UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Registrant's telephone number, including area code

(513) 852-7500

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

Securities registered pursuant to Section 12(g) of the Act:

Class B Stock, par value $100 per share

(Title of class)

PART I

This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (FHLBank)(the FHLB). These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:

We do not undertake any obligation to update any forward-looking statements made in this document.

The FHLBankFHLB is a regional wholesale bank that provides financial products and services to our member financial institutions.members. We are onepart of 12 District Banks in the FHLBank System; ourSystem (or System). Each FHLBank operates as a separate entity with its own stockholders, employees, Board of Directors, and business model. Our region, known as the Fifth District, comprisesis comprised of Kentucky, Ohio and Tennessee.

The U.S. Congress chartered the FHLBank System in the Federal Home Loan Bank Act of 1932 (the FHLBank Act) to improvehelp provide liquidity in the U.S. housing market. Each District Bank is a government-sponsored enterprise (GSE)FHLBanks are GSEs of the United States of America and operates as a separate entity with its own stockholders, employees, and Board of Directors.America. A GSE combines private sector ownership with public sector sponsorship. In addition to being GSEs, the FHLBanks are cooperative institutions, privately and wholly owned by their members, who purchase capital stock and who are the primary customers.

The FHLBanks are not government agencies and are exempt from federal, state, and local taxation (except real property taxes). Thethe U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the FHLBank System.

The FHLBank System also includes the Federal Housing Finance Agency (Finance Agency) and the Office of Finance. The Finance Agency is an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, the Federal National Mortgage Association (Fannie Mae) and, the Federal Home Loan Mortgage Corporation (Freddie Mac). The Finance Agency oversees, and the conservatorshipsOffice of Fannie Mae and Freddie Mac.Finance. The Office of Finance is a joint office of the District Banks regulated by the Finance Agency to facilitateFHLBanks that facilitates the issuance and servicing of the FHLBank System's Consolidated Obligations (or Obligations).

In addition to being GSEs, the FHLBanks are cooperative institutions, which means our stockholders are also our primary customers. Private-sector financial institutions within our district voluntarily become members of our FHLBank and purchase capital stock in order to gain access to products and services. Only members can purchase capital stock. All Fifth District federally insured depository institutions, certain insurance companies, and community development financial institutions chartered in the Fifth District may voluntarily apply for membership. Such applicantsmembership in our FHLB. Applicants must satisfy membership requirements in accordance with federal legislationstatutes and Finance Agency regulations. These requirements deal primarily with home financing activities, satisfactory financial condition such that Advances may be made safely, to the member, and matters related to the regulatory, supervisory and management oversight of the applicant. By law, an institution is permitted to be a member of only one Federal Home Loan Bank,FHLBank, although a holding company may have memberships in more than one District BankFHLBank through its subsidiaries.

The combination of public sponsorship and private ownership that drives our business model is reflected in the composition of our 17-member Board of Directors, all of whom our members elect. Ten directors are officers and/or directors of our member institutions, while the remaining directors are independent directors who represent the public interest.

The FHLBank'sFHLB's mission is to provide financial intermediation between the capital markets and our member stockholders and the capital markets in order to facilitate and expand the availability of financing and flow of credit for housing and community lending throughoutand investment.

We achieve our mission through a cooperative business model. We raise private-sector capital from member stockholders and issue high-quality debt securities in the Fifth District. Wecapital markets (along with other FHLBanks) in order to provide products and services (called Mission Asset Activity) to members with competitive services and generate a competitive return on their FHLBank capital investment through quarterly dividend payments. Ourin our company.

The primary services include a reliable,products we offer are readily available low-cost source of fundsloans called Advances, and purchases of certain whole mortgage loans sold by our qualifying members. An important componentmembers through the Mortgage Purchase Program (MPP), and Letters of our mission related to public sector sponsorship is providingCredit. We also offer affordable housing programs and related activities to support members in their efforts to assist low- and moderate- income peoplemoderate-income households and their local communities. We finance our operations mostly by raising private-sector capital from member stockholders and by issuing high-quality debt in the capital markets with other FHLBanks.

