UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20142016
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 000-51399
FEDERAL HOME LOAN BANK OF CINCINNATI
(Exact name of registrant as specified in its charter)
Federally chartered corporation 
 31-6000228
(State or other jurisdiction of
incorporation or organization) 
 
(I.R.S. Employer
Identification No.)
600 Atrium Two, P.O. Box 598,  
Cincinnati, Ohio 
 45201-0598
(Address of principal executive offices) 
 (Zip Code)
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)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yes   x No

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).        x Yes   o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
  (Do not check if a smaller reporting company) 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes   x No
As of February 28, 2015,2017, the registrant had 43,469,46642,055,343 shares of capital stock outstanding, which included stock classified as mandatorily redeemable. 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.

Documents Incorporated by Reference: None

Page 1 of
163166


Table of Contents
 PART I 
   
Item 1.Business
4
   
Item 1A.Risk Factors
17
   
Item 1B.Unresolved Staff Comments
2122
   
Item 2.Properties
2122
   
Item 3.Legal Proceedings
2122
   
Item 4.Mine Safety Disclosures
2122
   
 PART II 
   
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
2223
   
Item 6.Selected Financial Data
2324
   
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
2425
   
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
7576
   
Item 8.Financial Statements and Supplementary Data 
   
 Financial Statements for the Years Ended 2014, 2013,2016, 2015, and 20122014
7677
   
 Notes to Financial Statements
8384
   
 Supplemental Financial Data
137
  ��
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
137
   
Item 9A.Controls and Procedures
137
   
Item 9B.Other Information
137
   
 PART III 
   
Item 10.Directors, Executive Officers and Corporate Governance
138139
   
Item 11.Executive Compensation
143144
   
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
157159
   
Item 13.Certain Relationships and Related Transactions, and Director Independence
158160
   
Item 14.Principal Accountant Fees and Services
159161
   
 PART IV 
   
Item 15.Exhibits and Financial Statement Schedules
159162
Item 16.Form 10-K Summary
162
   
Signatures 
160163

2
Table of Contents

PART I

Special Cautionary Notice Regarding Forward Looking Information

This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (the FHLBank)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:

▪the effects of economic, financial, credit, market, and member conditions on our financial condition and results of operations, including changes in economic growth, general liquidity conditions, inflation and deflation, interest rates, interest rate spreads, interest rate volatility, mortgage originations, prepayment activity, housing prices, asset delinquencies, and members' mergers and consolidations, deposit flows, liquidity needs, and loan demand;

▪political events, including legislative, regulatory, federal government, judicial or other developments that could affect us, our members, our counterparties, other FHLBanksFederal Home Loan Banks (FHLBanks) and other government-sponsored enterprises (GSEs), and/or investors in the Federal Home Loan Bank System's (FHLBank System or System) unsecured debt securities, which are called Consolidated Obligations or Obligations;(or Obligations);

▪competitive forces, including those related to other sources of funding available to members, to purchases of mortgage loans, and to our issuance of Consolidated Obligations;

▪the financial results and actions of other FHLBanks that could affect our ability, in relation to the FHLBank System's joint and several liability for Consolidated Obligations, to access the capital markets on favorable terms or preserve our profitability, or could alter the regulations and legislation to which we are subject;

▪changes in investor demand for Consolidated Obligations;

▪the volatility of market prices, interest rates, credit quality, and other indices that could affect the value of investments and collateral we hold as security for member obligations and/or for counterparty obligations;

▪the ability to attract and retain skilled management and other key employees;

▪the ability to develop, secure and support technology and information systems that effectively manage the risks we face;

▪the ability to successfully manage new products and services; and

▪the risk of loss arising from litigation filed against us or one or more other FHLBanks.

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


3
Table of Contents

Item 1.
Business.


COMPANY INFORMATION

Organizational StructureCompany Background

The FHLBankFHLB is a regional wholesale bank that providesserves the public interest by providing financial products and services to our members.members to fulfill a public-policy mission of supporting housing finance and community investment. We are part of the FHLBank System (or System).System. Each FHLBankof the 11 FHLBanks operates as a separate entity with its own stockholders, employees, Board of Directors, and business model. Our region, known as the Fifth District, is 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) as a GSE to help provide liquidity inand credit to the U.S. housing market. FHLBanks are GSEsmarket and support home ownership. Promoting home ownership is a long-standing central theme of the United States of America;U.S. government policy. The System has a GSE combines private sector ownership with public sector sponsorship. In additioncritical public-policy role as important national liquidity providers 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.mortgage lenders, particularly during stressful conditions when private-sector liquidity often proves unreliable.

The FHLBanks are not government agencies and the U.S. government does not guarantee, directly or indirectly, the debt securities or other obligations of the FHLBank System. Rather, the FHLBanks are GSEs, which combine private sector ownership with public sector sponsorship. In addition, the FHLBanks are cooperative institutions, privately and wholly owned by their members, who purchase capital stock and who are the primary customers.

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), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Office of Finance. The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the FHLBank System's Consolidated Obligations (or Obligations).Obligations.

All federally insured depository institutions, certain insurance companies, and community development financial institutions chartered in the Fifth District may voluntarily apply for membership in our FHLBank. Such applicantsFHLB. Applicants must satisfy membership requirements in accordance with statutes 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 FHLBank, although a holding company may have memberships in more than one FHLBank through its subsidiaries.

The combination of public sponsorship and private ownership that drives our business model is reflected in the composition of our 17-member18-member Board of Directors, all of whom 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.

At December 31, 2014,2016, we had 705687 members, 203209 full-time employees, and 1two part-time employee.employees. Our employees are not represented by a collective bargaining unit.

Mission and Corporate Objectives

The FHLBank'sOur mission is to provide financial intermediation between the capital markets and our member stockholders in order to facilitate and expand the availability of financing for housing and community lending and investment.investment and to help members expand their access to the mortgage markets.

How We Achieve Ourthe Mission
We achieve our mission through a cooperative business model. We raise private-sector capital from member stockholders and issue low-cost high-quality debt securities in the world-wide capital markets (along with other FHLBanks) in order. The capital and proceeds from debt issuance enable us to provide productsmembers services--primarily, access to credit and servicesliquidity via a reliable, readily available, economical, and low-cost sources of funding (called Mission Asset Activity) tofor their housing activities. These services include affordable housing and community investment. Additionally, we provide members and generate a competitive return on their capital investment in our company.


Our ability to maximize the housing finance mission depends on having a membership base that is an essential component of the nation’s housing and mortgage finance markets. We focus closely on fulfilling our mission relative to members who are community financial institutions, who we believe typically rely more on us for access to liquidity and mortgage markets compared with larger members. At the same time, we value having large members who are active borrowers because they provide the System the ability to consistently issue large amounts of debt, which helps ensure the debt has a relatively low cost, benefiting all members.

The primary Mission Asset products we offer are readily available low-cost loans called Advances, purchases of certain whole mortgage loans sold by qualifying members calledthrough the Mortgage Purchase Program (MPP), and Letters of Credit. We also offer affordable housing programs and related activities to support members in their efforts to assist very low-, low- and moderate-income households and their local communities. To a more limited extent, we also have several correspondent services that assist members in operational administration.

The primary way we obtain funding is through participation in the issuance of the FHLBank System's unsecured debt securities, called Consolidated Obligations in the global capital markets. Secondary sources of funding are capital and deposits we accept from our members. A critical component of the success of the FHLBank System is its ability to maintain a comparative

4
Table of Contents

advantage in funding, which is due largely to its GSE status, andconfers an implied guarantee from the U.S. federal government, low risk operations.operations, and joint and several liability across the 11 FHLBanks. 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 attempt to achieve 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 cooperative ownership structure and deep access to debt markets allow our business to be scalable and self-capitalizing without jeopardizing profitability, taking undue risks, or diminishing capital adequacy.

Our franchise value is derived from the synergies brought by the various components of our business model, including the public-policy mandate, GSE status, cooperative ownership structure, consistent ability to issue large amounts of debt in the world-wide capital markets at favorable funding costs, and mechanisms of providing housing finance liquidity through products and services to financial institutions rather than directly to homeowners.

Corporate Objectives
Our corporate objectives, listed below, are to promote housing finance among members and ensure our operations and governance are effective and efficient. The first three objectives drive how members derive value from being in the cooperative.

▪
Mission Asset Activity:Activity: Implement strategies and practice effectivetactics to effectively manage ongoing operations aimed at promotingthat promote members’ usage of our products and services.Mission Asset Activity.

▪
Stock ReturnReturn:: Earn adequate profitability so that members receive a competitive long-term dividend rate on their capital stock investment.

▪
Housing and Community Investment ProgramsPrograms:: Maintain effective housing and community investment programs that maximize mandatory programs and provide funding for additionaloffer targeted voluntary contributions.assistance programs.

▪
Safe and Sound Operations:Operations: Optimize the FHLBank’sour counterparty and deposit ratings, achieve an acceptable rating on annual regulatory examinations, and maintainhave an adequate amount and composition of capital.

▪
Risk ManagementManagement:: Employ effective risk optimization management practices and maintain risk exposures at low to moderate levels.

▪
GovernanceGovernance:: Operate in accordance with effective corporate governance processes.processes that emphasize compliance and consider the interest of all stakeholders (members, stockholders, employees, creditors, housing partners, and regulators).


Business Activities

Mission Asset Activity
The following are our principal business activities with members:

▪We lend readily-available, competitively-priced, and fully-collateralized Advances.

▪We issue collateralized Letters of Credit.

▪We purchase qualifying residential mortgage loans through the MPP and hold them on our balance sheet.

Together, these product offerings constitute “Mission Asset Activity.” We refer to Advances and Letters of Credit as Credit Services.

Affordable Housing and Community Investment
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 interest, as well as direct grants.

Investments
To help us achieve our mission and corporate objectives, 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, as permitted by Finance Agency regulation. Investments provide liquidity, help us manage market risk exposure, enhance earnings, and through the purchase of mortgage-related securities, support the housing market.

5
Table of Contents


Sources of Earnings

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

Major items of expense are:

▪interest paid on Consolidated Obligations and deposits to fund assets;

▪costs of providing below-market-cost Advances and direct grants and subsidies under the Affordable Housing Program; and

▪non-interest expenses.

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.

We believe members' capital investment is comparable to investing in adjustable-rate preferred equity instruments. Therefore, we structure our balance sheet risk exposures so that earnings tend to move in the same direction as changes in short-term market rates, which can help provide a degree of predictability for dividend returns.

Capital

Due to our cooperative structure, we obtain capital from members. Each member must own capital stock as a condition of membership and normally must hold additional stock above the membership stock amount in order to gain access to Advances and possibly to sell us MPP loans. We issue, redeem, and repurchase capital stock only at its stated par value of $100 per share. By law, our stock is not publicly traded.

We strive to ensure that assets are self-capitalizing, meaning that we acquire capital primarily in connection with growth in Mission Asset Activity. We also maintain an amount of capital to ensure we meet all of our regulatory and business

requirements relating to capital adequacy and protection of creditors against losses. We hold retained earnings to protect members' stock investment against impairment risk.risk and to help stabilize dividend payments when earnings may be volatile.

Tax Status

We are exempt from all federal, state, and local taxation other than real property taxes. Any cash dividends we issue are taxable to members and do not benefit from the corporate dividends received exclusion. Notes 1 and 14 of the Notes to Financial Statements provide additional details regarding the assessment for the Affordable Housing Program.

Ratings of Nationally Recognized Statistical Rating Organizations

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 20142016 and maintained a stable outlook. In 2014,2016, 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 ratings closely follow the U.S. sovereign ratings from both agencies. The lower-than AAA debt ratings from Standard & Poor's which first occurred in 2011, continue to have had no discernible impact on the System's debt issuance capabilities.capabilities since the rating change occurred in 2011.

The agencies' rationales for their ratings of the System and our FHLBankFHLB 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 on debt; strong liquidity; conservative use of derivatives; adequate capitalization relative to our risk

6
Table of Contents

profile; a stable capital structure; and the fact that no FHLBank has ever defaulted on repayment of, or delayed return of principal or interest on, any Obligation.

A credit rating is not a recommendation 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 any other rating. We cannot predict what future actions, if any, a rating organization may take regarding the System's or our ratings.

Regulatory Oversight

The Finance Agency is headed by a Director who has authority to promulgate regulations and to make other 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.

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.


BUSINESS SEGMENTS

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 18 of the Notes to Financial Statements for more information on our business segments, including their results of operations.


Traditional Member Finance

Credit Services
Advances. Advances are competitively priced sources of funds 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. In most cases members can access funds on a same-day basis.

We price a 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 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-Rate Advances have terms of 3 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 fiveseveral years, balances with call options have been at or close to zero.


7
Table of Contents

Putable Advances are fixed-rate Advances that provide us an option to terminate the Advance, usually after an initial “lockout” period. Most have long-term original maturities. Selling us these options enables members to secure lower rates on Putable Advances compared to Regular Fixed-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 various other Advance programs that have smaller outstanding balances.

Letters of Credit. Letters of Credit are collateralized contractual commitments we issue on a member's behalf to guarantee its performance to third parties. A Letter of Credit may obligate us to make direct payments to a third party, in which case it is treated as an Advance to the member. The most popular use of Letters of Credit is as collateral supporting public unit deposits, which are deposits held by governmental units at financial institutions. We earn fees on Letters of Credit based on the actual notional amount of the Letters utilized.

How We Manage Risks of Credit Services. We manage market risk from Advances by funding them with Consolidated Obligations and interest rate swaps that have a close similarity ofsimilar interest rate risk characteristics as the Advances. The net effect is that in practice we mitigate nearly all of Advances'the market risk exposures.exposure associated with Advances.

In addition, for many, but not all, Advance programs, Finance Agency regulations require us to charge members prepayment fees for early termination of principal when the early termination results in an economic loss to us. 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.

We manage credit risk on Advances by requiring each member to supply us with a security interest in eligible collateral that in the aggregate has estimated value in excess of the total Advances and Letters of Credit. Collateral is comprised mostly of single-family loans, home equity lines, multi-family loans and bond securities. The combination of conservative collateral policies and risk-based credit underwriting activities mitigates virtually all potential credit risk associated with 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 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.

Housing and Community Investment
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 net earnings, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 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 Program and a homeownership program called Welcome Home, which assists homebuyers with down payments and closing costs. Under the 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 an annual offering. Under Welcome Home, we make funds 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. We set aside up to 35 percent of the Affordable Housing Program accrual for Welcome Home and allocate the remainder to the Competitive Program.

Our Board of Directors also may allocate funds to voluntary housing programs. In 2014,2016, the Board re-authorized an additional $1$1.5 million to the Carol M. Peterson Housing Fund for 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 2015,2017, the Board re-authorized this fund in the same amount for use in 2015.2017. In 2012, the Board of Directors also established the Disaster Reconstruction Program, 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. Since the program's inception, we have disbursed nearlyover $3 million to assist 172184 households.


8
Table of Contents

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 households and, under certain conditions, community economic development projects. The Economic Development Program is a discounted Advance program used to promote economic development and job creation and retention.

Investments
Types of Investment Assets.Investments. WeA primary reason we hold investments in orderis to havecarry sufficient asset liquidity. Permissible liquidity investments include Federal funds, certificates of deposit, bank notes, bankers' acceptances, commercial paper, securities purchased under agreements to resell, and debt securities issued by the U.S. government or its agencies. The first five categories represent unsecured lending to private counterparties. We also may place deposits with the Federal Reserve Bank. We are prohibited by Finance Agency regulations from investing (secured or unsecured) in financial investments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks. Most liquidity investments have short-term maturities.

We are also permitted by regulation to purchase the following other investments, which have longer original maturities than liquidity investments and do not provide us with liquidity:investments:

▪mortgage-backed securities and collateralized mortgage obligations supported by mortgage securities (together, referred to as mortgage-backed securities) and issued by GSEs or private issuers;

▪asset-backed securities collateralized by manufactured housing loans or home equity loans and issued by GSEs or private issuers; and

▪marketable direct obligations of certain government units orand agencies (such as state housing finance agencies) that supply needed funding for housing or community lending and that do not exceed 20 percent of our regulatory capital.

We have never purchased asset-backed securities and currently do not own any privately-issued mortgage-backed securities. We have historically held small amounts of obligations of government units and agencies.


Per 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. See the “Capital Resources” section below for the definition of regulatory capital.

Purposes of Having Investments. The investments portfolio helps us achieve corporate objectives in the following ways:

▪
Liquidity management. Liquidity investments help support the ability to fund assets on a timely basis, especially Advances.Advances, and when it may be more difficult to issue new debt. These investments supply a source of liquidity because we normally ensure they have shorter maturitiesfund them with longer-term debt than the debt we issue to fund them.asset maturities. We also may be able to obtain liquidity by selling certain investments for cash without a significant loss of value.

▪
Earnings enhancement. The investments portfolio, especially mortgage-backed securities, assists with earning a competitive return on capital, which also increasesand increasing funding for Housing and Community Investment programs.

▪
Market risk management. Liquidity investments help stabilize earnings because they typically earn a relatively stable spread to the cost of debt issued to fund them, with less market risk than mortgage assets.

▪
DebtManagement of debt issuance management. Maintaining a short-term liquidity investment portfolio can help us participate in attractively priced debt issuances, on an opportunistic basis. We can temporarily invest proceeds from debt issuances in short-term liquid assets and quickly access them to fund demand for Mission Asset Activity, rather than having debt issuances dictated solely by the timing of member demand.

▪
Support of housing market. Investment in mortgage-backed securities and state housing finance agency bonds directly supports the residential mortgage market by providing capital and financing for mortgages.

How We Manage Risks of Investments. We strive to ensure our investment holdings have a moderate degree of market risk and limited credit risk, which tends to lower the returns we can expect to earn on these securities. We believe that a philosophy of purchasing investments with a high amount of market or credit risk would be inconsistent with our GSE status and corporate objectives.

9
Table of Contents


Market risk associated with short-term investments tends to be minimal because of their short maturities and because we typically fund them with similar duration short-term Consolidated Obligations.Obligations having similar maturities. 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, by funding them with a portfolio of long-term fixed-rate callable and noncallable Obligations, and by managing the market risk exposure of the entire balance sheet within prudent policy limits.

Finance Agency regulations 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 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.
 
Deposits
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.


Mortgage Purchase Program (MPP or Mortgage Loans Held for Portfolio)

Description of the MPP
Types of Loans and Benefits. Finance Agency regulations permit FHLBanks to purchase and hold specified whole mortgage loans from their members, which offers members a competitive alternative to the traditional secondary mortgage market and directly supports housing finance. We account for MPP loans as mortgage loans held for portfolio. By selling mortgage loans to us, members can increase their balance sheet liquidity and lower interest rate and mortgage prepayment risks. The MPP particularly enables small- and medium-sized community-based financial institutions to use their existing relationship with us to participate more effectively in the secondary mortgage market.

Under the MPP, weWe purchase two types of mortgage loans: qualifying conforming fixed-rate conventional 1-4 family residential mortgages and residential mortgages fully insured by the Federal Housing Administration (FHA). Members approved to sell us these loans are referred to as Participating Financial Institutions (PFIs). Although regulations permit us to purchase qualifying mortgage loans originated within any state or territory of the United States, beginning several years ago we no longer purchase loans originated in New York, Massachusetts, Maine, Rhode Island or New Jersey due to features of those states' Anti-Predatory Lending laws that are less restrictive than we prefer.

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 2015,2017, the Finance Agency re-established thatestablished the conforming limit at $417,000$424,100 with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. We do not purchase mortgages subject to these higher amounts.

Loan Purchase Process. A Master Commitment Contract is negotiated with each PFI, in which the PFI agrees to make a best efforts attempt to sell us a specific dollar amount of mortgage loans generally over a period of up to 12 months. We purchase loans pursuant to a Mandatory Delivery Contract, which is a legal commitment we make to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of note rates and prices.

Shortly before delivering the loans that will fill 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

10
Table of Contents

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 a PFI sells us a loan in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase the loan.

How We Manage Risks of the MPP
Market Risk. We mitigate the MPP's market risk similarly to how we mitigate market risk from mortgage-backed securities.

Credit Risk - Conventional Mortgage Loans. A unique feature of the MPP is that it separates the various activities and risks associated with residential mortgage lending for conventional loans and allows these risks and activities to be taken on by different entities. We manage the funding of the loans, market risk (including interest rate risk and prepayment risk), and liquidity risk. PFIs manage marketing, originating and, in most cases, servicing the loans. PFIs may either retain servicing or sell it to a qualified and approved third-party servicer (also referred to as a PFI). Because PFIs manage and bear most of the credit risk, they do not pay us a guarantee fee to transfer credit risk.

We manage credit risk exposure 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) available primary mortgage insurance, (when applicable), the Lender Risk Account (discussed below), and for loans acquired before February 2011, Supplemental Mortgage Insurance 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 us 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 holdback of 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.

Credit Risk - FHA Mortgage Loans. Because the FHA makes an explicit guarantee on FHA loans, we do not require any credit enhancements on these loans beyond underwriting, homeowner's equity, and primary mortgage insurance.

Item 7's “Quantitative and Qualitative Disclosures About Risk Management” provides more detail on how we manage market and credit risks for the MPP.

Earnings from 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:

▪minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans);
▪minus the cost of Supplemental Mortgage Insurance (for applicable loans); and
▪adjusted for the amortization of purchase premiums or the accretion of purchase discounts and for the amortization or accretion of fair value adjustments on loans initially classified as mortgage loan commitments.

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.potential return on investment. 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.



11
Table of Contents

FUNDING - CONSOLIDATED OBLIGATIONS

Our primary source of funding and hedging market risk exposure is through participation in the sale of Consolidated Obligation 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:

▪to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets;
▪to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and
▪to acquire liquidity.liquidity investments.

Bonds may have fixed or adjustable 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. Our adjustable-rate Bonds use LIBOR for interest rate resets. In the last five years, we have not participated in the issuance of range Bonds, zero coupon Bonds, or indexed principal redemption Bonds.

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 transact in interest rate swaps to synthetically convert some fixed-rate Bonds to adjustable-rate terms indexed to LIBOR. These are used to hedge adjustable-rate LIBOR Advances.

We participate in the issuance of Discount Notes to fund short-term Advances, adjustable-rate LIBOR Advances, putable Advances (which we normally swap to LIBOR), liquidity investments, and a portion of longer-term fixed-rate assets. Discount Notes have maturities from one day to one year, with most of ours normally maturing within three months.


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.
 
Interest rates on Obligations, including their relationship to other products such as U.S. Treasury securities and LIBOR, are affected by a multitude of factors such as: overall economic and credit conditions; credit ratings of the FHLBank System; investor demand and preferences for our debt securities; the level of interest rates and the shape of the U.S. Treasury curve and the LIBOR swap curve; and the supply, volume, timing, and characteristics of debt issuances by the FHLBanks, other GSEs, and other highly rated issuers.

Finance Agency regulations govern the issuance of 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 received the proceeds. However, we also are jointly and severally liable with the other 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.

An FHLBank may not issue individual debt securities without Finance Agency approval.



12
Table of Contents

LIQUIDITY

Our business requires a continualsubstantial and substantialcontinual amount of liquidity to meetsatisfy 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 environments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to sell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the MPP, purchases of investments, and payments of interest.

Liquidity requirements are significant because Advance balances can be volatile, many have short-term maturities, and we strive to allow members to borrow Advances on the same day they 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.
 


CAPITAL RESOURCES

Capital Plan

Basic Characteristics
Under Finance Agency 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:

▪We offer only one class of capital stock, Class B, which is generally redeemable upon a member's five-year advance written notice, withnotice. We strive to manage capital risks to be able to safely and soundly repurchase redemption requests sooner than five years, although we may elect to wait up to five years (or longer under certain conditions described below.

▪The Capital Plan enables us to efficiently expand and contract capital stock needed to capitalize assets in response to changes in our membership base and demand for Mission Asset Activity. This enables us to maintain a prudent amount of financial leverage and also consistently generate a competitive dividend return.conditions).

▪We issue shares of capital stock as required for an institution to become a member or maintain membership, as required for members to capitalize Mission Asset Activity, and when we may pay dividends in the form of additional shares of stock.

▪The Capital Plan enables us to efficiently increase and decrease capital stock needed to capitalize assets in response to changes in the membership base and demand for Mission Asset Activity. This enables us to maintain a prudent amount of financial leverage and consistently generate a competitive dividend return.

▪We may, subject to the restrictions described below, repurchase certain capital stock (i.e., "excess" capital stock).

▪The concept of “cooperative capital,” explained below, better aligns the interests of heavy users of our products with light users by enhancing the dividend return.

Prudent risk management requires usUnder Finance Agency 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 maintain effectiveabsorb losses. 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 leverage to minimize risk tolosses.

GAAP capital excludes mandatorily redeemable capital stock, while preserving profitabilityregulatory 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 hold an adequate amountmeet 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 15 of retained earnings. Pursuantthe Notes to these objectives, Financial Statements for more discussion of mandatorily redeemable capital stock.

Finance Agency regulations stipulate that we must comply with three limits on capital leverage and risk-based capital. These ensure a low amount of capital risk while providing for competitive profitability. We have always complied with thethese regulatory capital requirements.

▪We must maintain at least a four percent minimum regulatory capital-to-assets ratio. This has historically been the regulatory capital requirement that has been closest to affecting our operations.

13
Table of Contents

▪We must maintain at least a five percent minimum leverage ratio of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement.
▪We are subject to a risk-based capital rule in which we must hold an amount of "permanent" capital that exceeds the amount of exposure to market risk, credit risk, and operational risk. How we determine the amount of these risk exposures is stipulated by Finance Agency regulation. Permanent capital includes retained earnings and the regulatory amount of Class B capital stock.

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, whichways. These combine to give member stockholders a clear incentive to require us to minimize our risk profile:

▪the five-year redemption period for Class B stock;
▪the option we have to call on members to purchase additional capital if required to preserve safety and soundness; and

▪the limitations, described below, on our ability to honor requested redemptions of capital if we are at risk of not maintaining safe and sound operations.

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 15 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.

Components of Capital Stock Purchases and Operations of the Capital Plan
OurThe 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).us. The former stock is called membership stock; the latter is called 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 that range determined as a percentage of member assets.

In addition to its membership stock, a member may beis 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, and the principal balance of loans and commitments in the MPP that occurred after implementation of the Capital Plan.MPP.

The FHLBankFHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. However, each member is permitted to maintain an amount of activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:
    
Mission Asset Activity Minimum Activity Percentage Maximum Activity Percentage
Advances    2%    4%
Advance Commitments 2 4
MPP 0 4
 
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 then utilizesmay 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, withinwith 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$100 million.


14
Table of Contents

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, assuming availability of cooperative capital.

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

▪We may not redeem any capital stock if, following the redemption, we would fail to satisfy any Regulatory capital requirements. By law, we may not redeem any stock if we become undercapitalized.

▪We may not redeem any capital stock without approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we have incurred or are likely to incur losses resulting or expected to result in a charge against capital.

If our FHLBank iswe were to be liquidated, and after payment in full to our creditors, stockholders would be entitled to receive the par value of their capital stock.stock after payment in full to our creditors. In addition, each stockholder would 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 shallwould determine the rights and preferences of the FHLBank'sFHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.


Retained Earnings

Purposes and Amount of Retained Earnings
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.volatile. 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 other-than-temporary losses exceeded the amount of our retained earningswere experienced and expected 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.
 
We have a policy that sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and facilitate dividend stability in light of the risks we face. The currentAt December 31, 2016, the minimum retained earnings requirement is $450ranges from $325 million to $550 million, based on mitigating quantifiable risks under very stressed business and market scenarios to at least a 99 percent confidence level. Given the regulatory environment, we carry a greater amount of retained earnings than required by the Policy. At the end of 2014,2016, our retained earnings totaled $689$834 million. We believe the current amount of retained earnings is fully sufficient to protect our capital stock against impairment risk and to provide for dividend stability if needed.stability.

Joint Capital Agreement to Augment Retained Earnings
The FHLBanks 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 our ability to use retained earnings held outside of the Account to pay dividends.

Although we have always maintained compliance with our capital requirements, we believe the Capital Agreement enhances risk mitigation by building a larger capital buffer over time to absorb unexpected losses, if any, that we may experience. Therefore, the Capital Agreement provides additional protection against impairment risk to stockholders' capital investment.



15
Table of Contents

USE OF DERIVATIVES

Finance Agency regulations and our 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.value.

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

▪below-market rates and/or the market risk exposure on Putable Advances, and certain other Advances, for which members have sold us options embedded within the Advances; or

▪Regular Fixed-Rate Advances when it may not be as advantageous to issue Obligations or when it may improve our market risk management.

We also useThe derivatives we transact related to mortgage assets primarily hedge the marketinterest rate risk created by commitment periodsand prepayment risk. Such derivatives include options on interest rates swaps (swaptions) and sales of Mandatory Delivery Contracts in the MPP.to-be-announced mortgage-backed securities for forward settlement.

Other derivativesDerivatives transactions related to Bonds help us intermediate between the preference of capital market investors for intermediate- and long-term fixed-rate debt securities and the preference 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 haveWe strive to maintain a cooperative business model, our Boardlow amount of Directors has emphasizedearnings volatility from realized gains and losses on derivatives. We accept a moderate amount of earnings volatility from unrealized gains and losses on recording derivatives at fair values, to the importance of controlling earnings volatility. Accordingly, our strategy is to execute derivatives that we expect to be effective hedges of market risk exposure relative to their impacts on profitability. As a result, the volatility in the market value of equity and earnings fromextent our use of derivatives has historically tended to be moderate.effectively hedge market risk exposure.


COMPETITION

Numerous economic and financial factors influence members' use of Mission Asset Activity. One of the most important factors that affect Advance demand is the amount of member deposits, which for most members are their primary source of funds. In addition, both small and, in particular, large members typically have access to wholesale funds besides FHLBankFHLB Advances. Another important source of competition for Advances is the ongoing fiscal and monetary stimuli initiated by the federal government to combat the continued difficulties in the housing market and broader economy. This is discussed in Item 1A's “Risk Factors” and in Item 7's “Executive Overview" and "Conditions in the Economy and Financial Markets.Overview."
 
The holding companies of some of our large asset members have membership(s) in other FHLBanks through 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 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. Some members may also evaluate benefits of diversifying business relationships among FHLBank memberships. We regularly monitor these competitive forces among the FHLBanks.

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. Fannie Mae and Freddie Mac, in particular, have long-established and efficient programs and are the dominant purchasers of 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 the 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.


16
Table of Contents

Item 1A.    Risk Factors.        

The following are the most important risks we currently face. The realization of one or more of the risks could negatively affect our results of operations, financial condition, and, at the extreme, the viability of our business franchise. The effects could include reductions in Mission Asset Activity, lower earnings and dividends, and, at the extreme, impairment of our capital or an inability to participate in issuances of Consolidated Obligations. The risks identified below are not the only risks we face. Other risks not presently known or which we deem to be currently immaterial may also impact our business. Additionally, the risks identified may adversely affect our business in ways we do not expect or anticipate.

Economy. An economic downturn could lower Mission Asset Activity and profitability.

Member demand for Mission Asset Activity depends in large part on the general health of the economy and overall business conditions. Numerous external factors can affect our Mission Asset Activity and earnings including:

▪the general state and trends of the economy and financial institutions, especially in our Fifth District;
▪conditions in the financial, credit, mortgage, and housing markets;
▪interest rates;
▪competitive alternatives to our products, such as retail deposits and other sources of wholesale funding;
▪actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply;
▪the willingness and ability of financial institutions to expand lending; and
▪regulatory initiatives.initiatives facing our company, the System and our members.

Because our business tends to be cyclical, a recessionary economy or an economy characterized by stagflation, normally lowers the amount of Mission Asset Activity, can decrease profitability, and can cause stockholders to request redemption of a portion of their capital or request withdrawal from membership (both referred to herein this document as “request withdrawal of capital”). These unfavorable effects are more likely to occur and be more severe if a weak economy is accompanied by significant changes in interest rates, stresses in the housing market, elevated competitive forces, or actual or potential changes in the legislative and regulatory environment.

In the last five years theThe economy has grown at a measured pace contributing toin recent years, a major reason for tempered memberoverall demand for Mission Asset Activity. In addition, overall Advance demand has been and continues to be unfavorably affected by the substantial amount of deposit baseddeposit-based liquidity provided to financial institutions through the monetary actions of the Federal Reserve and a more onerous regulatory environment for our members. Acceleration of these conditions or another recession could decrease Mission Asset Activity, and increase MPP credit losses, both of which could reduce profitability.

Competition. The competitive environment for our products could adversely affect business activities, including decreasing the level and utilization rates of Mission Asset Activity, earnings, and capitalization.

We operate in a highly competitive environment for Mission Asset Activity.environment. Increased competition could decrease the amount of Mission Asset Activity and narrow profitability on that activity, both of which could cause stockholders to request withdrawals of capital. Historically, our primary competition has been from other wholesale lenders and debt issuers, including other GSEs. A substantial source of competition in the last seven yearsdecade has come from the federal government's actions to stimulate the economy, especially the actions of the Federal Reserve System through its policies of quantitative easing and maintaining extremely low interest rates. Among other effects, these actions have significantly expanded liquidity and excess reserves available to many members. We expect overall, broad-based growth in Advance demand will remain modest until the government reduces these initiatives by tightening monetary policy and winding down its holdings of U.S. Treasury and mortgage-backed securities. Even if these events take place, we cannot provide assurance regarding the pace or strength of the renewedany acceleration in Advance demand that we would anticipate.demand.

In addition, the FHLBank System competes for funds through issuance of debt with the U.S. Treasury, Fannie Mae, Freddie Mac, other GSEs, and corporate, state, and sovereign entities, among others. Increases in the supply and types of competing debt products or other regulatory factors could adversely affect the System's ability to access funding or increase the cost of our debt issuance. Either of these effects could in turn adversely affect our financial conditions and results of operations and the value of FHLBankFHLB membership.


17
Table of Contents

GSE Reform. Potential GSE reform could unfavorably affect our business model, financial condition, and results of operations.

The FHLBank System's regulator,Due to our GSE status, the Finance Agency, also regulatesultimate resolution to the conservatorship of Fannie Mae and Freddie Mac.Mac could affect the FHLBanks. While there appears to be consensus that a permanent financial and political solution for Fannie Mae and Freddie Macto the current conservatorship status should be implemented, which could include maintaining the current structure, no consensus has evolved to date around any of the various legislative proposals. However, someSome policy proposals directed towards Fannie Mae and Freddie Mac have included provisions applicable to the FHLBanks, such as limitations on Advances and portfolio investments, development of a covered bond market, and restrictions on GSE mortgage finance, that could threaten the FHLBank System's long-standing business model.

Because all the GSEs share a common regulator and general housing mission, the ultimate resolution to the conservatorship of Fannie Mae and Freddie Mac could threaten the FHLBanks. There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and ourits distinctive cooperative business model. LegislationGSE legislation could inadequately account for these differences, whichdifferences. This could substantially change or imperil the ability of the FHLBank System to continue operating effectively within its current business model, or could changeincluding by adversely changing the System's business model.

At this time, it is unknownperceptions of the capital markets about the risk associated with the debt of housing GSEs. We cannot predict the effects on the System if and when GSE reform willwere to be enacted and, if it is, what the effects would be on the FHLBank System's business model or our financial condition and results of operations, including whether the effects would be positive or negative.enacted.

FHLBankFHLB Regulatory Environment. We face a heightenedChanges in the regulatory and legislative environment which could unfavorably affect our business model, financial condition, and results of operations.

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 emanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). There have been numerous new regulations promulgated in the last several years and more are in the process of being promulgated for the FHLBank System, many of which are pursuant to HERA or the Dodd-Frank Act. Current Recently-promulgated

and future legislative and regulatory actions, including possible changes in the Dodd-Frank Act, could significantly affect us.our business model, financial condition, or results of operations.
Further, there has been a trend in the financial industry of migration of mortgage finance away from traditional FHLBank System members. However, the legislative and regulatory environment faced by the FHLBanks has not kept pace in recent years with adapting to this trend. For example, in January 2016, the Finance Agency published a final rule regarding membership requirements, which negatively affected our business and Advance balances by deeming that captive insurance companies (to which some of the housing finance has been migrating) were ineligible for membership in the System.

We believe that, thetaken as a whole, legislative and regulatory actions have raised our operating costs and imparted added uncertainty regarding the business model and membership base 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.

There is one proposed regulation regarding membership requirements about which we are particularly concerned. This is discussed in the "Executive Overview."
 
Liquidity and Market Access. Impaired access to the capital markets for debt issuance could increase liquidity risk, decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, result in realization of liquidity risk preventingprevent the System from meeting its financial obligations.

Our principal long-term source of funding, liquidity, and market risk management is through access on favorable terms to the capital markets for participation in the issuances of debt securities and execution of derivative transactions at prices and yields that are adequate to support our business model. AccessOur ability to obtain funds through the sale of Consolidated Obligations depends in part on prevailing conditions in the capital markets, particularly the short-term capital markets, because we and the System normally have a large reliance on favorable terms is the fundamental source of the FHLBank System's business franchise.short-term funding. The System's strong debt ratings, the implicit U.S. government backing of our debt, strong investor demand for FHLBank System debt, and effective funding management are instrumental in ensuring satisfactory access to the capital markets.

We are exposed to liquidity risk if significant disruptions in the capital markets occur. Although the last several years were characterized byexperienced ongoing issues with the federal government's fiscal condition we haveand changes in the regulatory environment that affected the functioning of capital markets, the System has been able to maintain access to the capital markets for debt issuances on acceptable terms (including when the FHLBank System's debt was downgraded by Standard & Poor's).terms. However, there is no assurance this will continue to be the case. Future ability to effectively access the capital markets could be adversely affected by external events (such as general economic and financial instabilities, political instability, wars, and natural disasters), deterioration in the perception of financial market participants about the financial strength of Consolidated Obligations, or downgrades to the System's credit ratings. It could also be affected by continued evolution of capital markets in response to financial regulations and by the System's joint and several liability for Consolidated Obligations, which exposes us to events at other FHLBanks. If access to capital markets were to be impaired for anyan extended period, the effect on our financial condition and results of operations could be material. At the extreme, the System's ability to achieve its mission and satisfy its financial obligations could be threatened.

18
Table of Contents


Credit and Counterparty Risk. We are exposed to credit risk that, if realized, could materially affect our ability to pay members a competitive dividend.

We believe we have a smallde minimis overall amount of residual credit risk exposure related to Credit Services, purchases of investments, and transactions in derivatives, and a moderateminimal amount of credit risk exposure related to the MPP. However, we can make no assurances that credit losses will not materially affect our financial condition or results of operations. An extremely severe and prolonged economic downturn, especially if combined with continued significant disruptions in housing or mortgage markets, could result in credit losses on assets that could impair our financial condition or results of operations.

The FHLBankFHLB is an asset-based lender for Advances and Letters of Credit. Advances are over-collateralized and we have a perfected first lien position on such collateral. Under a "Blanket" lien collateral status, which we assign to 85 percent of members amounting to approximately two-thirds of pledged collateral,However, we do not have full information on the structure and risk characteristics of the loannor do we estimate current market values on a large portion of collateral. This results in a degree of uncertainty as to the ultimate value we might obtain if we were forced to liquidate the loan collateral pledged to us under a Blanket lien.precise amount of over-collateralization.

Although credit losses in the MPP have historically been minor to date,small, they could increase under adverse economic scenarios involving significant and sustained reductions in home prices and sustained elevated levels of unemployment and other factors that influence delinquencies and defaults.


Some of our liquidity investments are unsecured, as are uncollateralized portions of interest rate swaps.swaps and swaptions. We make unsecured liquidity investments in and transact derivatives with highly rated, investment-grade institutions, have conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices. Failure of an investment or derivative counterparty with which we have a large unsecured position could have a material adverse effect on our financial conditions and results of operations. To the extent we engage in derivative transactions required to be cleared under provisions of the Dodd-Frank Act, we may be exposed to nonperformance from central clearinghouses and Futures Commission Merchants.

Financial institutions are increasingly inter-related as a result of trading, clearing, counterparty, and other relationships. As a result, actual or potential defaults of one or more financial institutions could lead to market-wide disruptions making it difficult for us to find qualified counterparties for transactions.

Market Risk. Changes in interest rates and mortgage prepayment speeds (together referred to as market risk exposure or interest rate risk exposure) could significantly reduce our ability to pay members a competitive dividend from current earnings.

Exposure of earnings to unhedged changes in interest rates and mortgage prepayment speeds is one of our largest ongoing residual risks. We derive most of our income from the interest earned on assets less the interest paid on Consolidated Obligations and deposits used to fund the assets. We fundhedge mortgage assets and hedge them with a combination of Consolidated Obligations and capital.derivatives transactions. Interest rate movements can lower profitability in two ways: 1) directly due to their impact on earnings from cash flow mismatches between assets and liabilities; and 2) indirectly via their impact on prepayment speeds, which can unfavorably affect the cash flow mismatches. The effects on income can include changesacceleration in the amortization of purchasepurchased premiums on mortgage assets.

Because it is normally cost-prohibitive to completely mitigate market risk exposure, a residual amount of market risk normally remains after incorporating risk management activities. Sharp increases in interest rates, especially short-term rates, or sharp decreases in long-term interest rates could adversely affect us and our stockholders by making dividend rates less competitive relative to the returns available to members on alternative investments.

In some extremely stressful scenarios, changes in interest rates and prepayment speeds could result in dividends being below stockholders' expectations for an extended period of time. In such a situation, members could engage in less Mission Asset Activity and could request a withdrawal of capital. See Item 7's "Quantitative and Qualitative Disclosures About Risk Management" for additional information about market risk exposure.


19
Table of Contents

Asset Profitability. Spreads on assets to funding costs may narrow because of changes in market conditions and competitive factors, resulting in lower profitability.

Spreads on our assets tend to be narrow compared to those of many other financial institutions due to our cooperative business model, resulting in relatively lower profitability.model. Market conditions, competitive forces, and, as discussed above, market risk exposure could cause these already narrow asset spreads to decline, which could substantially reduce our profitability. A key spread relationship is that we tend to utilize Consolidated Discount Notes to fund a significant amount of assets that have adjustable-rates tied to LIBOR. Because rates on Discount Notes do not perfectly correlate with LIBOR, a narrowing of this spread, for example from investors changing perceptions about the quality of our debt, is a key risk for us. Realizationcould lower income and reduce balances of narrower spreads could result in lower dividends and a reduction in Mission Asset Activity.


Capital Adequacy. Failure to meet capital adequacy requirements mandated by Finance Agency regulations and by our internal policies, or not being able to pay dividends or repurchase or redeem capital stock, may lower demand for Mission Asset Activity, affectharm results of operations, and lower membership value.

To ensure safe and sound operations, we must hold a minimum amount of capital relative to our asset levels. We must also hold a minimumsufficient amount of retained earnings to, among other things, help protect members' capital stock investment against impairment risk. If we were to violate these or any capital requirement, we may be unable to pay dividends or redeem and repurchase capital stock. Thisstock in a timely manner (or at all). Such events could adversely affect the value of membership including members' capital investment.investment in our company. Outcomes could be reduced demand for Mission Asset Activity, decreased profitability, requests from members to redeem a portion of their capital or to withdraw from membership, or increased investors' perception of the riskiness of our FHLBank.FHLB.

Business Concentration and Industry Consolidation.Consolidation and Composition of the Financial Industry. Sharp reductions in Mission Asset Activity resulting from lower usage by large members, or consolidation of large members, or continued shift in mortgage lending activities towards entities not eligible for FHLB membership could adversely impact our net income and dividends.

The amount of Mission Asset Activity and capital is concentrated among a handful of large members. The financial industry continues to consolidate amongto a smaller number of institutions and to become more concentrated.the market share of mortgage financing has shown a systemic trend towards financial institutions that are currently ineligible for FHLB membership. Our large members could decrease their Mission Asset Activity and the amount of their capital stock as a result of merger and acquisition activity or their reduced demand for Mission Assets.continued loss of market share to ineligible FHLB members. At December 31, 2014,2016, one member, JPMorgan Chase Bank, N.A., held overnearly half of our Advances and one member PFI, Union Savings Bank, accounted for nearly 25over 30 percent of the outstanding MPP principal balance. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital and because of our relatively lowmodest operating expenses. However, an extremely large and sustained reduction in Mission Asset Activity could affect our profitability and possibly our ability to pay competitive dividends.dividends, as well as, at the FHLBank System level, raise policy questions about the relevance of the FHLBank System in its traditional mission of supporting housing finance.

Exposure to FHLBank System.Other FHLBanks. Financial difficulties at other FHLBanks could require us to provide financial assistance to another FHLBank, which could adversely affect our results of operations or our financial condition.

