity securities.
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See Note 3 - Investments for details on the allowance methodologies relating to available-for-sale and held-to-maturity securities.

Advances. Advances (loans to members, former members, or housing associates) are carried at amortized cost, or at fair value, when the fair value option has been elected. Advances recorded at amortized cost are carried at original cost net of periodic principal repayments and amortization of premiums and accretion of discounts (including discounts related to the Affordable Housing Program), unearned commitment fees, and fair value hedge adjustments. Accrued interest receivable is recorded separately on the Statements of Condition. The Advances carried at amortized cost are evaluated quarterly for expected credit losses. If deemed necessary, an allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses. See Note 4 - Advances for details on the allowance methodology relating to Advances.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio are recorded at amortized cost, which is original cost, net of periodic principal repayments and amortization of premiums and accretion of discounts, hedging basis adjustments on loans initially classified as mortgage loan commitments, and direct write-downs. The FHLB has the intent and ability to hold these mortgage loans to maturity. Accrued interest receivable is recorded separately on the Statements of Condition. The FHLB performs a quarterly assessment of its mortgage loans held for portfolio to estimate expected credit losses. An allowance for credit losses is recorded with a corresponding adjustment to the provision (reversal) for credit losses.

The FHLB measures expected credit losses on mortgage loans on a collective basis, pooling loans with similar risk characteristics. If a mortgage loan no longer shares risk characteristics with other loans, it is removed from the pool and evaluated for expected credit losses on an individual basis.

When developing the allowance for credit losses, the FHLB measures the expected loss over the estimated remaining life of a mortgage loan, which also considers how the FHLB’s credit enhancements mitigate credit losses. If a loan is purchased at a discount, the discount does not offset the allowance for credit losses. The FHLB’s measurement of expected credit losses takes into consideration any accrued interest that may be lost as a result of a default.

The FHLB does not purchase mortgage loans with credit deterioration present at the time of purchase. The FHLB includes estimates of expected recoveries within the allowance for credit losses. See Note 5 - Mortgage Loans for details on the allowance methodologies relating to mortgage loans.

Off-Balance Sheet Credit Exposures. The FHLB evaluates its off-balance sheet credit exposures on a quarterly basis for expected credit losses. If deemed necessary, an allowance for expected credit losses on these off-balance sheet exposures is recorded in other liabilities with a corresponding adjustment to the provision (reversal) for credit losses.


Note 2 - Recently Issued Accounting Standards and Interpretations

Troubled Debt Restructuring Relief. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act providing optional, temporary relief from accounting for certain loan modifications as troubled debt restructurings (TDRs) was signed into law. Under the CARES Act, TDR relief is available to banks for loan modifications related to the adverse effects of the coronavirus pandemic (COVID-19) granted to borrowers that were current as of December 31, 2019. TDR relief applies to COVID-19 related modifications made from March 1, 2020, until the earlier of December 31, 2020, or 60 days following the termination of the national emergency declared by the President of the United States. The FHLB elected to apply the TDR relief provided by the CARES Act.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On March 12, 2020, the Financial Accounting Standards Board (FASB) issued temporary, optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate reform if certain criteria are met. The transactions primarily include (1) contract modifications, (2) hedging relationships, and (3) sale and/or transfer of debt securities classified as held-to-maturity. This guidance is effective immediately for the FHLB, and the amendments may be applied prospectively through December 31, 2022. The FHLB has assessed the guidance and plans to elect the majority of the optional expedients and exceptions provided; however, the effect on the FHLB's financial condition, results of operations and cash flows has not yet been determined.

Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. On August 29, 2018, the FASB issued amended guidance that aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This
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guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2020. The guidance did not have a material impact on the FHLB’s financial condition, results of operations, and cash flows.

Changes to the Disclosure Requirements for Defined Benefit Plans. On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans to improve disclosure effectiveness. This guidance becomes effective for annual periods ending after December 15, 2020 (December 31, 2020 for the FHLB) and will be applied retrospectively for all comparative periods presented. Early adoption is permitted. The FHLB will adopt this guidance for the year ending December 31, 2020. The adoption of this guidance will affect the FHLB's disclosures, but will not have any effect on the FHLB's financial condition, results of operations, or cash flows.

Changes to the Disclosure Requirements for Fair Value Measurement. On August 28, 2018, the FASB issued amended guidance that modifies the disclosure requirements for fair value measurements to improve disclosure effectiveness. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2020. The adoption of this guidance affected the FHLB's disclosures, but did not have any effect on the FHLB's financial condition, results of operations, or cash flows.
Measurement of Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to immediately record the full amount of expected credit losses in their loan portfolios. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses and expanded disclosure requirements. The guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2020. The guidance was applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance was effective. The adoption of this guidance did not result in an allowance for credit losses for certain financial instruments including Advances, U.S. obligation/GSE investments, securities purchased under agreement to resell and other short-term investments given the specific terms, issuer guarantees, and/or collateralized/secured nature of the instruments. For mortgage loans held for portfolio, the adoption of this guidance did not have a material impact on the FHLB's financial condition, results of operations, or cash flows.