To help us achieve our mission,The primary way we invest in highly-rated debt instruments of financial institutions and the U.S. government and in mortgage-related securities. In practice, these investments normally include shorter-term liquidity instruments and longer-term mortgage-backed securities. Investments furnish liquidity, help us manage market risk exposure, enhance earnings, and (through the purchase of mortgage-related securities) support the housing market.

advantage in funding, which is due largely to its GSE status.status and low risk operations. We regularly issue Obligations under a wide range of maturities, structures, and amounts, and at relatively favorable spreads to benchmark market interest rates (represented by U.S. Treasury securities and the London InterBank Offered Rate (LIBOR)) compared with many other financial institutions.

Because we are a cooperative organization with some members using our products more heavily than others and members having different percentages of capital stock, we must achieve a balance in generating membership value from product prices and characteristics and paying a competitive dividend rate. We also execute derivative transactionsattempt to help hedge market risk exposure. These capabilities enable us to offer members a wide range ofachieve this balance by pricing Mission Asset Activity at relatively narrow spreads over funding costs, compared with other financial institutions, while still achieving acceptable profitability.

Our corporate objectives, listed below, are to promote housing finance among members and enableensure our operations and governance are effective and efficient. The first three objectives drive how members to accessderive value from being in the capital markets, throughcooperative.

The following are our principal business activities with the FHLBank, in ways that may not be availablemembers:

Together, these product offerings constitute “Mission Asset Activity.” We refer to them without our services.Advances and Letters of Credit as Credit Services.

In addition, through various Housing and Community Investment programs, we assist members in serving very low-, low-, and moderate-income households and community economic development. These programs provide Advances at below-market rates of Nationally Recognized Statistical Rating Organizationsinterest, as well as direct grants.

To help us achieve our mission and corporate objectives, we invest in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assign, and historically has assigned, the System's Obligations the highest ratings available: long-termhighly-rated debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 2012. This action was taken based on Moody's expectation that the respective long-term ratings are unlikely to fall below the AA level and that the FHLBanks have sufficient asset liquidity for business operations in the event there would be any short-term disruptions in the short-term debt markets.

Our major source of revenue is interest income earned on Advances, MPP notes,loans, and investments.

Major items of expense are:

The largest component of earnings is net interest income, which equals interest income minus interest expense. We derive net interest income from the interest rate spread earned on assets versus funding costs and the use of financial leverage. Each of these can vary over time with changes in market conditions, including most importantly interest rates, business conditions and our risk management activities.

The FHLBank System's comparative advantage in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assigns, and historically has assigned, the System's Consolidated Obligations the highest ratings available: long-term debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 2015 and maintained a stable outlook. In 2015, Standard & Poor's affirmed its issuer credit ratings on each FHLBank and its AA+ ratings on the System's senior debt and also maintained a stable outlook.

The agencies' rationales for their ratings of the System and our FHLB include the System's status as a GSE; the joint and several liability for Obligations; excellent overall asset quality; extremely strong capacity to meet commitments to pay timely principal and interest rate spread is the difference between the interest we earn on assetsdebt; strong liquidity; conservative use of derivatives; adequate capitalization relative to our risk profile; a stable capital structure; and the fact that no FHLBank has ever defaulted on repayment of, or delayed return of principal or interest we pay on, liabilities. Financial leverage results from fundingany Obligation.

A credit rating is not a portionrecommendation to buy, sell or hold securities. A rating organization may revise or withdraw its ratings at any time, and each rating should be evaluated independently of interest-earning assets with capital on which we do not pay interest.any other rating. We cannot predict what future actions, if any, a rating organization may take regarding the System's or our ratings.

The Finance Agency is headed by a director (the Director)Director who has sole authority to promulgate Agency regulations and to make other Agency decisions. The Finance Agency is charged with ensuring that each FHLBank carries out its housing and community development finance mission, remains adequately capitalized, operates in a safe and sound manner, and complies with Finance Agency Regulations.regulations.

To carry out these responsibilities, the Finance Agency conducts on-site examinations at least annually of each FHLBank, as well as periodic on- and off-site reviews, and receives monthly information on each FHLBank's financial condition and operating results. While an individual FHLBank has substantial discretion in governance and operational structure, the Finance Agency maintains broad supervisory and regulatory authority. In addition, the Comptroller General has authority to audit or examine the Finance Agency and the FHLBanks, to decide the extent to which the FHLBanks fairly and effectively fulfill the purposes of the FHLBank Act, and to review any audit, or conduct its own audit, of the financial statements of an FHLBank.