Each FHLBank has a joint and several liability for principal and interest payments on Consolidated Obligations, which are backed only by the financial resources of the FHLBanks. Although no FHLBank has ever defaulted on its principal or interest share of an Obligation, there can be no assurance that this will continue to be the case. Financial performance issues could require our FHLBankFHLB to provide financial assistance to one or more other FHLBanks, for example, by making a payment on an Obligation on behalf of another FHLBank. Such assistance could adversely affect our financial condition, earnings, ability to pay dividends, or ability to redeem or repurchase capital stock.

Member Regulatory Environment. Members faceand investors and underwriters in our debt have faced increased regulatory scrutiny in recent years, which could further decrease Mission Asset Activity, lower profitability, and lower profitability.make maintaining adequate liquidity more difficult.

In the last number of years, regulation and scrutiny of the financial industry has increased significantly. We believe these activities have decreased members' overall usage of Advances.

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 are required, among other things, to have higher capital ratios. While itIt is uncertain how the new capital regime and other regulatory standards, such as those related to liquidity developed by

20
Table of Contents

the Basel Committeeadequacy, will ultimately be implemented by U.S. regulatory authorities, theauthorities. The new regime could ultimately require some of our members to divest assets in order to comply with the regime's more stringent capital and liquidity requirements, thereby possibly 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.mission.


Similarly, changes in regulatory requirements faced by our debt investors and underwriters could affect our financial condition, results of operations, and ability to access the capital markets.

Operational and Compliance Risks. Failures or interruptions in our internal controls, compliance activities, information systems and other technologies, models, and third-party vendors could harm our financial condition, results of operations, reputation, and relations with members.

Control failures, including failures in our controls over financial reporting as well as business interruptions with members and counterparties, could occur from human error, fraud, breakdowns in information and computer systems, errors or misuse of financial and business models and services we employ (including third-party vendor services), 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.

We rely heavily on internal and third-party information systems and other technology to 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,” which are breaches, unauthorized access, misuse, computer viruses or other malicious code and other events 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 failures, interruptions, or "cyberattacks" in information systems and other technology. If we experience a failure, interruption, or "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.
Personnel Risk. Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.

The success of our business mission depends, in large part, on the ability to attract and retain key personnel. Competition for qualified people or ineffective succession planning could affect the ability to hire or retain effective key personnel, thereby harming our financial condition and results of operations.

Operational and Compliance Risks. Failures or interruptions in our internal controls, compliance activities, information systems and other operating technologies could harm our financial condition, results of operations, reputation, and relations with members.

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.

We rely heavily on internal and third-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., breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) that 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" in information systems and other technology. If we experience a failure, interruption, or "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.

Item 2.        Properties.

Our offices are located in approximately 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.

Item 3.        Legal Proceedings.

From time to time, we are subject to various legal proceedings arising in the normal course of business. Management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material adverse effect on our financial condition or results of operations.

Item 4.        Mine Safety Disclosures.

Not applicable.


21
Table of Contents


PART II


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

By law our stock is not publicly traded, and only our members (and former members with a withdrawal notice pending) may own our stock. The par value of our capital stock is $100 per share. As of December 31, 2014,2016, we had 705687 stockholders and 43approximately 42 million shares of capital stock outstanding, all of which were Class B Stock.

We paid quarterly dividends in 20142016 and 20132015 as outlined in the table below.
(Dollars in millions)(Dollars in millions)       (Dollars in millions)       
 2014 2013 2016 2015
   Annualized   Annualized    Annualized   Annualized 
Quarter Amount Rate Form Quarter Amount Rate Form Amount Rate Form Quarter Amount Rate Form
First $47
 4.00% Cash First $39
 4.25% Cash $44
 4.00% Cash First $43
 4.00% Cash
Second 44
 4.00
 Cash Second 43
 4.25
 Cash 43
 4.00
 Cash Second 42
 4.00
 Cash
Third 42
 4.00
 Cash Third 49
 4.25
 Cash 42
 4.00
 Cash Third 43
 4.00
 Cash
Fourth 43
 4.00
 Cash Fourth 47
 4.00
 Cash 42
 4.00
 Cash Fourth 44
 4.00
 Cash
Total $176
 4.00
 Total $178
 4.18
  $171
 4.00
 Total $172
 4.00
 
    

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 Policypolicy 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.

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). At December 31, 2016, we had excess capital stock outstanding totaling less than one percent of total assets.

We may not declare a dividend if, at the time, we are not in compliance with all of our capital requirements. We also may not declare or pay a dividend if, after distributing the dividend, we would fail to meet any of our capital requirements or if we determine that the dividend would create a safety and soundness issue for the FHLBank.FHLB. See Note 15 of the Notes to the Financial Statements for additional information regarding our capital stock.


RECENT SALES OF UNREGISTERED SECURITIES

From time to time, we provide Letters of Credit in the ordinary course of business to support members' obligations issued in support of unaffiliated, third-party offerings of notes, bonds or other securities. We provided $60 million and $17 million of such credit support during 2016 and 2015. We did not provide such credit support during 2014 and 2013. We provided $8 million of such credit support during 2012.2014. To the extent that these Letters of Credit are securities for purposes of the Securities Act of 1933, their issuance is exempt from registration pursuant to section 3(a)(2) thereof.


22
Table of Contents

Item 6.Selected Financial Data.

The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the five years ended December 31, 2014.2016. The FHLB's change to the contractual interest method for amortizing premiums and accreting discounts on mortgage loans held for portfolio has been reported through retroactive application of the change in accounting principle to all periods presented.
Year Ended December 31,Year Ended December 31,
(Dollars in millions)2014 2013 2012 2011 20102016 2015 2014 2013 2012
STATEMENT OF CONDITION DATA AT PERIOD END:                  
Total assets$106,640
 $103,181
 $81,562
 $60,397
 $71,631
$104,635
 $118,756
 $106,607
 $103,137
 $81,540
Advances70,406
 65,270
 53,944
 28,424
 30,181
69,882
 73,292
 70,406
 65,270
 53,944
Mortgage loans held for portfolio6,989
 6,826
 7,548
 7,871
 7,782
9,150
 7,954
 6,956
 6,782
 7,526
Allowance for credit losses on mortgage loans5
 7
 18
 21
 12
1
 2
 5
 7
 18
Investments (1)
26,007
 22,364
 19,950
 21,941
 33,314
25,334
 37,356
 26,007
 22,364
 19,950
Consolidated Obligations, net:                  
Discount Notes41,232
 38,210
 30,840
 26,136
 35,003
44,690
 77,199
 41,232
 38,210
 30,840
Bonds59,217
 58,163
 44,346
 28,855
 30,697
53,191
 35,092
 59,217
 58,163
 44,346
Total Consolidated Obligations, net100,449
 96,373
 75,186
 54,991
 65,700
97,881
 112,291
 100,449
 96,373
 75,186
Mandatorily redeemable capital stock63
 116
 211
 275
 357
35
 38
 63
 116
 211
Capital:                  
Capital stock - putable4,267
 4,698
 4,010
 3,126
 3,092
4,157
 4,429
 4,267
 4,698
 4,010
Retained earnings689
 621
 538
 444
 438
834
 737
 656
 578
 516
Accumulated other comprehensive loss(17) (9) (11) (11) (7)(13) (13) (17) (9) (11)
Total capital4,939
 5,310
 4,537
 3,559
 3,523
4,978
 5,153
 4,906
 5,267
 4,515
STATEMENT OF INCOME DATA:                  
Net interest income$317
 $328
 $308
 $249
 $275
$363
 $327
 $327
 $307
 $288
(Reversal) provision for credit losses—
 (7) 1
 12
 13
—
 —
 —
 (7) 1
Non-interest income (loss)23
 20
 13
 (5) 20
Non-interest expenses68
 64
 58
 57
 56
Assessments28
 30
 27
 37
 62
Non-interest income46
 30
 23
 20
 13
Non-interest expense111
 75
 68
 64
 58
Affordable Housing Program assessments30
 28
 28
 30
 27
Net income$244
 $261
 $235
 $138
 $164
$268
 $254
 $254
 $240
 $215
FINANCIAL RATIOS:                  
Dividend payout ratio (2)
72.2% 68.1% 60.1% 95.4% 84.1%63.9% 67.7% 69.5% 74.2% 65.6%
Weighted average dividend rate (3)
4.00
 4.18
 4.44
 4.25
 4.38
4.00
 4.00
 4.00
 4.18
 4.44
Return on average equity4.93
 5.10
 6.20
 3.89
 4.67
5.35
 5.04
 5.16
 4.72
 5.69
Return on average assets0.24
 0.28
 0.35
 0.21
 0.24
0.25
 0.24
 0.25
 0.26
 0.32
Net interest margin (4)
0.31
 0.35
 0.46
 0.37
 0.40
0.35
 0.31
 0.32
 0.33
 0.43
Average equity to average assets4.90
 5.47
 5.68
 5.29
 5.08
4.76
 4.78
 4.86
 5.43
 5.67
Regulatory capital ratio (5)
4.71
 5.27
 5.84
 6.37
 5.43
4.80
 4.38
 4.68
 5.23
 5.81
Operating expense to average assets0.054
 0.055
 0.067
 0.068
 0.070
Operating expenses to average assets (6)
0.064
 0.058
 0.054
 0.055
 0.067
(1)Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.
(2)Dividend payout ratio is dividends declared in the period as a percentage of net income.
(3)Weighted average dividend rates are dividends paid divided by the average number of shares of capital stock eligible for dividends.
(4)Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average earning assets.
(5)Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets.
(6)Operating expenses comprise compensation and benefits and other operating expenses, which are included in non-interest expense.


23
Table of Contents

Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis by management of the FHLB's financial condition and results of operations should be read in conjunction with the Financial Statements and related Notes to Financial Statements contained in this Form 10-K.

Our change to the contractual interest method for amortizing premiums and accreting discounts on mortgage loans held for portfolio has been reported through retroactive application of the change in accounting principle to all periods presented. See Note 1 of the Notes to Financial Statements for related disclosures.


EXECUTIVE OVERVIEW

Financial Condition

Mission Asset Activity
The following table summarizes our financial condition.
Year Ended December 31,Year Ended December 31,
Ending Balances Average BalancesEnding Balances Average Balances
(In millions)2014 2013 2014 20132016 2015 2016 2015
Total Assets$106,640
 $103,181
 $101,157
 $93,691
$104,635
 $118,756
 $105,425
 $105,539
Mission Asset Activity:              
Advances (principal)70,299
 65,093
 66,492
 61,327
69,907
 73,242
 69,214
 70,355
Mortgage Purchase Program (MPP):              
Mortgage loans held for portfolio (principal)6,796
 6,643
 6,620
 6,881
8,926
 7,758
 8,323
 7,396
Mandatory Delivery Contracts (notional)451
 37
 273
 254
441
 450
 555
 471
Total MPP7,247
 6,680
 6,893
 7,135
9,367
 8,208
 8,878
 7,867
Letters of Credit (notional)17,780
 13,472
 15,154
 12,560
17,508
 19,555
 17,035
 17,694
Total Mission Asset Activity$95,326
 $85,245
 $88,539
 $81,022
$96,782
 $101,005
 $95,127
 $95,916

In 20142016, the FHLBankFHLB fulfilled its mission by providing a key source of readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing and community investment, and paying stockholders a competitive dividend return on their capital investment.

The majoritybalance of ourMission Asset Activity – which we define as Advances, Letters of Credit, and total MPP (including purchase commitments) – was $96.8 billion at December 31, 2016, a decrease of $4.2 billion (four percent) from year-end 2015. However, the 2016 average balance of Mission Asset Activity was relatively flat compared to 2015.

The reduction in Mission Asset Activity at the end of 2016 compared to the end of 2015 was primarily driven by a decrease in the balances of Advances and Letters of Credit. Advance principal balances decreased $3.3 billion (five percent) primarily due to a reduction in borrowings from a few large-asset members along with captive insurance companies, who were required to pay off their Advances due to the membership ruling issued by the Finance Agency in January 2016. The MPP principal balance rose $1.2 billion (15 percent).

As of December 31, 2016, members funded on average 3.2 percent of their assets with Advances, and the market penetration rate was relatively stable with over 68 percent of members holding Mission Asset Activity. As in the last several years, most members continued to have modest demand for new Advance borrowings due to measured economic growth and significant amounts of liquidity made available as a result of the actions of the Federal Reserve System.

Total assets at December 31, 2014increased$3.5 billion (three percent) from year-end 2013. Average asset balances were $7.5 billion (eight percent) higher in 2014 than 2013. The balance of Mission Asset Activity – comprising Advances, Letters of Credit, and total MPP – was $95.3 billion at December 31, 2014, an increase of $10.1 billion (12 percent) from year-end 2013. Mission Asset Activity on this date constituted 80 percent of adjusted Consolidated Obligations (which equal Obligations plus Letters of Credit and Mandatory Delivery Contracts), equal to our internal benchmark.borrowings.

The growth in ending and average balancesthe MPP reflected our strategy to increase this segment as well as continued low mortgage rates, which resulted in a substantial amount of Mission Asset Activity in 2014 was led by an increase in the principal balance of Advances, primarily from a few larger members. As of December 31, 2014, members funded on average 3.3 percent of their assets with Advances, and the penetration rate was relatively stable over the last year with 65-70 percent of members holding Mission Asset Activity.

The principal balance ofnew mortgage loans heldavailable for portfolio at December 31, 2014rose$0.2 billion (two percent)purchase from year-end 2013.homeowners' refinancing activity. During 20142016, we purchased $1.2$2.8 billion of mortgage loans, while principal paydownsreductions totaled $1.0$1.6 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be modest. The allowance for credit losses in the MPP decreased to minimal.$5 million at December 31, 2014.


Based on earnings in 20142016 earnings,, we contributed $28accrued $30 million tofor the Affordable Housing Program (AHP) pool of funds to be awardedavailable to members in 2015.2017. In addition, we continued our voluntary sponsorship of two other housing programs, which provide resources to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners and to help members aid their communities following natural disasters.
 
Investments and Other Assets
The balance of investments at December 31, 20142016 was $26.0$25.3 billion, an increasea decrease of $3.6$12.0 billion (16(32 percent) from year-end 2013. At2015. Most of the reduction was driven by a decline in short-term investments used for asset liquidity, for which we carried a substantially larger-than-normal balance at the end of 2014,2015. At December 31, 2016, investments included $14.7$14.5 billion of mortgage-backed securities and $11.3$10.8 billion of other investments, which arewere mostly short-term instruments we holdheld for liquidity.


24
Table of Contents

Investment balances averaged $27.5 billion in 2014, an increase of $2.7 billion (11 percent) from 2013's average. This growth occurred from both liquidity investments and mortgage-backed securities. All of our mortgage-backed securities held at December 31, 20142016 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.

The balance of cash and due from banks at December 31, 2014 was $3.1 billion, a decrease of $5.5 billion (64 percent) from year-end 2013. The larger than normal balance of cash and due from banks at the end of 2013 was a result of holding $8.6Investment balances averaged $27.4 billion in deposits at2016, similar to the Federal Reserve due to narrower spreads and fewer eligible counterparties at that time for certain types of liquidity investments.

average balance during 2015. We maintained an adequate amount of asset liquidity throughout the year2016 under a variety of liquidity measures as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."
 
Capital
Capital adequacy remained strong throughout 2014, exceeding2016, surpassing all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 20142016 was 4.634.76 percent,, while the regulatory capital-to-assets ratio was 4.71 percent.4.80 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP.

The amounts of GAAP and regulatory capital decreased $371$175 million and $416$178 million,, respectively, in 2014, primarily resulting2016, due to excess capital stock redemption requests from redemptiona larger member and repurchaserepurchases of $500 millioncapital stock from captive insurance company members, partially offset by the growth in excess stock in February as part of our capital management strategy.retained earnings.

Total retainedRetained earnings weretotaled $689834 million at December 31, 20142016, an increase of $6897 million (1113 percent) from year-end 20132015. Retained earnings were comprised of $529 million unrestricted and $160 million restricted. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLBank and to provide the opportunity to stabilize future dividends. Our Capital Plan also has safeguards to prevent financial leverage ratios from falling below regulatory minimum levels.

Results of Operations

Overall Results
The table below summarizes our results of operations.
For the Years Ended December 31,Year Ended December 31,
(Dollars in millions)2014 2013 20122016 2015 2014
Net income$244
 $261
 $235
$268
 $254
 $254
Affordable Housing Program accrual28
 30
 27
Affordable Housing Program assessments30
 28
 28
Return on average equity (ROE)4.93% 5.10% 6.20%5.35% 5.04% 5.16%
Return on average assets0.24
 0.28
 0.35
0.25
 0.24
 0.25
Weighted average dividend rate4.00
 4.18
 4.44
4.00
 4.00
 4.00
Average 3-month LIBOR0.23
 0.27
 0.43
0.74
 0.32
 0.23
Average overnight Federal funds effective rate0.09
 0.11
 0.14
ROE spread to 3-month LIBOR4.70
 4.83
 5.77
4.61
 4.72
 4.93
Dividend rate spread to 3-month LIBOR3.77
 3.91
 4.01
3.26
 3.68
 3.77
ROE spread to Federal funds effective rate4.84
 4.99
 6.06
Dividend rate spread to Federal funds effective rate3.91
 4.07
 4.30

Net income in 2016 increased $14 million (five percent) compared to 2015. The increase was the result of higher net interest income and non-interest income, the latter of which included $39 million in gains from the sale of securities during the fourth quarter of 2016. The increase in net interest income was primarily the result of more favorable funding costs related to variable-rate assets and growth in mortgage assets. Partially offsetting the gains in income was an increase in non-interest expense, which included a settlement of all claims related to the 2008 Lehman bankruptcy during the fourth quarter of 2016 of approximately $25 million.

We believe that our operations and financial condition will continue to generate steady and competitive profitability, reflecting the combination of a stable business model and operating environment, acceptable spreads on interest-earning assets, a relatively constant composition of assets, a consistent and conservative management of risk, a moderate increase in operating expenses, and a prudent economic use of derivative transactions. Our business model is structured to be able to absorb sharp changes in Mission Asset Activity because we can undertake commensurate reductions in liability balances and capital. Factors that can cause significant periodic earnings volatility are currently related to changes in spreads between LIBOR and our short-term funding costs, recognition of net amortization, and unrealized fair value adjustments related to the use of derivatives.

ROE in 2016 was significantly above short-term rates, while we maintained risk exposures in line with our tolerance and appetite for a moderate to low-risk profile. The spread between ROE and short-term interest rates, for which we use 3-month LIBOR and Federal funds as proxies, areis a market benchmarksbenchmark we believe member stockholders use to assess the competitiveness of the return on their capital investment in our company. Earnings levels continued to be sufficient to providerepresent competitive returns on stockholders' capital investment. Consistent with experience over

In December 2016, we paid stockholders a quarterly 4.00 percent annualized dividend rate on their capital investment in our company. This is the same rate we have distributed in each of the last seven years, ROE was significantly above short-term rates, resulting in the ROE spreads being wider than the long-term historical average spread.

The lower net income and ROE in 2014 compared to 2013 resulted primarily from the following factors:
▪implementation of a strategy to reduce market risk exposure to the possibility of higher interest rates;

25
Table of Contents

▪an increase in net amortization related to mortgage assets in 2014;
▪narrower spreads on LIBOR Advances funded by short-term debt;
▪a decline in mortgage asset spreads due to the run-off of higher yielding mortgages in excess of the retirement of high-cost debt;
▪a larger reversal for credit losses on mortgage loans held for portfolio in 2013;
▪a reduction in earnings from interest-free capital as interest rates continued to be low and trend lower; and
▪an increase in other expense.
Three factors increased income, offsetting a portion of the impact from the unfavorable factors:
▪Advance growth;
▪an increase in the average balance of mortgage-backed securities; and
▪an increase in fees received from Letters of Credit due to the substantial growth in notional balances outstanding.

The decline in ROE was less than that of net income due to our repurchase of excess stock in February 2014.13 quarters.

Effect of Interest Rate Environment
Trends in market interest rates strongly influence the results of operations and profitability via how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following tables presenttable presents key market interest rates (obtained from Bloomberg L.P.).
Year 2014 Year 2013 Year 2012Year 2016 Year 2015 Year 2014
Ending Average Ending Average Ending AverageEnding Average Ending Average Ending Average
Federal funds target0-0.25%
 0-0.25%
 0-0.25%
 0-0.25%
 0-0.25%
 0-0.25%
Federal funds effective0.06
 0.09
 0.07
 0.11
 0.09
 0.14
0.55% 0.39% 0.20% 0.13% 0.06% 0.09%
3-month LIBOR0.26
 0.23
 0.25
 0.27
 0.31
 0.43
1.00
 0.74
 0.61
 0.32
 0.26
 0.23
2-year LIBOR0.90
 0.62
 0.49
 0.44
 0.39
 0.50
1.45
 1.00
 1.18
 0.88
 0.90
 0.62
10-year LIBOR2.28
 2.65
 3.09
 2.47
 1.84
 1.88
2.34
 1.70
 2.19
 2.18
 2.28
 2.65
2-year U.S. Treasury0.67
 0.45
 0.38
 0.30
 0.25
 0.27
1.19
 0.83
 1.05
 0.67
 0.67
 0.45
10-year U.S. Treasury2.17
 2.53
 3.03
 2.34
 1.76
 1.78
2.45
 1.84
 2.27
 2.13
 2.17
 2.53
15-year mortgage current coupon (1)
2.10
 2.34
 2.68
 2.21
 1.71
 1.64
2.49
 1.94
 2.32
 2.13
 2.10
 2.34
30-year mortgage current coupon (1)
2.85
 3.23
 3.63
 3.07
 2.22
 2.54
3.14
 2.63
 3.02
 2.88
 2.85
 3.23
Year 2014 by Quarter - AverageYear 2016 by Quarter - Average
Quarter 1 Quarter 2 Quarter 3 Quarter 4Quarter 1 Quarter 2 Quarter 3 Quarter 4
Federal funds target0-0.25%
 0-0.25%
 0-0.25%
 0-0.25%
Federal funds effective0.07
 0.09
 0.09
 0.10
0.36% 0.37% 0.39% 0.45%
3-month LIBOR0.24
 0.23
 0.23
 0.24
0.62
 0.64
 0.79
 0.92
2-year LIBOR0.49
 0.54
 0.71
 0.75
0.91
 0.90
 0.96
 1.24
10-year LIBOR2.87
 2.72
 2.62
 2.40
1.78
 1.61
 1.43
 1.99
2-year U.S. Treasury0.36
 0.41
 0.50
 0.52
0.84
 0.77
 0.72
 1.00
10-year U.S. Treasury2.76
 2.61
 2.49
 2.27
1.92
 1.75
 1.56
 2.13
15-year mortgage current coupon (1)
2.51
 2.35
 2.34
 2.16
1.99
 1.86
 1.72
 2.19
30-year mortgage current coupon (1)
3.45
 3.29
 3.21
 2.95
2.71
 2.56
 2.37
 2.85
(1)Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications.

Short-term interest rates remained close to zero in 2014. The Federal Reserve maintained the overnight Federal funds target and effective rates between zero and 0.25 percent, with other short-term interest rates generally consistent with their historical relationships to Federal funds. The Federal Reserve has communicated that it currently anticipates continuing actions to hold short-term interest rates at or near zero until at least mid-2015. Intermediate-term rates (up to five years) were relatively stable, while longer-term rates declined approximately 80 basis points and resulted in an overall flattening of the yield curve.


26
Table of Contents

Thecontinued low interest rate environment remained favorable overall forin 2016 moderately benefited our results of operations in 2014. Theoperations. Because the low rate environment since 2008 has benefited our profitability (ROE)persisted for nearly a decade, much of the benefit has diminished over time as many assets and liabilities have fully repriced to the low rates. However, results of operations continued to benefit from a lack of sharp changes in interest rates, especially upward movements.

In December 2016, the Federal Reserve increased its target overnight Federal funds from a 0.25 to 0.50 percent range to a 0.50 to 0.75 percent range. In addition, during 2016 LIBOR increased relative to interest rate levels,the cost of funds for several reasons:our short-term debt, which improved income because we have a substantial amount of assets tied directly or indirectly to LIBOR.
▪Reductions in, and low, market interest rates raise ROE compared to market rates to the extent we fund a portion of long-term assets with shorter-term debt.
▪The low rate environment has provided the opportunity for us to retire many Consolidated Bonds and replace them with lower cost Obligations, at a pace exceeding mortgage asset paydowns, which have been slower than would be expected in more normal housing and mortgage environments.
▪Earnings generated from funding assets with interest-free capital have not decreased as much as the reduction in overall interest rates because long-term assets do not reprice immediately to the lower rates.

Average long-term rates were lower in 2016 compared to 2015, which increased net mortgage amortization. However, long-term rates rose in the fourth quarter. We expect the recent movements in both short- and long-term rates will have only a modest effect on results of operations and profitability, outside of temporary fluctuations from net amortization and unrealized fair value adjustments on derivatives.


Business Conditions and Outlook and Risk Management

This section summarizes the business outlook and what we believe are our current major risk exposures. Item 1A's “Risk Factors” has a detailed discussion of risk factors that could affect our corporate objectives, financial condition, and results of operations. "Quantitative and Qualitative Disclosures About Risk Management" provides details on current risk exposures.

Strategic/Business Risk
Advances.Advances:Our business is cyclical and Mission Asset Activity normally grows slowly, stabilizes, or declines in periods of difficult macro-economic conditions, when financial institutions have ample liquidity, or when there is significant growth in the money supply. InSince the last several years,end of the recession in 2009, measured economic growth has resulted in relatively slow growth in consumer, mortgage and commercial loans across the broad membership both in absolute terms and relative to deposit growth. Other important factors continuing to constrain widespread demand for Advances are the extremely low levels of interest rates resultingand little deviation in favorable broad-based funding levelsAdvance rates versus deposit rates, and the Federal Reserve's ongoing actions to provide an extraordinary amount of deposit-based liquidity to attempt to stimulate economic growth. We would expect to see a broad-based increase in Advance demand when the economy experiences a sustained improvementan improved growth trend, when interest rates begin to increase over time, or if changes in Federal Reserve policy reduce other sources of liquidity available to our members.

The relative balance between loan and deposit growth providesfluctuations can provide an indication of potential member Advance demand. From September 30, 20132015 to September 30, 20142016 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $52.7$132 billion (4.3 percent) (9.7 percent) while their aggregate deposit balances rose $74.6$264 billion (3.6 percent) (12.7 percent). The data include the effect of large mergers and acquisitions only when they are available for both comparison dates. Most of the loan and deposit growth in this period occurred from our largest members, which is consistent with the concentration of nationwide financial activity.

Excluding the five members withthat have over $50 billion of assets, and recent acquisitions, aggregate loans increased $12.0$13.0 billion (6.4 percent) (6.5 percent) in the 12-month period while aggregate deposits grew $4.7by $10.4 billion (2.0 percent) (4.5 percent).

Members' faster This relative balance of loan growth thanand deposit growth could over time produce increased demand for Advances, althoughcontributed to the impactsmall fluctuation in 2014 across the membership base was modest withAdvance balances from most of the Advance growth coming from a few larger members.

MPP.MPP: MPP balances are influenced by conditions in the housing and mortgage markets, the competitiveness of prices we offer to purchase loans as well as program features, and activity from our largest sellers.

Our current and ongoing strategy for the MPP has two components: 1) increase the number of regular sellers and participants in the programprogram; and 2) and grow balancesincrease purchases while maintaining thembalances at a prudent level relative to capital and total assets to helpeffectively manage market and credit risks consistent with our risk appetite.

Balances are influenced primarily by activity from large sellers and a Finance Agency regulation requiring that if purchases in a calendar year exceed $2.5 billion, we must enact additional housing goals. Given the uncertainty of the goal requirements and possible operational and economic impacts, we currently plan to limit our calendar year purchases to less than $2.5 billion until we receive further guidance from the Finance Agency and we confirm our ability to meet the goals.

27
Table of Contents


Regulatory and Legislative Risk
General.General: The FHLBank System currently faces heightened legislative and regulatory risks and uncertainties, which we believe has affected, and could continue to affect, our Mission Asset Activity, capitalization, and results of operations. Item 1A.'s "Risk Factors" provides details of some of the primary current and recent regulatory and legislative initiatives that could affect our business. The legislativeoversight. Legislative and regulatory actions relatedapplicable, directly or indirectly, to our companythe FHLBank System in the last decade have raised our operating costs and increased uncertainty regarding the business model and membership base under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution.resolution, and the evolution of mortgage financing moving towards financial institutions currently not eligible for FHLBank membership. See Item 1A's "Risk Factors" for more discussion. We cannot predict the ultimate outcome of GSE reform and whether our membership base will be legislatively and regulatorily permitted to evolve in concert with the housing finance market.

Membership Requirements.Requirements: In September 2014,January 2016, the Finance Agency publishedissued a notice of proposed rulemaking that would modifyrule on membership requirements. This is the primary current regulatory action in process that could significantly affect how we achieve our mission. The primary provisions of the proposed rule include the following:changes were:

▪A new membership requirement for allbanning captive insurance companies as being eligible members to hold, onin an ongoing basis, at least one percent of their assets in first-lien mortgage loans (including mortgage-backed securities), with the option of the Finance Agency making the requirement two percent or up to five percent.FHLBank, and

▪A requirement that all insured depository members with assets over $1.1 billion must hold, on an ongoing basis, at least 10 percent of their assets in a broader range of residential mortgage loans.
▪Narrowingclarifying matters related to defining the definition of eligible insurance companies by eliminating from FHLBank membership all currently-eligible captive insurance companies.
▪Clarification of how FHLBanks should determine the "principal place of business" for membership of insurance companies and community development financial institutions. Current rules define an institution's "principal place of business" as the state in which it maintains its home office. The proposed rule would also add a requirement that an institution should conduct business operations from the home office for that state to be considered its principal place of business. The change would be applied prospectively.business for members for purposes of determining their appropriate FHLBank district.

At the end of 2015, we had 15 captive insurance company members, each of which has mortgage-based operations. As a result of this rule, all Advances made to these members were repaid during 2016 and most of their capital stock was repurchased.

The proposed rule would disallow a numberhas not materially affected our financial condition or results of financial institutions from being members of an FHLBank whooperations. However, we are currently eligible under the FHLBank Act established by the U.S. Congress. We are thereby concerned that the rule if adopted in its current form, wouldcould constrain the ability of the FHLBanks to fulfill their mission of promoting housing finance through providing liquidity and funding to financialwith institutions engaged in housing finance activities.

The comment period ended on January 12, 2015. Along with other FHLBanks, many members, We continue to believe that captive insurance companies are important institutions in helping to deepen and diversify the U.S. Congress, we provided our comments onflow of funds in the proposed rule.mortgage markets.

Market Risk
During 2014,2016, as in 2013,2015, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless long-term rates were to permanently increase immediately and permanentlyover the next 12 months by five percentage points or more combined with short-term rates increasing to at least eightseven percent. We believe such an extremea stress scenario although plausible, is extremely unlikely to occur in the foreseeable future. However, in anticipation of interest rates beginning to increase we adopted a strategy in late 2013, which we implemented in 2014, to lower market risk exposure to higher rates. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would likely result in ROE still beingremaining well above market interest rates.

Capital Adequacy
We maintained compliance with regulatory capital requirements. Capital ratios at December 31, 2014 exceeded the regulatory required minimum of four percent. We believe that the amount of our retained earnings is sufficient to protect against impairment risk of capital stock and to provide the opportunity to stabilize dividends. Our Capital Plan has safeguards to prevent financial leverage from increasing beyond regulatory minimums or below safe levels. We believe members place a high value on their capital investment in our company. Our capital policies and Capital Plan have safeguards to ensure we meet regulatory and prudential capital requirements. Capital ratios at December 31, 2016 and all throughout the year exceeded the regulatory required minimum of four percent. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLB and to provide the opportunity to stabilize or augment future dividends.

Credit Risk
In 2014,2016, we continued to experience minimala de minimis level of overall residual credit risk exposure from 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,risks. Therefore, we have never experienced any credit losses and we continuedcontinue to have no loan loss reserves or impairment recorded for these instruments.


28
Table of Contents

Residual credit risk exposure in the mortgage loan portfolio remained modest.was minimal. The allowance for credit losses in the MPP continued to decline and was $5$1 million at December 31, 2014.

As in prior years, we did not evaluate any investments to be other-than-temporarily impaired in 2014. We held no private-label mortgage-backed securities. All of our mortgage-backed securities were issued and guaranteed by Fannie Mae or Freddie Mac, which we believe have the backing of the U.S. government, or by the National Credit Union Administration (NCUA) or Ginnie Mae, which issue guaranteed securities. Liquidity investments are either guaranteed by the U.S. government, secured (i.e., collateralized), or unsecured with our exposure limited to investment in the debt securities of highly rated, investment-grade institutions with appropriate limits on dollar and maturity exposure to each institution. We mitigate most of the credit risk exposure resulting from interest rate swap transactions through collateralization.2016.

Liquidity Risk
Our liquidity position remained strong during 2014,2016, as did our overall ability to fund operations through the issuance of Consolidated Obligations at acceptable interest costs. Investor demand for FHLBank System debt continued to be robust. There were minimalno substantive stresses on market access or liquidity from external market and political events. Although we can make no assurances, we expect this to continue to be the case and believe there is only a remote possibility of a liquidity or funding crisis in the FHLBank System that could impair the FHLBank'sour ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends.


ANALYSIS OF FINANCIAL CONDITION

Mission Asset Activity

We regularly monitor the dollar and percentage amount of our balance sheet that is Mission Asset Activity, which we define as Advances, Letters of Credit, and total MPP. TheseAssets are the primary means by which we fulfill our mission with direct connections to members. We measureregularly monitor our balance sheet concentration of Mission Asset Activity againstActivity. In 2016, our Primary Mission Asset ratio, which measures the sum of average Advances and mortgage loans as a percentage of average Consolidated Obligations, becausewas 78 percent. This ratio exceeded the latter reflect the major sourceFinance Agency's preferred ratio of our franchise value as a GSE. At December 31, 2014, the principal balance70 percent. In assessing overall mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of $95.3 billion constituted 80 percent of adjusted Obligations (which equal Obligations pluswhich is Letters of Credit and Mandatory Delivery Contracts). The daily average percentage in 2014 was also 80 percent. These percentage levels were equalissued to our internal benchmark.members.


29
Table of Contents

Credit Services

Credit Activity and Advance Composition
The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.
(Dollars in millions)December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Balance 
Percent(1)
 Balance 
Percent(1)
Balance 
Percent(1)
 Balance 
Percent(1)
Adjustable/Variable Rate Indexed:       
Adjustable/Variable Rate-Indexed:       
LIBOR$51,839
 74% $49,199
 75%$44,289
 64% $47,312
 65%
Other515
 1
 413
 1
918
 1
 617
 1
Total52,354
 75
 49,612
 76
45,207
 65
 47,929
 66
Fixed-Rate:              
REPO5,201
 7
 4,143
 7
10,786
 15
 10,568
 14
Regular Fixed-Rate7,398
 11
 5,751
 9
9,618
 14
 9,248
 13
Putable (2)
1,617
 2
 2,146
 3
565
 1
 1,046
 1
Convertible (2)
—
 —
 10
 —
Amortizing/Mortgage Matched2,734
 4
 2,593
 4
2,596
 4
 2,706
 4
Other995
 1
 838
 1
1,135
 1
 1,745
 2
Total17,945
 25
 15,481
 24
24,700
 35
 25,313
 34
Other Advances—
 —
 —
 —
Total Advances Principal$70,299
 100% $65,093
 100%$69,907
 100% $73,242
 100%
              
Letters of Credit (notional)$17,780
   $13,472
  $17,508
   $19,555
  
(Dollars in millions)December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016
Balance 
Percent(1)
 Balance 
Percent(1)
 Balance 
Percent(1)
 Balance 
Percent(1)
Balance 
Percent(1)
 Balance 
Percent(1)
 Balance 
Percent(1)
 Balance 
Percent(1)
Adjustable/Variable Rate Indexed:               
Adjustable/Variable-Rate Indexed:               
LIBOR$51,839
 74% $49,244
 69% $48,973
 71% $49,269
 75%$44,289
 64% $45,308
 66% $46,707
 63% $47,161
 69%
Other515
 1
 531
 1
 491
 1
 389
 1
918
 1
 588
 1
 524
 1
 420
 —
Total52,354
 75
 49,775
 70
 49,464
 72
 49,658
 76
45,207
 65
 45,896
 67
 47,231
 64
 47,581
 69
Fixed-Rate:                              
REPO5,201
 7
 8,993
 12
 7,817
 11
 4,465
 7
10,786
 15
 8,673
 12
 11,861
 16
 6,568
 10
Regular Fixed-Rate7,398
 11
 7,004
 10
 6,507
 9
 5,903
 9
9,618
 14
 9,625
 14
 10,007
 13
 9,359
 14
Putable (2)
1,617
 2
 1,935
 3
 2,091
 3
 2,138
 3
565
 1
 821
 1
 1,019
 1
 1,034
 1
Convertible (2)
—
 —
 5
 —
 5
 —
 10
 —
Amortizing/Mortgage Matched2,734
 4
 2,702
 4
 2,627
 4
 2,618
 4
2,596
 4
 2,659
 4
 2,728
 4
 2,684
 4
Other995
 1
 910
 1
 825
 1
 593
 1
1,135
 1
 1,133
 2
 1,615
 2
 1,401
 2
Total17,945
 25
 21,549
 30
 19,872
 28
 15,727
 24
24,700
 35
 22,911
 33
 27,230
 36
 21,046
 31
Other Advances—
 —
 1
 —
 —
 —
 —
 —
—
 —
 6
 —
 —
 —
 —
 —
Total Advances Principal$70,299
 100% $71,325
 100% $69,336
 100% $65,385
 100%$69,907
 100% $68,813
 100% $74,461
 100% $68,627
 100%
                              
Letters of Credit (notional)$17,780
   $16,080
   $15,563
   $13,603
  $17,508
   $16,769
   $17,467
   $16,757
  
(1)As a percentage of total Advances principal.    
(2)Excludes Putable/ConvertiblePutable Advances where the related put/conversionput options have expired. Such Advances are classified based on their current terms.




30
TableThe decline in Advance balances comparing the end of Contents

The growth2016 to the end of 2015 was primarily driven by modest reductions in Advances was comprised primarilyborrowings from a few large-asset members combined with the repayment of fixed-rate, LIBOR based and short-term repurchase (REPO)captive insurance companies' Advances. Most of the Advance growth came from several larger members.

Members increasedreduced their available lines in the Letters of Credit program by $4.3$2.0 billion (32(10 percent) in 2014. As with Advances, most2016. Letters of Credit balances averaged $17.0 billion in 2016, a decrease of $0.7 billion (four percent) from the growth was from a few large members.average balance during 2015. We generallynormally earn fees on Letters of Credit based on the actual notionalaverage amount of the Letters utilized, which normallygenerally is less than the available lines.notional amount issued.

Advance Usage
In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.
December 31, 2014 September 30, 2014 June 30, 2014 March 31, 2014 December 31, 2013December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016 December 31, 2015
Average Advances-to-Assets for Members                  
Assets less than $1.0 billion (639 members)3.24% 3.32% 3.24% 3.13% 3.27%
Assets over $1.0 billion (66 members)3.75
 3.77
 3.42
 3.17
 3.33
Assets less than $1.0 billion (602 members)3.07% 3.01% 3.04% 2.92% 3.26%
Assets over $1.0 billion (85 members)3.87
 3.99
 3.78
 3.19
 4.35
All members3.29
 3.36
 3.26
 3.13
 3.28
3.17
 3.13
 3.12
 2.95
 3.37

Overall Advance usage ratios were stablelower at year-end 2016 compared to year-end 2015, driven largely by the continued modest demand for Advances and the pay off and non-renewal of $6.6 billion in 2014. Largeborrowings from captive insurance company members currently utilize Advances to fund a similar amount of their assets as smaller members.required by the Finance Agency's 2016 final rule on membership requirements.

The following table shows Advance usage of members by charter type.
(Dollars in millions)December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Par Value of Advances Percent of Total Par Value of Advances Par Value of Advances Percent of Total Par Value of AdvancesPar Value of Advances Percent of Total Par Value of Advances Par Value of Advances Percent of Total Par Value of Advances
Commercial Banks$59,119
 84% $54,909
 84%$53,743
 77% $53,479
 73%
Thrifts and Savings Banks4,067
 6
 3,106
 5
Savings Associations6,857
 10
 5,220
 7
Credit Unions1,110
 1
 814
 1
1,191
 2
 957
 1
Insurance Companies5,408
 8
 4,601
 7
8,043
 11
 13,428
 19
Community Development Financial Institutions1
 —
 1
 —
3
 —
 2
 —
Total member Advances69,705
 99
 63,431
 97
69,837
 100
 73,086
 100
Former member borrowings594
 1
 1,662
 3
70
 —
 156
 —
Total par value of Advances$70,299
 100% $65,093
 100%$69,907
 100% $73,242
 100%

The following tables present principal balances for our topthe five members with the largest Advance borrowers.borrowings.
(Dollars in millions)                
December 31, 2014 December 31, 2013
December 31, 2016December 31, 2016 December 31, 2015
Name Par Value of Advances Percent of Total Par Value of Advances Name Par Value of Advances Percent of Total Par Value of Advances Par Value of Advances Percent of Total Par Value of Advances Name Par Value of Advances Percent of Total Par Value of Advances
JPMorgan Chase Bank, N.A. $41,300
 59% JPMorgan Chase Bank, N.A. $41,700
 64% $32,300
 46% JPMorgan Chase Bank, N.A. $35,350
 48%
U.S. Bank, N.A. 8,338
 12
 U.S. Bank, N.A. 4,584
 7
 8,563
 12
 U.S. Bank, N.A. 10,086
 14
Third Federal Savings and Loan Association 3,049
 4
 
Capstead Insurance, LLC (1)
 2,875
 4
Fifth Third Bank 2,517
 4
 Nationwide Life Insurance Company 2,279
 3
The Huntington National Bank 2,083
 3
 The Huntington National Bank 1,809
 3
 2,433
 3
 Third Federal Savings and Loan Association 2,162
 3
Nationwide Life Insurance Company 1,761
 3
 Western-Southern Life Assurance Co 1,342
 2
Western-Southern Life Assurance Co 1,623
 2
 Protective Life Insurance Company 1,171
 2
Total of Top 5 $55,105
 79% Total of Top 5 $50,606
 78% $48,862
 69% Total of Top 5 $52,752
 72%
(1)Captive insurance company member.

Advance concentration ratios are influenced by, and generally are similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members because itmembers. For example, such activity improves our operating efficiency, increases our earnings

31
Table of Contents

and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.


Mortgage Loans Held for Portfolio (Mortgage Purchase Program, or "MPP")

MPP balances continue to be driven primarily by activity from two large sellers and a Finance Agency regulation requiring that if purchases in a calendar year exceed $2.5 billion, we will be subject to Finance Agency established housing goals. Given the uncertainty of the housing goal requirements and possible operational and economic impacts, we continue to limit our calendar year purchases to less than $2.5 billion. The number of regular sellers remained at a high level in 2014 compared to historical trends.MPP)

The table below shows principal paydownspurchases and purchasesreductions of loans in the MPP for each of the last two years.
(In millions)2014 20132016 2015
Balance, beginning of year$6,643
 $7,366
$7,758
 $6,796
Principal purchases1,226
 1,171
2,830
 2,348
Principal paydowns(1,073) (1,894)
Principal reductions(1,662) (1,386)
Balance, end of year$6,796
 $6,643
$8,926
 $7,758

The small increase in principal loan balancebalances in 20142016 reflected purchase activity closely matchingour strategy to grow this segment of Mission Asset Activity. Most of the higher principal paydowns. Purchases resulted from sales by 95 participating financial institutions (PFIs) during the year,activity of our two largest sellers who drive program balances. In 2016, 101 members sold us mortgage loans, with the number of monthly sellers averaging 60. Almost all67. All loans acquired in 20142016 were conventional with less than one percent of purchases comprised of Federal Housing Administration (FHA) loans.

In the fourth quarter of 2014, MPP activity increased. At the end of the year, MPP commitments outstanding totaled $451 million, compared to only $37 million at the end of 2013.