Note 3 - Investments

The FHLB makes short-term investments in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold and may make other investments in debt securities, which are classified as either trading, available-for-sale, or held-to-maturity.

Interest-Bearing Deposits, Securities Purchased under Agreements to Resell, and Federal Funds Sold

The FHLB invests in interest-bearing deposits, securities purchased under agreements to resell, and Federal funds sold to provide short-term liquidity. These investments are transacted with counterparties that have received a credit rating of single-A or greater by a nationally recognized statistical rating organization (NRSRO). The FHLB’s internal ratings of these counterparties may differ from those issued by an NRSRO.

Federal funds sold are unsecured loans that are generally transacted on an overnight term. FHFA regulations include a limit on the amount of unsecured credit the FHLB may extend to a counterparty. At June 30, 2020 and December 31, 2019, all investments in interest-bearing deposits and Federal funds sold were repaid or expected to be repaid according to the contractual terms. No allowance for credit losses was recorded for these assets at June 30, 2020 and December 31, 2019. Carrying values of interest-bearing deposits and Federal funds sold exclude accrued interest receivable of (in thousands) $124 and $8 as of June 30, 2020, and $1,162 and $210 as of December 31, 2019.

Securities purchased under agreements to resell are short-term and are structured such that they are evaluated regularly to determine if the market value of the underlying securities decreases below the market value required as collateral (i.e., subject to collateral maintenance provisions). If so, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash, generally by the next business day. Based upon the collateral held as security and collateral maintenance provisions with counterparties, the FHLB determined that no allowance for credit losses was needed for its securities purchased under agreements to resell at June 30, 2020 and December 31, 2019. The carrying value of securities purchased under agreements to resell excludes accrued interest receivable of (in thousands) $14 and $3,503 as of June 30, 2020 and December 31, 2019.
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Debt Securities

The FHLB invests in debt securities, which are classified as either trading, available-for-sale, or held-to-maturity. The FHLB is prohibited by Finance Agency regulations from purchasing certain higher-risk securities, such as equity securities and debt instruments that are not investment quality, other than certain investments targeted at low-income persons or communities and instruments that experienced credit deterioration after their purchase by the FHLB.

Trading Securities

Table 3.1 - Trading Securities by Major Security Types (in thousands)
Fair ValueJune 30, 2020 December 31, 2019
Non-mortgage-backed securities (non-MBS):
U.S. Treasury obligations$9,828,791  $9,626,964  
GSE obligations2,148,433   1,988,259  
Total non-MBS11,977,224  11,615,223  
Mortgage-backed securities (MBS):   
U.S. obligation single-family MBS417   470  
Total$11,977,641   $11,615,693  

Table 3.2 - Net Gains (Losses) on Trading Securities (in thousands)
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
Net gains (losses) on trading securities held at period end
$(10,404) $171,461  $362,002   $193,587  
Net gains (losses) on trading securities$(10,404) $171,461  $362,002   $193,587  

Available-for-Sale Securities

Table 3.3 - Available-for-Sale Securities by Major Security Types (in thousands)
 June 30, 2020
 
Amortized
Cost (1)
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
Non-MBS:
GSE obligations$143,285  $271  $(572) $142,984  
Total non-MBS143,285  271  (572) 142,984  
MBS:
GSE multi-family MBS150,810  84  (296) 150,598  
Total MBS150,810  84  (296) 150,598  
Total$294,095  $355  $(868) $293,582  
 December 31, 2019
 
Amortized
Cost (1)
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
Certificates of deposit$1,410,000   $111   $—  $1,410,111  
GSE obligations131,815  601  (342) 132,074  
Total$1,541,815  $712  $(342) $1,542,185  
(1)Amortized cost of available-for-sale securities includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments, and excludes accrued interest receivable of (in thousands) $1,083 and $5,149 at June 30, 2020 and December 31, 2019.