We manage the development, resource allocation, product delivery, pricing, credit risk management, and operational administration of our Mission Asset Activity in two business segments: Traditional Member Finance and the MPP. Traditional Member Finance includes Credit Services, Housing and Community Investment, Investments, some correspondent and deposit services, and other financial products of the FHLBank.FHLB. See the “Segment Information” section of “Results of Operations” in Item 7 and Note 1918 of the Notes to Financial Statements for more information on our business segments, including their results of operations.

Advances. Advances provide membersare competitively priced sources of fundingfunds available for members to help manage their asset/liability and liquidity needs. Advances can both complement and be alternatives to retail deposits, other wholesale funding sources, and corporate debt issuance. We strive to facilitate efficient, fast, and continual member access to funds for our members, which we believe provides them with substantial benefits.funds. In most cases members can access funds on a same-day basis.

We price 13a variety of standard Advance programs every business day and several other standard programs on demand. We also offer customized, non-standard Advances that fall under one of the standard programs.Advances. Having diverse programs gives members the flexibility to choose and customize their borrowings according to size, maturity, interest rate, interest rate index (for adjustable-rate coupons), interest rate options, and other features.

Repurchase based (REPO) Advances are short-term, fixed-rate instruments structured similarly to repurchase agreements from investment banks, with one principal difference. Members collateralize their REPO Advances through our normal collateralization process, instead of being required to pledge specific securities as would be required in a repurchase agreement. A majority of REPO Advances outstanding normally have overnight maturities.

LIBOR Advances have adjustable interest rates typically priced off 1- or 3-month LIBOR indices. LIBOR Advances may be structured at the member's option as either prepayable with a fee or prepayable without a fee if the prepayment is made on a repricing date.

Regular Fixed RateFixed-Rate Advances have terms of three3 months to 30 years, with interest normally paid monthly and principal repayment normally at maturity. Members may choose to purchase call options on these Advances, although in the last 5five years, balances with call options have been at or close to zero.

Putable Advances are fixed- or adjustable-ratefixed-rate Advances that provide us an option to terminate the Advance, usually after an initial “lockout” period. Most have fixed-rates with long-term original maturities. Selling us these options enables members to secure lower rates on Putable Advances compared to Regular Fixed RateFixed-Rate Advances with the same final maturity.

Mortgage-Related Advances are fixed-rate, amortizing Advances with final maturities of 5 to 30 years. Some of these Advances, at the choice of the member, provide members with prepayment options without fees.

We also offer severalvarious other Advance programs that have smaller outstanding balances.

In addition, for many, but not all, Advance programs, Finance Agency Regulationsregulations require us to charge members prepayment fees for early termination of principal when the early termination results in an economic loss to us. Some Advance programs are structured as non-prepayable, such as REPO Advances. We determine prepayment fees using standard present-value calculations that make us economically indifferent to the prepayment. The prepayment fee equals the present value of the estimated profit that we would have earned over the remaining life of the prepaid Advance. If a member prepays principal on an Advance that we have hedged with an interest rate swap, we may also assess the member a fee to compensate us for the cost we incur in terminating the swap before its stated final maturity. Some Advance programs are structured as non-prepayable and may have additional restrictions in order to terminate.

The primary way weWe manage credit risk on Advances is to requireby requiring each member to supply us with a security interest in eligible collateral with anthat in the aggregate has estimated value in excess of the total Advances and Letters of Credit. Collateral is comprised mostly of single familysingle-family loans, home equity lines, multi-family loans and bond securities. We believe that theThe combination of conservative collateral policies and risk-based credit underwriting activities effectively mitigatemitigates virtually all potential credit risk associated with Advances.Advances and Letters of Credit. We have never experienced a credit loss on Advances, nor have we ever determined it necessary to establish a loan loss reserve.reserve for Advances. Item 7's “Quantitative and Qualitative Disclosures About Risk Management” and Notes 8 and 10 of the Notes to Financial Statements have more detail on our credit risk management of member borrowings.

Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance programs. We fund the Affordable Housing Program with an accrual equal to 10 percent of our previous year's regulatory income,net earnings, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA).1989. See Note 14 of the Notes to Financial Statements for a complete description of the Affordable Housing Program calculation.