The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. Similar to Advances,As shown in the table below, MPP activity is concentrated amongst a few members.
(Dollars in millions)December 31, 2014  December 31, 2013December 31, 2016  December 31, 2015
Principal % of Total  Principal % of TotalPrincipal % of Total  Principal % of Total
Union Savings Bank$1,593
 23% Union Savings Bank$1,433
 22%$2,886
 32% Union Savings Bank$2,242
 29%
Guardian Savings Bank FSB855
 10
 
PNC Bank, N.A. (1)
839
 11
PNC Bank, N.A. (1)
1,074
 16
 
PNC Bank, N.A. (1)
1,356
 20
660
 7
 Guardian Savings Bank FSB633
 8
Guardian Savings Bank FSB406
 6
 All others3,854
 58
All others3,723
 55
 Total$6,643
 100%4,525
 51
 All others4,044
 52
Total$6,796
 100%  

 

$8,926
 100% Total$7,758
 100%
(1)Former member.

We closely track the refinancing incentives of our mortgage assets (including thoseloans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents a largethe largest portion of our market risk exposure.exposure and can affect MPP balances. MPP principal paydowns in all of 20142016 equated to a 1215 percent annual constant prepayment rate, downup nominally from the 2114 percent rate for all of 2013. Refinancing incentives for many mortgage assets declined because although mortgage rates trended lower in 2014, they still remained above the low levels experienced in the first half of 2013.2015.

The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2014.2016. The weighted average mortgage note rate fell from 4.534.14 percent at the end of 20132015 to 4.363.95 percent at the end of 2014.2016. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages.mortgages in the low interest rate environment. MPP yields earned during 2014, relative toin 2016, after consideration of funding and hedging costs, continued to offer favorable returns relative to their market risk exposure.


32
Table of Contents

Housing and Community Investment

In 2014,2016, we accrued $28$30 million of earnings for the Affordable Housing Program, which will be awarded to members in 2015.2017. This amount represents aan increase of $2 million (seven percent) decrease from 2013,2015 due to 2014's lower earnings.the higher earnings in 2016.

Including funds available in 20142016 from previous years, we had $28 million available for the competitive Affordable Housing Program in 2014,2016, which we awarded to 7863 projects through a single competitive offering. In addition, we awarded $12disbursed $10 million to 173171 members on behalf of more than 2,3812,089 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-quarterone-third of members received approval for funding under the totaltwo Affordable Housing Program. Programs. 
Additionally, in 20142016 our Board authorized $1committed $1.5 million to renew the Carol M. Peterson Housing Fund (CMP Fund), which helped 224 homeowners, and continued its commitment to the $5 million Disaster Reconstruction Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.

Our activities to support affordable housing and economic development also include offering Advances through the Affordable Housing Program, Community Investment Program and Economic Development Program with below-market interest rates at

or near zero profit for us. At the end of 2014,2016, Advance balances under these programs totaled $460$419 million. AHP Advance balances have declined in recent years, reflecting our preference to distribute AHP subsidy in the form of grants.

Investments

The table below presents the ending and average balances of the investment portfolio.
(In millions)2014 20132016 2015
Ending Balance Average Balance Ending Balance Average BalanceEnding Balance Average Balance Ending Balance Average Balance
Liquidity investments$11,319
 $11,856
 $6,303
 $10,389
$10,818
 $12,177
 $22,110
 $12,590
Mortgage-backed securities14,688
 15,594
 16,061
 14,320
14,516
 15,061
 15,246
 14,664
Other investments (1)
—
 98
 —
 161
—
 144
 —
 85
Total investments$26,007
 $27,548
 $22,364
 $24,870
$25,334
 $27,382
 $37,356
 $27,339
(1)The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end.

We continued to maintain a sufficientan adequate amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis. Ending balances were noticeably higher at year-end 2014 comparedWe conservatively carried a larger amount of liquidity to satisfy any potential member borrowing needs leading up to year-end 2013,2015 during a period in which accessing additional liquidity was primarily duethought to our decisionpresent greater challenges. In 2016, we reduced liquidity investments closer to hold a larger portion of funds in depositshistorical levels, ending the year at the Federal Reserve at year-end 2013 resulting from the lack of suitable counterparties at the time.$10.8 billion.

Our overarching strategy for balances of mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The ratio of mortgage-backed securities to regulatory capital was 2.89 at December 31, 2016. The balance of mortgage-backed securities at December 31, 2014 represented a 2.93 multiple of regulatory capital and2016 consisted of $12.6$11.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $1.54.1 billion were floating-rate securities), $1.1$0.7 billion of floating-rate securities issued by the NCUA,National Credit Union Administration (NCUA), and $1.0$2.5 billion of securities issued by Ginnie Mae.Mae (which are primarily fixed rate). We held no private-label mortgage-backed securities.

Total outstanding mortgage-backed securities balances were modestly lower at year-end 2014 relative to 2013 due to the repurchase of excess stock that occurred in early 2014, which limited our authority to purchase mortgage-backed securities until the regulatory multiple fell below three.

33
Table of Contents

The table below shows principal purchases, paydowns and paydownssales of our mortgage-backed securities for each of the last two years.
(In millions)Mortgage-backed Securities PrincipalMortgage-backed Securities Principal
2014 20132016 2015
Balance, beginning of year$16,087
 $12,757
$15,203
 $14,715
Principal purchases722
 6,017
3,016
 3,099
Principal paydowns(2,094) (2,687)(2,925) (2,611)
Principal sales(807) —
Balance, end of year$14,715
 $16,087
$14,487
 $15,203

Principal paydowns in 20142016 equated to a 13an 18 percent annual constant prepayment rate, down fromcompared to the 1716 percent rate in 2013.

Only two2015. The securities sold were composed of securities that had less than 15 percent of total pass-through mortgage-backed securities had 30-year fixed-rate mortgages as collateral. Because approximately 75 percentthe original acquired principal outstanding at the time of MPP loans have 30-year original terms, purchasing pass-throughs with shorter than 30-year original terms is one way we diversify mortgage assets to help manage market risk exposure.the sale.


Consolidated Obligations

The table below presents the ending and average balances of our participations in Consolidated Obligations.
(In millions)2014 20132016 2015
Ending Balance Average Balance Ending Balance Average BalanceEnding Balance Average Balance Ending Balance Average Balance
Discount Notes:              
Par$41,238
 $35,996
 $38,217
 $34,581
$44,711
 $49,853
 $77,225
 $52,714
Discount(6) (4) (7) (7)(21) (18) (26) (8)
Total Discount Notes41,232
 35,992
 38,210
 34,574
44,690
 49,835
 77,199
 52,706
Bonds:              
Unswapped fixed-rate26,124
 25,513
 24,222
 23,037
25,373
 26,495
 26,962
 26,350
Unswapped adjustable-rate27,610
 29,355
 28,650
 24,319
18,290
 14,512
 4,065
 13,385
Swapped fixed-rate5,390
 3,697
 5,155
 4,628
9,510
 7,959
 4,010
 6,489
Total par Bonds59,124
 58,565
 58,027
 51,984
53,173
 48,966
 35,037
 46,224
Other items (1)
93
 116
 136
 125
18
 68
 55
 90
Total Bonds59,217
 58,681
 58,163
 52,109
53,191
 49,034
 35,092
 46,314
Total Consolidated Obligations (2)
$100,449
 $94,673
 $96,373
 $86,683
$97,881
 $98,869
 $112,291
 $99,020
(1)Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments.
(2)
The 1211 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of all 12the FHLBanks was (in millions) $847,175989,311 and $766,837905,202 at December 31, 20142016 and 2013,2015, respectively.

We fund LIBOR-indexed assets with Discount Notes, adjustable-rate Bonds, and swapped fixed-rate Bonds because they give us the ability to effectively match the LIBOR reset periods embedded in these assets. In the second half of 2015, we shifted the composition of this funding more towards Discount Notes, which provided lower funding costs and was in response to growth in Advance balances and liquidity investments. By contrast, during 2016, we began to shift the composition of shorter-term funding away from Discount Notes towards adjustable-rate LIBOR Bonds and fixed-rate Bonds swapped to adjustable-rate LIBOR, which normally have longer maturities than Discount Notes. We took these actions in 2016, and are continuing to do so in 2017, in order to return our funding composition to historical levels. The intent is to lower exposure to compression in spreads between LIBOR and Discount Notes and unexpected liquidity risk. This change in funding composition, which has increased our funding costs, has also reduced the income benefits associated with the elevated spreads in 2016 (compared to historical averages) between LIBOR-indexed assets and interest paid on Discount Notes.

The composition of Consolidated Obligations remainedunswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 20142016 compared to 2013, but can vary with balance sheet needs as well as the market and funding environment. The growth in total Consolidated Obligations in 2014 related mostly to the increase in Advance balances.

In 2014, interest costs of Consolidated Obligations relative to market indices (U.S. Treasuries and LIBOR) were comparable to recent years' historical differences.


34
Table of Contents

2015. The following table shows the allocation on December 31, 20142016 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower interest rates.
(In millions)Year of Maturity Year of Next CallYear of Maturity Year of Next Call
CallableNoncallableAmortizingTotal CallableCallableNoncallableAmortizingTotal Callable
Due in 1 year or less$—
$3,637
$24
$3,661
 $6,277
$150
$3,648
$—
$3,798
 $5,394
Due after 1 year through 2 years390
3,093
2
3,485
 405
630
3,467
—
4,097
 70
Due after 2 years through 3 years1,052
3,042
—
4,094
 50
659
3,602
—
4,261
 209
Due after 3 years through 4 years1,485
2,685
—
4,170
 —
746
2,805
—
3,551
 —
Due after 4 years through 5 years535
1,992
—
2,527
 —
1,006
2,164
—
3,170
 —
Thereafter3,270
4,917
—
8,187
 —
2,482
4,014
—
6,496
 —
Total$6,732
$19,366
$26
$26,124
 $6,732
$5,673
$19,700
$—
$25,373
 $5,673


Deposits

Members'Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 20142016 were $0.70.8 billion, a decrease of 19five percent from year-end 2013.2015. The average balance of total interest bearing deposits in 20142016 was $0.8 billion, a decrease of 21 percent fromsimilar to the average balance during 20132015.

Derivatives Hedging Activity and Liquidity

Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.” We did not change our strategy of using derivatives solely to manage market risk exposure in 2014.

Capital Resources

The GLB Act and Finance Agency regulations specify limits on how much we can leverage capital by requiring that we maintain, at all times, at least a four percent regulatory capital-to-assets ratio. A lower ratio indicates more leverage. If financial leverage increases too much, or becomes too close to the regulatory limit, we have discretionary ability within our Capital Plan to enact changes to ensure capitalization remains strong and in compliance with regulatory limits.

We have always complied with our regulatory capital requirements. The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.
Year Ended December 31,Year Ended December 31,
(In millions)2014 20132016 2015
Period End Average Period End AveragePeriod End Average Period End Average
GAAP and Regulatory Capital              
GAAP Capital Stock$4,267
 $4,298
 $4,698
 $4,534
$4,157
 $4,214
 $4,429
 $4,344
Mandatorily Redeemable Capital Stock63
 105
 116
 139
35
 88
 38
 61
Regulatory Capital Stock4,330
 4,403
 4,814
 4,673
4,192
 4,302
 4,467
 4,405
Retained Earnings689
 666
 621
 598
834
 813
 737
 715
Regulatory Capital$5,019
 $5,069
 $5,435
 $5,271
$5,026
 $5,115
 $5,204
 $5,120
2014 20132016 2015
Period End Average Period End AveragePeriod End Average Period End Average
GAAP and Regulatory Capital-to-Assets Ratio              
GAAP4.63% 4.90% 5.15% 5.47%4.76% 4.76% 4.34% 4.78%
Regulatory(1)4.71
 5.01
 5.27
 5.63
4.80
 4.85
 4.38
 4.85
(1)At all times, the FHLBanks must maintain at least a four percent minimum regulatory capital-to-assets ratio.


35
Table of Contents

Both GAAP and regulatory capital-to-assets ratios remained above the regulatory required minimum of four percent. We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same way thatmanner as GAAP capital stock and retained earnings do. The regulatory capital-to-assets ratio of 4.71 percent at the end of 2014 means that, given the amount of regulatory capital, total assets could increase by approximately $19 billion with no new stock purchases before the capital-to-assets ratio would fall to four percent. This amount of growth in assets is unlikely to occur and, if it did, our Capital Plan would require us to obtain additional amounts of capital well before the four percent policy limit on capitalization would be reached.earnings.

The following table presents the sources of change in regulatory capital stock balances in 20142016 and 2013.2015.
(In millions)2014 20132016 2015
Regulatory stock balance at beginning of year$4,814
 $4,221
$4,467
 $4,330
Stock purchases:      
Membership stock11
 16
34
 13
Activity stock73
 705
58
 178
Stock repurchases/redemptions:      
Redemption of member excess(1) (3)(285) (1)
Repurchase of member excess(498) —
Withdrawals(69) (125)(82) (53)
Regulatory stock balance at the end of the year$4,330
 $4,814
$4,192
 $4,467

In 2014, the amount ofThe decrease in our regulatory capital decreased principally due to the redemption and repurchase ofstock balance during 2016 was driven by excess capital stock in February. redemption requests from a larger member and repurchases of captive insurance company members' capital stock.

The table below shows the amount of excess capital stock.
(In millions)December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Excess capital stock (Capital Plan definition)$504
 $1,229
$347
 $461
Cooperative utilization of capital stock$441
 $404
$525
 $521
Mission Asset Activity capitalized with cooperative capital stock$11,020
 $10,100
$13,133
 $13,034

A portion of capital stock is excess, meaning it is not required as a condition to being a member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augmentaugments loss protections for bondholders, and capitalizecapitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $504$347 million at December 31, 2014, a decrease2016, which was within our preferred range of $725$200 million to $700 million.

Retained earnings increased by $97 million (13 percent) from year-end 2013, primarily due to the stock repurchase noted above and, secondarily, our growth2015, while we maintained a competitive 4.00 percent dividend rate in Advances.each quarter of 2016.

Membership and Stockholders

In 2014,2016, we added two12 new member stockholders and lost 24 members, ending the year at 705. The 24687 member stockholders. Sixteen of the members lost members included 21 that merged with other Fifth District members two that merged out ofand, therefore, the District, and one that failed and was taken into Federal Deposit Insurance Corporation receivership. The impact on our earnings and Mission Asset Activity from the members lost was negligible. We will continue to recruit the remaining institutions eligible for membership in order to maintain and expand our customer base.small.

In 2014,2016, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2014,2016, the composition of membership by state was Ohio with 307,306, Kentucky with 208,192, and Tennessee with 190.189.


36
TableThe Finance Agency issued a final rule on FHLBank membership in January 2016. This rule imposes new membership requirements and eliminates captive insurance companies from FHLBank membership. The rule required that certain captive insurance companies, which represented 15 members totaling $6.6 billion in Advances at December 31, 2015, pay off existing Advances by February 2017 and cease any new borrowings. All Advances to these members were repaid by the end of Contents2016. The subsequent loss of this membership segment did not significantly affect our financial condition or results of operations.


The following table provides the number of member stockholders by charter type.
December 31,December 31,
2014 20132016 2015
Commercial Banks442
 457
402
 418
Thrifts and Savings Banks101
 109
Savings Associations96
 99
Credit Unions120
 120
130
 124
Insurance Companies38
 37
55
 54
Community Development Financial Institutions4
 4
4
 4
Total705
 727
687
 699


The following table provides the ownership of capital stock by charter type.
(In millions)December 31,December 31,
2014 20132016 2015
Commercial Banks$3,441
 $3,878
$3,224
 $3,425
Thrifts and Savings Banks376
 399
Savings Associations391
 378
Credit Unions121
 120
141
 128
Insurance Companies328
 301
400
 497
Community Development Financial Institutions1
 —
1
 1
Total GAAP Capital Stock4,267
 4,698
4,157
 4,429
Mandatorily Redeemable Capital Stock63
 116
35
 38
Total Regulatory Capital Stock$4,330
 $4,814
$4,192
 $4,467

Credit union members hold relatively less stock than their membership proportion because they tend to be smaller than the average member and borrow less. Insurance company members hold relatively more stock than their membership proportion because they tend to be larger than the average member and borrow more.

The following table provides a summary of member stockholders by asset size.
December 31,December 31,
Member Asset Size (1)
2014 20132016 2015
Up to $100 million182
 196
172
 177
> $100 up to $500 million381
 394
359
 370
> $500 million up to $1 billion76
 73
71
 76
> $1 billion66
 64
85
 76
Total Member Stockholders705
 727
687
 699
(1)The December 31 membership composition reflects members' assets as of September 30 (thethe most-recently available figures for total assets).assets.

Most members are smaller community financial institutions, with 8077 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.


37
Table of Contents


RESULTS OF OPERATIONS

Components of Earnings and Return on Equity

The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period. Factors determining the level of, and changes in, net income and ROE are explained in the remainder of this section.
(Dollars in millions)2014 2013 2012
 Amount 
ROE (1)
 Amount 
ROE (1)
 Amount 
ROE (1)
Net interest income$317
 6.40 % $328
 6.40 % $308
 8.14%
(Reversal) provision for credit losses—
 (0.01) (7) (0.15) 1
 0.04
Net interest income after (reversal) provision for credit losses317
 6.41
 335
 6.55
 307
 8.10
Net gains on derivatives and hedging activities7
 0.13
 8
 0.16
 9
 0.23
Other non-interest income16
 0.32
 12
 0.23
 4
 0.12
Total non-interest income23
 0.45
 20
 0.39
 13
 0.35
Total revenue340
 6.86
 355
 6.94
 320
 8.45
Total non-interest expense68
 1.38
 64
 1.26
 58
 1.53
Assessments28
 0.55
 30
 0.58
 27
 0.72
Net income$244
 4.93 % $261
 5.10 % $235
 6.20%
(Dollars in millions)2016 2015 2014
 Amount 
ROE (1)
 Amount 
ROE (1)
 Amount 
ROE (1)
Net interest income$363
 7.24 % $327
 6.50% $327
 6.64 %
Reversal for credit losses—
 —
 —
 —
 —
 (0.01)
Net interest income after reversal for credit losses363
 7.24
 327
 6.50
 327
 6.65
Non-interest income:           
Net realized gains from sale of held-to-maturity securities39
 0.77
 —
 —
 —
 —
Net (losses) gains on derivatives and hedging activities(47) (0.95) 13
 0.26
 7
 0.14
Net gains on financial instruments held under fair value option40
 0.81
 1
 0.02
 2
 0.04
Other non-interest income, net14
 0.29
 16
 0.31
 14
 0.28
Total non-interest income46
 0.92
 30
 0.59
 23
 0.46
Total revenue409
 8.16
 357
 7.09
 350
 7.11
Non-interest expense111
 2.21
 75
 1.50
 68
 1.39
Affordable Housing Program assessments30
 0.60
 28
 0.55
 28
 0.56
Net income$268
 5.35 % $254
 5.04% $254
 5.16 %
(1)The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results.

Net income declined $17 million (six percent) in 2014 over 2013. ROE declined less (three percent) due to our repurchase of excess stock in February 2014. Profitability remained competitive as ROE continued to significantly exceed our benchmarks relative to short-term interest rates. Details on the individual factors contributing to the decrease in profitability are in the sections below.
Net Interest Income
The largest component of net income is net interest income. Our principal goalsgoal in managing net interest income areis to balance trade-offs between maintaining a moderate market risk profile and ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.

Our ROE normally is lower than that of many other financial institutions because of the cooperative wholesale business model that results in narrow spreads to funding costs on our primary assets (Advances), the moderate overall risk profile, and the strategic objective to have a positive correlation of dividends to short-term interest rates.

Components of Net Interest Income
We generate net interest income from the following two components:

▪
Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits.
▪
Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial proportionportion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure.

38
Table of Contents


The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.
(Dollars in millions)2014 2013 20122016 2015 2014
Amount Pct of Earning Assets Amount Pct of Earning Assets Amount Pct of Earning AssetsAmount % of Earning Assets Amount % of Earning Assets Amount % of Earning Assets
Components of net interest rate spread:                      
Net (amortization)/accretion (1) (2)
$(11) (0.01)% $(1) —% $(49) (0.07)%$(54) (0.05)% $(24) (0.02)% $(1) —%
Prepayment fees on Advances, net (2)
4
 —
 2
 —
 20
 0.03
10
 0.01
 3
 —
 4
 —
Other components of net interest rate spread291
 0.29
 290
 0.31
 293
 0.44
360
 0.34
 314
 0.30
 291
 0.29
Total net interest rate spread284
 0.28
 291
 0.31
 264
 0.40
316
 0.30
 293
 0.28
 294
 0.29
Earnings from funding assets with interest-free capital33
 0.03
 37
 0.04
 44
 0.06
47
 0.05
 34
 0.03
 33
 0.03
Total net interest income/net interest margin (3)
$317
 0.31 % $328
 0.35% $308
 0.46 %$363
 0.35 % $327
 0.31 % $327
 0.32%
(1)Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations.
(2)These components of net interest rate spread have been segregated here to display their relative impact.
(3)Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets.

Net Amortization/Accretion.Accretion: Net amortization/accretion (generally referred to as "amortization") includes monthly recognition of premiums and discounts paid on purchases of mortgage assets, as well as premiums, discounts and concessions paid on Consolidated Obligations. Periodic amortization adjustments do not necessarily indicate a trend in economic return over the entire life of mortgage assets, although amortization over the entire lifeit is one component of lifetime economic returns.

While net amortization has been large and volatileAmortization increased substantially in several periods over the last five years, it was moderate in 2014 and 2013. Net amortization was higher in 20142016 compared to 2013 due2015 primarily tobecause of an acceleration in prepayment speeds as long-term interest rates generally declined during the first three quarters of 2016. Amortization was lower than normal amortization in 2013, which had resulted from2014 due to a decline in actual and projected prepayment speeds in response to higher mortgage rates. Net amortization in 2014 was at a relatively normal level reflecting less fluctuation in mortgage rates.

Prepayment Fees on Advances.Advances: Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Advance prepayment fees increased in 2016 compared to 2015 primarily due to the prepayment of Advances related to an in-district merger in the third quarter of 2016. Although Advance prepayment fees can be and have been significantwere moderate in the past,2016, they were smallminimal in 20142015 and 2013, reflecting a low amount of member prepayments of Advances.2014.

Other Components of Net Interest Rate Spread.Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased only $1$46 million in 20142016 compared to 2013. However, there were several factors that on a net basis offset one another.2015, compared to an increase of $23 million in 2015 over 2014. The following factors are presented in estimated approximate order of impact from largest to smallest.primarily accounted for the net increase.


39
Table of Contents

20142016 Versus 20132015
▪
Asset-liability management-Funding of LIBOR-indexed assets-Unfavorable:Favorable: Management strategies and actions related to reducing our market risk exposure, along with changes in the market rate environment, lowered earnings on a net basis of $29 million for the following reasons:
1)Net interest income decreased $18 million due to a decline in mortgage asset spreads resulting from management actions to reduce market risk exposureon LIBOR-indexed assets increased by extending debt maturities and from continued run-off of higher yielding mortgages.
2)Net interest income declined $11an estimated $25 million primarily because of changes in market spreadstheir yields rose by more than the rates on Discount Notes and adjustable-rate Bonds funding LIBOR Advances. Secondarily, we extended maturitiesthem. These spreads widened in part due to new regulatory requirements for the money market industry, which were effective in October 2016. These new requirements have raised investor demand for short-term government and GSE debt compared to prime institutional funds. This factor was partially offset by a decrease in the average amount of LIBOR-indexed assets funded by lower-cost Discount Notes in order to reduce the burden of replacing Discount Notes as frequently.Notes.
▪
Advance growth-Growth in MPP Balances-Favorable: FavorableThe $5.1: A $1.0 billion growth inhigher average Advance balances at higher spreads improvedbalance of MPP loans increased net interest income by an estimated $26$12 million.
▪
Higher balancesspreads on mortgage-backed securities-liquidity investments-Favorable:Favorable: The average balance of the mortgage-backed security portfolio increased $1.3 billion compared to 2013's average, whichHigher spreads earned on liquidity investments increased net interest income by an estimated $5$4 million.

2013 Versus 2012
▪
Advance growth-Favorable: The $28.8 billion growth in average Advance balances and new capital stock purchased to support the growth improved net interest income by an estimated $77 million. Leveraging the additional capital with mortgage-backed securities contributed to the increase in net interest income.spreads was primarily driven by the larger increase in rates earned on liquidity investments relative to their associated funding.
▪
Asset-liability management-Higher spreads on MPP loans-Unfavorable:Favorable: Management strategies and actions, along with changesAn increase in the market rate environment, related to reducing our market risk exposure lowered earningsspread earned on a net basis, for the following reasons:
1)We carried a lower amount of short-term debt funding fixed-rate mortgages in 2013, which resulted in a year-over-year $19 million decrease in net interest income.
2)We use short-term Discount Notes to fund a substantial amount of LIBOR-indexed assets. The average market spread between LIBOR and Discount Notes narrowed in 2013, loweringmortgage loans improved net interest income by an estimated $15$3 million. The increase was driven by additional utilization of hedging with derivatives (swaptions) and the decision to call and replace debt at lower rates driven by declines in long-term interest rates. These factors were partially offset by continued paydowns of higher-yielding mortgage assets and low-cost debt.
The overall impact of these items decreased interest income an estimated $34 million.
▪
TradingHigher spreads on mortgage-backed securities-Unfavorable: FavorableIn 2012, we held a large amount of investments in short-term trading: Higher spreads earned on new mortgage-backed securities (including instruments of the U.S. Treasury and GSEs) in order to enhance asset liquidity and manage counterparty credit risk. No such securities were held in 2013. Many of the trading securities had been purchased with above-market coupon rates, which resulted in a $32 million increase inincreased net interest income by an estimated $3 million.
2015 Versus 2014
▪
Growth in 2012Mission Assets-Favorable: Higher balances of Mission Assets increased net interest income by an estimated $19 million. This was comprised of $8 million from a $3.8 billion increase in average Advance balances and $11 million from a $0.8 billion increase in average MPP balances.
▪
LIBOR Asset funding-Favorable: Net interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to a reduction in the cost of Discount Notes compared to 2013. However, this was offsetthe cost of adjustable-rate LIBOR Bonds.
▪
Fixed-rate asset funding-Unfavorable: A reduction in the amount of short-term debt funding longer-term fixed-rate mortgages lowered net interest income by earnings reductionsan estimated $7 million.
▪
Lower MPP spread-Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a decline in other non-interestthe spread earned on mortgage loans, decreasing net interest income (specifically, net unrealized market value losses on trading securities), with the resulting combined earnings from the trading securities reflecting at-market rates.by an estimated $6 million.
▪
Lower balances on MPP loans-mortgage-backed securities-Unfavorable:Unfavorable: The average balance of MPP loansthe mortgage-backed securities portfolio declined $0.9 billion, which reduceddecreased net interest income by an estimated $13$5 million.
▪
Lower balances and narrower spreads on the short-term investment portfolio-Other factors-Unfavorable:Favorable: Average balances for short-term investments decreased $3.5 billion, while asset spreads tightened dueVarious other factors, including, but not limited to, management actions to enhance liquidity. We estimate the earnings reduction from these changesa decrease in the short-term investment portfolio was approximately $8amount of mandatorily redeemable capital stock and higher spreads earned on mortgage-backed securities, increased net interest income by an estimated $4 million.
▪
Lower interest expense on Mandatorily Redeemable Stock-Favorable: Interest expense on this liability fell $7 million due primarily to a lower average balance.
▪
Additional factors-Favorable: Other factors included changes in Advance spreads and mortgage-backed security balances that were not caused by Advance growth.

Earnings From Capital.from Capital: The earnings from funding assets with interest-free capital declinedincreased $13 million in 2014, as2016 compared to 2015 due to modestly higher interest rates driven in part by the prior several years,Federal Reserve's decision to raise short-term rates and the increase in LIBOR. The earnings from funding assets with interest-free capital did not change significantly in 2015 compared to 2014 due to the continued low interest rate environment.


40
Table of Contents

Average Balance Sheet and Rates
The following table provides average ratesbalances and average balancesrates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship. The changes in the net interest rate spread and net interest margin in 2014 versus 2013 and in 2013 versus 2012 occurred mostly from the net impact of the factors discussed above in “Components of Net Interest Income.”
(Dollars in millions)2014 2013 20122016 2015 2014
Average Balance Interest 
Average Rate (1)
 Average Balance Interest 
Average Rate (1)
 Average Balance Interest 
Average Rate (1)
Average Balance Interest 
Average Rate (1)
 Average Balance Interest 
Average Rate (1)
 Average Balance Interest 
Average Rate (1)
Assets                                  
Advances$66,642
 $318
 0.48% $61,574
 $308
 0.50% $32,781
 $261
 0.80%$69,282
 $587
 0.85% $70,458
 $369
 0.52% $66,642
 $318
 0.48%
Mortgage loans held for portfolio (2)
6,804
 237
 3.48
 7,065
 269
 3.80
 7,981
 313
 3.92
8,541
 261
 3.06
 7,581
 251
 3.32
 6,766
 247
 3.64
Federal funds sold and securities
purchased under resale agreements
9,673
 7
 0.07
 9,110
 8
 0.09
 8,004
 11
 0.14
11,218
 44
 0.39
 11,493
 14
 0.12
 9,673
 7
 0.07
Interest-bearing deposits in banks (3) (4) (5)
2,244
 3
 0.15
 1,414
 2
 0.14
 1,955
 3
 0.17
1,071
 6
 0.57
 1,141
 2
 0.20
 2,244
 3
 0.15
Mortgage-backed securities15,594
 343
 2.20
 14,320
 313
 2.19
 11,375
 293
 2.58
15,061
 325
 2.16
 14,664
 326
 2.22
 15,594
 343
 2.20
Other investments (4)
37
 —
 0.08
 26
 —
 0.12
 4,392
 40
 0.90
32
 —
 0.44
 41
 —
 0.11
 37
 —
 0.08
Loans to other FHLBanks—
 —
 —
 4
 —
 0.13
 3
 —
 0.12
3
 —
 0.41
 —
 —
 —
 —
 —
 —
Total earning assets100,994
 908
 0.90
 93,513
 900
 0.96
 66,491
 921
 1.39
Total interest-earning assets105,208
 1,223
 1.16
 105,378
 962
 0.92
 100,956
 918
 0.91
Less: allowance for credit losses
on mortgage loans
6
     12
     20
    1
     2
     6
    
Other assets169
     190
     231
    218
     163
     169
    
Total assets$101,157
     $93,691
     $66,702
    $105,425
     $105,539
     $101,119
    
Liabilities and Capital                                  
Term deposits$93
 —
 0.19
 $120
 —
 0.17
 $114
 —
 0.22
$100
 —
 0.35
 $132
 —
 0.20
 $93
 —
 0.19
Other interest bearing deposits (5)
753
 —
 0.01
 955
 —
 0.01
 1,050
 —
 0.01
734
 1
 0.13
 704
 —
 0.01
 753
 —
 0.01
Short-term borrowings35,992
 28
 0.08
 34,574
 37
 0.11
 29,499
 31
 0.10
Discount Notes49,835
 174
 0.35
 52,706
 65
 0.12
 35,992
 28
 0.08
Unswapped fixed-rate Bonds25,605
 519
 2.03
 23,117
 488
 2.11
 18,738
 544
 2.90
26,549
 532
 2.00
 26,425
 528
 2.00
 25,605
 519
 2.03
Unswapped adjustable-rate Bonds29,355
 33
 0.11
 24,319
 35
 0.14
 3,086
 7
 0.23
14,512
 84
 0.58
 13,385
 21
 0.15
 29,355
 33
 0.11
Swapped Bonds3,721
 7
 0.20
 4,673
 7
 0.15
 9,267
 19
 0.21
7,973
 66
 0.83
 6,504
 19
 0.29
 3,721
 7
 0.20
Mandatorily redeemable capital stock105
 4
 4.01
 139
 5
 3.95
 252
 12
 4.64
88
 3
 4.01
 61
 2
 4.00
 105
 4
 4.01
Other borrowings—
 —
 —
 4
 —
 0.12
 1
 —
 0.29
—
 —
 0.37
 —
 —
 —
 —
 —
 —
Total interest-bearing liabilities95,624
 591
 0.62
 87,901
 572
 0.65
 62,007
 613
 0.99
99,791
 860
 0.86
 99,917
 635
 0.64
 95,624
 591
 0.62
Non-interest bearing deposits4
     18
     18
    1
     —
     4
    
Other liabilities573
     651
     888
    618
     578
     573
    
Total capital4,956
     5,121
     3,789
    5,015
     5,044
     4,918
    
Total liabilities and capital$101,157
     $93,691
     $66,702
    $105,425
     $105,539
     $101,119
    
                                  
Net interest rate spread    0.28%     0.31%     0.40%    0.30%     0.28%     0.29%
Net interest income and
net interest margin (6)
  $317
 0.31%   $328
 0.35%   $308
 0.46%  $363
 0.35%   $327
 0.31%   $327
 0.32%
Average interest-earning assets to
interest-bearing liabilities
    105.62%     106.38%     107.23%    105.43%     105.47%     105.57%
(1)Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.
(2)Non-accrual loans are included in average balances used to determine average rate.
(3)Includes certificates of deposit and bank notes that are classified as available-for-sale securities.
(4)Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities.
(5)The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end.
(6)Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets.

            
2016 Versus 2015:The net interest rate spread and net interest margin were higher in 2016 compared to 2015 because the increase in other components of net interest rate spread, as discussed in the previous section, offset the increase in the recognition of net amortization.

Rates on shorter-term interest-earning assets (short-term Advances, Federal funds sold and securities purchased under resale agreements, and interest-bearing deposits in banks) rose in 2016 compared to 2015 following the increase in the Federal funds target rate in December 2015 and subsequent increases in short-term LIBOR that occurred throughout 2016. However, long-term rates fell year-over-year resulting in a compression between rates earned on short-term interest-earning assets relative to


41
Tablelong-term assets. The result was an increase in the net average rate on total interest-earning assets of Contents0.24 percentage points in 2016 compared to 2015, after only a 0.01 percentage points change in 2015 over 2014.

The increase in average rates on total interest-bearing liabilities was driven by higher rates on shorter-term liabilities that reset similar to short-term assets, which represent the largest component of our liability portfolio.

The net impact was an overall increase in net interest spread and margin, with the largest contributing factor being the proportionally larger increase in rates earned on LIBOR-indexed assets relative to associated funding.

20142015 Versus 2013.2014:The net interest spread and net interest margin decreased due to an increase in Advances balances and, secondarily, to remained stable as the higher recognition of mortgage premium amortization was offset by the net effectother components of the other earnings factorsnet interest rate spread discussed in the previous section. Although the Advance growth increased net interest income because of a larger asset base, the growth lowered the spread and margin because Advances tend to have narrower spreads to funding costs compared to mortgage assets.

The decline in the average rate on total earning assets and total interest-bearing liabilities resulted from the continued low rate environment and an increase in the balance sheet composition of instruments (due to the Advance growth) that tend to carry lower interest rates. The low rate environment particularly resulted in a decline in the average rate of long-term assets (such as certain Advances and mortgage loans held for portfolio) and long-term liabilities (unswapped fixed-rate Bonds). This is because a substantial portion of the principal paid down on these assets and liabilities, which had higher rates, was replaced with new assets and liabilities at lower rates.

Rates on short-term assets (Federal funds sold and securities sold under resale agreements) and liabilities (short-term borrowings and unswapped adjustable-rate Bonds) decreased slightly in 2014 as the low-rate rate environment continued.

2013 Versus 2012.The decline in net interest spread and net interest margin and in the average rate on total earning assets and total interest-bearing liabilities resulted from the same factors listed above in the 2014 versus 2013 comparison. The average rate on other investments decreased in 2013 since most of the instruments in this portfolio in 2012 were trading securities with above-market coupons purchased at premiums, with corresponding market value adjustments reflected in non-interest income as losses to the securities' fair values. All of these investments matured in late 2012.



42
Table of Contents

Volume/Rate Analysis
Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and interest expense.
(In millions)2014 over 2013 2013 over 20122016 over 2015 2015 over 2014
Volume (1)(3)
 
Rate (2)(3)
 Total 
Volume (1)(3)
 
Rate (2)(3)
 Total
Volume (1)(3)
 
Rate (2)(3)
 Total 
Volume (1)(3)
 
Rate (2)(3)
 Total
Increase (decrease) in interest income                      
Advances$25
 $(15) $10
 $169
 $(122) $47
$(6) $224
 $218
 $19
 $32
 $51
Mortgage loans held for portfolio(10) (22) (32) (35) (9) (44)31
 (21) 10
 27
 (23) 4
Federal funds sold and securities purchased under resale agreements1
 (2) (1) 1
 (4) (3)—
 30
 30
 1
 6
 7
Interest-bearing deposits in banks1
 —
 1
 (1) —
 (1)—
 4
 4
 (2) 1
 (1)
Mortgage-backed securities28
 2
 30
 69
 (49) 20
8
 (9) (1) (20) 3
 (17)
Other investments—
 —
 —
 (21) (19) (40)—
 —
 —
 —
 —
 —
Loans to other FHLBanks—
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
Total45
 (37) 8
 182
 (203) (21)33
 228
 261
 25
 19
 44
Increase (decrease) in interest expense                      
Term deposits—
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
Other interest-bearing deposits—
 —
 —
 —
 —
 —
—
 1
 1
 —
 —
 —
Short-term borrowings1
 (10) (9) 5
 1
 6
Discount Notes(3) 112
 109
 16
 21
 37
Unswapped fixed-rate Bonds51
 (20) 31
 111
 (167) (56)2
 2
 4
 17
 (8) 9
Unswapped adjustable-rate Bonds7
 (9) (2) 32
 (4) 28
2
 61
 63
 (22) 10
 (12)
Swapped Bonds(2) 2
 —
 (8) (4) (12)5
 42
 47
 7
 5
 12
Mandatorily redeemable capital stock(1) —
 (1) (5) (2) (7)1
 —
 1
 (2) —
 (2)
Other borrowings—
 —
 —
 —
 —
 —
—
 —
 —
 —
 —
 —
Total56
 (37) 19
 135
 (176) (41)7
 218
 225
 16
 28
 44
Increase (decrease) in net interest income$(11) $—
 $(11) $47
 $(27) $20
$26
 $10
 $36
 $9
 $(9) $—
(1)Volume changes are calculated as the change in volume multiplied by the prior year rate.
(2)Rate changes are calculated as the change in rate multiplied by the prior year average balance.
(3)Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.


Effect of the Use of Derivatives on Net Interest Income
The following table shows the effect of using derivatives on net interest income. The effect on earnings from the non-interestother components of derivatives, related toincluding market value adjustments, is provided in the next section “Non-Interest Income and Non-Interest Expense.”
(In millions)

2014 2013 20122016 2015 2014
Advances:          
Amortization/accretion of hedging activities in net interest income$(3) $(3) $(4)
Amortization of hedging activities in net interest income$(3) $(3) $(3)
Net interest settlements included in net interest income(91) (107) (245)(60) (84) (91)
Mortgage loans:          
Amortization of derivative fair value adjustments in net interest income(4) (2) (3)(7) (5) (2)
Consolidated Obligation Bonds:          
Net interest settlements included in net interest income18
 27
 37
8
 20
 18
Decrease to net interest income$(80) $(85) $(215)$(62) $(72) $(78)

Most of our use of derivatives synthetically convert the intermediate- and long-term fixed interest rates on certain Advances and Bonds to adjustable-coupon rates tied to short-term LIBOR (mostly one- and three-month repricing resets). These adjustable-rate coupons normally carry lower interest rates than the fixed rates.fixed-rates. The use of derivatives lowered net interest income in each

43
Table of Contents

period primarily because the Advances that were swapped to short-term LIBOR had higher fixed interest rates than the Bonds that were swapped to short-term LIBOR. This reduction in earnings was acceptable because it enabled us, as we designed, to significantly lower market risk exposure by creating a much closer match of actual cash flows between assets and liabilities than would occur otherwise. The reduction in earnings was significantly smaller in 2014 and 2013 compared to 2012 primarily due to a decrease in the notional amount of swaps outstanding.

Provision for Credit Losses

In 2014, delinquencyDelinquency trends in the MPP continued to decrease while home prices were relatively steady,declined over the last three years as the housing market improved, resulting in no provision for estimated incurred credit losses in 2016 and 2015 and a $0.5 million reversal for estimated incurred credit losses. In 2013, we recorded a $7.5 million reversal for estimated incurred credit losses in the MPP driven by higher home prices combined with improved delinquency trends in that year.2014. Further information is in the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.

Non-Interest Income and Non-Interest Expense

The following table presents non-interest income and non-interest expense for each of the last three years.
(Dollars in millions)2014 2013 20122016 2015 2014
Non-interest income          
Net gains on held-to-maturity securities$—
 $—
 $29
Net gains on derivatives and hedging activities7
 8
 9
Other non-interest income (loss), net16
 12
 (25)
Net realized gains from sale of held-to-maturity securities$39
 $—
 $—
Net (losses) gains on derivatives and hedging activities(47) 13
 7
Net gains on financial instruments held under fair value option40
 1
 2
Other non-interest income, net14
 16
 14
Total non-interest income$23
 $20
 $13
$46
 $30
 $23
Non-interest expense          
Compensation and benefits$37
 $34
 $31
$42
 $40
 $37
Other operating expense17
 17
 14
26
 22
 17
Finance Agency7
 5
 6
6
 7
 7
Office of Finance4
 5
 3
4
 4
 4
Litigation settlement25
 —
 —
Other3
 3
 4
8
 2
 3
Total non-interest expense$68
 $64
 $58
$111
 $75
 $68
Average total assets$101,157
 $93,691
 $66,702
$105,425
 $105,539
 $101,119
Average regulatory capital5,069
 5,271
 4,050
5,115
 5,120
 5,030
Total other expense to average total assets (1)
0.07% 0.07% 0.09%
Total other expense to average regulatory capital (1)
1.35
 1.22
 1.43
Total non-interest expense to average total assets (1)
0.11% 0.07% 0.07%
Total non-interest expense to average regulatory capital (1)
2.17
 1.48
 1.36
(1)Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

Non-interest income increased in 20142016 compared to 20132015 primarily from higher fees received on Letters of Credit because notional balances of Letters increased.

The netdue to $39 million in gains on held-to-maturity securities in 2012 occurred from the salessale of mortgage-backed securities.securities during the fourth quarter of 2016. Each of the securities sold had less than 15 percent of the original acquired principal remaining and were sold under our periodic clean-up process. These gains were partially offset by unrealized losses from changes in market values on derivatives used to hedge certain Consolidated Obligations, net of unrealized market value gains on these Obligations, which are held at fair value. The table below presents further information on the effect of derivatives and hedging activities on non-interest income.

TheNon-interest expense increased in 2016 primarily due to a settlement in December 2016 of all claims related to the 2008 Lehman bankruptcy of approximately $25 million, and secondarily, higher operating expenses driven primarily by legal fees and other non-interest loss in 2012 was dueexpense. The latter increase resulted primarily to losses recordedfrom more recognition of issuance costs (concession fees) on trading securities that were no longerConsolidated Obligations held in 2013 or 2014. The losses on the trading securities occurred because these securities had above-market coupon rates and, therefore, were purchased at prices above par. The related premiums paid are recognized as mark-to-market losses as their fair values approach par at maturity.value.

Non-interest income increased in 2015 compared to 2014 primarily from larger gains on derivatives and hedging activities in 2015 compared to 2014, as presented in the table below. The change in non-interest expense in 2015 resulted primarily from higher legal fees and compensation and benefits.

44
Table of Contents

Effect of Derivatives and Hedging Activities on Non-Interest Income
The following tables present the net effect of derivatives and hedging activities on non-interest income.
(In millions)2014 2013 2012
Net gains on derivatives and hedging activities     
Advances:     
Gains on fair value hedges$5
 $10
 $7
Gains (losses) on derivatives not receiving hedge accounting—
 5
 (5)
Mortgage loans:     
(Losses) gains on derivatives not receiving hedge accounting—
 (11) 1
Consolidated Obligation Bonds:     
Gains on fair value hedges—
 1
 —
Gains on derivatives not receiving hedge accounting2
 3
 6
Total net gains on derivatives and hedging activities7
 8
 9
Net gains on financial instruments held at fair value (1)
2
 —
 2
Total net effect of derivatives and hedging activities$9
 $8
 $11
(In millions)2016
 Advances Mortgage Loans Consolidated Obligation Bonds Balance Sheet Total
Net effect of derivatives and hedging activities         
Gains on fair value hedges$1
 $—
 $—
 $—
 $1
Gains (losses) on derivatives not receiving hedge accounting—
 3
 (57) 6
 (48)
Total net gains (losses) on derivatives and hedging activities1
 3
 (57) 6
 (47)
Net gains on financial instruments held under fair value option (1)
—
 —
 40
 —
 40
Total net effect on non-interest income$1

$3

$(17)
$6
 $(7)
(In millions)2015
 Advances Mortgage Loans Consolidated Obligation Bonds Balance Sheet Total
Net effect of derivatives and hedging activities         
Gains on fair value hedges$2
 $—
 $1
 $—
 $3
Gains on derivatives not receiving hedge accounting1
 1
 8
 —
 10
Total net gains on derivatives and hedging activities3
 1
 9
 —
 13
Net gains on financial instruments held under fair value option (1)
—
 —
 1
 —
 1
Total net effect on non-interest income$3

$1

$10

$—
 $14
(In millions)2014
 Advances Mortgage Loans Consolidated Obligation Bonds Balance Sheet Total
Net effect of derivatives and hedging activities         
Gains on fair value hedges$5
 $—
 $—
 $—
 $5
Gains on derivatives not receiving hedge accounting—
 —
 2
 —
 2
Total net gains on derivatives and hedging activities5
 —
 2
 —
 7
Net gains on financial instruments held under fair value option (1)
—
 —
 2
 —
 2
Total net effect on non-interest income$5

$—

$4

$—
 $9
(1)Includes only those gains or losses on financial instruments held at fair value that have an economic derivative "assigned."