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Table 3.4 summarizes the available-for-sale securities with unrealized losses, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 3.4 - Available-for-Sale Securities in a Continuous Unrealized Loss Position (in thousands)
June 30, 2020
Less than 12 Months12 Months or moreTotal
 Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
Non-MBS:
GSE obligations$50,873  $(451) $16,658  $(121) $67,531  $(572) 
Total non-MBS50,873  (451) 16,658  (121) 67,531  (572) 
MBS:
GSE multi-family MBS116,466  (296) —  —  116,466  (296) 
Total MBS116,466  (296) —  —  116,466  (296) 
Total$167,339  $(747) $16,658  $(121) $183,997  $(868) 
December 31, 2019
Less than 12 Months12 Months or moreTotal
Fair ValueGross Unrealized LossesFair ValueGross Unrealized LossesFair ValueGross Unrealized Losses
GSE obligations$17,071  $(126) $21,574  $(216) $38,645  $(342) 
Total $17,071  $(126) $21,574  $(216) $38,645  $(342) 

Table 3.5 - Available-for-Sale Securities by Contractual Maturity (in thousands)
 June 30, 2020 December 31, 2019
Year of MaturityAmortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
Non-MBS:
Due in 1 year or less$—   $—   $1,410,000   $1,410,111  
Due after 1 year through 5 years—  —  —  —  
Due after 5 years through 10 years129,429  129,353  119,771  119,870  
Due after 10 years13,856  13,631  12,044  12,204  
Total non-MBS143,285  142,984  1,541,815  1,542,185  
MBS (1)
150,810  150,598  —  —  
Total$294,095  $293,582  $1,541,815  $1,542,185  
(1)MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.6 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
 June 30, 2020 December 31, 2019
Amortized cost of non-MBS:   
Fixed-rate$143,285   $1,541,815  
Total amortized cost of non-MBS143,285  1,541,815  
Amortized cost of MBS:
Fixed-rate150,810  —  
Total amortized cost of MBS150,810  —  
Total$294,095  $1,541,815  

The FHLB had no sales of securities out of its available-for-sale portfolio for the six months ended June 30, 2020 or 2019.

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Held-to-Maturity Securities

Table 3.7 - Held-to-Maturity Securities by Major Security Types (in thousands)
June 30, 2020
Amortized Cost (1)
Gross Unrecognized Holding
Gains
Gross Unrecognized Holding LossesFair Value
Non-MBS:
U.S. Treasury obligations
$34,478  $20  $—  $34,498  
Total non-MBS34,478  20  —  34,498  
MBS:    
U.S. obligation single-family MBS1,407,502  56,681  (337) 1,463,846  
GSE single-family MBS
3,888,426  124,789  —  4,013,215  
GSE multi-family MBS
6,537,599  1,468  (27,443) 6,511,624  
Total MBS11,833,527  182,938  (27,780) 11,988,685  
Total$11,868,005  $182,958  $(27,780) $12,023,183  
 
 December 31, 2019
 
Amortized Cost (1)
Gross Unrecognized Holding
Gains
Gross Unrecognized Holding LossesFair Value
Non-MBS:
U.S. Treasury obligations$35,171  $ $—  $35,176  
Total non-MBS35,171   —  35,176  
MBS:   
U.S. obligation single-family MBS1,670,783  13,499  (239) 1,684,043  
GSE single-family MBS4,500,471  40,386  (24,072) 4,516,785  
GSE multi-family MBS7,292,894  54  (27,745) 7,265,203  
Total MBS13,464,148  53,939  (52,056) 13,466,031  
Total$13,499,319  $53,944  $(52,056) $13,501,207  
 
(1)Carrying value equals amortized cost. Amortized cost of held-to-maturity securities includes adjustments made to the cost basis of an investment for accretion and amortization and excludes accrued interest receivable of (in thousands) $12,131 and $20,365 as of June 30, 2020 and December 31, 2019.

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Table 3.8 - Net Purchased Premiums Included in the Amortized Cost of MBS Classified as Held-to-Maturity (in thousands)
June 30, 2020December 31, 2019
Premiums$21,816  $32,071  
Discounts(9,380) (13,996) 
Net purchased premiums$12,436  $18,075  

Table 3.9 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
June 30, 2020December 31, 2019
Year of Maturity
Amortized Cost (1)
Fair Value
Amortized Cost (1)
Fair Value
Non-MBS:    
Due in 1 year or less$34,478  $34,498  $35,171  $35,176  
Due after 1 year through 5 years—  —  —  —  
Due after 5 years through 10 years—  —  —  —  
Due after 10 years—  —  —  —  
Total non-MBS34,478  34,498  35,171  35,176  
MBS (2)
11,833,527  11,988,685  13,464,148  13,466,031  
Total$11,868,005  $12,023,183  $13,499,319  $13,501,207  
(1)Carrying value equals amortized cost.
(2)MBS are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

Table 3.10 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
 June 30, 2020December 31, 2019
Amortized cost of non-MBS:   
Fixed-rate$34,478   $35,171  
Total amortized cost of non-MBS34,478   35,171  
Amortized cost of MBS:   
Fixed-rate4,744,117   5,438,532  
Variable-rate7,089,410   8,025,616  
Total amortized cost of MBS11,833,527   13,464,148  
Total$11,868,005   $13,499,319  

From time to time the FHLB may sell securities out of its held-to-maturity portfolio. These securities, generally, have less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification. For the six months ended June 30, 2020 and 2019, the FHLB did not sell any held-to-maturity securities.