The Affordable Housing Program provides funding for the development of affordable housing. The Program consists of a competitive programCompetitive Program and a homeownership set-aside program called the Welcome Home, Program.which assists homebuyers with down payments and closing costs. Under the competitive program,Competitive Program, we currently distribute funds in the form of either grants or below-market rate Advances to members that apply and successfully compete in semiannual offerings.an annual offering. Under the Welcome Home, Program,we make funds are normally available beginning in March until they have been fully committed. For both programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. UpWe set aside up to 35 percent of the Affordable Housing Program accrual is set aside for the Welcome Home Program and allocate the remainder allocated to the competitive program.Competitive Program.

Our Board of Directors also may allocate funds to voluntary housing programs, which it reviews annually.programs. In March 2012 and again in January 2013,2015, the Board authorizedre-authorized an additional $1.0$1 million forto the Carol M. Peterson Housing Fund. The Carol M. Peterson Housing Fund resourcesfor use during the year. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In March 2016, the Board re-authorized this fund in the amount of $1.5 million for use in 2016. In 2012, the Board of Directors also established the Disaster Reconstruction Program. The Disaster Reconstruction Program, is a $5 million voluntary housing program that provides grants for purchase or rehabilitation of a home to Fifth District residents that have suffered loss or damage to their primary residence as a result of a state or federally declared disaster occurring withindisaster. Since the Fifth District.program's inception, we have disbursed nearly $3 million to assist 177 households.

Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the Economic Development Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program to serve housing needs of low- and moderate-income peoplehouseholds and, under certain

conditions, community economic development projects. The Economic Development Program is a discounted Advance program used exclusively forto promote economic development projects.and job creation and retention.

We are also permitted by Finance Agency Regulationsregulation to purchase the following other investments, most of which have longer-termlonger original maturities than liquidity investments:

We have never purchased any asset-backed securitysecurities and currently do not own any privately-issued mortgage-backed securities. Per regulation,Finance Agency regulations, the total investment in mortgage-backed securities and asset-backed securities may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. (SeeSee the “Capital Resources” section below for the definition of regulatory capital.)

Market risk associated with short-term investments tends to be moderateminimal because of their short maturities and because we typically fund them with similar duration short-term Consolidated Obligations. We mitigate much of the market risk of mortgage-backed securities, which exists primarily from changes in mortgage prepayment speeds, by limiting their balances to

300 percent of regulatory capital, and by issuing and dynamically rebalancingfunding them with a portfolio of long-term unswapped fixed-rate callable and noncallable Consolidated Bonds.Obligations, and by managing the market risk exposure of the entire balance sheet within prudent policy limits.

Finance Agency Regulationsregulations and internal policies also provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. These restrictions prohibit, among others, the purchase of interest only or principal only stripped mortgage-backed securities and mortgage-backed securities whose average life varies more than six years under a 300 basis points interest rate shock.

Our internal policies specify general guidelines for, and relatively tight constraints on, the types and amounts of short-term investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our conservative investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security.

 

We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest funds in short-term liquid assets. We accept deposits from members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds members have available to invest, as well as, the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically betweenless than one and two percent of our funding sources.

Under the MPP, we purchase two types of mortgage loans: qualifying conforming fixed-rate conventional 1-4 family residential loansmortgages and residential mortgages fully guaranteedinsured by the Federal Housing Administration (FHA). Members approved to sell us these loans are referred to as Participating Financial Institutions (PFIs).We hold purchased mortgage loans on our balance sheet and account

A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2013,2016, the Finance Agency established thatre-established the conforming limit at $417,000 the same as 2006-2012, with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. Our policies prohibit us from purchasing conformingWe do not purchase mortgages subject to these higher amounts.

Shortly before delivering the loans that will fill in the Mandatory Delivery Contract, the PFI must submit loan level detail including underwriting information. We apply procedures through the automated Loan Acquisition System designed to screen loans that do not comply with our policies. Our underwriting guidelines generally mirror those of Fannie Mae and Freddie Mac for conforming conventional loans, although our guidelines and pool composition requirements are more conservative in a number of ways in order to further limit credit risk exposure. PFIs are required to make certain representations and warranties against our underwriting guidelines on the loans they sell to us. If loans are solda PFI sells us a loan in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase those loans.the loan.

CreditWe manage credit risk exposure is mitigated for conventional loans through underwriting and pool composition requirements and by applying layered credit enhancements. These enhancements, which apply after a homeowner's equity is exhausted, include (in order of priority) primary mortgage insurance (when applicable), the Lender Risk Account (discussed below), and for loans acquired before February 2011, Supplemental Mortgage Insurance (when applicable) that the PFI purchased from one of our approved third-party providers naming us as the beneficiary.