The amountstotal amount of income volatility in overall derivatives and hedging activities were modestduring 2016, 2015, and 2014 was moderate compared to the notional principal amounts well within the range of normal historical fluctuation, and consistent with the close hedging relationships of our derivative transactions. Income volatility in derivatives and hedging activities mostly represents unrealized fair value gains and losses. The volatility created by these fair value fluctuations is not expected to result in material realized gains or losses since we typically hold the associated instruments to maturity.

Analysis of Quarterly ROE

The following table summarizes the components of 2014's2016's quarterly ROE and provides quarterly ROE for 20132015 and 2012.2014.
 
1st  Quarter
2nd  Quarter
3rd  Quarter
4th  Quarter
Total
Components of 2014 ROE:     
Net interest income:     
Other net interest income6.13 %6.54 %6.65%6.84 %6.54 %
Net (amortization)/accretion(0.13)(0.28)0.07
(0.52)(0.21)
Prepayment fees0.08
0.09
0.03
0.09
0.07
Total net interest income6.08
6.35
6.75
6.41
6.40
(Reversal) Provision for credit losses—
(0.07)—
0.03
(0.01)
Net interest income after (reversal) provision for credit losses6.08
6.42
6.75
6.38
6.41
Net (losses) gains on derivatives and
   hedging activities
(0.09)0.28
0.01
0.35
0.13
Other non-interest income0.38
0.25
0.30
0.36
0.32
Total non-interest income0.29
0.53
0.31
0.71
0.45
Total revenue6.37
6.95
7.06
7.09
6.86
Total non-interest expense1.35
1.38
1.42
1.37
1.38
Assessments0.51
0.57
0.57
0.58
0.55
2014 ROE4.51 %5.00 %5.07%5.14 %4.93 %
      
2013 ROE5.49 %4.80 %5.37%4.78 %5.10 %
      
2012 ROE6.50 %6.03 %6.05%6.22 %6.20 %
 
1st  Quarter
2nd  Quarter
3rd  Quarter
4th  Quarter
Total
Components of 2016 ROE:     
Net interest income:     
Other net interest income7.65 %7.77 %8.18 %8.90 %8.12 %
Net amortization(0.75)(1.28)(1.20)(1.09)(1.08)
Prepayment fees0.18
0.15
0.41
0.05
0.20
Net interest income after reversal for credit losses7.08
6.64
7.39
7.86
7.24
Net gains (losses) on derivatives and
   hedging activities
0.45
1.80
(1.39)(4.62)(0.95)
Other non-interest (loss) income(0.79)(1.27)1.06
8.46
1.87
Total non-interest (loss) income(0.34)0.53
(0.33)3.84
0.92
Total revenue6.74
7.17
7.06
11.70
8.16
Total non-interest expense1.73
1.68
1.70
3.75
2.21
Affordable Housing Program assessments0.51
0.56
0.54
0.80
0.60
2016 ROE4.50 %4.93 %4.82 %7.15 %5.35 %
      
2015 ROE5.32 %4.70 %5.23 %4.93 %5.04 %
      
2014 ROE4.78 %5.33 %4.92 %5.63 %5.16 %

ROE in the firstfourth quarter of 20142016 was lowerhigher than the lastfirst three quarters because the second quarter and beyond reflect the full impact of the repurchase of excess stock in February. The upward trend in other net interest income throughout 2014 is attributable to a moderately increasing amount of short-funding.

The moderate volatility in quarterly ROEs in 2013 was due primarily to changes in asset-liability management strategies, the timing of Advance growth, reversal of credit losses, and net gains on derivatives and hedging activities.

45
Table of Contents


Quarterly ROEs in 2012 were at levels above six percent2016 primarily due to management's asset-liability and market risk strategies (which includes calling and replacing bonds at substantially lower rates in excessthe gains from the sale of high-yielding mortgage paydowns and maintaining a higher amount of short-funding), higher Advance prepayment fees, lower net amortization,securities and the reductionhigher spreads earned on LIBOR-indexed assets that were driven by the larger increase in provision for credit losses.rates earned on these assets relative to their associated funding. These favorable factors were partially offset by the litigation settlement, discussed above.

Segment Information

Note 18 of the Notes to Financial Statements presents information on our two operating business segments. We manage financial operations and market risk exposure primarily at the macro level, and within the context of the entire balance sheet, rather than exclusively at the level of individual segments. Under this approach, the market risk/return profile of each segment may not match, or possibly even have the same trends as, what would occur if we managed each segment on a stand-alone basis. The tables below summarize each segment's operating results for the periods shown.
      
(Dollars in millions)Traditional Member Finance MPP TotalTraditional Member Finance MPP Total
2016     
Net interest income after reversal for credit losses$288
 $75
 $363
Net income$205
 $63
 $268
Average assets$96,855
 $8,570
 $105,425
Assumed average capital allocation$4,607
 $408
 $5,015
Return on average assets (1)
0.21% 0.73% 0.25%
Return on average equity (1)
4.45% 15.44% 5.35%
     
2015     
Net interest income after reversal for credit losses$250
 $77
 $327
Net income$192
 $62
 $254
Average assets$97,932
 $7,607
 $105,539
Assumed average capital allocation$4,680
 $364
 $5,044
Return on average assets (1)
0.20% 0.82% 0.24%
Return on average equity (1)
4.10% 17.14% 5.04%
     
2014          
Net interest income after reversal for credit losses$238
 $79
 $317
$238
 $89
 $327
Net income$181
 $63
 $244
$181
 $73
 $254
Average assets$94,333
 $6,824
 $101,157
$94,333
 $6,786
 $101,119
Assumed average capital allocation$4,622
 $334
 $4,956
$4,588
 $330
 $4,918
Return on average assets (1)
0.19% 0.93% 0.24%0.19% 1.08% 0.25%
Return on average equity (1)
3.91% 18.96% 4.93%3.94% 22.16% 5.16%
     
2013     
Net interest income after reversal for credit losses$229
 $106
 $335
Net income$184
 $77
 $261
Average assets$86,609
 $7,082
 $93,691
Assumed average capital allocation$4,733
 $388
 $5,121
Return on average assets (1)
0.21% 1.09% 0.28%
Return on average equity (1)
3.88% 20.00% 5.10%
     
2012     
Net interest income after provision for credit losses$210
 $97
 $307
Net income$154
 $81
 $235
Average assets$58,708
 $7,994
 $66,702
Assumed average capital allocation$3,335
 $454
 $3,789
Return on average assets (1)
0.26% 1.01% 0.35%
Return on average equity (1)
4.62% 17.76% 6.20%
      
(1)Amounts used to calculate returns are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

Traditional Member Finance Segment
2016 Versus 2015:The increase in net interest income in 2014 compared to 2013 was due primarily to Advance growth, angains from the sale of securities during the fourth quarter of 2016 and higher spreads earned on LIBOR-indexed assets that were driven by the larger increase in mortgage-backed securities leverage, and a decrease in net amortization expense of mortgage-backed securities. However, net income decreased asrates earned on these assets relative to their associated funding. These positive factors were more thanpartially offset by a decreasesettlement during the fourth quarter of 2016 of all claims related to the 2008 Lehman bankruptcy and net unrealized losses on derivatives and hedging activities, as discussed above.

2015 Versus 2014:The increase in net income was due to higher spreads earned on Advances primarily from lower funding costs as a result of using more Discount Notes, growth in average Advance balances, and larger unrealized net gains on derivatives and hedging activities. Despite the decrease in net income, ROE increased slightly in 2014 primarily due to a lower amount of capital.


46
Table of Contents

The increase in net income from 2012 to 2013 was due primarily to Advance growth and lower net amortization for mortgage-backed securities. These favorable factorsitems were partially offset by net gainslower average balances on securities sales recognized in 2012 that did not reoccur in 2013, decreased short-funding, and narrower spreads between LIBOR and Discount Notes.

ROE decreased in 2013 compared to 2012 even though net income increased because the total increase in net income was insufficient to offset the increase in average total capital to support Advance growth. The growth in capital diluted ROE because earnings were spread over a larger capital base.mortgage-backed securities.

MPP Segment
Compared to the Traditional Member Finance segment, the MPP segment can exhibit more earnings volatility relative to short-term interest rates and more credit risk exposure. However, the MPP segment also provides the opportunity for enhancing risk-adjustedrisk-

adjusted returns, which normally augments earnings. Although mortgage assets are the largest source of our market risk, we believe that we have historically managed this risk prudently and consistently with our risk appetite and corporate objectives. We also believe that these assets do not excessively elevate the balance sheet's overall market risk exposure.

The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and small amount of credit risk. In 20142016, the MPP averaged seveneight percent of total average assets while accounting for 2623 percent of earnings.

2016 Versus 2015:Net interest income decreased 25 percentincreased slightly in 20142016 compared to 2013 as2015 due primarily to growth in MPP balances and a result of higher net amortization expense, smaller reversalsspread, resulting from an increase in the use of MPP credit losses, management actionsswaptions to extendhedge interest rate risk and the decision to call and replace debt maturities, run-off of higher yielding MPP loans, andat lower average MPP balances. Net income decreased by a smaller amount (18 percent) because therates. These favorable factors above were partiallymostly offset by a small gain in 2014 compared to losses in 2013 on derivatives and hedging activities.

Netthe increased amortization of MPP assets was $13 million higher in 2014 due to a lower than normal amount of amortization in 2013 as a result of increases inpurchased mortgage rates.

ROE decreased only modestly in 2014 compared to 2013 because the net income decrease was partially offset by a lower amount of capital allocated reflecting the repurchase of excess stock.

Net income for 2013 decreased $4 million compared to 2012premiums as a result of lower MPP balances and a decreaselong-term interest rates in the amountfirst three quarters of short-funding. These factors2016. Secondarily, profitability decreased due to the paydown of higher-yielding mortgage loans and low-cost debt.

2015 Versus 2014:Net interest income decreased resulting from higher net amortization expense and the paydown of higher-yielding mortgage assets and low-cost debt, which were mostlypartially offset by lower net amortization as well as reversals for credit losses.growth in MPP balances.

Despite the reduction in net income, ROE increased in 2013 as a result of a lower amount of capital allocated due to lower MPP balances and Advance growth, which resulted in more capital being allocated to the Traditional Member Finance segment.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT

Overview

We face various risks that could affect the ability to achieve our mission and corporate objectives. We generally categorize risks into:as: 1) business/strategic risk, 2) regulatory/legislative risk, 3) market risk (also referred to as interest rate or prepayment risk), 4) credit risk, 5) capital adequacy (capital risk), 6) funding/liquidity risk, 7) concentration risk, 8) accounting risk, and 8)9) operational risk. Our Board of Directors establishes objectives regarding risk philosophy, risk appetite, risk tolerances, and financial performance expectations. Market, capital, credit, capital, liquidity, concentration, and operational risks are discussed below. Other risks are discussed throughout this filing.

We strive to maintain a risk profile that ensures we operate safely and soundly, to promotepromotes prudent growth in Mission Asset Activity, to consistently generategenerates competitive earnings, and to protectprotects the par value of members' capital stock investment. We believe our business is financially sound and adequately capitalized on a risk-adjusted basis.

We practice this conservative risk philosophy in many ways:

▪We operate with moderate market risk and limited residual credit risk, liquidity risk, operational risk, and capital impairment risk.

▪We have a priority to ensure competitive and relatively stable profitability.

47
Table of Contents


▪We make conservative investment choices in terms of the types of investments we purchase and counterparties with which we engage.

▪We use derivatives primarily to hedge individual assets and liabilities.liabilities and to help hedge market risk exposure.

▪We normally operate with lessmaintain a prudent amount of financial leverage than Finance Agency regulations permit.leverage.

▪We are judicious in instituting regular, large-scale, district-wide repurchases of excess stock.

▪We have significantly increasedhold a significant amount of retained earnings in recent years and hold an amount that we assessbelieve is consistent with achievingprotecting the first corporate objective listed above.par value of capital stock and providing for dividend stabilization.

▪We create a working and operating environment that emphasizes a stable employee base.

We have numerous Board-adopted policies and processes that address risk management including risk appetite, tolerances, limits, guidelines, and regulatory compliance. Our cooperative business model, corporate objectives, capital structure, and regulatory oversight provide us clear incentives to minimize risk exposures to the extent possible.exposures. Our policies and operating practices are designed to limit risk exposures from ongoing operations in the following broad ways:

▪by anticipating potential business risks and developing appropriate responses;

▪by defining permissible lines of business;

▪by limiting the kinds of assets we are permitted to hold in terms of their credit risk exposure and the kinds of hedging and financing arrangements we are permitted to use;

▪by limiting the amount of market risk and capital risk to which we are permitted to be exposed;

▪by specifying very conservative tolerances for credit risk posed by Advances;

▪by specifying capital adequacy minimums; and

▪by requiring strict adherence to internal controls and operating procedures, adequate insurance coverage, and comprehensive Human Resources policies, procedures, and strategies.

Market Risk

Overview
Market risk exposure is the risk that profitability and the value of stockholders' capital investment may decrease and that profitability may be uncompetitive as a result of changes and volatility in the market environment and economy. Along with business/strategic risk, market risk is normally one of our largest residual risks.risk.

Our risk appetite is to maintain market risk exposure withinin a prudent moderate range while earning a competitive return on members' capital stock investment. There is normally a tradeoff between long-term market risk exposure and shorter-term exposure. Effective management of both components is important in order to attract and retain members and capital and to support Mission Asset Activity.

The primary challenges in managing market risk exposure arise from 1) the tradeoff between earning a competitive return and correlating profitability with short-term interest rates and 2) the market risk exposure of owning mortgage assets. Mortgage assets grant homeowners prepayment options that tend tocould adversely affect usour financial performance when interest rates increase or decrease. We mitigate the market risk of mortgage assets primarily by funding them principally with a portfolio of long-term fixed-rate callable and noncallable Bonds that haveand, secondarily, with swaptions derivative transactions. The Bonds and swaptions provide expected cash flows that are similar to the aggregate cash flows expected from mortgage assets under a wide range of interest rate and prepayment environments. Because it is normally cost-prohibitive to completely mitigate mortgage prepayment risk, a residual amount of market risk normally remains after funding and hedging activities.

We analyze market risk using numerous analytical measures under a variety of interest rate and business scenarios, including stressed scenarios, and perform sensitivity analyses on the many variables that can affect market risk, using several market risk

48
Table of Contents

models from third-party software companies. These models employ rigorous valuation techniques for the optionality that exists in mortgage prepayments, call and put options, and caps/floors. We regularly assess the effects of different assumptions, techniques and methodologies on the measurements of market risk exposure, including comparisons to alternative models and information from brokers/dealers.

We have historically emphasized strategies aimed at ensuring a moderate level of market risk, with the goal of generating competitive profitability over a wide variety of market and business environments and having a moderate amount of earnings volatility. These strategies include, among others: 1) conservative management of market risk exposure, 2) controlled growth in mortgage assets and 3) hedging practices that attempt to optimize earnings volatility from the use of derivatives.

Policy Limits on Market Risk Exposure
We have five sets of policy limits regarding market risk exposure, which primarily addressmeasure long-term market risk exposure. We determine compliance with our policy limits at every month end or more frequently if market or business conditions change significantly or are volatile.

▪
Market Value of Equity Sensitivity. The market value of equity for the entire balance sheet in two hypothetical interest rate scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative 10 percent of the current balance sheet's market value of equity. The interest rate movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount. We reduced this limit from 12 percent to 10 percent in early 2015 to better align our market risk policy with our risk appetite.

movements are “shocks,” defined as instantaneous, permanent, and parallel changes in interest rates in which every point on the yield curve is changed by the same amount.

▪
Duration of Equity. The duration of equity for the entire balance sheet in the current (“flat rate” or “base case”) interest rate environment must be between positive and negative five years and in the two interest rate shock scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative six years.

▪
Mortgage Assets Portfolio. The change in net market value of the mortgage assets portfolio as a percentage of the book value of portfolio assets must be between positive and negative three percent in each of the two interest rate shock scenarios. Net market value is defined as the market value of assets minus the market value of liabilities, with no assumed capital allocation.

▪
Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 95 percent in the current rate environment and must be above 8590 percent in each of the two interest rate shock scenarios.

▪
Mortgage Assets as a Multiple of Regulatory Capital. The amount of mortgage assets must be less than six times the amount of regulatory capital.

In addition, Finance Agency regulations and an internal policy provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. We also manage market risk exposure by charging members prepayment fees on many Advance programs where an early termination of an Advance would result in an economic loss to us.


49
TableIn practice we carry a substantially smaller amount of Contentsmarket risk exposure by establishing a strategic management range that is well within policy limits.


Market Value of Equity and Duration of Equity - Entire Balance Sheet
Two key measures of long-term market risk exposure are the sensitivities of the market value of equity and the duration of equity to changes in interest rates and other variables, as presented in the following tables for various instantaneous and permanent interest rate shocks. Averageshocks (in basis points). We compiled average results are compiled using data for each month end. Given the current very low level of rates, the down rate shocks are nonparallel scenarios, with short-term rates decreasing less than long-term rates sosuch that no rate falls below zero.

Market Value of Equity
(Dollars in millions)Down 300 Down 200 Down 100 Flat Rates Up 100 Up 200 Up 300Down 300 Down 200 Down 100 Flat Rates Up 100 Up 200 Up 300
Average Results                          
2014 Full Year             
2016 Full Year             
Market Value of Equity$4,763
 $4,908
 $4,961
 $4,889
 $4,771
 $4,626
 $4,479
$4,571
 $4,595
 $4,720
 $4,843
 $4,791
 $4,655
 $4,509
% Change from Flat Case(2.6)% 0.4 % 1.5% —
 (2.4)% (5.4)% (8.4)%(5.6)% (5.1)% (2.5)% —
 (1.1)% (3.9)% (6.9)%
2013 Full Year             
2015 Full Year             
Market Value of Equity$5,288
 $5,319
 $5,268
 $5,127
 $4,962
 $4,788
 $4,620
$4,697
 $4,792
 $4,958
 $4,969
 $4,875
 $4,729
 $4,568
% Change from Flat Case3.1 % 3.7 % 2.8% —
 (3.2)% (6.6)% (9.9)%(5.5)% (3.6)% (0.2)% —
 (1.9)% (4.8)% (8.1)%
Month-End Results                          
December 31, 2014             
December 31, 2016             
Market Value of Equity$4,714
 $4,824
 $4,938
 $4,920
 $4,835
 $4,688
 $4,524
$4,587
 $4,660
 $4,803
 $4,770
 $4,654
 $4,543
 $4,457
% Change from Flat Case(4.2)% (2.0)% 0.4% —
 (1.7)% (4.7)% (8.1)%(3.8)% (2.3)% 0.7 % —
 (2.4)% (4.8)% (6.6)%
December 31, 2013             
December 31, 2015             
Market Value of Equity$5,205
 $5,271
 $5,187
 $5,044
 $4,925
 $4,814
 $4,711
$4,565
 $4,652
 $4,849
 $4,888
 $4,795
 $4,656
 $4,507
% Change from Flat Case3.2 % 4.5 % 2.8% —
 (2.4)% (4.6)% (6.6)%(6.6)% (4.8)% (0.8)% —
 (1.9)% (4.7)% (7.8)%


Duration of Equity
 
(In years)Down 300 Down 200 Down 100 Flat Rates Up 100 Up 200 Up 300
Average Results             
2014 Full Year(3.7) (2.1) 1.0
 2.0
 3.0
 3.3
 3.3
2013 Full Year0.1 1.2 2.9 3.4 3.5 3.7 3.6
Month-End Results             
December 31, 2014(3.8) (3.4) (0.2) 1.0
 2.6
 3.5
 3.7
December 31, 2013(2.3) 1.0
 2.9
 2.5
 2.4
 2.3
 2.1
(In years)Down 300 Down 200 Down 100 Flat Rates Up 100 Up 200 Up 300
Average Results             
2016 Full Year(2.3) (2.8) (3.4) (0.8) 2.3
 3.1
 3.3
2015 Full Year(5.7) (4.6) (1.7) 1.0
 2.8
 3.4
 3.5
Month-End Results             
December 31, 2016(2.0) (3.7) (1.7) 1.8
 2.5
 2.0
 1.8
December 31, 2015(6.9) (5.7) (2.8) 0.6
 2.8
 3.3
 3.2

During 20142016, as in 2013,2015, consistent with our historical practice and risk appetite, we positioned market risk exposure to higherchanging interest rates at a moderate level. In late 2013, we adoptedlevel and well within policy limits. The dollar amount of equity exposure for any individual rate shock can be obtained by multiplying the percentage change of the market value of equity by the amount of total capital. The durations of equity provide an estimate of the change in market value of equity for a strategy to lower risk exposure to higher1.00 percentage point further change in interest rates and to reducefrom the variability of risk positioning. We maintained the strategy throughout 2014. Market risk exposure continued to benefit from exposure to lower rates by way of relatively subdued mortgage prepayment speeds (given the level of rates and composition of mortgage assets) over the last several years.rate shock level.

Based on the totality of our risk analysis, we expect that profitability, defined as the level of ROE compared with short-term market rates, will remain competitive unless interest rates change by extremely large amounts in a short period of time. Decreases in long-term interest rates even up to two percentage points (which would put fixed-rate mortgages below two percent) would still result in profitability being well above market interest rates. Similarly, we believe that profitability would not become uncompetitive in a rising rate environment unless long-term rates were to permanently increase in a short period of time by more than five percentage points or more, combined with short-term rates increasing to at least eightseven percent.


50
Table of Contents

Market Risk Exposure of the Mortgage Assets Portfolio
The mortgage assets portfolio normally accounts for almost all market risk exposure because of prepayment volatility that we cannot completely hedge while maintaining positivesufficient net spreads. Sensitivities of the market value of equity allocated to the mortgage assets portfolio under interest rate shocks (in basis points) are shown below. At December 31, 20142016, the mortgage assets portfolio had an assumed capital allocation of $1.1 billion based on the entire balance sheet's regulatory capital-to-assets ratio. Average results are compiled using data for each month-end. The market value sensitivities are one measure we use to analyze the portfolio's estimated market risk exposure.

% Change in Market Value of Equity-Mortgage Assets Portfolio
 Down 300 Down 200 Down 100 Flat Rates Up 100 Up 200 Up 300
Average Results             
2014 Full Year(19.1)% (3.9)% 3.6 % — (9.7)% (22.1)% (35.0)%
2013 Full Year6.3 % 10.6 % 8.9 % — (14.0)% (29.0)% (43.7)%
Month-End Results             
December 31, 2014(25.0)% (13.7)% (1.0)% — (7.9)% (21.4)% (36.6)%
December 31, 20137.7 % 16.3 % 11.3 % — (12.6)% (24.6)% (36.1)%
 Down 300 Down 200 Down 100 Flat Rates Up 100 Up 200 Up 300
Average Results             
2016 Full Year(31.7)% (29.4)% (15.5)% — (3.1)% (15.3)% (29.0)%
2015 Full Year(33.1)% (22.7)% (4.1)% — (8.0)% (21.3)% (36.3)%
Month-End Results             
December 31, 2016(28.4)% (18.5)% 0.7 % — (10.4)% (20.3)% (27.7)%
December 31, 2015(41.7)% (30.8)% (6.4)% — (9.6)% (24.4)% (40.7)%

The risk exposure of the mortgage assets portfolio to higher interest rates was slightlymodestly lower in 20142016 compared to 2013. The dollar amount of exposure for any individual2015 and modestly higher in most lower rate shock can be obtained by multiplying the percentage changescenarios, driven primarily by the assumed equity allocation.low level of current market rates. We believe the mortgage assets portfolio continuescontinued to have an acceptable amount of market risk exposure relative to the inherent market risks of owning mortgages and relative to theirits actual and expected profitability. We believe this exposureprofitability and is consistent with our risk appetite philosophy and cooperative business model.philosophy.




51
Table of Contents

Use of Derivatives in Market Risk Management
A key component of hedging market risk exposure is the use of derivatives transactions, as discussed in Item 1 "Business." The following table presents the notional principal amounts of the derivatives used to hedge other financial instruments classified by how we designate the hedging relationship.
(In millions) December 31, 2014 December 31, 2013
Hedged Item/Hedging InstrumentHedging ObjectiveFair Value HedgeEconomic Hedge Fair Value HedgeEconomic Hedge
Advances:      
Pay-fixed, receive floating interest rate swap (without options)Converts the Advance's fixed rate to a variable rate index.$1,734
$15
 $1,284
$—
Pay-fixed, receive floating interest rate swap (with options)Converts the Advance's fixed rate to a variable rate index and offsets option risk in the Advance.1,653
128
 2,093
128
Total Advances 3,387
143
 3,377
128
Mortgage Loans:      
Forward settlement agreementProtects against changes in market value of fixed rate Mandatory Delivery Contracts resulting from changes in interest rates.—
439
 —
31
Consolidated Obligations Bonds:      
Receive-fixed, pay floating interest rate swap (without options)Converts the Bond's fixed rate to a variable rate index.760
2,215
 855
—
Receive-fixed, pay floating interest rate swap (with options)Converts the Bond's fixed rate to a variable rate index and offsets option risk in the Bond.155
2,277
 285
4,015
Total Consolidated Obligations
   Bonds
 915
4,492
 1,140
4,015
Stand-Alone Derivatives:      
Mandatory Delivery ContractsProtects against fair value risk associated with fixed rate mortgage purchase commitments.—
451
 —
37
Total $4,302
$5,525
 $4,517
$4,211

In addition to issuing long-term Bonds, we may engage in derivative transactions, primarily interest rate swaps and forward settlement agreements of mortgage-backed securities, to manage the market risk exposure associated with our MPP delivery commitments and LIBOR-indexed assets. The notional amount of derivatives at December 31, 20142016 increased by $1.1$7.7 billion (13(81 percent) from the end of 2013.2015, driven primarily by the shift in composition of shorter-term funding away from Discount Notes towards fixed-rate Bonds swapped to adjustable-rate LIBOR and secondarily, higher utilization of interest rates swaptions.
(In millions) December 31, 2016 December 31, 2015
Hedged Item/Hedging InstrumentHedging ObjectiveFair Value HedgeEconomic Hedge Fair Value HedgeEconomic Hedge
Advances:      
Pay-fixed, receive-float interest rate swap (without options)Converts the Advance's fixed rate to a variable-rate index.$3,605
$15
 $3,007
$15
Pay-fixed, receive-float interest rate swap (with options)Converts the Advance's fixed rate to a variable-rate index and offsets option risk in the Advance.696
33
 1,187
48
Total Advances 4,301
48
 4,194
63
Mortgage Loans:      
Forward settlement agreementProtects against changes in market value of fixed-rate Mandatory Delivery Contracts resulting from changes in interest rates.—
511
 —
462
Consolidated Obligations Bonds:      
Receive-fixed, pay-float interest rate swap (without options)Converts the Bond's fixed rate to a variable-rate index.1,229
6,789
 1,184
2,494
Receive-fixed, pay-float interest rate swap (with options)Converts the Bond's fixed rate to a variable-rate index and offsets option risk in the Bond.130
1,362
 170
162
Total Consolidated Obligations
   Bonds
 1,359
8,151
 1,354
2,656
Balance Sheet:      
Interest rate swaptionsProvides the option to enter into an interest rate swap to offset interest-rate or prepayment risk.—
2,346
 —
281
Stand-Alone Derivatives:      
Mandatory Delivery ContractsExposure to fair-value risk associated with fixed rate mortgage purchase commitments.—
441
 —
450
Total $5,660
$11,497
 $5,548
$3,912

Capital Adequacy

Retained Earnings
We must hold sufficient capital to protect against exposure to various risks, including market, credit, and operational. We regularly conduct a variety of measurements and assessments for capital adequacy. At December 31, 2016, our capital management policy set forth a range of $325 million to $550 million as the minimum amount of retained earnings we believe is necessary to mitigate impairment risk from market risk exposure and to provide for dividend stability from factors that could cause earnings to be volatile. At December 31, 2016, the $834 million of retained earnings was comprised of $574 million unrestricted (an increase of $43 million from year-end 2015) and $260 million restricted (an increase of $54 million from year-end 2015), which by the FHLBank System's Joint Capital Enhancement Agreement we are not permitted to distribute as dividends.


We believe that the current amount of retained earnings, which substantially exceeds the policy range, is sufficient to mitigate members' impairment risk of their capital stock investment and to provide the opportunity to stabilize dividends when profitability may be volatile. We will continue to carry a greater amount of retained earnings than required by the policy and will continue to bolster capital adequacy over time by allocating a portion of earnings to the required restricted retained earnings account.

Risk-Based Capital
The following table shows the amount of risk-based capital required based on Finance Agency prescribed measurements. By regulation, we are required to hold permanent capital at least equal to the amount of risk-based capital.
(Dollars in millions)December 31, 2016 Monthly Average 2016 December 31, 2015
Market risk-based capital$184
 $220
 $206
Credit risk-based capital262
 262
 280
Operational risk-based capital134
 144
 145
Total risk-based capital requirement580
 626
 631
Total permanent capital5,026
 5,115
 5,204
Excess permanent capital$4,446
 $4,489
 $4,573
Risk-based capital as a percent of permanent capital12% 12% 12%

The increaserisk-based capital requirement has historically not been a constraint on operations, and we do not use it to actively manage any of our risks. It has normally ranged from 10 to 20 percent of permanent capital. This measure has been at the low end of the range for several years, primarily due to the low level of interest rates during this period limiting estimated exposure to extreme lower rate scenarios.

Dodd-Frank Stress Test
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, all FHLBanks are required to perform an annual stress test for capital adequacy. Our test was completed and published in November 2016, based on our financial condition as of December 31, 2015 and the methodology prescribed by the Finance Agency. Capital adequacy was sufficient under all established scenarios to fully absorb losses under both adverse and severely adverse economic conditions.

Market Capitalization Ratios
We measure two sets of market capitalization ratios. One measures the market value of equity (i.e., total capital) relative to the par value of regulatory capital stock (which is GAAP capital stock and mandatorily redeemable capital stock). The other measures the market value of total capital relative to the book value of total capital, which includes all components of capital. The measures provide a point-in-time indication of the FHLB's liquidation or franchise value and can also serve as a measure of realized or potential market risk exposure.

The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for several interest rate environments.
 December 31, 2016 Monthly Average Year Ended December 31, 2016 December 31, 2015
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario114% 113% 109%
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1)
115
 110
 109
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2)
108
 109
 104
(1)Represents a down shock of 100 basis points.
(2)Represents an up shock of 200 basis points.

A base case value below 100 percent (par) could indicate that, in the notionalremote event of an immediate liquidation scenario involving redemption of all capital stock, capital stock may be returned to stockholders at a value below par. This could be due to experiencing risks that lower the market value of capital and/or to having an insufficient amount of interest rate swaps was due primarilyretained earnings. In 2016, the market capitalization ratios in the scenarios presented continued to our decision to enter into new transactions with the derivatives clearing house following the resolution of prior uncertainties that had existed in 2013 surrounding costs, operating and regulatory processes, and the credit and legal risks associated with clearing requirements under the Dodd-Frank Act.be above policy limits. The base case ratio, which

increased modestly at the end of 2016 compared to the end of 2015, remains acceptable because retained earnings were 20 percent of regulatory capital stock at December 31, 2016, well above policy requirements, and because we maintained risk exposures at moderate levels.

The following table presents the market value of equity to the book value of total capital.
 December 31, 2016 Monthly Average Year Ended December 31, 2016 December 31, 2015
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1)
95% 96% 94%
Market Value of Equity to Book Value of Capital - Down Shock (1)(2)
96
 93
 93
Market Value of Equity to Book Value of Capital - Up Shock (1)(3)
91
 92
 89
(1)Capital includes total capital and mandatorily redeemable capital stock.
(2)Represents a down shock of 100 basis points.
(3)Represents an up shock of 200 basis points.

A base-case value below par indicates that we have realized or could realize risks (especially market risk) such that the market value of total capital owned by stockholders, which includes regulatory capital stock and retained earnings, is below par value (i.e., below 100 percent of the total book value). The base-case ratio of 95 percent at December 31, 2016 indicates that the market value of total capital is $256 million below the par value of total capital. In a scenario in which interest rates increase 200 basis points, the market value of total capital would be $483 million below the par value of total capital. This indicates that capital stock would still be redeemable at par value in a liquidation but stockholders would not receive the full sum of their total ownership claims in the FHLB which include both capital stock and retained earnings. We believe the likelihood of a liquidation scenario is extremely remote and therefore, we accept the risk of diluting ownership claims in such a scenario.

Credit Risk

Overview
Our business entails a significant amount of inherent credit risk exposure. We believe our risk management practices, discussed below, bring the amount of residual credit risk to a minimal level. We have no loan loss reserves or impairment recorded for Credit Services, investments, and derivatives and a modestminimal amount of legacy credit risk exposure to the MPP.

Credit Services
Overview.Overview: Our goal isWe have policies and practices to manage credit risk exposure tofrom our secured lending activities, which include Advances and Letters of CreditCredit. The objective of our credit risk management is to equalize risk exposure across members and counterparties to a zero level of expected losses. We continuedlosses, consistent with our conservative risk management principles and desire to achieve this objective in 2014 by employing the following practices:

▪significant over-collateralization;
▪significant further discounts applied to subprime and nontraditional loan collateral;

52
Table of Contents

▪close monitoring of financial condition, performance, and repayment capacities of members; and
▪review and verification of the quality, documentation, and administration of collateral.

Because of these factors, we have never experienced avirtually no residual credit loss nor established a loan loss reserve for Advances. Prospectively, we expectrisk related to collect all amounts due in accordance with their contractual terms.member borrowings.

Collateral.Collateral: We require each member to provide us a security interest in eligible collateral before it can undertake any secured borrowing. At December 31, 20142016, our policy of over-collateralization resulted in total collateral pledged of $253.0318.5 billion to serve members' total borrowing capacity of $210.1273.8 billion. of which $186.3 billion was unused. The estimated value of pledged collateral is discounted in order to offset market, credit, and liquidity risks that may affect the collateral's realizable value in the event it must be liquidated. Over-collateralization by one member is not applied to another member.


The table below shows the total pledged collateral (unadjusted for CollateralizedCollateral Maintenance Requirements). The collateral composition in 2014 was consistent with that in 2013.
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
(Dollars in billions)  Percent of Total   Percent of Total  Percent of Total   Percent of Total
Collateral Amount Pledged Collateral Collateral Amount Pledged CollateralCollateral Amount Pledged Collateral Collateral Amount Pledged Collateral
Single-family loans$140.4
 55% $125.0
 56%
Single family loans$188.7
 59% $174.0
 57%
Multi-family loans38.2
 15
 33.2
 15
56.7
 18
 44.9
 15
Commercial real estate29.5
 12
 26.5
 12
33.8
 11
 31.0
 10
Home equity loans/lines of credit22.0
 9
 20.4
 9
24.9
 8
 23.1
 7
Bond securities22.3
 9
 17.0
 8
Bond Securities13.8
 4
 32.9
 11
Farm real estate0.6
 —
 0.6
 —
0.6
 —
 0.6
 —
Total$253.0
 100% $222.7
 100%$318.5
 100% $306.5
 100%

At December 31, 2016, 67 percent of collateral was related to residential mortgage lending in single-family loans and home equity loans/lines of credit.

We assign each member one of four levels of collateral status: Blanket, Securities, Listing, and Physical Delivery. Assignment is based in part on an internal credit rating model that reflects our view of the member's current financial condition and performance. Blanket collateral status, which we assign to approximately 8590 percent of borrowers, is the least restrictive status and is available to lower-risk bank and credit union members. Approximately 6653 percent of pledged collateral is under Blanket status. We monitor the level of eligible collateral pledged under Blanket status using quarterly regulatory financial reports or periodic collateral “Certification” documents submitted by all significant borrowers.

Under Listing collateral status, a member provides us detailed information on specifically identified individual loans that meet certain minimum qualifications. Physical Delivery is the most restrictive collateral status, which we assign to members experiencing significant financial difficulties, insurance companies pledging loans, and newly chartered institutions. We require borrowers in Physical Delivery to deliver into our custody securities and/or original notes, mortgages or deeds of trust. Under any collateral status, members may elect to pledge bond securities, which we either hold in our custody or, less often, have third parties control on our behalf. We use third-party services to regularly estimate market values of collateral under Listing and Physical status. Third-party services use various proprietary models to estimate market values. Assumptions may be made on factors that affect collateral value, such as market liquidity, discount rates, prepayments, liquidation and servicing costs in the event of a default, and may be adjusted in response to changes in economic and market conditions in order to produce reliable results, even though some risk remains. We have policies and procedures for validating the reasonableness of collateral valuations.

Borrowing Capacity/Lendable Value.Value: We determine borrowing capacity against pledged collateral by establishing minimum levels of over-collateralization (Collateralized(Collateral Maintenance Requirements or CMRs). CMRs result in a lendable value, or borrowing capacity that is less than the amount of pledged collateral.

CMRs are determined by statistical analysis and management assumptions relating to historical price volatility, inherent credit risks, liquidation costs, and the current credit and economic environment. We apply CMR results to the estimated values of pledged assets. CMRs vary among pledged assets and members based on the financial strength of the member institution, the level of collateral status, the issuer of bond collateral or the quality of securitized assets, the marketability of the pledged assets, the payment performance of pledged loan collateral, and the quality of loan collateral as reflected in the manner in which it was underwritten and is administered. In August 2016, we updated CMRs resulting in relatively minor changes in borrowing capacity for most members.

53
Table of Contents


The table below indicates the range of lendable values remaining after the application of CMRs for each major collateral type pledged at December 31, 2014.2016.
 Lending Values Applied to Collateral
Blanket Status: 
Prime 1-4 family loans67-87%
Multi-family loans53-77%54-77%
Prime home equity loans/lines of credit57-77%56-74%
Commercial real estate loans61-80%59-83%
Farm real estate loans65-83%67-83%
Listing Status/Physical Delivery: 
Cash/U.S. Government/U.S. Treasury/U.S. agency securities79-100%81-100%
U.S. agency mortgage-backed securities/collateralized mortgage obligations79-98%82-98%
Private-label residential mortgage-backed securities43-87%44-88%
Private-label commercial mortgage-backed securities33-86%33-88%
Municipal securities25-93%54-93%
Small Business Administration certificates88-93%81-94%
1-4 family loans67-94%61-91%
Multi-family loans57-87%57-88%
Home equity loans/lines of credit63-87%56-89%
Commercial real estate loans65-91%61-89%
Farm real estate loans67-91%63-88%

The ranges of lendable values exclude subprime and nontraditional mortgage loan collateral. Loans pledged by lower risk members for which we require only high level, summary reporting of eligible balances are generally discounted more heavily than loans on which we have detailed loan structure and underwriting information. For any form of loan collateral, additional credit risk based adjustments may be made to an individual member’s collateral that results in a lower lendable value than that indicated in the above table.

Subprime and Nontraditional Mortgage Loan Collateral.Collateral: We have policies and processes to identify subprime and nontraditional residential mortgage loans pledged by members. We perform collateral reviews, sometimes engaging third parties, to determine whether the pledged loans meet our definition of subprime, nontraditional, or both. Depending on the quality of underwriting and administration, we may subject these loans to higher CMRs. We also limit the overall percentage of borrowing capacity that members can receive from subprime and nontraditional collateral.

Collateralization of Former Members. Former members may maintain existing Advances up to their maturity date as long as they meet certain requirements. Underwriting criteria, including the forms of collateral that may be pledged, are generally the same for members and former members. One exception is that former members with outstanding Advances must deliver sufficient collateral into our custody, regardless of whether they would qualify for Blanket or Listing status as a member. Alternatively, if a former member is acquired by a member of another FHLBank, we may allow its outstanding Advances to be covered by that FHLBank's collateral under the terms and conditions of an intercreditor agreement. On December 31, 2014, we had $0.6 billion of Advances outstanding to former members. This amount continued to be overcollateralized through a combination of subordination or other intercreditor security agreements with other FHLBanks and marketable securities and loan collateral held in our custody.
 
Internal Credit Ratings.Ratings: We perform credit underwriting of our members and nonborrower membersnonmember borrowers and assign them an internal credit rating on a scale of one to seven, with a higher number representing a less favorable assessment of the institution's credit and overall financial condition. The credit ratings are based on internal credit analysis and consideration of available credit ratings from independent credit rating organizations. The credit ratings are used in conjunction with other measures of the credit risk and pledged collateral, as described above, in managing credit risk exposure to member and nonmember borrowers.

A less favorable credit rating can cause us to 1) decrease the institution's borrowing capacity via higher CMRs, 2) require the institution to provide an increased level of detail on pledged collateral, 3) require it to deliver collateral into our custody, and/or 4) prompt us to more closely and/or frequently monitor the institution using several established processes.processes, and/or 5) limit the institution's exposure through borrowing restrictions (e.g., maturity restrictions on new Advances or requiring prepayments on existing Advances).


54
Table of Contents

The following tables show the distribution of internal credit ratings we assigned to member and nonmember borrowers, which we use to help manage credit risk exposure.
(Dollars in billions)(Dollars in billions)      (Dollars in billions)      
December 31, 2014 December 31, 2013
December 31, 2016December 31, 2016 December 31, 2015
 Borrowers   Borrowers Borrowers   Borrowers
   Collateral-Based    Collateral-Based   Collateral-Based    Collateral-Based
Credit   Borrowing Credit   Borrowing   Borrowing Credit   Borrowing
Rating Number Capacity Rating Number Capacity Number Capacity Rating Number Capacity
1-3 547
 $131.1
 1-3 505
 $108.4
 599
 $265.8
 1-3 582
 $251.7
4 107
 74.9
 4 125
 58.7
 67
 6.7
 4 85
 5.2
5 37
 3.6
 5 59
 4.0
 22
 1.2
 5 29
 3.6
6 14
 0.2
 6 26
 0.9
 8
 0.1
 6 8
 0.1
7 12
 0.3
 7 22
 0.4
 3
 —
 7 7
 —
Total 717
 $210.1
 Total 737
 $172.4
 699
 $273.8
 Total 711
 $260.6

A “4” rating is our assessment of the lowest level of satisfactory performance. At December 31, 20142016, 6333 borrowers (ninefive percent of the total) had credit ratings of "5" through "7," a net decrease of 4411 from the end of 2013.2015. These members had $4.11.3 billion of borrowing capacity at December 31, 20142016. There was a net decrease of 18 members who had a "4" credit rating and a net increase of 4217 members with credit ratings of "1," "2," or "3." These trends indicate a general improvement in the overall financial condition of our members during the recovery cycle for the overall economy and housing market.

Member Failures, Closures, and Receiverships.Receiverships: There was one member failure in 2014. All Advance2016. We had no outstanding exposure to this member was fully collateralized by assets held in our custody at the time of failure and all Advances have been subsequently repaid by the acquiring institution.

MPP
Overview.Overview: We believe that theThe residual amount of credit risk exposure to loans in the MPP is modest,minimal, based on the following factors:

▪various credit enhancements for conventional loans, which are designed to protect us against credit losses;
▪conservative underwriting and loan characteristics consistent with favorable expected credit performance;
▪a relatively minorsmall overall amount of delinquencies and defaults when compared to national averages;
▪
charge-offscredit losses totaling $1.8$1.2 million in 20142016 and $14.8$17.9 million over the life of the program, which represent an immaterial percentage of conventional loans' current unpaid principal balances at December 31, 20142016 and of total purchases-to-date for the entire MPP; and
▪in addition to the low program-to-date charge-offs,credit losses, based on financial analysis, we believe that future credit losses will not harm capital adequacy and will not significantly affect profitability except under the most extreme and unlikely credit conditions.

Portfolio Loan Characteristics.Characteristics:The following table shows FICO® credit scores of homeowners at origination dates for the conventional loan portfolio.
FICO® Score (1)
 December 31, 2014 December 31, 2013 December 31, 2016 December 31, 2015
< 620 —% —% —% —%
620 to < 660 2
 2
 1
 1
660 to < 700 8
 9
 6
 7
700 to < 740 18
 18
 16
 17
>= 740 72
 71
 77
 75
        
Weighted Average 760
 758
 764
 762
(1)
Represents the FICO® score at origination.


55
Table of Contents

There was little change in the distribution of FICO® scores at origination in 20142016 compared to 2013.2015. The distribution of FICO® scores at origination is one indication of the portfolio's overall favorable credit quality. At December 31, 2014, 722016, 77 percent of the

portfolio had scores at an excellent level of 740 or above and 9093 percent had scores above 700, which is a threshold generally considered indicative of homeowners'homeowners with good credit quality.

The following tables show loan-to-value ratios for conventional loans based on values estimated at the origination dates and current values estimated at the noted periods. The estimated current ratios are based on original loan values, principal paydowns that have occurred since origination, and a third-party estimate of changes in historical home prices for the zip code in which each loan resides. Both measures are weighted by current unpaid principal.
 Based on Estimated Origination Value  Based On Estimated Current Value Based on Estimated Origination Value  Based On Estimated Current Value
Loan-to-Value December 31, 2014 December 31, 2013 Loan-to-Value December 31, 2014 December 31, 2013 December 31, 2016 December 31, 2015 Loan-to-Value December 31, 2016 December 31, 2015
<= 60% 17% 19% <= 60% 34% 33% 15% 16% <= 60% 38% 33%
> 60% to 70% 16
 17
 > 60% to 70% 25
 26
 16
 16
 > 60% to 70% 26
 22
> 70% to 80% 55
 53
 > 70% to 80% 25
 25
 55
 55
 > 70% to 80% 28
 28
> 80% to 90% 7
 7
 > 80% to 90% 12
 11
 9
 8
 > 80% to 90% 7
 13
> 90% 5
 4
 > 90% to 100% 3
 3
 5
 5
 > 90% to 100% 1
 4
     > 100% 1
 2
     > 100% —
 —
Weighted Average 72% 71% Weighted Average 65% 65% 73% 72% Weighted Average 63% 65%

The levels of loan-to-value ratios and overall positive trends in the last several years are consistent with the portfolio's excellent credit quality. The positive trends reflect the sustained recovery and improvement in the overall housing market. At December 31, 20142016 and 2013,, we estimated that 16eight percent of loans have current loan-to-value ratios above 80 percent.percent, compared to 17 percent at the end of 2015. The improvement in the 2016 current loan-to-value ratios reflected the six percent average increase in housing prices nationwide during the year.

Based on the available data, we believe we have littleminimal exposure to loans in the MPP considered to have characteristics of “subprime” or “alternative/nontraditional” loans. Further, we do not knowingly purchase any loan that violates the terms of our Anti-Predatory Lending Policy.

The geographical allocation of conventional loans in the MPP is concentrated in Ohio, as shown in the following table based on unpaid principal balance.
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Ohio61% Ohio59%65% Ohio63%
Kentucky13
 Kentucky13
14
 Kentucky14
Indiana8
 Indiana7
11
 Indiana10
Tennessee3
 Tennessee3
2
 Tennessee3
Michigan2
 California2
1
 Michigan1
All others13
 All others16
7
 All others9
Total100% Total100%100% Total100%

Lender Risk Account.Credit Enhancements: Conventional mortgage loans are supported against credit losses by various combinations of primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) (for loans purchased before February 2011), and the Lender Risk Account.Account (LRA). The Lender Risk AccountLRA is a holdbackhold back of a portion of the initial purchase price.price to cover expected credit losses for a specific pool of loans. Starting after five years from the loan purchase date, we may return the holdbackhold back to PFIs if they manage credit risk to predefined acceptable levels of exposure on the loan pools they sell to us. The Lender Risk Account is funded by the FHLBank from a portion of the purchase proceeds to cover expected credit losses for a specific pool of loans. As a result, some pools of loans may have sufficient credit enhancements to recapture all losses while other pools of loans may not have enough credit enhancements to recapture all losses.

not. The amount of loss claims against the Lender Risk Account in 2014 was approximately $2 million. The AccountLRA had balances of $129188 million and $115$158 million at December 31, 20142016 and 20132015, respectively. For more information, see Note 10 of the Notes to Financial Statements.


56
Table of Contents

Credit Performance.Performance: The table below provides an analysis of conventional loans delinquent or in the process of foreclosure, along with the national average serious delinquency rate.
Conventional Loan DelinquenciesConventional Loan Delinquencies
(Dollars in millions)December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Early stage delinquencies - unpaid principal balance (1)
$61
 $59
$47
 $51
Serious delinquencies - unpaid principal balance (2)
$43
 $58
$23
 $32
Early stage delinquency rate (3)
1.0% 1.0%0.5% 0.7%
Serious delinquency rate (4)
0.7% 1.0%0.3% 0.4%
National average serious delinquency rate (5)
2.4% 2.9%1.5% 1.8%
(1)Includes conventional loans 30 to 89 days delinquent and not in foreclosure.
(2)Includes conventional loans that are 90 days or more past due or where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported.
(3)Early stage delinquencies expressed as a percentage of the total conventional loan portfolio.
(4)Serious delinquencies expressed as a percentage of the total conventional loan portfolio.
(5)
National average number of fixed-rate prime conventional loans that are 90 days or more past due or in the process of foreclosure is based on the most recent national delinquency data available. The December 31, 20142016 rate is based on September 30, 20142016 data.

The MPP has experienced a relatively small amount of delinquencies and foreclosures with ratesthe serious delinquency rate continuing to be well below national averages.

We consider a high risk loan as having a current loan-to-value ratio above 100 percent. At December 31, 20142016, high risk loans had experienced a moderateminimal amount of serious delinquencies (i.e., delinquencies that are 90 days or more past due or in the process of foreclosure). For example, of the $51$15 million of conventional principal balances with current estimated loan-to-values above 100 percent, $4$0.3 million (seventwo percent) were seriously delinquent. We believe these data further support our view that the overall portfolio is comprised of high-quality, well-performing loans.

Credit Losses.Losses: The following table shows the effects of credit enhancements on the determinationestimation of the allowance for credit losses at the noted periods. Estimated incurred credit losses, after credit enhancements, are accounted for in the allowance for credit loss or as a charge off (i.e., a reduction to the principal of mortgage loans held for portfolio).
(In millions)December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Estimated incurred credit losses, before credit enhancements$(23) $(31)$(9) $(14)
Estimated amounts deemed recoverable by:      
Primary mortgage insurance2
 3
1
 1
Supplemental mortgage insurance13
 17
5
 8
Lender Risk Account3
 4
2
 2
Allowance for credit losses, after credit enhancements$(5) $(7)
Estimated incurred credit losses, after credit enhancements$(1) $(3)
 
The data presented above providesmall amount of incurred credit losses provides further informationsupport on the aggregate health of the portfolio. Credit risk exposure depends on the actual and potential credit performance of the loans in each pool compared to the pool's equity (on individual loans) and credit enhancements, including PMI, (for individual loans), the Lender Risk Account,LRA, and SMI.

The allowance for credit losses at December 31, 2014 decreased $2 million compared to the end of 2013 as problem loans continued to liquidate, new delinquency trends continued to stabilize and housing prices, which affect both delinquency rates and loss severities, remained relatively stable.

In addition to the allowance for credit losses recorded, we regularly analyze potential ranges of additional lifetime credit risk exposure for the loans in the MPP. Even under adverse scenarios for either home prices or unemployment rates, we expect that further credit losses would not significantly decrease our overall annual profitability or dividends payable to members. For example, assuming a 20 percent decline in all home prices in each of the next two years, we estimate that our lifetime credit losses, net of the effect of credit enhancements, could increase by approximately $13 million, which would decrease annual ROE by approximately only 0.05 percentage points over the next five years (most of the losses are estimated to occur in the next five years).profitability.


57
Table of Contents

Credit Risk Exposure to Insurance Providers.Providers:
PMI
Some of our conventional loans carry PMI as a credit enhancement feature. Based on the guidelines of the MPP, we have assessed that we do not have any credit risk exposure to theour PMI providers.

SMI
Another credit enhancement feature on some conventional loans is SMI purchased from Genworth and Mortgage Guaranty Insurance Corporation (MGIC). Beginning February 1, 2011, we discontinued use of SMI as a credit enhancement for new

loan purchases; instead, we now augment credit enhancements with a greater amount of the purchase proceeds added to the Lender Risk Account.LRA. At December 31, 20142016, we had $1.9$1.1 billion of conventional loans purchased prior to February 2011 with outstanding SMI coverage through Genworth and MGIC that are paying down over time. Both providers have experienced weak financial condition in recent years; although, the most recent available information indicatesAlthough there has been improvements in their financial health. However, due to the uncertainty ofis a possibility that MGIC and Genworth's financial condition,Genworth may not pay all of the future insurance claims we estimate that $0.4 millionmake, our estimation of payments arecredit exposure to them has declined over the last several years, and was not probableconsidered material at December 31, 2014. The estimation of SMI exposure, similar to overall trends of our loan losses, has declined in the last year.2016.

Investments
Liquidity Investments.Investments: Liquidity investments are either unsecured, guaranteed by the U.S. government, or secured (i.e., collateralized). For unsecured liquidity investments, we invest in the debt securities of highly rated, investment-grade institutions, have appropriate and conservative limits on dollar and maturity exposure to each institution, and have strong credit underwriting practices, including active monitoring of credit quality of our counterparties and of the environment in which they operate. We believe we purchased allpurchase liquidity investments from counterparties that have a strong ability to repay principal and interest.

Our unsecured liquidity investments to a counterparty or group of affiliated counterparties are limited by Finance Agency regulations to maturities of no more than nine months and limited to a dollar amount based on a percentage of eligible regulatory capital (defined as the lessor of our regulatory capital or the eligible amount of a counterparty's Tier 1 capital). The permissible percentage ranges from one percent to 15 percent based on the counterparty's lowest long-term credit rating of its debt from a nationally recognized statistical rating organization (NRSRO). In 2014,addition, pursuant to a Finance Agency regulation, we reducedcomplement reliance on NRSRO ratings for unsecured investment activity by enhancingalso considering internal credit risk analytics on unsecured counterparties.


The lowest long-term credit rating for a counterparty to which we are permitted to extend credit is double-B. In practice, for many years, we have generally invested funds only in those eligible institutions with long-term credit ratings of at least single-A. In addition, we restrict maturities, reduce dollar exposure, and avoid new investments with counterparties we deem to represent elevated credit risk.

58
Table of Contents


The following table presents the carrying value of liquidity investments outstanding in relation to the counterparties' lowest long-term credit ratings provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. For resale agreements, the ratings shown are based on ratings of the associated collateral.
(In millions)December 31, 2014December 31, 2016
Long-Term RatingLong-Term Rating
AAA AA A TotalAA A Total
Unsecured Liquidity Investments            
Federal funds sold$—
 $2,100
 $4,500
 $6,600
$1,280
 $2,977
 $4,257
Certificates of deposit—
 950
 400
 1,350
1,300
 —
 1,300
Total unsecured liquidity investments—
 3,050
 4,900
 7,950
2,580
 2,977
 5,557
Guaranteed/Secured Liquidity Investments            
Securities purchased under agreements to resell—
 3,343
 —
 3,343
5,230
 —
 5,230
Government-sponsored enterprises (1)
—
 26
 —
 26
31
 —
 31
Total guaranteed/secured liquidity investments—
 3,369
 —
 3,369
5,261
 —
 5,261
Total liquidity investments$—
 $6,419
 $4,900
 $11,319
$7,841
 $2,977
 $10,818
December 31, 2013December 31, 2015
Long-Term RatingLong-Term Rating
AAA AA A TotalAA A Total
Unsecured Liquidity Investments            
Federal funds sold$—
 $760
 $980
 $1,740
$4,305
 $6,540
 $10,845
Certificates of deposit—
 1,800
 385
 2,185
600
 100
 700
Total unsecured liquidity investments—
 2,560
 1,365
 3,925
4,905
 6,640
 11,545
Guaranteed/Secured Liquidity Investments            
Securities purchased under agreements to resell—
 2,350
 —
 2,350
10,532
 —
 10,532
Government-sponsored enterprises (1)
—
 28
 —
 28
33
 —
 33
Total guaranteed/secured liquidity investments—
 2,378
 —
 2,378
10,565
 —
 10,565
Total liquidity investments$—
 $4,938
 $1,365
 $6,303
$15,470
 $6,640
 $22,110
(1)Consists of securities that are issued and effectively guaranteed by Fannie Mae and/or Freddie Mac, which have the support of the U.S. government, although they are not obligations of the U.S. government.

At December 31, 2014 and 2013, as well as many business days between these two dates,During 2016, we purchased a portion of our total liquidity investments from counterparties for which the investments are secured with collateral (secured resale agreements). We believe these investments present little or no credit risk exposure to us.


59
Table of Contents

The following table presents credit ratings of our unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
(In millions) December 31, 2014 December 31, 2016
 
Counterparty Rating (1)
   
Counterparty Rating (1)
  
Domicile of Counterparty 
Sovereign Rating (1)
 AA A Total AA A Total
Domestic AA+ $550
 $200
 $750
 $680
 $925
 $1,605
U.S. branches and agency offices of foreign commercial banks:            
Canada AAA 400
 2,000
 2,400
 700
 905
 1,605
Australia 800
 —
 800
Netherlands —
 647
 647
France —
 500
 500
Sweden 300
 —
 300
Finland AAA 1,400
 —
 1,400
 100
 —
 100
Netherlands AAA —
 900
 900
United Kingdom AA+ —
 900
 900
Germany AAA —
 900
 900
Australia AAA 700
 —
 700
Total U.S. branches and agency offices of foreign commercial banks 
 2,500
 4,700
 7,200
 1,900
 2,052
 3,952
Total unsecured investment credit exposure 
 $3,050
 $4,900
 $7,950
 $2,580
 $2,977
 $5,557
(1)Represents the lowest long-term credit rating provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services.

The following table presents the remaining contractual maturity of our unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.
(In millions) December 31, 2014 December 31, 2016
Domicile of Counterparty Overnight Due 2 days through 30 days Due 31 days through 90 days Due 91 days through 180 days Total Overnight Due 2 days through 30 days Due 31 days through 90 days Total
Domestic $—
 $—
 $750
 $—
 $750
 $1,305
 $—
 $300
 $1,605
U.S. branches and agency offices of foreign commercial banks:                  
Canada 1,800
 600
 —
 —
 2,400
 1,305
 100
 200
 1,605
Australia 500
 —
 300
 800
Netherlands 647
 —
 —
 647
France 500
 —
 —
 500
Sweden —
 —
 300
 300
Finland 1,400
 —
 —
 —
 1,400
 —
 100
 —
 100
Netherlands 900
 —
 —
 —
 900
United Kingdom 900
 —
 —
 —
 900
Germany 900
 —
 —
 —
 900
Australia 700
 —
 —
 —
 700
Total U.S. branches and agency offices of foreign commercial banks 6,600
 600
 —
 —
 7,200
 2,952
 200
 800
 3,952
Total unsecured investment credit exposure $6,600
 $600
 $750
 $—
 $7,950
 $4,257
 $200
 $1,100
 $5,557

At December 31, 20142016, all of the $8.05.6 billion of unsecured liquidityinvestment exposure was to counterparties with holding companies domiciled in countries receiving either AAA or AA long-term sovereign ratings. Furthermore, we restrict a significant portion of unsecured lending to overnight maturities, which further limits risk exposure to these counterparties. By Finance Agency regulation, all counterparties exposed to non-U.S. countries are required to be domestic U.S. branches of foreign counterparties. We also limit exposure to counterparties and countries that could have significant direct or indirect exposure to European sovereign debt.

60
Table of Contents


Mortgage-Backed Securities.Securities:
 
GSE Mortgage-Backed Securities
Over 85 percentAt December 31, 2016, $11.3 billion of our mortgage-backed securities are single-familyheld were GSE securities issued by Fannie Mae and Freddie Mac, which provide credit safeguards by guaranteeing either timely or ultimate payments of principal and interest. We believe that the conservatorships of Fannie Mae and Freddie Mac lower the chance that they would not be able to fulfill their credit guarantees and that the securities issued by these two GSEs are effectively government guaranteed. In addition, based on the data available to us and our purchase practices, we believe that most of the mortgage loans backing our GSE mortgage-backed securities are of high quality with acceptable credit performance.

Mortgage-Backed Securities Issued by Other Government Agencies
We also invest in mortgage-backed securities issued and guaranteed by Ginnie Mae and the NCUA. These investments totaled $2.0$3.2 billion at December 31, 20142016. The majority of the Ginnie Mae securities are fixed rate. The NCUA securities have floating rate coupons tied to one-month LIBOR with interest rate caps ranging from seven to eight percent. We believe that the strength of the issuers' guarantees and backing by the full faith and credit of the U.S. government is sufficient to protect us against credit losses on these securities.

Private-Label Mortgage-Backed Securities
We held no private-label mortgage-backed securities at December 31, 2014.

Derivatives
Credit Risk Exposure.Exposure: We mitigate most of the credit risk exposure resulting from interest rate swapderivative transactions through collateralization. The table below presents the derivative positions to which we had credit risk exposure at December 31, 20142016.
(In millions)                
Credit Rating (1)
 Total Notional Net Derivatives Fair Value Before Collateral Cash Collateral Pledged To (From) Counterparty Net Credit Exposure to Counterparties Total Notional Net Derivatives Fair Value Before Collateral Cash Collateral Pledged To (From) Counterparty 
Net Credit Exposure to Counterparties (2)
Non-member counterparties:        
Asset positions with credit exposure:        
Bilateral derivatives:        
Non-member counterparties        
Asset positions with credit exposure        
Uncleared derivatives:        
AA $170
 $—
 $—
 $—
 $10
 $—
 $—
 $—
A 19
 —
 —
 —
 2,664
 10
 (8) 2
Liability positions with credit exposure:        
Total uncleared derivatives 2,674
 10
 (8) 2
Cleared derivatives (2)(3)
 3,607
 (2) 13
 11
 4,470
 35
 5
 40
Liability positions with credit exposure        
Uncleared derivatives:        
Aa/AA 2,608
 (9) 9
 —
Total uncleared derivatives 2,608
 (9) 9
 —
Cleared derivatives (3)
 6,353
 (67) 130
 63
Total derivative positions with credit exposure to non-member counterparties 3,796
 (2) 13
 11
 16,105
 (31) 136
 105
Member institutions (3)
 450
 4
 —
 4
Member institutions (4)
 49
 —
 —
 —
Total $4,246
 $2
 $13
 $15
 $16,154
 $(31) $136
 $105

(1)Each category includes the related plus (+) and minus (-) ratings (i.e., “A” includes “A+” and “A-” ratings).
(2)Represents derivative transactions cleared with clearinghouses, which are not rated.Amounts shown as $0 have net credit exposure of less than $1 million.
(3)Represents derivative transactions cleared with LCH.Clearnet LLC and CME Clearing, the FHLB's clearinghouses, which are not rated. LCH.Clearnet LLC's parent, LCH.Clearnet Group Ltd, is rated A+ by Standard & Poor's and CME Clearing's parent, CME Group Inc. is rated Aa3 by Moody's and AA- by Standard & Poor's.
(4)Represents Mandatory Delivery Contracts.


61
Table of Contents

Based on both the gross and net exposures, we had a minimal amount of residual credit risk exposure on bilateraluncleared derivatives throughout 2014.at December 31, 2016. Gross exposure would likely increase if interest rates rise and could increase if the composition of our derivatives change. However, contractual collateral provisions in these derivatives would limit net exposure to acceptable levels.

The following table presents counterparties that provided 10 percent or more of the total notional amount of bilateral interest rate swap derivatives outstanding.
(In millions)              
December 31, 2014       December 31, 2013      
Counterparty 
Credit Rating
Category
 
Notional
Principal
 
Net Unsecured
Exposure
 Counterparty 
Credit Rating
Category
 
Notional
Principal
 
Net Unsecured
Exposure
Wells Fargo Bank, N.A. AA $1,104
 $—
 Morgan Stanley Capital Services BBB $3,421
 $—
Deutsche Bank AG A 1,049
 —
 Deutsche Bank AG A 1,458
 —
HSBC Bank USA, N.A. A 1,000
 —
 Royal Bank of Scotland PLC A 1,142
 —

Although we cannot predict if we will realize credit risk losses from any of our derivatives counterparties, we believe that all of them will be able to continue making timely interest payments and, more generally, to continue to satisfy the terms and conditions of their derivative contracts with us. As of December 31, 20142016, we had $0.5$0.1 billion of notional principal of interest rate swaps outstanding to one member, JPMorgan Chase Bank, N.A. (JPMorgan), which also had outstanding credit services with us. Due to the amount of market value collateralization, we had no outstanding credit exposure to this counterparty related to interest rate swaps outstanding.

Lehman Brothers Derivatives.
Liquidity Risk

Liquidity Overview
The FHLBank System's primary source of funds is the sale of Consolidated Obligations in the capital markets. Our ability to obtain funds through the sale of Consolidated Obligations at acceptable interest costs depends on the financial market's perceived riskiness of the Obligations and on prevailing conditions in the capital markets, particularly the short-term capital markets. The System's favorable debt ratings, the implicit U.S. government backing of our debt, and our effective risk management practices are instrumental in ensuring satisfactory access to the capital markets.

We believe our liquidity position, as well as that of the System, remained strong during 2016. Our overall ability to effectively fund our operations through debt issuances remained sufficient. Investor demand for System debt remains robust and increased in 2016. Although we can make no assurances, we expect this to continue to be the case. We believe the possibility of a liquidity or funding crisis in the System that would impair our ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote. See Note 20the "Consolidated Obligations" section of "Analysis of Financial Condition" for further information on our funding actions throughout 2016 aimed at lowering exposure to unforeseen liquidity risks.

The System works collectively to manage and monitor the system-wide liquidity, funding, and refinancing risks. The System has a large reliance on short-term funding; therefore, it has a sharp focus on managing liquidity risk to very low levels. As shown on the Statements of Cash Flows, in 2016, our portion of the System's debt issuances totaled $325.5 billion for Discount Notes and $50.9 billion for Bonds. See the Notes to Financial Statements for more detailed information on derivatives we had with Lehman Brothers atregarding contractual maturities of certain financial assets and liabilities which are instrumental in determining the timeamount of their bankruptcy in September 2008.liquidity risk.

ExposureA primary way that we manage liquidity risk is to meet operational and contingency liquidity requirements. We satisfied the operational liquidity requirement by both meeting a contingency liquidity requirement, discussed below, and because we were able to adequately access the capital markets to issue debt. Liquidity investments, most of which were overnight, were generally in the range of $5 billion to $15 billion during 2016. In addition, Finance Agency guidance requires us to target at least 5 to 15 consecutive days of a positive amount of liquidity based on specific assumptions under two scenarios. We target holding at least three extra days of positive liquidity under each scenario, although as market conditions warrant we may hold, and often do hold, additional amounts.

Contingency Liquidity Requirement
Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. We continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.
(In millions)December 31, 2016 December 31, 2015
Contingency Liquidity Requirement   
Total Contingency Liquidity Reserves (1)
$32,127
 $41,932
Total Requirement (2)
(24,224) (28,420)
Excess Contingency Liquidity Available$7,903
 $13,512

(1)Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities.

(2)Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances.


Deposit Reserve Requirement
To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.
(In millions)December 31, 2016 December 31, 2015
Deposit Reserve Requirement   
Total Eligible Deposit Reserves$72,114
 $82,036
Total Member Deposits(765) (804)
Excess Deposit Reserves$71,349
 $81,232

Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2016. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations on a timely basis.
(In millions)< 1 year 1 < 3 years 3 < 5 years > 5 years Total
Contractual Obligations         
Long-term debt (Bonds) - par (1)
$20,971
 $17,170
 $8,536
 $6,496
 $53,173
Operating leases (include premises and equipment)1
 2
 2
 4
 9
Mandatorily redeemable capital stock25
 2
 7
 1
 35
Commitments to fund mortgage loans441
 —
 —
 —
 441
Pension and other postretirement benefit obligations2
 5
 4
 28
 39
Total Contractual Obligations$21,440
 $17,179
 $8,549
 $6,529
 $53,697

(1)Does not include Discount Notes and contractual interest payments related to Bonds. Total is based on contractual maturities; the actual timing of payments could be affected by factors affecting redemptions.

Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet items at December 31, 2016. For more information, see Note 20 of the Notes to Financial Statements.
(In millions)< 1 year 1 < 3 years 3 < 5 years > 5 years Total
Off-balance sheet items (1)
         
Standby Letters of Credit$17,029
 $366
 $66
 $47
 $17,508
Standby bond purchase agreements29
 68
 9
 —
 106
Consolidated Obligations traded, not yet settled6
 —
 —
 —
 6
Total off-balance sheet items$17,064
 $434
 $75
 $47
 $17,620
(1)Represents notional amount of off-balance sheet obligations.

Member Concentration Risk

We regularly assess concentration risks from business activity. The increase over the last two years in Advance borrowings from one member, JPMorgan, raised borrower concentration ratios. We believe that the current concentration of Advance activity is consistent with our risk management philosophy, and the impact of borrower concentration on market risk, credit risk, and operational risk, after considering mitigating controls, is small.

Our business is designed to support significant changes in asset levels without having to undergo material changes in staffing, operations, risk practices, or general resource needs. A key reason for this scalability is that the Capital Plan provides for additional capital when Mission Assets grow and the opportunity for us to retire capital when Mission Assets decline, thereby acting, along with our efficient operating expenses, to preserve competitive profitability.
 
We believe the effect on credit risk exposure from borrower concentration is minimal because of our application of normal credit risk mitigations, the most important of which is over-collateralization of borrowings. In the remote possibility of failure of a member to whom we lent a large amount of Advances, combined with the Federal Deposit Insurance Corporation's decision not to repay Advances, we would implement our member failure plan. Our member failure plan, which we test periodically, would liquidate collateral to recover losses from losing principal and interest on the Advance balances.

Advance concentration has a minorminimal effect on market risk exposure because Advances are largely match funded. Finally, the increasefunded by Consolidated Obligations and interest rate swaps that have similar interest rate characteristics. Furthermore, additional increases in Advance concentration haswould not affectedmaterially affect capital adequacy because Advance growth from the member is supported by new purchases of capital stock as required by the Capital Plan.


62
Table of Contents

Capital Adequacy

Retained Earnings
We must hold sufficient capital to protect against exposure to various risks and we regularly conduct a variety of measurements and assessments for capital adequacy. The $689 million of retained earnings at December 31, 2014 substantially exceeded our policy minimum of $450 million. Given the regulatory environment, we carry a greater amount of retained earnings than required by the policy. We will continue to bolster capital adequacy over time by allocating a portion of earnings to a separate restricted retained earnings account in accordance with the FHLBank System's Capital Agreement. We believe that the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment and to provide the opportunity to stabilize dividends.

Risk-Based Capital
The following table shows the amount of risk-based capital required based on Finance Agency prescribed measurements, the amount of permanent capital, and the amount of excess permanent capital.
(Dollars in millions)December 31, 2014 Monthly Average 2014 December 31, 2013
Market risk-based capital$125
 $165
 $199
Credit risk-based capital246
 241
 222
Operational risk-based capital111
 122
 126
Total risk-based capital requirement482
 528
 547
Total permanent capital5,019
 5,069
 5,435
Excess permanent capital$4,537
 $4,541
 $4,888
Risk-based capital as a percent of permanent capital10% 10% 10%

The risk-based capital requirement has historically not been a constraint on operations and we do not use it to actively manage any of our risks. It has normally ranged from 10 to 20 percent, which is significantly less than the amount of permanent capital. This measure has been at the low end of the range for several years, primarily due to the low level of interest rates during this period limiting estimated exposure to extreme lower rate scenarios.

Dodd-Frank Stress Test
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, all FHLBanks are required to perform an annual stress test for capital adequacy. Our first test was completed and published in July 2014, based on our financial condition as of September 30, 2013 and the methodology prescribed by the Finance Agency. Capital adequacy was sufficient under all established scenarios to fully absorb losses under both adverse and severely adverse economic conditions.


63
Table of Contents

Market Capitalization Ratios
We measure two sets of market capitalization ratios. One measures the market value of capital (i.e., stockholder equity) relative to the par value of regulatory capital stock (capital stock and mandatorily redeemable capital stock). The other measures the market value of capital relative to the book value of total capital, which includes retained earnings, and mandatorily redeemable capital stock. The measures provide a point-in-time indication of the FHLBank's liquidation or franchise value and also serve as a measure of realized or potential market risk exposure.

The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for the interest rate environments for which we have policy limits. A base case value below par could indicate that, in the event of an immediate liquidation scenario, capital stock may be impaired and returned at some value less than par.
 December 31, 2014 Monthly Average Year Ended December 31, 2014 December 31, 2013
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario114% 112% 105%
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock (1)
114
 114
 108
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock (2)
108
 106
 100
(1)Represents a down shock of 100 basis points.
(2)Represents an up shock of 200 basis points.

In 2014, the market capitalization ratios in the scenarios presented continued to be above the minimum policy limits. The ratios increased in 2014 due to the combined effect of several factors, which included the repurchase of excess stock, modest declines in long-term market rates and modestly higher market prices on mortgage assets relative to funding. The ratios remained at favorable levels because retained earnings were 16 percent of regulatory capital stock at December 31, 2014 and we maintained market risk exposure at moderate levels.

The following table presents the market value of equity to the book value of total capital and mandatorily redeemable capital stock for the same interest rate environments. A base case value below par could indicate that interest rate risk has been or could be incurred in the future or that, in the event of an immediate liquidation scenario, a portion of retained earnings would need to be utilized in order to return regulatory capital stock at par. The base case ratio of 98 percent at December 31, 2014 indicates that approximately $90 million of retained earnings would be required in order to return regulatory capital stock at par.
 December 31, 2014 Monthly Average Year Ended December 31, 2014 December 31, 2013
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario (1)
98% 97% 93%
Market Value of Equity to Book Value of Capital - Down Shock (1)(2)
99
 99
 96
Market Value of Equity to Book Value of Capital - Up Shock (1)(3)
94
 92
 89
(1)Capital includes total capital and mandatorily redeemable capital stock.
(2)Represents a down shock of 100 basis points.
(3)Represents an up shock of 200 basis points.

Liquidity Risk

Liquidity Overview
As shown on the Statements of Cash Flows, in 2014, our portion of the System's debt issuances totaled $270.4 billion for Discount Notes and $41.5 billion for Bonds. The System's favorable debt ratings, the implicit U.S. government backing of our debt, and our effective risk management have been instrumental in ensuring satisfactory access to the capital markets.

Our liquidity position remained strong during 2014 and our overall ability to fund our operations through debt issuances at acceptable interest costs remained sufficient. Although we can make no assurances, we expect this to continue to be the case,

64
Table of Contents

and we believe the possibility of a liquidity or funding crisis in the FHLBank System that would impair the FHLBank's ability to participate, on a cost-effective basis, in issuances of new debt, service outstanding debt, maintain adequate capitalization, or pay competitive dividends is remote.

We must meet both operational and contingency liquidity requirements. We satisfied the operational liquidity requirement by both meeting a contingency liquidity requirement, discussed below, and because we were able to adequately access the capital markets to issue debt. The amount of overnight liquidity was generally in the range of $5 billion to $15 billion during 2014. In addition, Finance Agency guidance requires us to target at least 5 to 15 consecutive days of positive liquidity based on specific assumptions under two scenarios. We target holding at least three extra days of positive liquidity under each scenario, although as market conditions warrant we may hold additional amounts.

Contingency Liquidity Requirement
Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. We continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.
(In millions)December 31, 2014 December 31, 2013
Contingency Liquidity Requirement   
Total Contingency Liquidity Reserves (1)
$30,594
 $30,699
Total Requirement (2)
(12,155) (11,752)
Excess Contingency Liquidity Available$18,439
 $18,947

(1)Includes, among others, cash, overnight Federal funds, overnight deposits, self-liquidating term Federal funds, 95 percent of the market value of available-for-sale negotiable securities, and 75 percent of the market value of certain held-to-maturity obligations, including obligations of the United States, U.S. government agency obligations and mortgage-backed securities.

(2)Includes net liabilities maturing in the next seven business days, assets traded not yet settled, Advance commitments outstanding, Advances maturing in the next seven business days, and a three percent hypothetical increase in Advances.

Deposit Reserve Requirement
To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.
(In millions)December 31, 2014 December 31, 2013
Deposit Reserve Requirement   
Total Eligible Deposit Reserves$77,920
 $73,531
Total Member Deposits(730) (898)
Excess Deposit Reserves$77,190
 $72,633


65
Table of Contents

Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2014. The allocations according to the expiration terms and payment due dates of these obligations were not materially different from those at the end of 2013. Changes reflected normal business variations. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations timely.
(In millions)< 1 year 1<3 years 3<5 years > 5 years Total
Contractual Obligations         
Long-term debt (Bonds) - par (1)
$32,501
 $11,514
 $6,892
 $8,217
 $59,124
Operating leases (include premises and equipment)1
 2
 1
 6
 10
Mandatorily redeemable capital stock61
 —
 2
 —
 63
Commitments to fund mortgage loans451
 —
 —
 —
 451
Pension and other postretirement benefit obligations3
 5
 5
 26
 39
Total Contractual Obligations$33,017
 $11,521
 $6,900
 $8,249
 $59,687

(1)Does not include Discount Notes and contractual interest payments related to Bonds. Total is based on contractual maturities; the actual timing of payments could be affected by factors affecting redemptions.

Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet items at December 31, 2014. The allocations according to the expiration terms and payment due dates of these items were not materially different from those at the end of 2013, and changes reflected normal business variations.
(In millions)< 1 year 1<3 years 3<5 years > 5 years Total
Off-balance sheet items (1)
         
Standby Letters of Credit$17,233
 $479
 $14
 $54
 $17,780
Standby bond purchase agreements37
 150
 —
 —
 187
Consolidated Obligations traded, not yet settled5
 —
 17
 —
 22
Total off-balance sheet items$17,275
 $629
 $31
 $54
 $17,989
(1)Represents notional amount of off-balance sheet obligations.

Operational RiskRisks

Operational risk is defined as the risk of an unexpected loss resulting from human error, fraud, inability to enforce legal contracts, or deficiencies in internal controls or information systems. We mitigate operational riskrisks through adherence to internal policies, conformance with entity level controls, department procedures and controls, usethrough an emphasis on the importance of tested information systems, disaster recovery provisions for those systems, acquisition of insurance coverage to help protect us from financial exposure relating to errors or fraud by our personnel, and comprehensive policies and procedures related to Human Resources.risk management, as further discussed below. In addition, the Internal Audit Department, which reports directly to the Audit Committee of the Board of Directors, regularly monitors and tests compliance with our policies, procedures, applicable regulatory requirements and best practices.

Internal Department Procedures and Controls
Each of our departments maintains and regularly reviews and enhances, as needed, a system of internal procedures and controls, including those that address proper segregation of duties. Each system is designed to prevent any one individual from processing the entirety of a transaction that affects member accounts, correspondent FHLBankFHLB accounts or third-party servicers providing support to us. We review daily and periodic transaction activity reports in a timely manner to detect erroneous or fraudulent activity. Procedures and controls also are assessed on an enterprise-wide basis, independently from the business unit departments. We also are in compliance with Sarbanes-Oxley Sections 302 and 404, which focus on the control environment over financial reporting.

Information Systems
We rely heavily upon internal and third-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 our computer systems and networks. Our computer systems, software and networks may be subjected to “cyberattacks” (e.g., breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) that could jeopardize the confidentiality or integrity of such information, or otherwise cause interruptions or malfunctions in our operations.

66
Table of Contents

We mitigate the risk associated with cyberattacks through the implementation of multiple layers of security controls. Administrative, physical, and logical controls are in place for establishing, administering and actively monitoring system access, sensitive data, and system change. Additionally, separate groups within our organization and/or third parties validate the strength of our security and confirm that established policies and procedures are adequately followed.
Disaster Recovery Provisions
We have a Business Resumption Contingency Plan that provides us with the ability to maintain operations in various scenarios of business disruption. A committee of staff reviewsWe review and updatesupdate this plan periodically to ensure that it serves our changing operational needs and those of our members. We have an off-site facility in a suburb of Cincinnati, Ohio, which is tested at least annually. We also have a back-up agreement in place with theanother FHLBank of Indianapolis in the event that both of our Cincinnati-based facilities are inoperable.

Insurance Coverage
We have insurance coverage for cyber risks, employee fraud, forgery and wrongdoing, as well asand Directors' and Officers' liabilityliability. This coverage thatprimarily provides protection for claims alleging breach of duty, misappropriation of funds, neglect, acts of omission, employment practices, and fiduciary liability. We also have property, casualty, computer equipment, automobile, and various types of other coverage as well.

Human Resources Policies and Procedures
The risks associated with our Human Resources function are categorized as either Employment Practices Risk or Human Capital Risk. Employment Practices Risk is the potential failure to properly administer our policies regarding employment practices and compensation and benefit programs for eligible staff and retirees, and the potential failure to observe and properly comply with federal, state and municipal laws and regulations. Human Capital Risk is the potential inability to attract and retain appropriate levels of qualified human resources to maintain efficient operations.

Comprehensive policies and procedures are in place to limit Employment Practices Risk. These are supported by an established internal control system that is routinely monitored and audited. With respect to Human Capital Risk, we strive to maintain a

competitive salary and benefit structure, which is regularly reviewed and updated as appropriate to attract and retain qualified staff. In addition, we have a management succession plan that is reviewed and approved by our Board of Directors.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Introduction

The preparation of financial statements in accordance with GAAP requires management to make a number of significant judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities (if applicable), and the reported amounts of income and expenses during the reported periods. Although management believes its judgments, estimates, and assumptions are reasonable, actual results may differ and other parties could arrive at different conclusions.

We have identified the following critical accounting policies that require management to make subjective or complex judgments about inherently uncertain matters. Our financial condition and results of operations could be materially affected under different conditions or different assumptions related to these accounting policies.

Accounting for Derivatives and Hedging Activity

In accordance with Finance Agency regulations, we execute all derivatives to manage market risk exposure, not for speculation or solely for earnings enhancement. As in past years, in 2014 all outstanding derivatives hedged specific assets, liabilities, or Mandatory Delivery Contracts. We record derivative instruments at their fair values on the Statements of Condition, and we record changes in these fair values in current period earnings. We strive to ensure that our use of derivatives maximizes the probability that they are highly effective in offsetting changes in the market values of the designated balance sheet instruments.

Fair Value Hedges
As indicated in the "Use of Derivatives in Market Risk Management" section of "Quantitative and Qualitative Disclosures About Risk Management," we designate a portion of our derivatives as fair value hedges. Fair value hedge accounting permits the changes in fair values of the hedged risk in the hedged instruments to be recorded in the current period, thus offsetting, partially or fully, the change in fair value of the derivatives. For derivatives accounted as fair value hedges, the hedged risk is

67
Table of Contents

designated to be changes in LIBOR benchmark interest rates. The result is that there has been a relatively small amount of unrealized earnings volatility from hedging market risk with derivatives.

In order to determine if a derivative qualifies for fair value hedge accounting, we must assess how effective the derivative has been, and is expected to be, in hedging changes in the fair values of the risk being hedged. Each month we perform effectiveness testing using a consistently applied standard statistical methodology, regression analysis, that measures the degree of correlation and relationship between the fair values of the derivative and hedged instrument. The results of the statistical measures must pass predefined threshold values to enable us to conclude that the fair values of the derivative transaction have a close correlation with the fair values of the hedged instrument. If any measure is outside of its respective tolerance, the hedge would no longer qualify for fair value hedge accounting. This means we must then record the fair value change of the derivative in current earnings without any offset in the fair value change of the related hedged instrument. Due to the intentional matching of terms between the derivative and the hedged instrument, we expect that failing an effectiveness test will be infrequent, which has been the case historically.

If a derivative/hedged instrument transaction fails effectiveness testing, it does not mean that the hedge relationship is no longer successful in achieving its intended economic purpose. For example, a Consolidated Obligation hedged with an interest rate swap creates adjustable-rate LIBOR funding, which is used to match fund adjustable-rate LIBOR and other short-term Advances. The hedge achieves the desired result (matching the net funding with the asset) because, economically, the Advance is part of the overall hedging strategy and the reason for engaging in the derivative transaction.

Fair value differences that have actually occurred have historically resulted in a relatively small amount of earnings volatility. Each month, we compute fair values on all derivatives and related hedged instruments across a range of interest rate scenarios. As of year-end 2014,2016, for derivatives receiving long-haul fair value hedge accounting, the total net difference between the fair values of the derivatives and related hedged instruments under an assumption of stressed interest rate environments was in a range of zeropositive $1 million to negative $2$4 million. This range is minimal compared to the notional principal amount.


Fair Value Option--Economic Hedge
We account for a portion of Advance and Bond-related derivatives using an accounting election called "fair value option," which is included in the economic hedge category. An economic hedge under the fair value option does not require passing effectiveness testing to permit the derivatives' fair market value to be offset with the market value of the hedged instrument, as is required under a fair value hedge. However, it records the fair market value of the hedged instrument at its full fair value instead of only the value of hedging the benchmark interest rate (LIBOR).

The effect of electing full fair value is that the hedged instruments' market value includes the impact of changes in spreads between LIBOR and the interest rate index related to the hedged instrument. This spread includes amay include other risk components, such as credit risk component.or liquidity. Therefore, full fair value results in a different kind of unrealized earnings volatility, (whichwhich could be higher or lower, compared to accounting under fair value hedge treatment.

Accounting for Premiums and Discounts on Mortgage Loans and Mortgage-Backed Securities

The accounting for amortization/accretion of premiums/discounts can result in earnings volatility, most of which relates to our MPP, mortgage-backed securities, and Consolidated Obligations. Normally, earnings volatility associated with amortization/accretion of premiums/discounts for Obligations is less pronounced than that for mortgage assets.

When we purchase or invest in mortgages, we normally pay an amount that differs from the principal balance. A premium price is paid if the purchase price exceeds the principal amount. A discount price is paid if the purchase price is less than the principal amount. Premiums/discounts are required to be deferred and amortized/accreted to net interest income in a manner such that the yield recognized each month on the underlying asset is constant over the asset's historical life and estimated future life. This is called the constant effective (level) yield method.

We typically pay more than the principal balance when the interest rate on a purchased mortgage is greater than the prevailing market rate for similar mortgages. The net purchase premium is amortized as a reduction in the mortgage's book yield. Similarly,A discount price is paid if the purchase price is less than the principal amount. If we pay less than the principal balance, the net discount is accreted in the same manner as the premium, resulting in an increase in the mortgage's book yield.

We have historically purchased most MPP loans at premium prices. Mortgage-backed securities outstanding at the end of 20142016 were purchased at net discountpremium prices close to par. At the end of 2014,2016, the MPP had a net premium balance of $194$224 million and

68
Table of Contents

mortgage-backed securities had a net discountpremium balance of $27$29 million, resulting in a total mortgage net premium balance of $167$253 million.

When mortgagePremiums/discounts are required to be deferred and amortized/accreted to net interest income in a manner such that a constant yield is recognized each month on the underlying asset by using either the contractual interest method (contractual method) or the retrospective interest method (retrospective method).

Contractual Method
For MPP loans, we use the contractual method, which recognizes the income effects of premiums and discounts over the contractual life of the loan based on the actual behavior of the underlying loans, including adjustments for actual prepayment activities. The contractual method does not consider changes in estimated prepayments based on assumptions about future borrower behavior.

Retrospective Method
For mortgage-backed securities, we apply the retrospective method. The retrospective method requires that we estimate principal cash flows are volatile, there can be substantial fluctuation inover the accounting recognitionestimated life of premiumsthe securities and discounts. We updatemake a retrospective adjustment of the constant effective yield method monthly using actual historical and projected principal cash flows. Projectedeach time the estimated life changes as if the new estimate had been known since the original acquisition date of the asset. Projecting principal cash flows requires us to estimate mortgage prepayment speeds, which are driven primarily by changes in interest rates. Projected prepayment speeds are derived using a market-tested third-party prepayment model. We regularly test the reasonableness and accuracy of the prepayment model by comparing its projections to actual prepayment results experienced over time and to dealer prepayment indications.