Beginning in February 2011, we discontinued use of Supplemental Mortgage Insurance for new loan purchases and replaced it with expanded use of the Lender Risk Account and aggregation of loan purchases into larger pools to provide diversification in credit risk exposure. These credit enhancements are designed to adequately protect the FHLBankus against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults.

The Lender Risk Account is a key component of how we manage residual credit risk. It is a purchase-price holdback that PFIs may receive back from us, startingof a portion of the initial purchase price. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to pre-defined acceptable levels of exposure on the loan pools they sell to us. Actual loan losses are deducted from the amount of the purchase-price holdback we return to the PFI. The Lender Risk Account provides PFIs with a strong incentive to sell us high quality performing mortgage loans.

Item 7's “Quantitative and Qualitative Disclosures About Risk Management” hasprovides more detail on ourhow we manage market and credit risk management ofrisks for the MPP.

The MPP enhances long-term profitability on a risk-adjusted basis and augments the return on member stockholders' capital investment. We generate earnings in the MPP from monthly interest payments minus the cost of funding and the cost of hedging the MPP's interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan's principal balance:

For new loan purchases, we consider the cost of the Lender Risk Account when we set conventional loan prices and evaluate the MPP's expected return. The pricing of each structure depends on a number of factors and is specific to the PFI and to the loan pool. We do not receive fees or income for retaining the risk of losses in excess of any credit enhancements.

Our primary source of funding and hedging market risk exposure is through participation in the sale of Consolidated Obligations. debt securities (Consolidated Obligations) to global investors. Obligations are the joint and several obligations of all the FHLBanks, backed only by the financial resources of these institutions.

There are two types of Consolidated Obligations: Consolidated Bonds (Bonds) and Consolidated Discount Notes (Discount Notes). We participate in the issuance of Bonds for three purposes:

Bonds may have fixed or adjustable (i.e., variable) rates of interest. Fixed-rate Bonds are either noncallable or callable. A callable Bond is one that we are able to redeem in whole or in part at our discretion on one or more predetermined call dates according to the Bond's offering notice. The maturity of Bonds typically ranges from one year to 20 years. Generally, ourOur adjustable-rate Bonds use LIBOR for interest rate resets. In the last five years, we have not issued step-up Bonds,participated in the issuance of range Bonds, zero coupon Bonds, or indexed principal redemption Bonds.

We use fixed-rate Bonds or other similarly complex instruments.to fund longer-term fixed-rate Advances and longer-term fixed-rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances.

The mix of Obligations fluctuates in response to relative changes in short-term versus long-term assets, relative changes in fixed-rate versus adjustable-rate assets, decisions on market risk management (particularly the amount of funding of longer-term assets with short-term Obligations), and differences in relative costs of various Obligations. We use fixed-rate Bonds to fund longer-term fixed-rate Advances and longer-term fixed rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances. We may transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms, mostly indexed to LIBOR. These are used normally to hedge adjustable-rate LIBOR Advances.

Finance Agency Regulationsregulations govern the issuance of Consolidated Obligations. An FHLBank may not issue individual debt securities without Finance Agency approval, and we have never done so. The Office of Finance services Obligations, prepares the FHLBank System's quarterly and annual combined financial statements, and serves as a source of information for the FHLBanks on capital market developments.

We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we receivereceived the proceeds. However, we also are jointly and severally liable with the other 11 FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLBank'sFHLB's behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If another FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation. The Finance Agency has never invoked this authority.

The FHLBank's operations requireOur business requires a continual and substantial amount of liquidity to meet financial obligations (primarily maturing Consolidated Obligations) in a timely and cost-efficient manner and to provide members access to timely Advance funding and mortgage loan sales in all financial environmentsenvironments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to meet financial obligations (primarilysell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Consolidated Obligations) as they come due in a timelyAdvances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and cost-efficient manner. Liquidity risk isinterest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the risk that we will be unable to satisfy these obligations or to meet the AdvanceMPP, purchases of investments, and MPP funding needspayments of members in a timely and cost-efficient manner. interest.

Liquidity requirements are significant because Advance balances can be highly volatile, many have short-term maturities, and we strive to offer accessallow members to borrow Advances on the same day membersthey request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.