When interest rates decline, actual and projected prepayment speeds are likely to increase. This accelerates the amortization/accretion, resulting in a reduction in the mortgages' book yields on mortgage-backed securities with premium balances and an increase in book yields on mortgage-backed securities with discount balances. The opposite effect tends to occur when interest rates rise. The immediate adjustment and the schedules for future amortization/accretion are based on applying the new constant effective yield as if it had been in effect since the purchase of the assets. See Note 1 of the Notes to Financial Statements for additional information.

Our mortgages under the MPP are stratified for amortization purposes into multiple portfolios according to common characteristics such as coupon interest rate, state of origination, final original maturity (mostly 15, 20, and 30 years), loan age, and type of mortgage (i.e., conventional and FHA). We compute amortization/accretion for each mortgage-backed security separately. Projected prepayment speeds are derived using a market-tested third-party prepayment model. We regularly test the reasonableness and accuracy of the prepayment model by comparing its projections to actual prepayment results experienced over time and to dealer prepayment indications.

It is difficult to calculate how much amortization/accretion is likely to change over time because prepayment projections are inherently subject to uncertainty. Exact trends depend on the relationship between market interest rates and coupon rates on

outstanding mortgage assets, the historical evolution of mortgage interest rates, the age of the mortgage loans, demographic and population trends, and other market factors. Changes in amortization/accretion also depend on 1) the accuracy of prepayment projections compared to actual realized prepayments and 2) term structure models used to simulate possible future evolution of various interest rates. The term structure models depend heavily on theories and assumptions related to future interest rates and interest rate volatility. We strive to maintain consistency in our use of prepayment and term structure models, although we do enhance these models based on developments in theories, technologies, best practices, and market conditions.

We regularly perform analyses that test the sensitivity of premium/discount recognition for mortgage assets to changes in prepayment speeds. The following table shows, as of year-end 2014, the estimated adjustments to the immediate recognition of premium amortization/discount accretion for various interest rate shocks (with interest rates not permitted to fall below zero percent). Although some of the changes shown below would result in a substantial change in ROE in the quarter in which the rate change occurred, it currently would not materially threaten our profitability.
(In millions) -200 -100 -50 Base +50 +100 +200
  $(48) $(23) $(12) $(3) $2
 $6
 $10

Provision for Credit Losses

We evaluate Advances and the MPP to assure an adequate reserve is maintained to absorb probable losses inherent in these portfolios.

Advances
We evaluate probable credit losses inherent in Advances due to borrower default or delayed receipt of interest and principal, taking into consideration the amount recoverable from the collateral pledged by members to secure Advances. This analysis is performed for each member separately on at least a quarterly basis. We believe we have adequate policies and procedures in place to effectively manage credit risk exposure on Advances. These include monitoring the creditworthiness and financial condition of the institutions to which we lend funds, determining the quality and value of collateral pledged, estimating borrowing capacity based on collateral value and type for each member, and evaluating historical loss experience. At December 31, 2014,2016, we had rights to collateral (either loans or securities), on a member-by-member basis, with an estimated fair value that exceeds the amount of outstanding Advances. At the end of 2014,2016, the aggregate estimated value of this collateral was $253.0$318.5 billion. Although some of this overcollateralization may reflect a desire to maintain excess borrowing capacity, all of a member's pledged collateral would be available as necessary to cover any of that member's credit obligations to the FHLBank.FHLB.

Based on the nature and quality of the collateral held as security for Advances, including overcollateralization, our credit analyses of members and collateral, and members' prior repayment history (i.e., we have never recorded a loss from an

69
Table of Contents

Advance), we believe that no allowance for losses was necessary at December 31, 2014.2016. See Notes 1 and 10 of the Notes to Financial Statements for additional information.

Mortgage Loans Acquired Under the MPP
We analyze loans in the MPP on at least a quarterly basis by 1) estimating the incurred credit losses inherent in the portfolio and comparing these to credit enhancements, including the recoverability of insurance, and 2) establishing reserves based on the results. We apply a consistent methodology to determine our estimates.

We acquire both FHA and conventional fixed-rate mortgage loans under the MPP. Because FHA mortgage loans are U.S. government insured, we have determined that they do not require a loan loss allowance. We are protected against credit losses on conventional mortgage loans from several sources, in order of priority:

▪having the related real estate as collateral, which effectively includes the borrower's equity; and
▪by credit enhancements including 1) primary mortgage insurance, if applicable, 2) the member's available funds remaining in the Lender Risk Account, and 3) if applicable, Supplemental Mortgage Insurance coverage up to the policy limit, applied on a loan-by-loan basis.

We assume any credit exposure if losses exceed the related real estate residual value and credit enhancements.
The key estimates and assumptions that affect our allowance for credit losses generally include:
▪the characteristics of specific conventional loans outstanding under the MPP;
▪evaluations of the overall delinquent loan portfolio through the use of migration analysis;
▪loss severity estimates;
▪historical claims and default experience;
▪expected proceeds from credit enhancements;
▪evaluation of exposure to Supplemental Mortgage Insurance providers and their ability to pay claims;

▪comparisons to industry reported data; and
▪current economic trends and conditions.
These estimates require significant judgments, especially considering the current national housing market, the inability to readily determine the fair value of all underlying properties, the application of pool level credit enhancements, and the uncertainty in other macroeconomic factors that make estimating defaults and severity imprecise.

Based on our analysis, as of December 31, 2014,2016, we determined that an allowance for credit losses of $5$1 million was required for our conventional mortgage loans in the MPP. Further substantialSubstantial reductions in home prices or other economic variables that affect mortgage defaults could increase credit losses experienced in the portfolio.

Other-Than-Temporary Impairment Analysis for Investment Securities

We closely monitor the performance of our investment securities to evaluate our exposure to the risk of loss of principal or interest on these investments and to determine on a quarterly basis whether this risk of loss represents an other-than-temporary impairment.

An investment security is deemed impaired if the fair value of the security is less than its amortized cost. To determine whether an impairment is other-than-temporary, we assess whether the amortized cost basis of the security will be recovered by considering numerous factors, as described in Notes 1 and 7 of the Notes to Financial Statements. We must recognize impairment losses if we intend to sell the security or if available evidence indicates it is more likely than not we will be required to sell the security before the recovery of its amortized cost basis. We also must recognize impairment losses when any credit losses are expected for the security. This includes consideration of market conditions and projections of future results, which requires significant judgments, estimates and assumptions, especially considering the uncertainty in the national housing market and other macroeconomic factors that make estimating future results imprecise.


70
Table of Contents

If we were to determine that an other-than-temporary impairment existed, the security would initially be written down to current market value, with the loss recognized in non-interest income if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost basis. If we do not intend to sell the security and it is not more likely than not we will be required to sell the security before recovery, the security would be written down to current market value with a separate display of losses related to credit deterioration and losses related to all other factors on the income statement. Any non-credit loss related amounts would then be reclassified and recorded in other comprehensive income, resulting in only net credit-related losses recorded on the income statement. As of December 31, 20142016 we did not consider any of our investment securities to be other-than-temporarily impaired.

Fair Values

We carry certain assets and liabilities on the Statement of Conditions at estimated fair value, including all derivatives, investments classified as available-for-sale and trading, and any financial instruments where we elected the fair value option. Fair value is defined as the price - the “exit price” - that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Because our financial instruments generally do not have available quoted market prices, we determine fair values based on 1) our valuation models or 2) dealer indications, which may be based on the dealers' own valuation models and/or prices of similar instruments.

Valuation models and their underlying assumptions are based on the best estimates of management with respect to discount rates, prepayments, market volatility, and other factors. These assumptions may have a significant effect on the reported fair values of assets and liabilities, and the income and expense related thereto. The use of different assumptions or changes in the models and assumptions, as well as changes in market conditions, could result in materially different net income and retained earnings.

We have control processes designed to ensure that fair value measurements are appropriate and reliable, that they are based on observable inputs wherever possible and that our valuation approaches and assumptions are reasonable and consistently applied. Where applicable, valuations are also compared to alternative external market data (e.g., quoted market prices, broker or dealer indications, pricing services and comparative analyses to similar instruments). For further discussion regarding how we measure financial assets and financial liabilities at fair value, see Note 19 of the Notes to Financial Statements.

We categorize each of our financial instruments carried at fair value into one of three levels in accordance with the fair value hierarchy. The hierarchy is based upon the transparency (observable or unobservable) of inputs to the valuation of an asset or

liability as of the measurement date. Observable inputs reflect market data obtained from independent sources (Levels 1 and 2), while unobservable inputs reflect our assumptions of market variables (Level 3). Management utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Because items classified as Level 3 are valued using significant unobservable inputs, the process for determining the fair value of these items is generally more subjective and involves a high degree of management judgment and use of assumptions. As of December 31, 20142016 and 2013,2015, all of our assets and liabilities measured at fair value on a recurring basis were classified as Level 2 within the fair value hierarchy.


RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS

See Note 2 of the Notes to Financial Statements for a discussion of recently issued accounting standards and interpretations.


71
Table of Contents

OTHER FINANCIAL INFORMATION

Income Statements (Quarter amounts are unaudited)

Summary income statements for each quarter within the two years ended December 31, 20142016 are provided in the tables below. The FHLB's change to the contractual interest method for amortizing premiums and accreting discounts on mortgage loans held for portfolio has been reported through retroactive application of the change in accounting principle to all periods presented. See Note 1 of the Notes to Financial Statements for more information.
20142016
(In millions)
1st  Quarter
 
2nd  Quarter
 
3rd  Quarter
 
4th  Quarter
 Total
1st  Quarter
 
2nd  Quarter
 
3rd  Quarter
 
4th  Quarter
 Total
Interest income$229
 $226
 $228
 $225
 $908
$303
 $298
 $308
 $314
 $1,223
Interest expense152
 149
 145
 145
 591
214
 215
 215
 216
 860
Net interest income77
 77
 83
 80
 317
89
 83
 93
 98
 363
(Reversal) provision for credit losses—
 (1) —
 1
 —
Non-interest income4
 6
 4
 9
 23
Non-interest (loss) income(4) 6
 (4) 48
 46
Non-interest expense24
 23
 25
 24
 96
28
 28
 28
 57
 141
Net income$57
 $61
 $62
 $64
 $244
$57
 $61
 $61
 $89
 $268
20132015
(In millions)
1st Quarter
 
2nd  Quarter
 
3rd  Quarter
 
4th  Quarter
 Total
1st Quarter
 
2nd  Quarter
 
3rd  Quarter
 
4th  Quarter
 Total
Interest income$217
 $224
 $230
 $229
 $900
$229
 $228
 $244
 $261
 $962
Interest expense142
 145
 139
 146
 572
148
 149
 161
 177
 635
Net interest income75
 79
 91
 83
 328
81
 79
 83
 84
 327
Reversal for credit losses(2) (4) (1) —
 (7)
Non-interest income8
 2
 4
 6
 20
8
 5
 10
 7
 30
Non-interest expense22
 23
 24
 25
 94
24
 26
 26
 27
 103
Net income$63
 $62
 $72
 $64
 $261
$65
 $58
 $67
 $64
 $254

Net income in the fourth quarter of 2016 was higher than the first three quarters of 2016 primarily due to the gains from the sale of securities and the higher spreads earned on LIBOR-indexed assets that were driven by the larger increase in rates earned on these assets relative to their associated funding. These favorable factors were partially offset by the litigation settlement as discussed in "Results of Operations."


Investment Securities

Data on investments for the years ended December 31, 2014, 20132016, 2015 and 20122014 are provided in the tables below.
(In millions)Carrying Value at December 31,Carrying Value at December 31,
2014 2013 20122016 2015 2014
Trading securities:          
Mortgage-backed securities:          
Other U.S. obligation single-family mortgage-backed securities$2
 $2
 $2
$1
 $1
 $2
Total trading securities2
 2
 2
1
 1
 2
Available-for-sale securities:          
Certificates of deposit1,350
 2,185
 —
1,300
 700
 1,350
Total available-for-sale securities1,350
 2,185
 —
1,300
 700
 1,350
Held-to-maturity securities:          
Government-sponsored enterprises26
 28
 26
31
 33
 26
Mortgage-backed securities:          
Other U.S. obligation single-family mortgage-backed securities2,039
 1,909
 1,411
3,183
 3,894
 2,039
Government-sponsored enterprise single-family mortgage-backed securities12,647
 14,150
 11,361
8,186
 10,891
 12,647
Government-sponsored enterprise multi-family mortgage-backed securities3,146
 460
 —
Total held-to-maturity securities14,712
 16,087
 12,798
14,546
 15,278
 14,712
Total securities16,064
 18,274
 12,800
15,847
 15,979
 16,064
Securities purchased under agreements to resell3,343
 2,350
 3,800
5,230
 10,532
 3,343
Federal funds sold6,600
 1,740
 3,350
4,257
 10,845
 6,600
Total investments$26,007
 $22,364
 $19,950
$25,334
 $37,356
 $26,007


72
Table of Contents


As of December 31, 2014,2016, investments had the following maturity and yield characteristics.
(Dollars in millions)Due in one year or lessDue after one year through five yearsDue after five through 10 yearsDue after 10 yearsCarrying ValueDue in one year or lessDue after one year through five yearsDue after five through 10 yearsDue after 10 yearsCarrying Value
Trading securities:  
Mortgage-backed securities(1):
  
Other U.S. obligation single-family mortgage-backed securities$—
$—
$1
$1
$2
$—
$—
$1
$—
$1
Total trading securities—
—
1
1
2
—
—
1
—
1
Yield on trading securities—%—%2.36%2.46% —%—%2.56%—% 
Available-for-sale securities:  
Certificates of deposit$1,350
$—
$—
$—
$1,350
$1,300
$—
$—
$—
$1,300
Total available-for-sale securities1,350
—
—
—
1,350
1,300
—
—
—
1,300
Yield on available-for sale securities0.15%—%—%—% 0.87%—%—%—% 
Held-to-maturity securities:  
Government-sponsored enterprises$26
$—
$—
$—
$26
$31
$—
$—
$—
$31
Mortgage-backed securities(1):
  
Other U.S. obligation single-family mortgage-backed securities—
213
839
987
2,039
128
594
—
2,461
3,183
Government-sponsored enterprise single-family mortgage-backed securities—
149
620
11,878
12,647
—
—
65
8,121
8,186
Government-sponsored enterprise multi-family mortgage-backed securities—
—
2,659
487
3,146
Total held-to-maturity securities26
362
1,459
12,865
14,712
159
594
2,724
11,069
14,546
Yield on held-to-maturity securities0.09%2.17%1.82%2.27% 0.90%1.10%1.34%2.21% 
Total securities$1,376
$362
$1,460
$12,866
$16,064
$1,459
$594
$2,725
$11,069
$15,847
Securities purchased under agreements to resell3,343
—
—
—
3,343
5,230
—
—
—
5,230
Federal funds sold6,600
—
—
—
6,600
4,257
—
—
—
4,257
Total investments$11,319
$362
$1,460
$12,866
$26,007
$10,946
$594
$2,725
$11,069
$25,334

(1)Mortgage-backed securities allocated based on contractual principal maturities assuming no prepayments.

As of December 31, 2014,2016, the FHLBankFHLB held securities of the following issuers with a book value greater than 10 percent of FHLBankFHLB capital. The table includes government-sponsored enterprises, securities of the U.S. government, and government agencies and corporations.
(In millions) Total Total Total Total
Name of Issuer Carrying Value Fair Value Carrying Value Fair Value
Freddie Mac $4,557
 $4,585
 $3,741
 $3,702
Fannie Mae 8,116
 8,161
 7,622
 7,547
National Credit Union Administration Trust 1,052
 1,056
 722
 723
Government National Mortgage Association 989
 994
 2,462
 2,442
Certificates of deposit (4 issuers) 1,350
 1,350
Certificates of deposit (5 issuers) 1,300
 1,300
Total investment securities $16,064
 $16,146
 $15,847
 $15,714


73
Table of Contents

Loan Portfolio Analysis

The FHLBank'sFHLB's outstanding loans, loans 90 days or more past due and accruing interest, and allowance for credit loss information for the five years ended December 31 are shown below. The FHLBank'sFHLB's interest and related shortfall on non-accrual loans and loans modified in troubled debt restructurings was not material during the years presented below.
(Dollars in millions)2014 2013 2012 2011 20102016 2015 2014 2013 2012
Domestic:                  
Advances$70,406
 $65,270
 $53,944
 $28,424
 $30,181
$69,882
 $73,292
 $70,406
 $65,270
 $53,944
Real estate mortgages$6,989
 $6,826
 $7,548
 $7,871
 $7,782
$9,150
 $7,954
 $6,956
 $6,782
 $7,526
Real estate mortgages past due 90 days
or more (including those in process of foreclosure)
and still accruing interest
$66
 $89
 $113
 $145
 $133
Real estate mortgages past due 90 days
or more (including those in process of foreclosure)
and still accruing interest, unpaid principal balance
$33
 $42
 $66
 $89
 $113
Non-accrual loans, unpaid principal balance (1)
$4
 $3
 $3
 $2
 $—
$4
 $7
 $4
 $3
 $3
Troubled debt restructurings (not included above)$5
 $4
 $3
 $1
 $—
Troubled debt restructurings, unpaid principal balance (not included above)$8
 $8
 $5
 $4
 $3
Allowance for credit losses on mortgage loans,
beginning of year
$7
 $18
 $21
 $12
 $—
$2
 $5
 $7
 $18
 $21
Charge-offs(2) (4) (4) (3) (1)
Net charge-offs(1) (3) (2) (4) (4)
(Reversal) provision for credit losses—
 (7) 1
 12
 13
—
 —
 —
 (7) 1
Allowance for credit losses on mortgage loans,
end of year
$5
 $7
 $18
 $21
 $12
$1
 $2
 $5
 $7
 $18
Ratio of net charge-offs during the period to
average loans outstanding during the period
0.03% 0.05% 0.06% 0.05% 0.02%0.01% 0.04% 0.03% 0.05% 0.06%
(1)
See Note 1 of the Notes to Financial Statements for an explanation of the FHLBank'sFHLB's non-accrual policy.

Other Borrowings

Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings exceeding 30 percent of total capital for the years ended December 31:
(Dollars in millions)2014 2013 20122016 2015 2014
Discount Notes          
Outstanding at year-end (book value)$41,232
 $38,210
 $30,840
$44,690
 $77,199
 $41,232
Weighted average rate at year-end (1) (2)
0.09% 0.09% 0.13%0.46% 0.24% 0.09%
Daily average outstanding for the year (book value)$35,992
 $34,574
 $29,499
$49,835
 $52,706
 $35,992
Weighted average rate for the year (2)
0.08% 0.11% 0.10%0.35% 0.12% 0.08%
Highest outstanding at any month-end (book value)$41,232
 $38,926
 $32,556
$63,137
 $77,199
 $41,232
Bonds (short-term)          
Outstanding at year-end (par value)$17,810
 $21,650
 $9,140
$11,332
 $4,415
 $17,810
Weighted average rate at year-end (2) (3)
0.10% 0.11% 0.17%0.66% 0.23% 0.10%
Daily average outstanding for the year (par value)$18,810
 $16,583
 $3,527
$11,996
 $6,974
 $18,810
Weighted average rate for the year (2) (3)
0.10% 0.13% 0.19%0.51% 0.13% 0.10%
Highest outstanding at any month-end (par value)$22,235
 $22,010
 $9,140
$14,591
 $13,825
 $22,235
(1)Represents an implied rate without consideration of concessions.
(2)Amounts used to calculate weighted average rates for the year are based on dollars in thousands. Accordingly, recalculations based upon amounts in millions may not produce the same results.
(3)Represents the effective coupon rate.


74
Table of Contents

Term Deposits

At December 31, 2014,2016, term deposits in denominations of $100,000 or more totaled $99,550,000.$149,300,000. The table below presents the maturities for term deposits in denominations of $100,000 or more:
(In millions)
By remaining maturity at December 31, 2014
3 months or less Over 3 months but within 6 months Over 6 months but within 12 months Over 12 months but within 24 months Total
(In millions)
By remaining maturity at December 31, 2016
3 months or less Over 3 months but within 6 months Over 6 months but within 12 months Over 12 months but within 24 months Total
Time certificates of deposit$22
 $13
 $34
 $31
 $100
$78
 $43
 $16
 $12
 $149

Ratios
2014 2013 20122016 2015 2014
Return on average assets0.24% 0.28% 0.35%0.25% 0.24% 0.25%
Return on average equity4.93
 5.10
 6.20
5.35
 5.04
 5.16
Average equity to average assets4.90
 5.47
 5.68
4.76
 4.78
 4.86
Dividend payout ratio72.20% 68.10% 60.09%63.92% 67.68% 69.45%

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Information required under this Item is set forth in the “Quantitative and Qualitative Disclosures About Risk Management” caption at Part II, Item 7, of this filing.


75
Table of Contents

Item 8.Financial Statements and Supplementary Data.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders
of the Federal Home Loan Bank of Cincinnati:

In our opinion, the accompanying statements of condition and the related statements of income, comprehensive income, capital, and cash flows present fairly, in all material respects, the financial position of the Federal Home Loan Bank of Cincinnati (the "FHLBank""FHLB") at December 31, 20142016 and 2013,2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20142016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the FHLBankFHLB maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The FHLBank'sFHLB's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included under Item 9A in Management's Report on Internal Control over Financial Reporting.Reporting. Our responsibility is to express opinions on these financial statements and on the FHLBank'sFHLB's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 1 to the financial statements, the FHLB changed the manner in which it accounts for amortization and accretion of premiums and discounts and hedging basis adjustments on mortgage loans held for portfolio in 2016.

A company'scompany’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'scompany’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company'scompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


Cincinnati, Ohio
March 19, 201516, 2017



76
Table of Contents


FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CONDITION
(In thousands, except par value)
December 31,December 31,
2014 20132016 2015
ASSETS      
Cash and due from banks (Note 3)$3,109,970
 $8,598,933
$8,737
 $10,136
Interest-bearing deposits119
 166
129
 99
Securities purchased under agreements to resell3,343,000
 2,350,000
5,229,487
 10,531,979
Federal funds sold6,600,000
 1,740,000
4,257,000
 10,845,000
Investment securities:      
Trading securities (Note 4)1,341
 1,578
970
 1,159
Available-for-sale securities (Note 5)1,349,977
 2,184,879
1,300,023
 700,081
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2014 and 2013, respectively, that may be repledged) (a) (Note 6)
14,712,271
 16,087,162
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2016 and 2015, respectively, that may be repledged) (a) (Note 6)
14,546,979
 15,278,206
Total investment securities16,063,589
 18,273,619
15,847,972
 15,979,446
Advances (includes $15,042 and $0 at fair value under fair value option in 2014 and 2013, respectively) (Note 8)70,405,616
 65,270,390
Advances (includes $15,093 and $15,057 at fair value under fair value option in 2016 and 2015, respectively) (Note 8)69,882,074
 73,292,172
Mortgage loans held for portfolio:      
Mortgage loans held for portfolio (Note 9)6,989,602
 6,825,523
9,149,860
 7,953,362
Less: allowance for credit losses on mortgage loans (Note 10)4,919
 7,233
1,142
 1,686
Mortgage loans held for portfolio, net6,984,683
 6,818,290
9,148,718
 7,951,676
Accrued interest receivable81,384
 85,151
109,886
 94,855
Premises, software, and equipment, net11,282
 13,811
9,187
 10,436
Derivative assets (Note 11)14,699
 3,241
104,753
 26,996
Other assets26,077
 27,101
37,338
 13,013
TOTAL ASSETS$106,640,419
 $103,180,702
$104,635,281
 $118,755,808
LIABILITIES      
Deposits (Note 12)$729,936
 $913,895
$765,879
 $804,342
Consolidated Obligations, net (Note 13):   
Consolidated Obligations: (Note 13)   
Discount Notes41,232,127
 38,209,946
44,689,662
 77,199,208
Bonds (includes $4,209,640 and $4,018,370 at fair value under fair value option in 2014 and 2013, respectively)59,216,557
 58,162,739
Total Consolidated Obligations, net100,448,684
 96,372,685
Bonds (includes $7,895,510 and $2,214,590 at fair value under fair value option in 2016 and 2015, respectively)53,190,866
 35,091,722
Total Consolidated Obligations97,880,528
 112,290,930
Mandatorily redeemable capital stock (Note 15)62,963
 115,853
34,782
 37,895
Accrued interest payable114,781
 116,381
119,322
 118,823
Affordable Housing Program payable (Note 14)98,103
 93,789
104,883
 107,352
Derivative liabilities (Note 11)63,767
 97,766
17,874
 31,087
Other liabilities183,177
 160,226
733,918
 212,254
Total liabilities101,701,411
 97,870,595
99,657,186
 113,602,683
Commitments and contingencies (Note 20)
 

 
CAPITAL (Note 15)      
Capital stock Class B putable ($100 par value); issued and outstanding shares: 42,665 shares in 2014 and 46,980 shares in 20134,266,543
 4,697,985
Capital stock Class B putable ($100 par value); issued and outstanding shares: 41,569 shares in 2016 and 44,288 shares in 20154,156,944
 4,428,756
Retained earnings:      
Unrestricted529,367
 510,321
574,122
 530,998
Restricted159,694
 110,843
260,285
 206,648
Total retained earnings689,061
 621,164
834,407
 737,646
Accumulated other comprehensive loss (Note 16)(16,596) (9,042)(13,256) (13,277)
Total capital4,939,008
 5,310,107
4,978,095
 5,153,125
TOTAL LIABILITIES AND CAPITAL$106,640,419
 $103,180,702
$104,635,281
 $118,755,808
(a)
Fair values: $14,794,326$14,413,231 and $15,808,39715,229,965 at December 31, 20142016 and 2013,2015, respectively.

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

77
Table of Contents

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF INCOME
(In thousands)
For the Years Ended December 31,For the Years Ended December 31,
2014 2013 20122016 2015 2014
INTEREST INCOME:          
Advances$314,800
 $305,658
 $240,637
$576,970
 $366,651
 $314,800
Prepayment fees on Advances, net3,624
 2,473
 20,064
9,874
 2,723
 3,624
Interest-bearing deposits85
 185
 571
320
 88
 85
Securities purchased under agreements to resell1,261
 1,872
 4,527
9,491
 2,147
 1,261
Federal funds sold5,426
 6,232
 6,844
34,313
 12,106
 5,426
Investment securities:     
Trading securities25
 31
 35,580
20
 22
 25
Available-for-sale securities3,204
 1,827
 2,794
5,822
 2,198
 3,204
Held-to-maturity securities343,042
 313,181
 297,127
325,500
 325,449
 343,042
Total investment securities331,342
 327,669
 346,271
Mortgage loans held for portfolio236,882
 268,691
 312,696
261,071
 251,594
 246,560
Loans to other FHLBanks—
 5
 3
13
 —
 —
Total interest income908,349
 900,155
 920,843
1,223,394
 962,978
 918,027
INTEREST EXPENSE:          
Consolidated Obligations - Discount Notes27,439
 36,686
 30,699
Consolidated Obligations - Bonds559,480
 529,788
 569,949
Consolidated Obligations:     
Discount Notes173,595
 65,217
 27,439
Bonds681,757
 566,970
 559,480
Total Consolidated Obligations855,352
 632,187
 586,919
Deposits264
 326
 383
1,320
 360
 264
Loans from other FHLBanks—
 5
 1
1
 —
 —
Mandatorily redeemable capital stock4,190
 5,506
 11,690
3,517
 2,432
 4,190
Other borrowings—
 —
 1
Total interest expense591,373
 572,311
 612,723
860,190
 634,979
 591,373
NET INTEREST INCOME316,976
 327,844
 308,120
363,204
 327,999
 326,654
(Reversal) provision for credit losses(500) (7,450) 1,459
NET INTEREST INCOME AFTER (REVERSAL) PROVISION FOR CREDIT LOSSES317,476
 335,294
 306,661
Reversal for credit losses—
 —
 (500)
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES363,204
 327,999
 327,154
NON-INTEREST INCOME:          
Net losses on trading securities(9) (19) (32,770)(5) (18) (9)
Net realized gains from sale of held-to-maturity securities—
 —
 29,292
38,763
 —
 —
Net gains on financial instruments held under fair value option2,174
 330
 1,939
40,503
 1,057
 2,174
Net gains on derivatives and hedging activities6,627
 7,903
 8,735
Net (losses) gains on derivatives and hedging activities(47,431) 13,037
 6,627
Standby Letters of Credit fees10,767
 8,066
 3,144
12,195
 13,098
 10,767
Other, net3,071
 3,511
 3,072
2,206
 2,720
 3,071
Total non-interest income22,630
 19,791
 13,412
46,231
 29,894
 22,630
NON-INTEREST EXPENSE:          
Compensation and benefits36,777
 33,992
 30,854
41,932
 39,766
 36,777
Other operating expenses17,454
 17,493
 14,048
25,935
 21,728
 17,454
Finance Agency7,084
 5,203
 6,002
6,325
 6,793
 7,084
Office of Finance4,374
 4,535
 3,442
4,284
 4,698
 4,374
Litigation settlement25,250
 —
 —
Other2,559
 3,164
 3,624
7,337
 2,566
 2,559
Total non-interest expense68,248
 64,387
 57,970
111,063
 75,551
 68,248
INCOME BEFORE ASSESSMENTS271,858
 290,698
 262,103
298,372
 282,342
 281,536
Affordable Housing Program assessments27,605
 29,620
 27,379
30,189
 27,906
 27,605
NET INCOME$244,253
 $261,078
 $234,724
$268,183
 $254,436
 $253,931
The accompanying notes are an integral part of these financial statements.

78
Table of Contents

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)

For the Years Ended December 31,For the Years Ended December 31,
2014 2013 20122016 2015 2014
Net income$244,253
 $261,078
 $234,724
$268,183
 $254,436
 $253,931
Other comprehensive income adjustments:          
Net unrealized gains (losses) on available-for-sale securities97
 (121) 1,014
Net unrealized (losses) gains on available-for-sale securities(58) 105
 97
Pension and postretirement benefits(7,651) 2,813
 (1,747)79
 3,214
 (7,651)
Total other comprehensive income adjustments(7,554) 2,692
 (733)21
 3,319
 (7,554)
Comprehensive income$236,699
 $263,770
 $233,991
$268,204
 $257,755
 $246,377

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


79
Table of Contents

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CAPITAL
(In thousands)

Capital Stock
Class B - Putable
 Retained Earnings Accumulated Other Comprehensive Total
Capital Stock
Class B - Putable
 Retained Earnings Accumulated Other Comprehensive Total
Shares Par Value Unrestricted Restricted Total Loss CapitalShares Par Value Unrestricted Restricted Total Loss Capital
BALANCE, DECEMBER 31, 201131,259
 $3,125,895
 $432,530
 $11,683
 $444,213
 $(11,001) $3,559,107
Proceeds from sale of capital stock9,248
 924,853
         924,853
Net shares reclassified to mandatorily
redeemable capital stock
(401) (40,126)         (40,126)
Comprehensive income    187,779
 46,945
 234,724
 (733) 233,991
Cash dividends on capital stock    (141,056)   (141,056)   (141,056)
BALANCE, DECEMBER 31, 201240,106
 4,010,622
 479,253
 58,628
 537,881
 (11,734) 4,536,769
Proceeds from sale of capital stock7,208
 720,820
         720,820
Net shares reclassified to mandatorily
redeemable capital stock
(334) (33,457)         (33,457)
Comprehensive income    208,863
 52,215
 261,078
 2,692
 263,770
Cash dividends on capital stock    (177,795)   (177,795)   (177,795)
BALANCE, DECEMBER 31, 201346,980
 4,697,985
 510,321
 110,843
 621,164
 (9,042) 5,310,107
46,980
 $4,697,985
 $510,321
 $110,843
 $621,164
 $(9,042) $5,310,107
Adjustment for cumulative effect of accounting change - change in amortization methodology    (37,459) (5,868) (43,327)   (43,327)
Proceeds from sale of capital stock835
 83,543
         83,543
835
 83,543
         83,543
Repurchase of capital stock(4,979) (497,875)         (497,875)(4,979) (497,875)         (497,875)
Net shares reclassified to mandatorily
redeemable capital stock
(171) (17,110)         (17,110)(171) (17,110)         (17,110)
Comprehensive income    195,402
 48,851
 244,253
 (7,554) 236,699
    203,145
 50,786
 253,931
 (7,554) 246,377
Cash dividends on capital stock    (176,356)   (176,356)   (176,356)    (176,356)   (176,356)   (176,356)
BALANCE, DECEMBER 31, 201442,665
 $4,266,543
 $529,367
 $159,694
 $689,061
 $(16,596) $4,939,008
42,665
 4,266,543
 499,651
 155,761
 655,412
 (16,596) 4,905,359
Proceeds from sale of capital stock1,912
 191,132
         191,132
Net shares reclassified to mandatorily
redeemable capital stock
(289) (28,919)         (28,919)
Comprehensive income    203,549
 50,887
 254,436
 3,319
 257,755
Cash dividends on capital stock    (172,202)   (172,202)   (172,202)
BALANCE, DECEMBER 31, 201544,288
 4,428,756
 530,998
 206,648
 737,646
 (13,277) 5,153,125
Proceeds from sale of capital stock920
 92,027
         92,027
Net shares reclassified to mandatorily
redeemable capital stock
(3,639) (363,839)         (363,839)
Comprehensive income    214,546
 53,637
 268,183
 21
 268,204
Cash dividends on capital stock    (171,422)   (171,422)   (171,422)
BALANCE, DECEMBER 31, 201641,569
 $4,156,944
 $574,122
 $260,285
 $834,407
 $(13,256) $4,978,095

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


80
Table of Contents

FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)

 For the Years Ended December 31,
 2014 2013 2012
OPERATING ACTIVITIES:     
Net income$244,253
 $261,078
 $234,724
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization8,188
 (512) 59,389
Net change in derivative and hedging activities16,224
 35,607
 69,279
Net change in fair value adjustments on trading securities9
 19
 32,770
Net change in fair value adjustments on financial instruments held under fair value option(2,174) (330) (1,939)
Other adjustments(393) (7,464) (27,830)
Net change in:     
Accrued interest receivable3,746
 (1,216) 30,354
Other assets(739) (3,244) (726)
Accrued interest payable(3,177) 10,829
 (36,317)
Other liabilities19,252
 25,470
 42,856
Total adjustments40,936
 59,159
 167,836
Net cash provided by operating activities285,189
 320,237
 402,560
      
INVESTING ACTIVITIES:     
Net change in:     
Interest-bearing deposits30,579
 119,127
 279,777
Securities purchased under agreements to resell(993,000) 1,450,000
 (3,800,000)
Federal funds sold(4,860,000) 1,610,000
 (1,080,000)
Premises, software, and equipment(686) (7,203) (2,129)
Trading securities:     
Net decrease in short-term—
 —
 2,510,301
Proceeds from maturities of long-term228
 325
 317,746
Available-for-sale securities:     
Net decrease (increase) in short-term835,000
 (2,185,000) 4,172,157
Held-to-maturity securities:     
Net decrease (increase) in short-term1,386
 (1,247) 835,392
Proceeds from maturities of long-term2,093,933
 2,686,432
 3,771,382
Proceeds from sale of long-term—
 —
 507,531
Purchases of long-term(719,833) (5,977,152) (5,323,500)
Advances:     
Proceeds1,120,239,271
 697,384,820
 749,327,365
Made(1,125,441,755) (708,852,213) (775,104,699)
Mortgage loans held for portfolio:     
Principal collected1,070,820
 1,890,141
 2,666,537
Purchases(1,260,888) (1,203,883) (2,374,523)
Net cash used in investing activities(9,004,945) (13,085,853) (23,296,663)
      
      
      
The accompanying notes are an integral part of these financial statements.    
      

81
Table of Contents

      
(continued from previous page)     
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
 For the Years Ended December 31,
 2014 2013 2012
FINANCING ACTIVITIES:     
Net (decrease) increase in deposits and pass-through reserves$(200,660) $(260,961) $108,546
Net payments on derivative contracts with financing elements(31,195) (42,054) (113,976)
Net proceeds from issuance of Consolidated Obligations:     
Discount Notes270,415,559
 165,083,112
 250,629,492
Bonds41,461,146
 34,035,263
 35,063,026
Payments for maturing and retiring Consolidated Obligations:     
Discount Notes(267,394,419) (157,714,961) (245,932,389)
Bonds(40,358,950) (20,166,866) (19,557,835)
Proceeds from issuance of capital stock83,543
 720,820
 924,853
Payments for repurchase/redemption of mandatorily redeemable capital stock(70,000) (128,432) (104,079)
Payments for repurchase of capital stock(497,875) —
 —
Cash dividends paid(176,356) (177,795) (141,056)
Net cash provided by financing activities3,230,793
 21,348,126
 20,876,582
Net (decrease) increase in cash and cash equivalents(5,488,963) 8,582,510
 (2,017,521)
Cash and cash equivalents at beginning of the period8,598,933
 16,423
 2,033,944
Cash and cash equivalents at end of the period$3,109,970
 $8,598,933
 $16,423
Supplemental Disclosures:     
Interest paid$621,865
 $584,640
 $649,609
Affordable Housing Program payments, net$23,291
 $18,503
 $18,902
 For the Years Ended December 31,
 2016 2015 2014
OPERATING ACTIVITIES:     
Net income$268,183
 $254,436
 $253,931
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization55,296
 35,793
 (1,490)
Net change in derivative and hedging activities63,806
 12,651
 16,224
Net change in fair value adjustments on trading securities5
 18
 9
Net change in fair value adjustments on financial instruments held under fair value option(40,503) (1,057) (2,174)
Other adjustments(38,774) (11) (393)
Net change in:     
Accrued interest receivable(15,028) (13,473) 3,746
Other assets(24,325) (1,120) (739)
Accrued interest payable21,273
 4,694
 (3,177)
Other liabilities32,560
 41,036
 19,252
Total adjustments54,310
 78,531
 31,258
Net cash provided by operating activities322,493
 332,967
 285,189
      
INVESTING ACTIVITIES:     
Net change in:     
Interest-bearing deposits(113,516) 12,092
 30,579
Securities purchased under agreements to resell5,302,492
 (7,188,979) (993,000)
Federal funds sold6,588,000
 (4,245,000) (4,860,000)
Premises, software, and equipment(1,623) (1,834) (686)
Trading securities:     
Proceeds from maturities of long-term184
 164
 228
Available-for-sale securities:     
Net (increase) decrease in short-term(600,000) 650,000
 835,000
Held-to-maturity securities:     
Net decrease (increase) in short-term1,404
 (6,585) 1,386
Proceeds from maturities of long-term2,924,469
 2,611,029
 2,093,933
Proceeds from sale of long-term852,199
 —
 —
Purchases of long-term(2,529,144) (3,172,521) (719,833)
Advances:     
Proceeds1,364,290,711
 930,146,812
 1,120,239,271
Made(1,360,955,355) (933,090,216) (1,125,441,755)
Mortgage loans held for portfolio:     
Principal collected1,661,697
 1,383,198
 1,070,820
Purchases(2,899,907) (2,414,064) (1,260,888)
Net cash provided by (used in) investing activities14,521,611
 (15,315,904) (9,004,945)
      
      
      
      
The accompanying notes are an integral part of these financial statements.    
      

      
(continued from previous page)     
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
 
 For the Years Ended December 31,
 2016 2015 2014
FINANCING ACTIVITIES:     
Net increase (decrease) in deposits and pass-through reserves$3,567
 $74,725
 $(200,660)
Net payments on derivative contracts with financing elements(23,185) (28,458) (31,195)
Net proceeds from issuance of Consolidated Obligations:     
Discount Notes325,535,819
 305,975,240
 270,415,559
Bonds50,922,924
 19,042,816
 41,461,146
Payments for maturing and retiring Consolidated Obligations:     
Discount Notes(358,051,273) (270,027,809) (267,394,419)
Bonds(32,787,008) (43,118,354) (40,358,950)
Proceeds from issuance of capital stock92,027
 191,132
 83,543
Payments for repurchase/redemption of mandatorily redeemable capital stock(366,952) (53,987) (70,000)
Payments for repurchase of capital stock—
 —
 (497,875)
Cash dividends paid(171,422) (172,202) (176,356)
Net cash (used in) provided by financing activities(14,845,503) 11,883,103
 3,230,793
Net decrease in cash and cash equivalents(1,399) (3,099,834) (5,488,963)
Cash and cash equivalents at beginning of the period10,136
 3,109,970
 8,598,933
Cash and cash equivalents at end of the period$8,737
 $10,136
 $3,109,970
Supplemental Disclosures:     
Interest paid$858,401
 $642,179
 $621,865
Affordable Housing Program payments, net$32,658
 $18,657
 $23,291



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


82

FEDERAL HOME LOAN BANK OF CINCINNATI

NOTES TO FINANCIAL STATEMENTS


Background Information    

The Federal Home Loan Bank of Cincinnati (the FHLBank)FHLB), a federally chartered corporation, is one of 1211 District Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLBankFHLB provides a readily available, competitively-priced source of funds to its member institutions. The FHLBankFHLB is a cooperative whose member institutions own nearly all of the capital stock of the FHLBankFHLB and may receive dividends on their investment to the extent declared by the FHLBank'sFHLB's Board of Directors. Former members own the remaining capital stock to support business transactions still carried on the FHLBank'sFHLB's Statements of Condition. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership. Housing associates, including state and local housing authorities, may also borrow from the FHLBank;FHLB; while eligible to borrow, housing authorities are not members of the FHLBankFHLB and, therefore, are not allowed to hold capital stock. A housing authority is eligible to utilize the Advance programs of the FHLBankFHLB if it meets applicable statutory requirements. It must be a U.S. Department of Housing and Urban Development approved mortgagee and must also meet applicable mortgage lending, financial condition, as well as charter, inspection and supervision requirements.

All members must purchase stock in the FHLBank.FHLB. Members must own capital stock in the FHLBankFHLB based on the amount of their total assets. Each member also may be required to purchase activity-based capital stock as it engages in certain business activities with the FHLBank.FHLB. As a result of these requirements, the FHLBankFHLB conducts business with stockholders in the normal course of business. For financial statement purposes, the FHLBankFHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLBank'sFHLB's outstanding capital stock. See Note 22 for more information relating to transactions with stockholders.

The Federal Housing Finance Agency (Finance Agency) was established and becameis the independent Federal regulator of the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae), effective July 30, 2008 with the passage of the “Housing and Economic Recovery Act of 2008” (HERA). Pursuant to HERA, all regulations, orders, determinations, and resolutions that were issued, made, prescribed, or allowed to become effective by the former Federal Housing Finance Board will remain in effect until modified, terminated, set aside, or superseded by the Finance Agency Director, any court of competent jurisdiction, or operation of law. The Finance Agency's stated mission with respect to the FHLBanks is to provide effective supervision, regulationensure that the housing government-sponsored enterprises (GSEs) operate in a safe and housing mission oversightsound manner so that they serve as a reliable source of the FHLBanks to promote their safetyliquidity and soundness, supportfunding for housing finance and affordable housing, and support a stable and liquid mortgage market.community investment.

Each FHLBank operates as a separate entity with its own management, employees, and board of directors. The FHLBankFHLB does not have any special purpose entities or any other type of off-balance sheet conduits.

The Office of Finance is a joint office of the FHLBanks established to facilitate the issuance and servicing of the debt instruments of the FHLBanks, known as Consolidated Obligations, and to prepare combined quarterly and annual financial reports of all 12 FHLBanks. As provided by the Federal Home Loan Bank Act of 1932, as amended (the FHLBank Act), or by Finance Agency regulation, the FHLBanks' Consolidated Obligations are backed only by the financial resources of the FHLBanks and are the primary source of funds for the FHLBanks. Deposits, other borrowings, and capital stock issued to members provide other funds. The FHLBankFHLB primarily uses its funds to provide Advances to members and to purchase loans from members through its Mortgage Purchase Program (MPP). The FHLBankFHLB also provides member institutions with correspondent services, such as wire transfer, security safekeeping, and settlement services.


Note 1 - Summary of Significant Accounting Policies

Basis of Presentation.Presentation

The FHLBank'sFHLB's accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America (GAAP).

Changes in the Presentation of Debt Issuance Costs (also referred to as Concessions). On January 1, 2016, the FHLB retrospectively adopted the guidance, Simplifying the Presentation of Debt Issuance Costs, issued by the Financial Accounting Standards Board (FASB) on April 7, 2015. As a result, unamortized concessions (in thousands) of $13,042 included in other assets at December 31, 2015 were reclassified as a reduction in the balance of the corresponding Consolidated Obligations. The reclassification resulted in a decrease (in thousands) of $13,042 in Consolidated Bonds at December 31, 2015. Accordingly, the FHLB's total assets and total liabilities each decreased by (in thousands) $13,042 at December 31, 2015. The adoption of this guidance had no effect on the FHLB's results of operations and cash flows.

Change in Accounting Principle. Effective October 1, 2016, the FHLB changed its method of accounting for the amortization and accretion of premiums and discounts and hedging basis adjustments on mortgage loans held for portfolio to the contractual interest method (contractual method). Historically, the FHLB deferred and amortized premiums and accreted discounts into interest income using the retrospective interest method (retrospective method), which used both actual prepayment experience and estimates of future principal repayments in calculating the estimated lives of the loans. While both the retrospective and contractual methods are acceptable under GAAP, the contractual method has become preferable for recognizing net unamortized premiums on mortgage loans held for portfolio because (i) it reduces the FHLB's reliance on subjective assumptions and estimates that affected the reported amounts of assets, capital and income in the financial statements and (ii) it represents the base accounting model articulated in GAAP applicable to accounting for the amortization of premiums and the accretion of discounts, whereas the retrospective method is only permitted by the guidance in narrowly defined circumstances.
The change to the contractual method for amortizing premiums and accreting discounts and hedging basis adjustments on mortgage loans has been reported through retroactive application of the change in accounting principle to all periods presented. For the quarters ended March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016, the effect of this change was an increase (decrease) to net income (in thousands) of $8,162, $5,017, $3,486, and $(22,522), respectively. The effect for the year ended December 31, 2016 was a decrease to net income (in thousands) of $(5,857).

The following tables illustrate the effect of the change in amortization and accretion method on the FHLB's financial statements as of and for the years ended December 31, 2016, 2015, and 2014.
 As of and for the Year Ended December 31, 2016
(In thousands)Previous Method New Method Effect of Change
Statements of Condition:     
Mortgage loans held for portfolio, net$9,183,157
 $9,148,718
 $(34,439)
Total assets104,669,720
 104,635,281
 (34,439)
Affordable Housing Program payable105,534
 104,883
 (651)
Total liabilities99,657,837
 99,657,186
 (651)
Retained earnings:     
Unrestricted603,950
 574,122
 (29,828)
Restricted264,245
 260,285
 (3,960)
Total retained earnings868,195
 834,407
 (33,788)
Total capital5,011,883
 4,978,095
 (33,788)
Total liabilities and capital104,669,720
 104,635,281
 (34,439)
Statements of Income:     
Interest income - mortgage loans held for portfolio$267,579
 $261,071
 $(6,508)
Net interest income after reversal for credit losses369,712
 363,204
 (6,508)
Income before assessments304,880
 298,372
 (6,508)
Affordable Housing Program assessments30,840
 30,189
 (651)
Net income274,040
 268,183
 (5,857)
Statements of Comprehensive Income:     
Net income$274,040
 $268,183
 $(5,857)
Comprehensive income274,061
 268,204
 (5,857)
Statements of Capital:     
Total retained earnings, beginning of year$765,577
 $737,646
 $(27,931)
Total comprehensive income274,061
 268,204
 (5,857)
Total retained earnings, end of year868,195
 834,407
 (33,788)
Total capital5,011,883
 4,978,095
 (33,788)
Statements of Cash Flows:     
Operating activities:     
Net income$274,040
 $268,183
 $(5,857)
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization48,788
 55,296
 6,508
Changes in:     
Other liabilities33,211
 32,560
 (651)
Total adjustments48,453
 54,310
 5,857
Net cash provided by operating activities322,493
 322,493
 —


 As of and for the Year Ended December 31, 2015
(In thousands)Previous Method New Method Effect of Change
Statements of Condition:     
Mortgage loans held for portfolio, net$7,979,607
 $7,951,676
 $(27,931)
Total assets118,783,739
 118,755,808
 (27,931)
Retained earnings:     
Unrestricted556,139
 530,998
 (25,141)
Restricted209,438
 206,648
 (2,790)
Total retained earnings765,577
 737,646
 (27,931)
Total capital5,181,056
 5,153,125
 (27,931)
Total liabilities and capital118,783,739
 118,755,808
 (27,931)
Statements of Income:     
Interest income - mortgage loans held for portfolio$245,876
 $251,594
 $5,718
Net interest income after reversal for credit losses322,281
 327,999
 5,718
Income before assessments276,624
 282,342
 5,718
Net income248,718
 254,436
 5,718
Statements of Comprehensive Income:     
Net income$248,718
 $254,436
 $5,718
Comprehensive income252,037
 257,755
 5,718
Statements of Capital:     
Total retained earnings, beginning of year$689,061
 $655,412
 $(33,649)
Total comprehensive income252,037
 257,755
 5,718
Total retained earnings, end of year765,577
 737,646
 (27,931)
Total capital5,181,056
 5,153,125
 (27,931)
Statements of Cash Flows:     
Operating activities:     
Net income$248,718
 $254,436
 $5,718
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization41,511
 35,793
 (5,718)
Total adjustments84,249
 78,531
 (5,718)
Net cash provided by operating activities332,967
 332,967
 —

 As of and for the Year Ended December 31, 2014
(In thousands)Previous Method New Method Effect of Change
Statements of Income:     
Interest income - mortgage loans held for portfolio$236,882
 $246,560
 $9,678
Net interest income after reversal for credit losses317,476
 327,154
 9,678
Income before assessments271,858
 281,536
 9,678
Net income244,253
 253,931
 9,678
Statements of Comprehensive Income:     
Net income$244,253
 $253,931
 $9,678
Comprehensive income236,699
 246,377
 9,678
Statements of Capital:     
Cumulative effect of change in accounting principle, January 1, 2014$—
 $(43,327) $(43,327)
Retained earnings after cumulative effect of change in accounting principle, beginning of year621,164
 577,837
 (43,327)
Comprehensive income236,699
 246,377
 9,678
Total retained earnings, end of year689,061
 655,412
 (33,649)
Total capital4,939,008
 4,905,359
 (33,649)
Statements of Cash Flows:     
Operating activities:     
Net income$244,253
 $253,931
 $9,678
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization8,188
 (1,490) (9,678)
Total adjustments40,936
 31,258
 (9,678)
Net cash provided by operating activities285,189
 285,189
 —

Significant Accounting Policies

Cash Flows. In the Statements of Cash Flows, the FHLBankFHLB considers non-interest bearing cash and due from banks as cash and cash equivalents. Federal funds sold are not treated as cash equivalents for purposes of the Statements of Cash Flows, but are instead treated as short-term investments and are reflected in the investing activities section of the Statements of Cash Flows.

83


Subsequent Events. The FHLBankFHLB 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.

Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates. These assumptions and estimates affect the reported amounts 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.

Fair Values. Some of the FHLBank'sFHLB's financial instruments lack an available trading market with prices characterized as those that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Therefore, the FHLBankFHLB uses pricing services and/or internal models employing significant estimates and present value calculations when disclosing fair values. See Note 19 for more information.

Interest Bearing Deposits, Securities Purchased Under Agreements to Resell, and Federal Funds Sold. These investments provide short-term liquidity and are carried at cost. Interest bearing deposits include certificates of deposits (CDs) not meeting the definition of an investment security. The FHLBankFHLB treats securities purchased under agreements to resell as short-term collateralized loans, which are classified as assets inon the Statements of Condition. Securities purchased under agreements to resell are held in safekeeping in the name of the FHLBankFHLB by third-party custodians approved by the FHLBank.FHLB. If the market value of

the underlying securities decrease below the market value required as collateral, the counterparty has the option to (1) place an equivalent amount of additional securities in safekeeping in the name of the FHLBankFHLB or (2) remit an equivalent amount of cash. Federal funds sold consist of short-term, unsecured loans generally transacted with counterparties that are considered by the FHLBankFHLB to be of investment quality.

Investment Securities. The FHLBankFHLB classifies investment securities as trading, available-for-sale and held-to-maturity at the date of acquisition. Purchases and sales of securities are recorded on a trade date basis.

Trading. Securities classified as trading are acquired for liquidity purposes and asset/liability management and carried at fair value. The FHLBankFHLB records changes in the fair value of these securities through other income as a net gain or loss on trading securities. However, the FHLBankFHLB does not participate in speculative trading practices and holds these investments indefinitely as management periodically evaluates its liquidity needs.

Available-for-Sale. Securities that are not classified as held-to-maturity or trading are classified as available-for-sale and are carried at fair value. The change in fair value of available-for-sale securities is recorded in other comprehensive income as a net unrealized gain or loss on available-for-sale securities.

Held-to-Maturity. Securities that the FHLBankFHLB has both the ability and intent to hold to maturity are classified as held-to-maturity and are carried at amortized cost, representing the amount at which an investment is acquired adjusted for periodic principal repayments, amortization of premiums and accretion of discounts.

Certain changes in circumstances may cause the FHLBankFHLB to change its intent to hold a security to maturity without calling into question its intent to hold other debt securities to maturity in the future. Thus, the sale or transfer of a held-to-maturity security due to certain changes in circumstances, such as evidence of significant deterioration in the issuer's creditworthiness or changes in regulatory requirements, is not considered to be inconsistent with its original classification. Other events that are isolated, nonrecurring, and unusual for the FHLBankFHLB that could not have been reasonably anticipated may cause the FHLBankFHLB to sell or transfer a held-to-maturity security without necessarily calling into question its intent to hold other debt securities to maturity.

In addition, sales of held-to-maturity debt securities that meet either of the following two conditions may be considered as maturities for purposes of the classification of securities: (1) the sale occurs near enough to the security's maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and changes in market interest rates would not have a significant effect on the security's fair value, or (2) the sale of the security occurs after the FHLBankFHLB has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the security or to scheduled payments on the security payable in equal installments (both principal and interest) over its term.

Premiums and Discounts. The FHLBankFHLB amortizes purchased premiums and accretes purchased discounts on mortgage-backed securities and other investment categories with a term of greater than one year using the retrospective level-yield method

84

(retrospective method).method. The retrospective method requires that the FHLBankFHLB estimate prepayments over the estimated life of the securities and make a retrospective adjustment of the effective yield each time that the FHLBankFHLB changes the estimated life and/or prepayments as if the new estimate had been known since the original acquisition date of the securities. The FHLBankFHLB uses nationally recognized third-party prepayment models to project estimated cash flows. Due to their short term nature, the FHLBankFHLB amortizes premiums and accretes discounts on other investment categories with a term of one year or less using a straight-line methodology based on the contractual maturity of the securities. Analyses of the straight-line compared to the level-yield methodology have been performed by the FHLBankFHLB and it has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.

Gains and Losses on Sales. The FHLBankFHLB computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in other income.

Investment Securities - Other-than-Temporary Impairment. The FHLBankFHLB evaluates its individual available-for-sale and held-to-maturity securities in an unrealized loss position for other-than-temporary impairment on a quarterly basis. A security is considered impaired when its fair value is less than its amortized cost. The FHLBankFHLB considers an other-than-temporary impairment to have occurred under any of the following circumstances:

▪if the FHLBankFHLB has an intent to sell the impaired debt security;
▪if, based on available evidence, the FHLBankFHLB believes it is more likely than not that it will be required to sell the impaired debt security before the recovery of its amortized cost basis; or

▪if the FHLBankFHLB does not expect to recover the entire amortized cost basis of the debt security.

Recognition of Other-than-Temporary Impairment. If either of the first two conditions above is met, the FHLBankFHLB recognizes an other-than-temporary impairment charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value as of the Statement of Condition date. For securities in an unrealized loss position that do not meet either of these conditions, the entire loss position, or total other-than-temporary impairment, is evaluated to determine the extent and amount of credit loss.

Advances. The FHLBankFHLB reports Advances (loans to members, former members or housing associates) either at amortized cost or at fair value when the fair value option is elected. Advances carried at amortized cost are reported net of premiums, discounts (including discounts on Advances related to the Affordable Housing Program (AHP), as discussed below), unearned commitment fees and hedging adjustments. The FHLBankFHLB amortizes theor accretes premiums and accretes the discounts, and recognizes unearned commitment fees and hedging adjustments on Advances to interest income using a level-yield methodology. The FHLBankFHLB records interest on Advances to income as earned. For Advances carried at fair value, interest income is recognized based on the contractual interest rate.

Advance Modifications. In cases in which the FHLBankFHLB funds a new Advance concurrent with or within a short period of time before or after the prepayment of an existing Advance by the FHLBanksame borrower, the FHLB evaluates whether the new Advance meets the accounting criteria to qualify as a modification of an existing Advance or whether it constitutes a new Advance. The FHLBankFHLB compares the present value of cash flows on the new Advance to the present value of cash flows remaining on the existing Advance. If there is at least a 10 percent difference in the cash flows, or if the FHLBankFHLB concludes the differences between the Advances are more than minor based on qualitative factors, the Advance is accounted for as a new Advance. In all other instances, the new Advance is accounted for as a modification.

Prepayment Fees. The FHLBankFHLB charges a borrower a prepayment fee when the borrower prepays certain Advances before the original maturity. The FHLBankFHLB records prepayment fees, net of basis adjustments related to hedging activities included in the carrying value of the Advances, as “Prepayment fees on Advances, net” in the interest income section of the Statements of Income.

If a new Advance qualifies as a modification of the existing Advance, the net prepayment fee on the prepaid Advance is deferred, recorded in the basis of the modified Advance, and amortized/accreted using a level-yield methodology over the life of the modified Advance to Advance interest income.

For prepaid Advances that are hedged and meet the hedge accounting requirements, the FHLBankFHLB terminates the hedging relationship upon prepayment and records the associated fair value gains and losses, adjusted for the prepayment fees, in interest income. If the FHLBank funds a new Advance to a member concurrent with or within a short period of time after the prepayment of a previous Advance to that member, the FHLBank evaluates whether the new Advance qualifies as a modification of the original hedged Advance. If the new Advance qualifies as a modification of the original hedged Advance,

85
Table of Contents

the fair value gains or losses of the Advance and the prepayment fees are included in the carrying amountbasis of the modified Advance, and gains or losses and prepayment fees are amortized in interest income over the life of the modified Advance using a level-yield methodology. If the modified Advance also is hedged and the hedge meets the hedging criteria, the modified Advance is marked to fair value after the modification, and subsequent fair value changes are recorded in other income.

If a new Advance does not qualify as a modification of an existing Advance, itthe existing Advance is treated as an Advance termination with subsequent funding of a new Advance and the existing fees, net of related hedging adjustments, are recorded in interest income as “Prepayment fees on Advances, net.”

The FHLBankFHLB defers commitment fees for Advances and amortizes them to interest income using a level-yield methodology. Refundable fees are deferred until the commitment expires or until the Advance is made. The FHLBankFHLB records commitment fees for Standby Letters of Credit as a deferred credit when it receives the fees and accretes them using a straight-line methodology over the term of the Standby Letter of Credit. Based upon past experience, the FHLBank'sFHLB's management believes that the likelihood of Standby Letters of Credit being drawn upon is remote.

Mortgage Loans Held for Portfolio. The FHLBankFHLB classifies mortgage loans as held for portfolio and, accordingly, reports them at their principal amount outstanding net of unamortized premiums and discounts and mark-to-markethedging basis adjustments on loans initially classified as mortgage loan commitments. The FHLBankFHLB has the intent and ability to hold these mortgage loans to maturity.

Premiums and Discounts. The FHLBankFHLB defers and amortizes premiums and accretes discounts paid to and received by the FHLBank'sFHLB's participating members (Participating Financial Institutions, or PFIs) and mark-to-markethedging basis adjustments, as interest income using the retrospectivecontractual method. The FHLBank aggregates the mortgage loans by similar characteristics (type, maturity, note rate and acquisition date) in determining prepayment estimates for the retrospective method.


Other Fees. The FHLBankFHLB may receive non-origination fees, called pair-off fees. Pair-off fees represent a make-whole provision and are assessed when a member fails to deliver the quantity of loans committed to in a Mandatory Delivery Contract. Pair-off fees are recorded in other income. A Mandatory Delivery Contract is a legal commitment the FHLBankFHLB makes to purchase, and a PFI makes to deliver, a specified dollar amount of mortgage loans, with a forward settlement date, at a specified range of mortgage note rates and prices.

Allowance for Credit Losses. An allowance for credit losses is separately established for each identified portfolio segment, if it is probable that a loss triggering event has occurred in the FHLBank'sFHLB's portfolio as of the Statements of Condition date and the amount of loss can be reasonably estimated. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See Note 10 for details on each allowance methodology.

Portfolio Segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology for determining its allowance for credit losses. The FHLBankFHLB has developed and documented a systematic methodology for determining an allowance for credit losses, where applicable, for (1) Advances, letters of credit and other extensions of credit to members, collectively referred to as “credit products”; (2) Federal Housing Administration (FHA) mortgage loans held for portfolio; and (3) conventional mortgage loans held for portfolio.

Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent needed to understand the exposure to credit risk arising from these financing receivables. The FHLBankFHLB determined that no further disaggregation of the portfolio segments identified above is needed as the credit risk arising from these financing receivables is assessed and measured by the FHLBankFHLB at the portfolio segment level.

Impairment Methodology. A loan is considered impaired when, based on current information and events, it is probable that the FHLBankFHLB will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Loans that are on non-accrual status and that are considered collateral-dependent are measured for impairment based on the fair value of the underlying property (net of estimated selling costs) and the amount of applicable credit enhancements. Loans are considered collateral-dependent if repayment is expected to be provided solely by the sale of the underlying property, that is, there is no other available and reliable source of repayment. Collateral-dependent loans are impaired if the fair value of the underlying collateral is insufficient to recover the unpaid principal balance on the loan. Interest income on impaired loans is recognized in the same manner as non-accrual loans noted below.

Non-accrual Loans. The FHLBankFHLB places a conventional mortgage loan on non-accrual status if it is determined that either (1) the collection of interest or principal is doubtful (e.g., when a related allowance for credit losses is recorded on a loan

86
Table of Contents

considered to be a troubled debt restructuring as a result of the individual evaluation for impairment), or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements and with monthly settlements on a schedule/scheduled basis). Loans with settlements on a schedule/scheduled basis means the FHLBankFHLB receives monthly principal and interest payments from the servicer regardless of whether the mortgagee is making payments to the servicer. Loans with monthly settlement on an actual/actual basis are considered well-secured; however, servicers of actual/actual loan types contractually do not advance principal and interest regardless of borrower creditworthiness. As a result, these loans are placed on non-accrual status once they become 90 days delinquent.

For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income. The FHLBankFHLB records cash payments received on non-accrual loans first as interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful. If the collection of the remaining principal amount due is considered doubtful, cash payments received are applied first solely to principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by recording interest income. A loan on non-accrual status may be restored to accrual status when (1) none of its contractual principal and interest is due and unpaid, and the FHLBankFHLB expects repayment of the remaining contractual interest and principal, or (2) it otherwise becomes well secured and in the process of collection.

Charge-off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The FHLBankFHLB evaluates whether to record a charge-off on a conventional mortgage loan upon the occurrence of a confirming event. Confirming events include, but are not limited to, the occurrence of foreclosure or notification of a claim against any of the credit enhancements. A charge-off is recorded ifThe FHLB charges off the recorded investmentportion of outstanding conventional mortgage loan balances in excess of fair value of the loan will not be recovered.underlying property, less cost to sell and adjusted for any available credit enhancements, for loans that are 180 days or more delinquent and/or certain loans that the borrower has filed for bankruptcy.


Premises, Software and Equipment, Net. The FHLBankFHLB records premises, software and equipment at cost less accumulated depreciation and amortization. The FHLBank'sFHLB's accumulated depreciation and amortization related to these items was $18,556,000$23,345,000 and $19,161,000$20,867,000 at December 31, 20142016 and 2013.2015. The FHLBankFHLB computes depreciation on a straight-line methodology over the estimated useful lives of assets ranging from three to ten years. The FHLBankFHLB amortizes leasehold improvements on a straight-line basis over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The FHLBankFHLB capitalizes improvements and major renewals but expenses ordinary maintenance and repairs when incurred. Depreciation and amortization expense for premises, software and equipment was $3,108,000, $2,549,000,$2,883,000, $2,691,000, and $2,176,000$3,108,000 for the years ended December 31, 2014, 2013,2016, 2015, and 2012.2014.

The FHLBankFHLB includes gains and losses on disposal of premises, software and equipment in other income. The net realized gain (loss) gain on disposal of premises, software and equipment was $(106,000), $13,000,$11,000, $11,000, and $(3,000)$(106,000) for the years ended December 31, 2014, 2013,2016, 2015, and 2012.2014.

The cost of computer software developed or obtained for internal use is capitalized and amortized over future periods. As of December 31, 20142016 and 2013,2015, the FHLBankFHLB had $6,659,000$4,902,000 and $8,677,000$5,887,000 in unamortized computer software costs. Amortization of computer software costs charged to expense was $2,433,000, $1,814,000,$2,080,000, $1,965,000, and $1,528,000$2,433,000 for the years ended December 31, 2014, 2013,2016, 2015, and 2012.2014.

Derivatives. All derivatives are recognized on the Statements of Condition at their fair values and are reported as either derivative assets or derivative liabilities, net of cash collateral and accrued interest from counterparties. The fair values of derivatives are netted by counterparty when the netting arrangementsrequirements have been met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability. Cash flows associated with derivatives are reflected as cash flows from operating activities in the Statement of Cash Flows unless the derivative meets the criteria to be a financing derivative.

Derivative Designations. Each derivative is designated as one of the following:

1.a qualifying hedge of the fair value of a recognized asset or liability or an unrecognized firm commitment (a "fair value" hedge); or

2.a non-qualifying hedge (“economic hedge”) for asset/liability management purposes.

Accounting for Fair Value Hedges. If hedging relationships meet certain criteria including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they are eligible for fair value hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in earnings. The application of hedge accounting generally requires the FHLBankFHLB to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis and to calculate the changes in fair value of the derivatives and related

87
Table of Contents

hedged items independently. This is known as the “long-haul” method of accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The FHLBankFHLB discontinued use of the shortcut method effective July 1, 2009 for all new hedging relationships.

Derivatives are typically executed at the same time as the hedged Advances or Consolidated Obligations, and the FHLBankFHLB designates the hedged item in a qualifying hedge relationship as of the trade date. In many hedging relationships, the FHLBankFHLB may designate the hedging relationship upon its commitment to disburse an Advance or trade a Consolidated Obligation in which settlement occurs within the shortest period of time possible for the type of instrument based on market settlement conventions. The FHLBankFHLB records the changes in fair value of the derivative and the hedged item beginning on the trade date.

Changes in the fair value of a derivative that is designated and qualifies as a fair value hedge, along with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, are recorded in other income as “Net (losses) gains on derivatives and hedging activities.”

Accounting for Economic Hedges. An economic hedge is defined as a derivative hedging specific or non-specific underlying assets, liabilities, or firm commitments that does not qualify, or was not designated, for hedge accounting, but is an acceptable hedging strategy under the FHLBank'sFHLB's risk management program. These economic hedging strategies also comply with Finance Agency regulatory requirements prohibiting speculative hedge transactions. An economic hedge by definition introduces the potential for earnings variability caused by the changes in fair value of the derivatives that are recorded in the FHLBank'sFHLB's income but that are not offset by corresponding changes in the value of the economically hedged assets, liabilities, or firm commitments. As a result, the FHLBankFHLB recognizes only the change in fair value of these derivatives in other income as “Net

(losses) gains on derivatives and hedging activities” with no offsetting fair value adjustments for the assets, liabilities, or firm commitments.

The difference between accruals of interest receivables and payables on derivatives that are designated as fair value hedge relationships is recognized as adjustments to the interest income or expense of the designated hedged item. The differentials between accruals of interest receivables and payables on economic hedges are recognized in other income as “Net (losses) gains on derivatives and hedging activities.”

Embedded Derivatives. The FHLBankFHLB may issue debt, make Advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, the FHLBankFHLB assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the Advance, debt, or purchased financial instrument (the host contract) and whether a separate, non-embedded instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When the FHLBankFHLB determines that (1) the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a stand-alone derivative instrument pursuant to an economic hedge. However, the entire contract is carried at fair value and no portion of the contract is designated as a hedging instrument if the entire contract (the host contract and the embedded derivative) is to be measured at fair value, with changes in fair value reported in current-period earnings (such as an investment security classified as “trading” as well as hybrid financial instruments that are selected for the fair value option), or if the FHLBankFHLB cannot reliably identify and measure the embedded derivative for purposes of separating that derivative from its host contract.

Discontinuance of Hedge Accounting. The FHLBankFHLB discontinues hedge accounting prospectively when: (1) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item attributable to the hedged risk; (2) the derivative and/or the hedged item expires or is sold, terminated, or exercised; or (3) management determines that designating the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued because the FHLBankFHLB determines that the derivative no longer qualifies as an effective fair value hedge of an existing hedged item, the FHLBankFHLB continues to carry the derivative on the Statements of Condition at its fair value, ceases to adjust the hedged asset or liability for changes in fair value, and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining life of the hedged item using a level-yield methodology.

Consolidated Obligations. Consolidated Obligations are recorded at amortized cost unless the FHLBankFHLB has elected the fair value option, in which case the Consolidated Obligations are carried at fair value.

Concessions. Dealers receive concessions in connection with the issuance of certain Consolidated Obligations. The Office of Finance prorates the amount of the concession to the FHLBankFHLB based upon the percentage of the debt issued that is assumed by

88
Table of Contents

the FHLBank.FHLB. Concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense. ConcessionsThe FHLB records concessions paid on Consolidated Obligation Bonds not designated under the fair value option as a direct deduction from their carrying amounts, consistent with the presentation of discounts on Consolidated Obligations. The concessions are deferred and amortized, using a level-yield methodology, over the terms to maturity or the expected lives of the Consolidated Obligation Bonds. Unamortized concessions are included in “Other assets,” and theThe amortization of those concessions is included in Consolidated Obligation Bond interest expense.

The FHLBankFHLB charges to expense as incurred the concessions applicable to Consolidated Obligation Discount Notes because of the short maturities of these Notes. Analyses of expensing concessions as incurred compared to a level-yield methodology have been performed by the FHLBankFHLB, and it has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.

Discounts and Premiums. The FHLBankFHLB accretes the discounts and amortizes the premiums on Consolidated Obligation Bonds to interest expense using a level-yield methodology over the terms to maturity or estimated lives of the corresponding Consolidated Obligation Bonds. Due to their short-term nature, itthe FHLB expenses the discounts on Consolidated Obligation Discount Notes using a straight-line methodology over the term of the Notes. Analyses of a straight-line compared to a level-yield methodology have been performed by the FHLBank,FHLB, and the FHLBankFHLB has determined that the impact of the difference on the financial statements for each period reported, taken individually and as a whole, is not material.

Mandatorily Redeemable Capital Stock. The FHLBankFHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member provides written notice of redemption, gives notice of intent to withdraw from membership, or attains nonmember status by merger or acquisition, charter termination, or involuntary termination from

membership, because the member shares then meet the definition of a mandatorily redeemable financial instrument. Shares meeting this definition are reclassified to a liability at fair value. Dividends declared on shares classified as a liability are accrued at the expected dividend rate and reflected as interest expense in the Statements of Income. The repurchase or redemption of mandatorily redeemable capital stock is reflected as a cash outflow in the financing activities section of the Statements of Cash Flows.

If a member cancels its written notice of redemption or notice of withdrawal, the FHLBankFHLB reclassifies the mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock are no longer classified as interest expense.

Employee Benefit Plans. The FHLBankFHLB records the periodic benefit cost associated with its employee retirement plans and its contributions associated with its defined contribution plans as compensation and benefits expense in the Statements of Income.

Restricted Retained Earnings. In 2011, the 12 FHLBanks entered into a Joint Capital Enhancement Agreement, as amended (Capital Agreement). Under the Capital Agreement, beginning in the third quarter of 2011, the FHLBankFHLB contributes 20 percent of its quarterly net income to a separate restricted retained earnings account until the account balance equals at least one percent of the FHLBank'sFHLB's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends and are presented separately on the Statements of Condition.

Finance Agency Expenses. The FHLBankFHLB funds its proportionate share of the costs of operating the Finance Agency. The portion of the Finance Agency's expenses and working capital fund paid by each FHLBank has been allocated based on theeach FHLBank's pro rata share of total annual assessments (which are based on the ratio between each FHLBank's minimum required regulatory capital and the aggregate minimum required regulatory capital of every FHLBank).

Office of Finance Expenses. The FHLBankFHLB is assessed for its proportionate share of the costs of operating the Office of Finance. Each FHLBank's proportionate share of Office of Finance operating and capital expenditures is calculated using a formula that is based upon the following components: (1) two-thirds based upon each FHLBank's share of total Consolidated Obligations outstanding and (2) one-third based upon an equal pro rata allocation.

Voluntary Housing Programs. The FHLBankFHLB classifies amounts awarded under its voluntary housing programs as other expenses.

Affordable Housing Program (AHP). The FHLBank Act requires each FHLBank to establish and fund an AHP. The FHLBankFHLB charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The FHLBankFHLB issues AHP Advances at interest rates below the customary interest rate for non-subsidized Advances. When the FHLBankFHLB makes an AHP Advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP Advance rate and the FHLBank'sFHLB's related cost of funds for comparable maturity funding is charged

89
Table of Contents

against the AHP liability and recorded as a discount on the AHP Advance. As an alternative, the FHLBankFHLB also has the authority to make the AHP subsidy available to members as a grant. The discount on AHP Advances is accreted to interest income on Advances using a level-yield methodology over the life of the Advance.


Note 2 - Recently Issued Accounting Standards and Interpretations

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.Cash Receipts and Cash Payments. On August 8, 2014,26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the Statement of Cash Flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified on the Statement of Cash Flows. This guidance is effective for the FHLB for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. The FHLB does not intend to adopt the new guidance early. At this time, the FHLB does not expect the new guidance to have a material impact on the FHLB’s cash flows.
Measurement of Credit Losses on Financial Accounting Standards Board (FASB)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 is effective for the classificationFHLB for interim and measurementannual periods beginning after December 15, 2019. Early application is permitted as of certain government-guaranteed mortgage loans upon foreclosure.

the interim and annual reporting periods beginning after December 15, 2018. The amendmentsguidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The FHLB does not intend to adopt the new guidance early. While the FHLB is still in the process of evaluating this guidance, requirethe FHLB expects the guidance will result in an increase in the allowance for credit losses given the requirement to estimate losses for the entire estimated life of the financial asset. The extent of the impact on the FHLB’s financial condition, results of operations, and cash flows will depend upon the composition of the FHLB’s financial assets at the adoption date and the economic conditions and forecasts at that time.
Contingent Put and Call Options in Debt Instruments.On March 14, 2016, the FASB issued amendments to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance requires entities to apply only the four-step decision sequence when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a mortgage loan be derecognized andcall (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a separate other receivable be recognized upon foreclosure if certain conditions are met.call (put) option is related to interest rates or credit risks. This guidance became effective for the FHLBankFHLB for the interim and annual periods beginning on January 1, 2015, and was adopted prospectively.2017. The adoption of this guidance will not have a materialhad no effect on the FHLBank'sFHLB's financial condition, results of operations, and cash flows.
Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.On March 10, 2016, the FASB issued amendments to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under GAAP does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments provide entities with the option to apply the guidance using either a prospective approach or a modified retrospective approach, retrospectively applied to all derivative instruments that meet the specific conditions. As permitted, the FHLB elected early adoption of the guidance prospectively on January 1, 2016. The adoption of this guidance had no effect on the FHLB's financial condition, results of operations, and cash flows.
Leases. On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the Statement of Condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee, of operating or finance leases, to recognize on the Statement of Condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2018, and early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. The FHLB does not intend to adopt the new guidance early. Upon adoption, the FHLB expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities on its Statement of Condition. While the FHLB is still in the process of evaluating this guidance, the FHLB does not expect the new guidance to have a material impact on its financial condition, results of operations, and cash flows.

Repurchase-to Maturity Transactions, Repurchase Financings,Recognition and Disclosures.Measurement of Financial Assets and Financial Liabilities. On June 12, 2014,January 5, 2016, the FASB issued amended guidance for repurchase-to-maturity transactionson certain aspects of recognition, measurement, presentation, and repurchase agreements executed as repurchase financings. This amendment requires secured borrowing accounting treatment for repurchase-to-maturity transactions and provides guidance on accounting for repurchase financing arrangements. In addition, this guidance requires additional disclosures, particularly on transfers accounted for as sales that are economically similar to repurchase agreements and on the naturedisclosure of collateral pledged in repurchase agreements accounted for as secured borrowings.financial instruments. This guidance becameincludes, but is not limited to, the following:

▪Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income.
▪Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected the fair value option.
▪Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the Statement of Condition or the accompanying notes to the financial statements.
▪Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the Statement of Condition.
The guidance becomes effective for the FHLBankFHLB for the interim and annual periods beginning on January 1, 2015.after December 15, 2017, and early adoption is only permitted for certain provisions. The changesamendments, in accounting for transactions outstanding on the effective date were presented asgeneral, should be applied by means of a cumulative-effect adjustment to retained earningsthe Statement of Condition as of January 1, 2015.the beginning of the period of adoption. The adoption ofFHLB does not intend to

adopt the new guidance early. At this time, the FHLB does not expect the new guidance will notto have a material effectimpact on the FHLBank'sFHLB's financial condition, results of operations, orand cash flows.

Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. On January 17, 2014, the FASB issued guidance clarifying when consumer mortgage loans collateralized by real estate should be reclassified to real estate owned. Specifically, such collateralized mortgage loans should be reclassified to real estate owned when either the creditor obtains legal title to the residential real estate property upon completion of a foreclosure, or the borrower conveys all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement. This guidance became effective for the FHLBank for interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance will not have a material effect on the FHLBank's financial condition, results of operations, or cash flows.

Framework for Adversely Classifying Loans, Other Real Estate Owned, and Other Assets and Listing Assets for Special Mention. On April 9, 2012, the Finance Agency issued an advisory bulletin that establishes a standard and uniform methodology for adverse classification and identification of special mention assets and off-balance sheet credit exposures at the FHLBanks, excluding investment securities. The adverse classification requirements were implemented as of January 1, 2014; this implementation did not have a material effect on the FHLBank's financial condition, results of operations, or cash flows. The charge-off requirements were implemented on January 1, 2015. The adoption of these requirements will not have a material effect on the FHLBank's financial condition, results of operations, or cash flows.


Note 3 - Cash and Due from Banks

Cash and due from banks on the Statement of Condition includes cash on hand, cash items in the process of collection, compensating balances, and amounts due from correspondent banks and the Federal Reserve Bank.

Compensating Balances. The FHLBankFHLB maintains collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions on the withdrawal of funds. The average collected cash balances for the years ended December 31, 20142016 and 20132015 were approximately $77,000$50,000 and $68,000.$63,000.

Pass-through Deposit Reserves. The FHLBankFHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as “Cash and due from banks” includes pass-through reserves deposited with Federal Reserve Banks of approximately $298,000$576,000 and $15,884,000$238,000 as of December 31, 20142016 and 2013.2015.



90
Table of Contents

Note 4 - Trading Securities

Table 4.1 - Trading Securities by Major Security Types (in thousands)        
Fair Value
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Mortgage-backed securities:      
Other U.S. obligation single-family mortgage-backed securities (1)
$1,341
 $1,578
$970
 $1,159
Total$1,341
 $1,578
$970
 $1,159
(1)Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities.

Table 4.2 - Net Losses on Trading Securities (in thousands)
 For the Years Ended December 31,
 2014 2013 2012
Net (losses) gains on trading securities held at period end$(9) $(19) $8
Net losses on securities matured during the period—
 —
 (32,778)
Net losses on trading securities$(9) $(19) $(32,770)
 For the Years Ended December 31,
 2016 2015 2014
Net losses on trading securities held at period end$(5) $(18) $(9)
Net losses on trading securities$(5) $(18) $(9)


Note 5 - Available-for-Sale Securities

Table 5.1 - Available-for-Sale Securities by Major Security Types (in thousands)
December 31, 2014December 31, 2016
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit$1,350,001
 $3
 $(27) $1,349,977
$1,300,000
 $38
 $(15) $1,300,023
Total$1,350,001
 $3
 $(27) $1,349,977
$1,300,000
 $38
 $(15) $1,300,023
              
December 31, 2013December 31, 2015
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses)
 
Fair
Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Certificates of deposit$2,185,000
 $1
 $(122) $2,184,879
$700,000
 $81
 $—
 $700,081
Total$2,185,000
 $1
 $(122) $2,184,879
$700,000
 $81
 $—
 $700,081

All securities outstanding with gross unrealized losses at December 31, 2014 have been2016 were in a continuous unrealized loss position for less than 12 months.


Table 5.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Year of Maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Due in one year or less$1,350,001
 $1,349,977
 $2,185,000
 $2,184,879
$1,300,000
 $1,300,023
 $700,000
 $700,081

Table 5.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Amortized cost of available-for-sale securities:      
Fixed-rate$1,350,001
 $2,185,000
$1,300,000
 $700,000

Realized Gains and Losses. The FHLBankFHLB had no sales of securities out of its available-for-sale portfolio for the years ended December 31, 20142016, 20132015, or 2012.2014.

91
Table of Contents



Note 6 - Held-to-Maturity Securities

Table 6.1 - Held-to-Maturity Securities by Major Security Types (in thousands)
December 31, 2014December 31, 2016
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 Gross Unrecognized Holding (Losses) Fair Value
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 Gross Unrecognized Holding Losses Fair Value
Non-mortgage-backed securities:              
Government-sponsored enterprises (GSE) (2)
$26,099
 $—
 $—
 $26,099
$31,279
 $1
 $—
 $31,280
Total non-mortgage-backed securities26,099
 —
 —
 26,099
31,279
 1
 —
 31,280
Mortgage-backed securities:              
Other U.S. obligation single-family
mortgage-backed securities (3)
2,038,960
 10,021
 (1,017) 2,047,964
Other U.S. obligation single-family
mortgage-backed securities
3,183,219
 3,653
 (23,151) 3,163,721
GSE single-family mortgage-backed securities (4)
12,647,212
 191,870
 (118,819) 12,720,263
8,186,733
 36,161
 (147,494) 8,075,400
GSE multi-family mortgage-backed securities3,145,748
 988
 (3,906) 3,142,830
Total mortgage-backed securities14,686,172
 201,891
 (119,836) 14,768,227
14,515,700
 40,802
 (174,551) 14,381,951
Total$14,712,271
 $201,891
 $(119,836) $14,794,326
$14,546,979
 $40,803
 $(174,551) $14,413,231
              
December 31, 2013December 31, 2015
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 Gross Unrecognized Holding (Losses) Fair Value
Amortized Cost (1)
 
Gross Unrecognized Holding
Gains
 Gross Unrecognized Holding Losses Fair Value
Non-mortgage-backed securities:              
GSE (2)
$27,485
 $1
 $—
 $27,486
GSE$32,683
 $—
 $—
 $32,683
Total non-mortgage-backed securities27,485
 1
 —
 27,486
32,683
 —
 —
 32,683
Mortgage-backed securities:              
Other U.S. obligation single-family
mortgage-backed securities (3)
1,909,099
 4,545
 (26,396) 1,887,248
GSE single-family mortgage-backed securities (4)
14,150,578
 141,962
 (398,877) 13,893,663
Other U.S. obligation single-family
mortgage-backed securities
3,894,432
 3,629
 (25,292) 3,872,769
GSE single-family mortgage-backed securities10,891,089
 122,044
 (148,589) 10,864,544
GSE multi-family mortgage-backed securities460,002
 —
 (33) 459,969
Total mortgage-backed securities16,059,677
 146,507
 (425,273) 15,780,911
15,245,523
 125,673
 (173,914) 15,197,282
Total$16,087,162
 $146,508
 $(425,273) $15,808,397
$15,278,206
 $125,673
 $(173,914) $15,229,965
 
(1)Carrying value equals amortized cost.
(2)Consists of debt securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government.
(3)Consists of Ginnie Mae mortgage-backed securities and/or mortgage-backed securities issued or guaranteed by the National Credit Union Administration (NCUA) and the U.S. government.
(4)Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government.


Table 6.2 - Net Purchased DiscountsPremiums Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Premiums$24,473
 $32,458
$60,519
 $84,450
Discounts(51,357) (58,658)(31,474) (40,667)
Net purchased discounts$(26,884) $(26,200)
Net purchased premiums$29,045
 $43,783


92
Table of Contents

Table 6.3 summarizes the held-to-maturity 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 6.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)
December 31, 2014December 31, 2016
Less than 12 Months 12 Months or more TotalLess than 12 Months 12 Months or more Total
Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses
Mortgage-backed securities:                      
Other U.S. obligation single-family
mortgage-backed securities (1)
$—
 $—
 $197,625
 $(1,017) $197,625
 $(1,017)$2,151,584
 $(23,151) $—
 $—
 $2,151,584
 $(23,151)
GSE single-family mortgage-backed securities (2)
631,907
 (1,348) 5,555,049
 (117,471) 6,186,956
 (118,819)
GSE single-family mortgage-backed securities4,548,897
 (90,119) 1,193,241
 (57,375) 5,742,138
 (147,494)
GSE multi-family mortgage-backed securities1,897,043
 (3,906) —
 —
 1,897,043
 (3,906)
Total$631,907
 $(1,348) $5,752,674
 $(118,488) $6,384,581
 $(119,836)$8,597,524
 $(117,176) $1,193,241
 $(57,375) $9,790,765
 $(174,551)
                      
December 31, 2013December 31, 2015
Less than 12 Months 12 Months or more TotalLess than 12 Months 12 Months or more Total
Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses) Fair Value Gross Unrealized (Losses)Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses
Mortgage-backed securities:                      
Other U.S. obligation single-family
mortgage-backed securities (1)
$663,278
 $(26,396) $—
 $—
 $663,278
 $(26,396)
GSE single-family mortgage-backed securities (2)
8,817,132
 (397,252) 48,902
 (1,625) 8,866,034
 (398,877)
Other U.S. obligation single-family
mortgage-backed securities
$2,574,649
 $(25,292) $—
 $—
 $2,574,649
 $(25,292)
GSE single-family mortgage-backed securities4,332,237
 (74,068) 2,065,926
 (74,521) 6,398,163
 (148,589)
GSE multi-family mortgage-backed securities459,969
 (33) —
 —
 459,969
 (33)
Total$9,480,410
 $(423,648) $48,902
 $(1,625) $9,529,312
 $(425,273)$7,366,855
 $(99,393) $2,065,926
 $(74,521) $9,432,781
 $(173,914)
(1)Consists of Ginnie Mae mortgage-backed securities.
(2)Consists of mortgage-backed securities issued and effectively guaranteed by Freddie Mac and/or Fannie Mae, which have the support of the U.S. government, although they are not obligations of the U.S. government.

Table 6.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Year of Maturity
Amortized Cost (1)
 Fair Value 
Amortized Cost (1)
 Fair Value
Amortized Cost (1)
 Fair Value 
Amortized Cost (1)
 Fair Value
Non-mortgage-backed securities:              
Due in 1 year or less$26,099
 $26,099
 $27,485
 $27,486
$31,279
 $31,280
 $32,683
 $32,683
Due after 1 year through 5 years—
 —
 —
 —
—
 —
 —
 —
Due after 5 years through 10 years—
 —
 —
 —
—
 —
 —
 —
Due after 10 years—
 —
 —
 —
—
 —
 —
 —
Total non-mortgage-backed securities26,099
 26,099
 27,485
 27,486
31,279
 31,280
 32,683
 32,683
Mortgage-backed securities (2)
14,686,172
 14,768,227
 16,059,677
 15,780,911
14,515,700
 14,381,951
 15,245,523
 15,197,282
Total$14,712,271
 $14,794,326
 $16,087,162
 $15,808,397
$14,546,979
 $14,413,231
 $15,278,206
 $15,229,965
(1)Carrying value equals amortized cost.
(2)Mortgage-backed securities 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.

93
Table of Contents


Table 6.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Amortized cost of non-mortgage-backed securities:      
Fixed-rate$26,099
 $27,485
$31,279
 $32,683
Total amortized cost of non-mortgage-backed securities26,099
 27,485
31,279
 32,683
Amortized cost of mortgage-backed securities:      
Fixed-rate12,091,591
 13,048,808
9,706,072
 12,664,603
Variable-rate2,594,581
 3,010,869
4,809,628
 2,580,920
Total amortized cost of mortgage-backed securities14,686,172
 16,059,677
14,515,700
 15,245,523
Total$14,712,271
 $16,087,162
$14,546,979
 $15,278,206

Realized Gains and Losses. The FHLBankFHLB sold securities out of its held-to-maturity portfolio during the periods noted below in Table 6.6, each of which had 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.