Because Obligations have favorable credit ratings and because the FHLBank System is one of the largest sellers of debt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates. This was the case even during the severe financial crisis of late 2008 and early 2009 and the federal government's political stresses over fiscal policy in mid-2011 and late-2012.

Under Finance Agency Regulations,regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Currently, our regulatory capital consists of capital stock and retained earnings. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.

Our Capital Plan has the following basic characteristics:

In addition to the minimum capital requirements, the GLB Act and our Capital Plan promote the adequacy of our capital to absorb financial losses in three ways, which combine to give member stockholders a clear incentive to require us to minimize our risk profile:

GAAP capital excludes mandatorily redeemable capital stock, while regulatory capital includes it. Mandatorily redeemable capital stock, which is stock subject to pending redemption, is accounted for as a liability on our Statements of Condition and related dividend payments are accounted for as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to meet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 1615 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.

Our Capital Plan ties the amount of each member's required capital stock to both the amount of the member's assets (membership stock) and the amount and type of its Mission Asset Activity with us (activity stock). Membership stock is required to become a member and maintain membership. The amount required for each member currently ranges from a minimum of $1 thousand to a maximum of $25 million for each member, with the amount within thethat range determined as a percentage of member assets.

In addition to its membership stock, a member may be required to purchase and hold activity stock to capitalize its Mission Asset Activity. For purposes of the Capital Plan, Mission Asset Activity includes the principal balance of Advances, guaranteed funds and rate Advance commitments, (GFR), and the principal balance of loans and commitments in the MPP that occurred after implementation of the Capital Plan.

The FHLBankFHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. By contrast,However, each member mustis permitted to maintain an amount of Class B activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:

If a member's capitalization of Mission Asset Activity falls to one of the minimum percentages, it must purchase additional stock to capitalize further Mission Asset Activity. If a member owns more stock than is needed to satisfy both its membership stock requirement and the maximum activity stock percentages for its Mission Asset Activity, we designate the remaining stock as the member's excess capital stock. The member may utilize its excess stock to capitalize additional Mission Asset Activity.

If an individual member's excess stock reaches zero, the Capital Plan normally permits us, within certain limits, to capitalize additional Mission Asset Activity of that member with excess stock owned by other members at the maximum percentage rate. This feature, called “cooperative capital,” enables us to more effectively utilize our capital stock. A member's use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. There is a limit to how much cooperative capital a member may use, which we currently set at $200 million.

When a member's ratio of activity stock to its Mission Asset Activity reaches the minimum activity stock percentage for all types of Mission Asset Activity, the member must capitalize additional Mission Asset Activity of a given type by purchasing capital stock at that asset type's minimum percentage rate.rate, assuming availability of cooperative capital.

In accordance with the GLB Act, our stock is putable by members. However, for us and the other FHLBanks, there are significant statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:

If our FHLBankFHLB is liquidated and after payment in full to our creditors, stockholders willwould be entitled to receive the par value of their capital stock. In addition, each stockholder willwould be entitled to any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation of the FHLBank,FHLB, the Board of Directors shall determine the rights and preferences of the FHLBank'sFHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.

Retained earnings are important to protect members' capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when earnings may be volatile in light of the risks we face. Impairment risk is the risk that members would have to write down the par value of their capital stock investment in our FHLBankFHLB as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which losses exceeded the amount of our retained earnings for a period of time determined to be other-than-temporary, could result in a determination that the value of our capital stock was impaired.

The 12 Federal Home Loan BanksFHLBanks entered into a Joint Capital Enhancement Agreement (the “Capital Agreement”) in February 2011. The Capital Agreement provides that each FHLBank will allocate quarterly at least 20 percent of its net income to a restricted retained earnings account (the “Account”). The 20 percent reserve allocation to the Account is similar to what had been required under the FHLBanks' REFCORP obligation, which was satisfied in 2011. The Account is not available to be distributed as dividends except under certain limited circumstances. The Capital Agreement does not limit theour ability to use our retained earnings held outside of the Account to pay dividends.

Finance Agency Regulationsregulations and FHLBankour policies establish guidelines for the execution and use of derivative transactions. We are prohibited from trading in, or the speculative use of, derivatives and have limits on the amount of credit risk to which we may be exposed. Most of our derivatives activity involves interest rate swaps, some of which may include options. We account for all derivatives at their fair values.

Similar to our participation in debt issuances, use of derivatives help us hedgeis integral to hedging market risk created by offering Advances, purchasing mortgage assets, and transacting mortgage commitments. Derivatives related to Advances most commonly hedge either:

Derivatives related to mortgage assets are used to augment debt issuance in the hedging of market risk. We also use derivatives to hedge the market risk created by commitment periods of Mandatory Delivery Contractsassociated with fixed-rate mortgage purchase commitments in the MPP.

Other derivativesDerivatives transactions related to Bonds also help us intermediate between the normal preferencespreference of capital market investors for intermediate- and long-term fixed-rate debt securities and the normal preferencespreference of our members for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.

Use of derivatives can result in a substantial amount of volatility of accounting and economic earnings. Because we have a cooperative business model, our Board of Directors has emphasized the importance of minimizingcontrolling earnings volatility, including volatility from the use of derivatives.volatility. Accordingly, our strategy is to execute derivatives that we expect to be highly effective hedges of market risk exposure. Therefore,exposure relative to their impacts on profitability. As a result, the volatility in the market value of equity and earnings from our use of derivatives has historically tended to be moderate. In this context, we have not executed derivatives to hedge market risk exposure outside of specifically and individually identified assets or liabilities. We believe that the economic benefits of using derivatives to hedge risks in the entire balance sheet instead of individual instruments would generally be less than the increased hedging costs and risks, which include potentially higher earnings volatility.

Numerous economic and financial factors influence themembers' use of Advances by our members as a competitive alternative for their balance sheet funding needs.Mission Asset Activity. One of the most important factors that affect Advance demand is the availability to our membersamount of competitively-priced local retailmember deposits, which for most members view asare their primary funding source.source of funds. In addition, both small and, in particular, large members typically have access to brokered deposits, repurchase agreements and public unit deposits, each of which presents a competitive alternative towholesale funds besides FHLB Advances. Larger members also have greater access to other competitive sources of funding and asset/liability management facilitated via the national and global credit markets. These sources include subordinated debt, interbank loans, covered bonds, interest rate swaps, options, bank notes, and commercial paper.

 

The holding companies of some of our large asset members have membership(s) in other FHLBanks through affiliates chartered in other FHLBank Districts.their affiliates. Others could initiate memberships in other Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks' competition with other wholesale lenders and other mortgage investors. We compete with other FHLBanks on the offerings and pricing of Mission Asset Activity, earnings and dividend performance, collateral policies, capital plans, and members' perceptions of our relative safety and soundness.

The primary competitors for mortgage loans we purchase in the MPP are Fannie Mae and Freddie Mac, government agencies such as the Government National Mortgage Association (Ginnie Mae), and private issuers, and, beginning in 2009, the U.S. government. We compete primarily based on price, products, and services.issuers. Fannie Mae and Freddie Mac, in particular, have long-established and efficient programs and are the dominant purchasers of residential conforming fixed-rate conventional mortgages. In addition, a number of private financial institutions have well-established securitization programs, although they may not currently be as active as they were historically. The MPP also competes with the Federal Reserve to the extent it purchases mortgage-backed securities and affects market prices and availability of supply.

For debt issuance, the FHLBank System competes with issuers in the national and global debt markets, including most importantly the U.S. government and other GSEs. Competitive factors include, but are not limited to, interest rates offered; the amount of debt offered; the market's perception of the credit quality of the issuing institutions and the liquidity of the debt; the types of debt structures offered; and the effectiveness of debt marketing activities.

Item 1A.    Risk Factors.        

In addition to potential GSE reform, the legislative and regulatory environment in which the FHLBank System operates continues to undergo rapid change driven principally by reforms underemanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Act. There are numerous new regulations promulgatedWall Street Reform and more in the process of being promulgated relative to the FHLBank System. CurrentConsumer Protection Act (Dodd-Frank Act). Recently-promulgated and future legislative and regulatory actions could significantly affect us, as summarized below.our business model, financial condition, or results of operations.

In general, there has been a renewed regulatory focus on the FHLBanks' core mission activity of utilizing their GSE status to provide funding and liquidityaddition, in support of the housing markets. This focus is manifested in several regulatory initiatives, in revamped examination processes, and in evolving expectations ofJanuary 2016, the Finance Agency aboutpublished a final rule regarding membership requirements, part of which will negatively affect our business. The rule prohibits captive insurance companies membership eligibility in the proportion of assets heldFHLBank System. The membership regulation is discussed further in activities considered core to the FHLBanks' mission. The Finance Agency's renewed focus on FHLBanks' core mission activities includes a request for each FHLBank to develop and submit a strategic plan to achieve core mission asset benchmarks that each FHLBank identifies.Item 7's "Executive Overview."

We believe thethat, taken as a whole, legislative and regulatory environment hasactions have raised our operating costs and imparted added uncertainty regarding the business model under which the FHLBanks may operate in the future. We are unable at this time to predict whatthe ultimate effects the heightened regulatory environment willcould have on the FHLBank System's business model or on our financial condition and results of operations.

The Basel Committee on Banking Supervision (the Basel Committee) has developed a proposed new capital regime for internationally active banks. Banks subject to the new regime will beare required, among other things, to have higher capital ratios. While it is uncertain how the new capital regime and other standards, such as those related to liquidity, developed by the Basel Committee will ultimately be implemented by the U.S. regulatory authorities, the new regime could require some of our members to divest assets in order to comply with the regime's more stringent capital and liquidity requirements, thereby tending to decreasepossibly lowering Advance demand. The proposedAdditionally, the liquidity requirements maybeing implemented could adversely impact Advance demand and investor demand for Consolidated Obligations because they would limit the ability of members to fully include Advances and Consolidated Obligations in required liquidity calculations. This could raise our debt costs and, in turn, raise the Advance rates we are able to offer members, thereby harming the ability to fulfill our business model.

Control failures, including failures in our controls over financial reporting, or business interruptions with members and counterparties could occur from human error, fraud, breakdowns in information and computer systems and financial and business models we use, lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse or repair the negative effects of such failures or interruptions.

Moreover, weWe rely heavily on internal and third partythird-party information systems and other technology to conduct and manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions including “cyberattacks” (e.g.,“cyberattacks,” which are breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) thatevents against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations.

We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate the negative effects of failures, interruptions, or cyberattacks"cyberattacks" in information systems and other technology. If we experience a failure, interruption, or cyberattack"cyberattack" in any of these systems, we may be unable to effectively conduct or manage our business activities, operating processes, and risk management, which could significantly harm customer relations, our reputation, or profitability, potentially resulting in material adverse effects on our financial condition and results of operations.

Item 1B.    Unresolved Staff Comments.

None.

Our offices are located in 70,879approximately 79,000 square feet of leased space in downtown Cincinnati, Ohio. We also maintain a leased, fully functioning, back-up facility in suburban Cincinnati. Additionally, we lease a small office in Nashville, Tennessee

for the area marketing representative. We believe that our facilities are in good condition, well maintained, and adequate for our current needs.

Not applicable.

PART II

We paid quarterly dividends in 20122015 and 20112014 as outlined in the table below.

Generally, our Board of Directors has discretion to declare or not declare dividends and to determine the rate of any dividend declared. Our Retained Earnings and Dividend Policy states that dividends for a quarter are declared and paid from retained earnings after the close of a calendar quarter and are based on average stock balances for the then closed quarter. Our Board of Directors' decision to declare dividends is influenced by the financial condition, overall financial performance and retained earnings of the FHLBank,FHLB, and actual and anticipated developments in the overall economic and financial environment including, most importantly, interest rates and the mortgage and credit markets. The dividend rate is generally referenced as a spread to average short-term interest rates experienced during the quarter to help assess a competitive level for our stockholders. Our earnings, and therefore dividends, generally increase as short-term interest rates rise and decrease as short-term interest rates fall.

A Finance Agency Capital Rule prohibits an FHLBankus from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the issuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLBank'sFHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and Mission Asset Activity requirements (as defined in our Capital Plan). In accordance with this Rule, we paid cash dividends in each quarter of 2012 and 2011. Our Board, and we believe our members, continue to have a stated preference for dividends in the form of stock.

WeIn 2015, we continued in 2012 to experience limiteda de minimis level of overall residual credit risk exposure from offering Advances,our Credit Services, making investments, and executing derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments.

The FHLBank is a collateral-based asset lender for Advances and Letters of Credit. We have robust policies, strategies and processes designed to manageResidual credit risk on Credit Services. Advances are overcollateralizedexposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to decline and we have a perfected first lien position on all pledged loan collateral, as well as conservative policies and procedures related to managing credit risk on Advances. We do not anticipate any losses from Advances or Letters of Credit.was $2 million at December 31, 2015.