Table 6.6 - Proceeds from Sale and Gains on Held-to-Maturity Securities (in thousands)
For the Years Ended December 31,For the Years Ended December 31,
2014 2013 20122016 2015 2014
Proceeds from sale of held-to-maturity securities$—
 $—
 $507,531
$852,199
 $—
 $—
Gross gains from sale of held-to-maturity securities—
 —
 29,292
38,763
 —
 —


Note 7 - Other-Than-Temporary Impairment Analysis

The FHLBankFHLB evaluates any of its individual available-for-sale and held-to-maturity investment securities holdings in an unrealized loss position for other-than-temporary impairment on a quarterly basis.

For its otherOther U.S. obligations and GSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLBankFHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLBankFHLB from losses based on current expectations. As a result, the FHLBankFHLB determined that, as of December 31, 20142016, all of the gross unrealized losses on these investments were temporary as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLBankFHLB does not intend to sell the investments, and it is not more likely than not that the FHLBankFHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLBankFHLB did not consider any of these investments to be other-than-temporarily impaired at December 31, 20142016.

The FHLBankFHLB also reviewed its available-for-sale securities that have experienced unrealized losses at December 31, 20142016 and determined that the unrealized losses were temporary, based on the creditworthiness of the issuers and the related collateral characteristics, and that the FHLBankFHLB will recover its entire amortized cost basis. Additionally, because the FHLBankFHLB does not intend to sell these securities, nor is it more likely than not that the FHLBankFHLB will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at December 31, 2014.2016.

The FHLBankFHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 20132015.


Note 8 - Advances

The FHLBankFHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate Advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 10 years, where the interest rates reset periodically at a fixed spread to the London Interbank Offered Rate (LIBOR) or other specified index. At December 31, 2014 and 2013, the FHLBank had Advances outstanding, including AHP Advances (see Note 14), at interest rates ranging from 0.00 percent to 9.20 percent. Advances with interest rates of 0.00 percent are AHP Advances. The following table presents Advance

94
Table of Contents

redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.

Table 8.1 - Advance Redemption Terms (dollars in thousands)
 December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Redemption Term Amount 
Weighted Average Interest
Rate
 Amount 
Weighted Average Interest
Rate
Amount 
Weighted Average Interest
Rate
 Amount 
Weighted Average Interest
Rate
Overdrawn demand deposit accounts $—
 —% $150
 0.20%
Due in 1 year or less 14,139,630
 0.40
 17,729,350
 0.42
$23,129,060
 0.85% $27,177,311
 0.57%
Due after 1 year through 2 years 14,810,847
 0.54
 6,614,470
 0.63
21,503,138
 1.06
 12,360,345
 0.79
Due after 2 years through 3 years 12,829,760
 0.69
 9,485,558
 0.64
14,292,353
 1.12
 15,839,007
 0.77
Due after 3 years through 4 years 14,222,722
 0.60
 9,444,110
 0.81
5,322,050
 1.26
 11,107,509
 0.78
Due after 4 years through 5 years 10,724,619
 0.54
 11,831,887
 0.61
963,105
 1.78
 3,391,892
 1.06
Thereafter 3,570,929
 1.51
 9,987,245
 0.78
4,697,315
 1.75
 3,366,205
 1.69
Total par value 70,298,507
 0.60
 65,092,770
 0.62
69,907,021
 1.07
 73,242,269
 0.75
Commitment fees (699)   (750)  (534)   (629)  
Discount on AHP Advances (12,110)   (14,953)  (7,435)   (9,396)  
Premiums 3,058
   3,413
  2,061
   2,744
  
Discounts (12,572)   (14,104)  (5,994)   (8,386)  
Hedging adjustments 129,390
   204,014
  (13,138)   65,513
  
Fair value option valuation adjustments and accrued interest 42
   —
  93
   57
  
Total $70,405,616
   $65,270,390
  $69,882,074
   $73,292,172
  

The FHLBankFHLB offers certain fixed and variable-rate Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). If the call option is exercised, replacement funding may be available.available to members. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLBankFHLB that makes the FHLBankFHLB financially indifferent to the prepayment of the Advance. At December 31, 2014 and 2013, the FHLBank had callable Advances (in thousands) of $15,098,357 and $10,072,203.

Table 8.2 - Advances by Year of Contractual Maturity or Next Call Date for Callable Advances (in thousands)
Year of Contractual Maturity or Next Call DateDecember 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Overdrawn demand deposit accounts$—
 $150
Due in 1 year or less23,003,946
 25,109,451
$33,831,156
 $33,384,838
Due after 1 year through 2 years12,159,384
 5,300,184
15,901,805
 11,289,035
Due after 2 years through 3 years9,659,975
 7,149,237
13,608,214
 13,959,002
Due after 3 years through 4 years12,295,893
 7,050,325
2,982,425
 10,356,770
Due after 4 years through 5 years9,970,280
 10,877,078
2,243,105
 2,747,419
Thereafter3,209,029
 9,606,345
1,340,316
 1,505,205
Total par value$70,298,507
 $65,092,770
$69,907,021
 $73,242,269

The FHLBankFHLB also offers putable Advances. With a putable Advance, the FHLBankFHLB effectively purchases put options from the member that allows the FHLBankFHLB to terminate the Advance at predetermined dates. The FHLBankFHLB normally would exercise its put option when interest rates increase relative to contractual rates. At December 31, 2014 and 2013, the FHLBank had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $1,617,400 and $2,146,400.


95
Table of Contents

Table 8.3 - Advances by Year of Contractual Maturity or Next Put/ConvertPut Date for Putable/ConvertiblePutable Advances (in thousands)
Year of Contractual Maturity or Next Put/Convert DateDecember 31, 2014 December 31, 2013
Overdrawn demand deposit accounts$—
 $150
Year of Contractual Maturity or Next Put DateDecember 31, 2016 December 31, 2015
Due in 1 year or less15,753,030
 19,681,750
$23,499,560
 $28,111,211
Due after 1 year through 2 years14,663,847
 6,424,970
21,248,138
 11,895,945
Due after 2 years through 3 years12,115,860
 9,338,558
14,286,853
 15,549,007
Due after 3 years through 4 years13,649,722
 8,582,710
5,322,050
 11,098,009
Due after 4 years through 5 years10,715,119
 11,256,887
963,105
 3,391,892
Thereafter3,400,929
 9,807,745
4,587,315
 3,196,205
Total par value$70,298,507
 $65,092,770
$69,907,021
 $73,242,269

Table 8.4 - Advances by Interest Rate Payment Terms (in thousands)                    
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Fixed-rate (1)
      
Due in one year or less$8,638,946
 $6,706,181
$16,330,685
 $15,599,101
Due after one year9,306,104
 8,774,636
8,369,765
 9,713,857
Total fixed-rate (1)
17,945,050
 15,480,817
24,700,450
 25,312,958
Variable-rate (1)
      
Due in one year or less5,500,684
 10,580,389
6,798,375
 11,578,210
Due after one year46,852,773
 39,031,564
38,408,196
 36,351,101
Total variable-rate (1)
52,353,457
 49,611,953
45,206,571
 47,929,311
Total par value$70,298,507
 $65,092,770
$69,907,021
 $73,242,269
(1)Payment terms based on current interest rate terms, which reflect any option exercises or rate conversions that have occurred subsequent to the related Advance issuance.

Credit Risk Exposure and Security Terms.Exposure. The FHLBank'sFHLB's potential credit risk from Advances is concentrated in commercial banks and insurance companies. The FHLBank'sFHLB's Advances outstanding that were greater than or equal to $1.0 billion per borrower were $56.6$55.5 billion (80.5(79.4 percent) and $51.6$57.4 billion (79.3(78.4 percent) at December 31, 20142016 and 2013,2015, respectively. These Advances were made to 69 and 8 borrowers (members and former members) at December 31, 20142016 and 2013.2015. See Note 10 for information related to the FHLBank'sFHLB's credit risk on Advances and allowance methodology for credit losses.

Table 8.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLBankFHLB (dollars in millions)
December 31, 2014 December 31, 2013
December 31, 2016December 31, 2016 December 31, 2015
Principal % of Total Principal % of TotalPrincipal % of Total Par Value of Advances Principal % of Total Par Value of Advances
JPMorgan Chase Bank, N.A.$41,300
 59% JPMorgan Chase Bank, N.A.$41,700
 64%$32,300
 46% JPMorgan Chase Bank, N.A.$35,350
 48%
U.S. Bank, N.A.8,338
 12
 U.S. Bank, N.A.4,584
 7
8,563
 12
 U.S. Bank, N.A.10,086
 14
Total$49,638
 71% Total$46,284
 71%$40,863
 58% Total$45,436
 62%


96
Table of Contents

Note 9 - Mortgage Loans Held for Portfolio

Total mortgage loans held for portfolio represent residential mortgage loans under the MPP that the FHLBank'sFHLB's members originate, credit enhance, and then sell to the FHLBank.FHLB. The FHLBankFHLB does not service any of these loans. The FHLBankFHLB plans to retain its existing portfolio of mortgage loans.

Table 9.1 - Mortgage Loans Held for Portfolio (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Unpaid principal balance:      
Fixed rate medium-term single-family mortgage loans (1)
$1,393,525
 $1,482,345
$1,320,585
 $1,478,780
Fixed rate long-term single-family mortgage loans5,402,479
 5,160,854
7,605,088
 6,278,904
Total unpaid principal balance6,796,004
 6,643,199
8,925,673
 7,757,684
Premiums179,540
 177,180
211,058
 184,975
Discounts(2,460) (3,631)(3,740) (4,572)
Hedging basis adjustments (2)
16,518
 8,775
16,869
 15,275
Total mortgage loans held for portfolio$6,989,602
 $6,825,523
$9,149,860
 $7,953,362

(1)Medium-term is defined as a term of 15 years or less.
(2)Represents the unamortized balance of the mortgage purchase commitments' market values at the time of settlement. The market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.

Table 9.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Unpaid principal balance:      
Conventional mortgage loans$6,203,318
 $5,897,804
$8,534,542
 $7,277,584
Federal Housing Administration (FHA) mortgage loans592,686
 745,395
FHA mortgage loans391,131
 480,100
Total unpaid principal balance$6,796,004
 $6,643,199
$8,925,673
 $7,757,684

For information related to the FHLBank'sFHLB's credit risk on mortgage loans and allowance for credit losses, see Note 10.10.

Table 9.3 - Members, Including Any Known Affiliates that are Members of the FHLBank,FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)
December 31, 2014  December 31, 2013December 31, 2016  December 31, 2015
Principal % of Total  Principal % of TotalPrincipal % of Total  Principal % of Total
Union Savings Bank$1,593
 23% Union Savings Bank$1,433
 22%$2,886
 32% Union Savings Bank$2,242
 29%
Guardian Savings Bank FSB855
 10
 
PNC Bank, N.A. (1)
839
 11
PNC Bank, N.A.(1)
1,074
 16
 
PNC Bank, N.A. (1)
1,356
 20
660
 7
 Guardian Savings Bank FSB633
 8
Guardian Savings Bank FSB406
 6
 

 

 
(1)
Former member.     


97
Table of Contents

Note 10 - Allowance for Credit Losses

The FHLBankFHLB has established an allowance methodology for each of the FHLBank'sFHLB's portfolio segments: credit products (Advances, Letters of Credit and other extensions of credit to members); FHA mortgage loans held for portfolio; and conventional mortgage loans held for portfolio.

Credit products

The FHLBankFHLB manages its credit exposure to credit products through an integrated approach that includes establishing a credit limit for each borrower, includes an ongoing review of each borrower's financial condition and is coupled with detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLBankFHLB lends to eligible borrowers in accordance with federal statutes, including the FHLBank Act and Finance Agency regulations, which require the FHLBankFHLB to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each member's credit products is calculated by applying collateral discounts, or haircuts, to the value of the collateral. The FHLBankFHLB accepts certain investment securities, residential mortgage loans, deposits and other real estate related assets as collateral. In addition, community financial institutions are eligible to utilize expanded statutory collateral provisions for small business, agriculture loans and agriculturecommunity development loans. The FHLBank'sFHLB's capital stock owned by its member borrowers is also pledged as collateral. Collateral arrangements and a member’s borrowing capacity vary based on the financial condition and performance of the institution, the types of collateral pledged and the overall quality of those assets. The FHLBankFHLB can also require additional or substitute collateral to protect its security interest. Management of the FHLBankFHLB believes that these policies effectively manage the FHLBank'sFHLB's credit risk from credit products.

Members experiencing financial difficulties are subject to FHLBank-performedFHLB-performed “stress tests” of the impact of poorly performing assets on the member’s capital and loss reserve positions. Depending on the results of these tests and the level of overcollateralization, a member may be allowed to maintain pledged loan assets in its custody, may be required to deliver those loans into the custody of the FHLBankFHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLBankFHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLBankFHLB by a member priority over the claims or rights of any other party except for claims or rights of a third party that would be entitled to priority under otherwise applicable law and that are held by a bona fide purchaser for value or by a secured party holding a prior perfected security interest.

Using a risk-based approach, the FHLBankFHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At December 31, 20142016 and 2013,2015, the FHLBankFHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

The FHLBankFHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At December 31, 20142016 and 2013,2015, the FHLBankFHLB did not have any Advances that were past due, in non-accrual status or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLBankFHLB during 20142016 or 20132015.

The FHLBankFHLB has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies management's credit analysis and the repayment history on credit products, the FHLBankFHLB did not record any credit losses on credit products as of December 31, 20142016 or 2013.2015. Accordingly, the FHLBankFHLB did not record any allowance for credit losses on Advances.

At December 31, 20142016 and 2013, no2015, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures was recorded.exposures. See Note 20 for additional information on the FHLBank'sFHLB's off-balance sheet credit exposure.

Mortgage Loans Held for Portfolio - FHA

The FHLBankFHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. AnyThe FHLB expects to recover any losses from such loans are expected to be recovered from the FHA. Any losses from these loans that are not recovered from the FHA would be due to a claim rejection by the FHA and, as such, would be recoverable from the selling participating financial institutions. Therefore, the FHLBankFHLB only has credit risk for these loans if the seller or servicer fails to pay for losses not covered by the FHA insurance. As a result, the FHLBankFHLB did not establish an allowance for credit losses on its FHA insured mortgage loans. Furthermore, due to the insurance, none of these mortgage loans have been placed on non-accrual status.


98
Table of Contents

Mortgage Loans Held for Portfolio - Conventional Mortgage Purchase Program (MPP)

The FHLB determines the allowance for conventional loans is determined bythrough analyses that include consideration of various data observations such as past performance, current performance, loan portfolio characteristics, collateral-related characteristics, industry data, and prevailing economic conditions. The measurement of the allowance for credit losses consists of: (1) collectively evaluating homogeneous pools of residential mortgage loans; (2) reviewing specifically identified loans for impairment; and (3) considering other relevant qualitative factors.

Collectively Evaluated Mortgage Loans. The credit risk analysis of conventional loans evaluated collectively for impairment considers historical delinquency migration, applies estimated loss severities, and incorporates the associated credit enhancements in order to determine the FHLBank'sFHLB's best estimate of probable incurred losses at the reporting date. The FHLB performs the credit risk analysis of all conventional mortgage loans is performed at the individual Master Commitment Contract level to properly determine the credit enhancements available to recover losses on loans under each individual Master Commitment Contract. The Master Commitment Contract is an agreement with a member in which the member agrees to make everya best efforts attempt to sell a specific dollar amount of loans to the FHLBankFHLB generally over a one-year period. Migration analysis is a methodology for determining, through the FHLBank'sFHLB's experience over a historical period, the rate of default on loans. The FHLBankFHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLBankFHLB then estimates, based on historical experience, how many loans in these categories may migrate to a loss realization event and applies a current loss severity to estimate losses. The estimated losses are then reduced by the probable cash flows resulting from available credit enhancements. Any credit enhancement cash flows that are projected and assessed as not probable of receipt do not reduce estimated losses.

Individually Evaluated Mortgage Loans. Conventional mortgage loans that are considered troubled debt restructurings are specifically identified for purposes of calculating the allowance for credit losses. The FHLBankFHLB measures impairment of these specifically identified loans by either estimating the present value of expected cash flows, estimating the loan's observable market price, or estimating the fair value of the collateral if the loan is collateral dependent. SpecificallyThe FHLB removes specifically identified loans evaluated for impairment are removed from the collectively evaluated mortgage loan population.

Qualitative Factors. The FHLBankFHLB also assesses other qualitative factors in its estimation of loan losses for the collectively evaluated population. This amount represents a subjective management judgment, based on facts and circumstances that exist as of the reporting date, that is intended to cover other incurred losses that may not otherwise be captured in the methodology described above.

Rollforward of Allowance for Credit Losses on Mortgage Loans. The following tables present a rollforward of the allowance for credit losses on conventional mortgage loans as well as the recorded investment in mortgage loans by impairment methodology. The recorded investment in a loan is the unpaid principal balance of the loan adjusted for accrued interest,

unamortized premiums or discounts, hedging basis adjustments and direct write-downs. The recorded investment is not net of any allowance.

Table 10.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)
For the Years Ended December 31,For the Years Ended December 31,
2014 2013 20122016 2015 2014
Balance, beginning of period$7,233
 $17,907
 $20,750
$1,686
 $4,919
 $7,233
Charge-offs(1,814) (3,224) (4,302)
(Reversal) provision for credit losses(500) (7,450) 1,459
Net charge offs(544) (3,233) (1,814)
Reversal for credit losses—
 —
 (500)
Balance, end of period$4,919
 $7,233
 $17,907
$1,142
 $1,686
 $4,919


99
Table of Contents

Table 10.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Allowance for credit losses, end of period:   
Allowance for credit losses:   
Collectively evaluated for impairment$4,766
 $7,159
$1,142
 $1,686
Individually evaluated for impairment153
 74
—
 —
Total$4,919
 $7,233
Recorded investment, end of period:   
Total allowance for credit losses$1,142
 $1,686
Recorded investment:   
Collectively evaluated for impairment$6,402,994
 $6,082,636
$8,772,681
 $7,483,523
Individually evaluated for impairment8,639
 7,799
9,889
 9,385
Total recorded investment$6,411,633
 $6,090,435
$8,782,570
 $7,492,908

Credit Enhancements. The conventional mortgage loans under the MPP are supported by some combination of credit enhancements (primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) and the Lender Risk Account (LRA), including pooled LRA for those members participating in an aggregated MPP pool). The amount of credit enhancements needed to protect the FHLBankFHLB against credit losses is determined through use of a third-party default model. These credit enhancements apply after a homeowner's equity is exhausted. Beginning in February 2011, the FHLBankFHLB discontinued the use of SMI for all new loan purchases and replaced it with expanded use of the LRA. The LRA is funded by the FHLBankFHLB as a portion of the purchase proceeds to cover expected losses. The LRA is recorded in other liabilities in the Statements of Condition. Excess funds over required balances are distributed to the member in accordance with a step-down schedule that is established upon execution of a Master Commitment Contract, subject to performance of the related loan pool. The LRA established for a pool of loans is limited to only covering losses of that specific pool of loans.

Table 10.3 - Changes in the LRA (in thousands)
For the Years Ended December 31,For the Years Ended December 31,
2014 2013 20122016 2015 2014
LRA at beginning of year$115,236
 $102,680
 $68,684
$158,010
 $129,213
 $115,236
Additions18,947
 18,331
 39,111
34,338
 33,100
 18,947
Claims(2,075) (4,118) (3,409)(885) (1,747) (2,075)
Scheduled distributions(2,895) (1,657) (1,706)(3,779) (2,556) (2,895)
LRA at end of period$129,213
 $115,236
 $102,680
$187,684
 $158,010
 $129,213


100
Table of Contents

Credit Quality Indicators. Key credit quality indicators for mortgage loans include the migration of past due loans, non-accrual loans, and loans in process of foreclosure.foreclosure, and non-accrual loans. The table below summarizes the FHLBank'sFHLB's key credit quality indicators for mortgage loans.

Table 10.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)
December 31, 2014December 31, 2016
Conventional MPP Loans FHA Loans TotalConventional MPP Loans FHA Loans Total
Past due 30-59 days delinquent$49,053
 $42,744
 $91,797
$39,409
 $23,206
 $62,615
Past due 60-89 days delinquent13,597
 12,881
 26,478
9,350
 8,275
 17,625
Past due 90 days or more delinquent42,991
 25,045
 68,036
21,773
 14,054
 35,827
Total past due105,641
 80,670
 186,311
70,532
 45,535
 116,067
Total current mortgage loans6,305,992
 522,042
 6,828,034
8,712,038
 351,299
 9,063,337
Total mortgage loans$6,411,633
 $602,712
 $7,014,345
$8,782,570
 $396,834
 $9,179,404
Other delinquency statistics:          
In process of foreclosure, included above (1)
$34,854
 $11,687
 $46,541
$15,412
 $5,841
 $21,253
Serious delinquency rate (2)
0.68% 4.27% 0.99%0.26% 3.59% 0.40%
Past due 90 days or more still accruing interest (3)
$41,857
 $25,045
 $66,902
$19,408
 $14,054
 $33,462
Loans on non-accrual status, included above$3,574
 $—
 $3,574
$3,908
 $—
 $3,908
          
December 31, 2013December 31, 2015
Conventional MPP Loans FHA Loans TotalConventional MPP Loans FHA Loans Total
Past due 30-59 days delinquent$48,619
 $53,305
 $101,924
$42,606
 $31,846
 $74,452
Past due 60-89 days delinquent11,971
 18,963
 30,934
10,125
 9,887
 20,012
Past due 90 days or more delinquent57,934
 32,942
 90,876
30,575
 17,426
 48,001
Total past due118,524
 105,210
 223,734
83,306
 59,159
 142,465
Total current mortgage loans5,971,911
 654,399
 6,626,310
7,409,602
 428,186
 7,837,788
Total mortgage loans$6,090,435
 $759,609
 $6,850,044
$7,492,908
 $487,345
 $7,980,253
Other delinquency statistics:          
In process of foreclosure, included above (1)
$46,285
 $18,595
 $64,880
$23,171
 $7,043
 $30,214
Serious delinquency rate (2)
0.96% 4.41% 1.34%0.42% 3.64% 0.62%
Past due 90 days or more still accruing interest (3)
$57,543
 $32,942
 $90,485
$25,016
 $17,426
 $42,442
Loans on non-accrual status, included above$3,077
 $—
 $3,077
$6,753
 $—
 $6,753
(1)Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.
(2)Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class recorded investment amount.
(3)Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status.

The FHLBankFHLB did not have any real estate owned at December 31, 20142016 or 2015.

Individually Evaluated Impaired Loans.Table 10.52013 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment..

Table 10.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
 December 31, 2016 December 31, 2015
Conventional MPP loansRecorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance
With no related
allowance
$9,889
 $9,708
 $—
 $9,385
 $9,187
 $—
With an allowance—
 —
 —
 —
 —
 —
Total$9,889
 $9,708
 $—
 $9,385
 $9,187
 $—

Table 10.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
 For the Years Ended December 31,
 2016 2015 2014
Individually impaired loansAverage Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Conventional MPP Loans$9,440
 $466
 $8,433
 $438
 $8,029
 $417

Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLBank'sFHLB's troubled debt restructurings primarily involve loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans discharged in Chapter 7 bankruptcy. The FHLBank had 53 and 42 modified loans considered troubled debt restructurings at December 31, 2014 and 2013, respectively.


101
Table of Contents

A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls (i.e., loss severity rate) incurred as of the reporting date.

Table 10.5 - Recorded Investment in Troubled Debt Restructurings (in thousands)
Troubled debt restructuringsDecember 31, 2014 December 31, 2013
Conventional MPP Loans$8,639
 $7,799

Due to the minimal change in terms of modified loans (i.e., no principal forgiven), the FHLBank's pre-modification recorded investment was not materially different than the post-modificationThe FHLB's recorded investment in troubled debt restructurings.

Certain conventional MPPmodified loans that were modified within the previous 12 months and considered troubled debt restructurings experienced a payment default as noted in the table below. A borrower is considered to have defaulted on awas (in thousands) $9,889 and $9,385 at December 31, 2016 and 2015, respectively. The amount of troubled debt restructuring ifrestructurings is not considered material to the borrower's contractually due principalFHLB's financial condition, results of operations, or interest is 60 days or more past due at any time during the periods presented.

Table 10.6 - Recorded Investment of Financing Receivables Modified within the Previous 12 Months and Considered Troubled Debt Restructurings that Subsequently Defaulted (in thousands)cash flows.
 For the Years Ended December 31,
Defaulted troubled debt restructurings2014 2013 2012
Conventional MPP Loans$671
 $793
 $—

Modified loans that subsequently default may recognize a higher probability of loss when calculating the allowance for credit losses.

Individually Evaluated Impaired Loans. At December 31, 2014 and 2013, only certain conventional MPP loans individually evaluated for impairment required an allowance for credit losses. Table 10.7 presents the recorded investment, unpaid principal balance, and related allowance associated with these loans.

Table 10.7 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)
 December 31, 2014 December 31, 2013
Conventional MPP loansRecorded Investment Unpaid Principal Balance Related Allowance Recorded Investment Unpaid Principal Balance Related Allowance
With no related
allowance
$5,297
 $5,165
 $—
 $4,959
 $4,828
 $—
With an allowance3,342
 3,293
 153
 2,840
 2,801
 74
Total$8,639
 $8,458
 $153
 $7,799
 $7,629
 $74

Table 10.8 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)
 For the Years Ended December 31,
 2014 2013 2012
Individually impaired loansAverage Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
Conventional MPP Loans$8,029
 $417
 $6,615
 $348
 $4,331
 $228


102
Table of Contents


Note 11 - Derivatives and Hedging Activities

Nature of Business Activity

The FHLBankFHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the funding sourcesinterest-bearing liabilities that finance these assets. The goal of the FHLBank'sFHLB's interest-rate risk management strategy is not to eliminate interest-rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, the FHLBankFHLB has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept. In addition, the FHLBankFHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and funding sources.interest-bearing liabilities.

The FHLBankFHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (bilateral(uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).

Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.

Consistent with Finance Agency regulations, the FHLBankFHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLBank'sFHLB's risk management objectives and to act as an intermediary between its members and counterparties. The use of derivatives is an integral part of the FHLBank'sFHLB's financial

management strategy. However, Finance Agency regulations and the FHLBank'sFHLB's financial management policy prohibit trading in, or the speculative use of, derivative instruments and limit credit risk arising from them.

The most common ways in which the FHLBankFHLB uses derivatives are to:

▪reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

▪manage embedded options in assets and liabilities;

▪reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the cost of a combined funding structure can be lower than the cost of a comparable Consolidated Obligation Bond;

▪preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance); without
▪manage embedded options in assets and liabilities;
▪reduce funding costs by combining a derivative with a Consolidated Obligation Bond, as the usecost of derivatives, this interest rate spread coulda combined funding structure can be reduced or eliminated whenlower than the cost of a change in the interest rate on the Advance does not match a change in the interest rate on thecomparable Consolidated Obligation Bond; and

▪protect the value of existing asset or liability positions.

Types of Derivatives

The FHLBank may enter into interest rate swaps (including callable and putable swaps), swaptions, interest rate cap and floor agreements, calls, puts, futures, and forward contracts to manage its exposure to changes in interest rates.FHLB primarily uses the following derivative instruments:

Interest rate swaps - An interest rate swap is an agreement between two entities to exchange cash flows in the future. The agreement sets the dates on which the cash flows will be paid and the manner in which the cash flows will be calculated. One of the simplest forms of an interest rate swap involves the promise by one party to pay cash flows equivalent to the interest on a notional principal amount at a predetermined fixed rate for a given period of time. In return for this promise, this party receives cash flows equivalent to the interest on the same notional principal amount at a variable-rate index for the same period of time. The variable-rate transacted by the FHLBankFHLB in its derivatives is LIBOR.

Swaptions - A swaption is an option on a swap that gives the buyer the right to enter into a specified interest rate swap at a certain time in the future. The FHLB may enter into both payer swaptions and receiver swaptions. A payer swaption is the option to make fixed interest payments at a later date and a receiver swaption is the option to receive fixed interest payments at a later date.

103
TableForwards Contracts - Forwards contracts gives the buyer the right to buy or sell a specific type of Contentsasset at a specific time at a given price. For example, certain mortgage purchase commitments entered into by the FHLB are considered derivatives. The FHLB may hedge these commitments by selling to-be-announced (TBA) mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price.


Application of Interest Rate SwapsDerivatives

The FHLBank generally uses derivatives as fair value hedges of underlying financial instruments. However, because the FHLBank uses interest rate swaps when they are considered to be the most cost-effective alternative to achieve the FHLBank's financial and risk management objectives, it may enter into interest rate swaps that do not necessarily qualify for hedge accounting (economic hedges). The FHLBank re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
Types of Hedged Items

The FHLBankFHLB documents at inception all relationships between derivatives designated as hedging instruments and the hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition. The FHLBankFHLB also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives that are used in hedging transactions have been effective in offsetting changes in the fair value of the hedged items and whether those derivatives may be expected to remain effective in future periods. The FHLBankFHLB currently uses regression analyses to assess the effectiveness of its hedges.

The FHLB may use certain derivatives as fair value hedges of associated financial instruments. However, because the FHLB uses derivatives when they are considered to be the most cost-effective alternative to achieve the FHLB's financial and risk management objectives, it may enter into derivatives that do not necessarily qualify for hedge accounting (economic hedges). The FHLB re-evaluates its hedging strategies from time to time and may change the hedging techniques it uses or adopt new strategies.
Types of Hedged Items

The types of assets and liabilities currently hedged with derivatives are:

Investments - The interest rate and prepayment risks associated with the FHLBank'sFHLB's investment securities are managed through a combination of debt issuance and, possibly, derivatives. The FHLBankFHLB may manage the prepayment and interest rate risks by funding investment securities with Consolidated Obligations that have call features or by hedging the prepayment risk with caps

or floors, callable swaps or swaptions. The FHLB may also purchase swaptions to minimize the prepayment risk embedded in certain investments. Although these derivatives are valid economic hedges against the prepayment risk of the investments, they are not specifically linked to individual investments and therefore do not receive fair value hedge accounting. These derivatives are marked-to-market through earnings.

Advances - The FHLBankFHLB offers a wide arrayrange of fixed- and variable-rate Advance structures to meet members' funding needs. These Advances may haveproducts with different maturities, up to 30 years with variable or fixedinterest rates, and may include early termination features or options. The repricingpayment characteristics, and optionality embedded in certain Advances may create interest-rate risk.optionality. The FHLBankFHLB may use derivatives to adjustmanage the repricing and/or option characteristics of Advances in order to more closely match the characteristics of the FHLBank'sFHLB's funding liabilities. In general, whenever a member executes a fixed-rate Advance or a variable-rate Advance with embedded options, the FHLBank willFHLB may simultaneously execute a derivative with terms that offset the terms and embedded options if any, in the Advance. For example, the FHLBankFHLB may hedge a fixed-rate Advance with an interest rate swap where the FHLBankFHLB pays a fixed-rate coupon and receives a floating-rate coupon,variable-rate, effectively converting the fixed-rate Advance to a floating-ratevariable-rate Advance. These types of hedges are typically treated as fair value hedges.

When issuing a putable Advance, the FHLBankFHLB effectively purchases a put option from the member that allows the FHLBankFHLB to put or extinguish the fixed-rate Advance, which the FHLBankFHLB normally would exercise when interest rates increase. The FHLBankFHLB may hedge these Advances by entering into a cancelable derivative.

Mortgage Loans - The FHLBankFHLB invests in fixed-rate mortgage loans. The prepayment options embedded in these mortgage loans can result in extensions or contractions in the expected repayment of these investments, depending on changes in actual and estimated prepayment speeds. The FHLBankFHLB may manage the interest rate and prepayment risks associated with mortgagesmortgage loans through a combination of debt issuance and derivatives. The FHLBankFHLB issues both callable and noncallable debt and prepayment linked Consolidated Obligations to achieve cash flow patterns and liability durations similar to those expected on the mortgage loans. The FHLBank is also permittedFHLB may purchase swaptions to useminimize the prepayment risk embedded in mortgage loans. Although these derivatives to matchare valid economic hedges against the expected prepayment characteristicsrisk of the mortgages, althoughloans, they are not specifically linked to date it hasindividual loans and therefore do not done so.receive fair value hedge accounting. These derivatives are marked-to-market through earnings.

Consolidated Obligations - The FHLBank entersFHLB may enter into derivatives to hedge the interest rate risk associated with its specific debt issuances. The FHLBankFHLB manages the risk arising from changing market prices and volatility of a Consolidated Obligation by matching the cash inflow on a derivative with the cash outflow on the Consolidated Obligation.

For instance, in a typical transaction,example, fixed-rate Consolidated Obligations are issued by one or more FHLBanks, and the FHLBankFHLB may simultaneously entersenter into a matching interest rate swap in which the counterparty pays fixed cash flows to the FHLBankFHLB designed to mirror in timing and amount the cash outflows the FHLBankFHLB pays on the Consolidated Obligation. The FHLBankFHLB pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate Advances, typically 3-month LIBOR. These transactions are treated as fair value hedges.
 
This strategy of issuing BondsConsolidated Obligations while simultaneously entering into derivatives enables the FHLBankFHLB to offer a wider range of attractively priced Advances to its members and may allow the FHLBankFHLB to reduce its funding costs. The continued attractiveness of such debt depends on yield relationships between the BondFHLB's Consolidated Obligations and the derivative markets. If conditions in these markets change, the FHLBankFHLB may alter the types or terms of the Bonds that it issues. By acting in both the capital and the

104
Table of Contents

swap markets, the FHLBank may raise funds at lower costs than through the issuance of simple fixed- or variable-rate Consolidated Obligations in the capital markets alone.Obligations.

Firm Commitments - Certain mortgage loan purchase commitments, such as mortgage delivery commitments, are considered derivatives. The FHLBankFHLB may hedge these commitments by selling to-be-announced (TBA)TBA mortgage-backed securities for forward settlement. A TBA represents a forward contract for the sale of mortgage-backed securities at a future agreed upon date for an established price. The mortgage loan purchase commitment and the TBA used in the firm commitment hedging strategy (economic hedge) are recordedtreated as a derivative asset or derivative liability at fair value, with changes in fair value recognized in the current periodan economic hedge and are marked-to-market through earnings. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.

Financial Statement Effect and Additional Financial Information

The notional amount of derivatives serves as a factor in determining periodic interest payments or cash flows received and paid. The notional amount reflects the FHLBanks'FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLBankFHLB to credit and market risk; the overall risk is much smaller. The risks of derivatives only can be measured meaningfully on a portfolio basis that takes into account the counterparties, the types of derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.


105
Table of Contents

Table 11.1 summarizes the notional amount and fair value of derivative instruments, including the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest.

Table 11.1 - Fair Value of Derivative Instruments (in thousands)
December 31, 2014December 31, 2016
Notional Amount of Derivatives Derivative Assets Derivative LiabilitiesNotional Amount of Derivatives Derivative Assets Derivative Liabilities
Derivatives designated as fair value hedging instruments:          
Interest rate swaps$4,301,547
 $19,826
 $138,150
$5,660,420
 $37,379
 $26,610
Derivatives not designated as hedging instruments:          
Interest rate swaps4,635,000
 900
 6,559
8,199,000
 2,135
 64,661
Interest rate swaptions2,346,000
 13,335
 —
Forward rate agreements439,000
 6
 4,924
511,000
 681
 166
Mortgage delivery commitments451,292
 3,799
 1
440,849
 319
 10,628
Total derivatives not designated as hedging instruments5,525,292
 4,705
 11,484
11,496,849
 16,470
 75,455
Total derivatives before netting and collateral adjustments$9,826,839
 24,531
 149,634
$17,157,269
 53,849
 102,065
Netting adjustments and cash collateral (1)
  (9,832) (85,867)  50,904
 (84,191)
Total derivative assets and total derivative liabilities  $14,699
 $63,767
  $104,753
 $17,874
          
December 31, 2013December 31, 2015
Notional Amount of Derivatives Derivative Assets Derivative LiabilitiesNotional Amount of Derivatives Derivative Assets Derivative Liabilities
Derivatives designated as fair value hedging instruments:          
Interest rate swaps$4,517,340
 $36,061
 $215,691
$5,548,351
 $12,205
 $77,950
Derivatives not designated as hedging instruments:          
Interest rate swaps4,143,000
 2,928
 7,732
2,719,000
 1,051
 4,029
Interest rate swaptions281,000
 683
 —
Forward rate agreements31,000
 454
 —
462,000
 1,680
 69
Mortgage delivery commitments36,620
 2
 412
449,856
 342
 1,650
Total derivatives not designated as hedging instruments4,210,620
 3,384
 8,144
3,911,856
 3,756
 5,748
Total derivatives before netting and collateral adjustments$8,727,960
 39,445
 223,835
$9,460,207
 15,961
 83,698
Netting adjustments and cash collateral (1)
  (36,204) (126,069)  11,035
 (52,611)
Total derivative assets and total derivative liabilities  $3,241
 $97,766
  $26,996
 $31,087
 
(1)Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $78,755$180,169 and $109,288$66,685 at December 31, 20142016 and 2013.2015. Cash collateral received and related accrued interest was (in thousands) $2,720$45,074 and $19,423$3,039 at December 31, 20142016 and 2013.2015.






106
Table of Contents

Table 11.2 presents the components of net (losses) gains on derivatives and hedging activities as presented in the Statements of Income.

Table 11.2 - Net (Losses) Gains on Derivatives and Hedging Activities (in thousands)
For the Years Ended December 31,For the Years Ended December 31,
2014 2013 20122016 2015 2014
Derivatives and hedged items in fair value hedging relationships:          
Interest rate swaps$5,127
 $10,837
 $6,864
$697
 $2,762
 $5,127
Derivatives not designated as hedging instruments:          
Economic hedges:          
Interest rate swaps628
 7,456
 3,771
(69,266) 2,515
 628
Interest rate swaptions6,229
 (274) —
Forward rate agreements(15,465) (845) (8,645)2,794
 (1,090) (15,465)
Net interest settlements706
 328
 (2,378)12,009
 6,623
 706
Mortgage delivery commitments15,631
 (9,873) 9,123
106
 2,501
 15,631
Total net gains (losses) related to derivatives not designated as hedging instruments1,500
 (2,934) 1,871
Net gains on derivatives and hedging activities$6,627
 $7,903
 $8,735
Total net (losses) gains related to derivatives not designated as hedging instruments(48,128) 10,275
 1,500
Net (losses) gains on derivatives and hedging activities$(47,431) $13,037
 $6,627

Table 11.3 presents by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships and the impact of those derivatives on the FHLBank'sFHLB's net interest income.

Table 11.3 - Effect of Fair Value Hedge-Related Derivative Instruments (in thousands)
For the Years Ended December 31,For the Years Ended December 31,
2016Gain/(Loss) on Derivative Gain/(Loss) on Hedged Item Net Fair Value Hedge Ineffectiveness 
Effect of Derivatives on Net Interest Income(1)
Hedged Item Type:       
Advances$76,401
 $(75,744) $657
 $(59,560)
Consolidated Bonds(6,641) 6,681
 40
 7,624
Total$69,760
 $(69,063) $697
 $(51,936)
2015       
Hedged Item Type:       
Advances$62,657
 $(60,453) $2,204
 $(83,571)
Consolidated Bonds(10,930) 11,488
 558
 19,787
Total$51,727
 $(48,965) $2,762
 $(63,784)
2014Gain/(Loss) on Derivative Gain/(Loss) on Hedged Item Net Fair Value Hedge Ineffectiveness 
Effect of Derivatives on Net Interest Income(1)
       
Hedged Item Type:              
Advances$76,295
 $(71,315) $4,980
 $(91,232)$76,295
 $(71,315) $4,980
 $(91,232)
Consolidated Bonds(15,633) 15,780
 147
 18,298
(15,633) 15,780
 147
 18,298
Total$60,662
 $(55,535) $5,127
 $(72,934)$60,662
 $(55,535) $5,127
 $(72,934)
2013       
Hedged Item Type:       
Advances$156,025
 $(145,843) $10,182
 $(106,452)
Consolidated Bonds(26,341) 26,996
 655
 27,038
Total$129,684
 $(118,847) $10,837
 $(79,414)
2012       
Hedged Item Type:       
Advances$268,944
 $(261,817) $7,127
 $(244,836)
Consolidated Bonds(8,666) 8,403
 (263) 36,763
Total$260,278
 $(253,414) $6,864
 $(208,073)
 
(1)
The net effect of derivatives, in fair value hedge relationships, on net interest income is included in the interest income or interest expense line item of the respective hedged item type. These amounts include the effect of net interest settlements attributable to designated fair value hedges but do not include (in thousands) $(3,310)$(2,908), $(3,022)$(3,424), and $(3,566) $(3,310)of (amortization)/accretion related to fair value hedging activities for the years ended December 31, 2014, 2013,2016, 2015, and 2012, respectively.2014.


107
Table of Contents

Offsetting of Derivative Assets and Derivative Liabilities

The FHLBank presents derivative instruments, related cash collateral, including initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.

Table 11.4 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. At December 31, 2014 and 2013, the FHLBank did not receive or pledge any non-cash collateral. Any overcollateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.

Table 11.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands)
 December 31, 2014
 Derivative Assets Derivative Liabilities
Derivative instruments meeting netting requirements:   
Gross recognized amount:   
Bilateral derivatives$19,585
 $141,352
Cleared derivatives1,141
 3,357
Total gross recognized amount20,726
 144,709
Gross amounts of netting adjustments and cash collateral:   
Bilateral derivatives(19,544) (82,510)
Cleared derivatives9,712
 (3,357)
Total gross amounts of netting adjustments and cash collateral(9,832) (85,867)
Net amounts after netting adjustments and cash collateral:   
Bilateral derivatives41
 58,842
Cleared derivatives10,853
 —
Total net amounts after netting adjustments and cash collateral10,894
 58,842
Derivative instruments not meeting netting requirements(1):
   
Bilateral derivatives3,805
 4,925
   Total derivative instruments not meeting netting requirements(1)
3,805
 4,925
Total derivative assets and total derivative liabilities:   
    ��Bilateral derivatives3,846
 63,767
     Cleared derivatives10,853
 —
   Total derivative assets and total derivative liabilities$14,699
 $63,767
    
 December 31, 2013
 Derivative Assets Derivative Liabilities
Bilateral derivative instruments meeting netting requirements:   
Gross recognized amount$38,989
 $223,423
Gross amounts of netting adjustments and cash collateral(36,204) (126,069)
 Net amounts after netting adjustments and cash collateral2,785
 97,354
Derivative instruments not meeting netting requirements(1)
456
 412
   Total derivative assets and total derivative liabilities$3,241
 $97,766
(1)Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement.

Credit Risk on Derivatives

The FHLBank is subject to credit risk due to the risk of non-performance by counterparties to its derivative transactions, and manages credit risk through credit analysis, collateral requirements and adherence to the requirements set forth in its policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations. For bilateral derivatives, the

108
Table of Contents

degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. The FHLBank requires collateral agreements with collateral delivery thresholds on the majority of its bilateral derivatives.

For cleared derivatives, the Clearinghouse is the FHLBank's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent notifies the FHLBank of the required initial and variation margin. The requirement that the FHLBank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the FHLBank to credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily through a clearing agent, for changes in the value of cleared derivatives.

The FHLBank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default including bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the FHLBank's clearing agent, or both. Based on this analysis, the FHLBank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse.

Certain of the FHLBank's bilateral interest rate swapFHLB's uncleared derivative contracts contain provisions that require the FHLBankFHLB to post additional collateral with its counterparties if there is deterioration in the FHLBank'sFHLB's credit ratings. At December 31, 2016, the FHLB would not have been required to deliver any additional collateral if the FHLB's credit ratings had been lowered to the next lower rating. The aggregate fair value of all bilateral interest rate swapsuncleared derivatives with credit-risk-related contingent features that were in a net liability position (before cash collateral and related accrued interest) at December 31, 20142016 was (in thousands) $121,808,$15,677, for which the FHLBankFHLB had posted collateral with a fair value of (in thousands) $62,966$8,764 in the normal course of business.

If one of the FHLBank's credit ratings had been lowered to the next lower rating that would have triggered additional collateral to be delivered, the FHLBank would have been required to deliver up to an additional (in thousands) $12,353 of collateral at fair value to its derivatives counterparties at December 31, 2014.

For cleared derivatives, the Clearinghouse determines initial margin requirements and generally credit ratings are not factored into the initial margin. However, clearing agents may require additional initial margin to be posted based on credit considerations, including, but not limited to, credit rating downgrades. At December 31, 2014,2016, the FHLBankFHLB was not required to post additional initial margin by its clearing agents based on credit considerations.

Offsetting of Derivative Assets and Derivative Liabilities

The FHLB presents derivative instruments, related cash collateral, including any initial and variation margin, received or pledged, and associated accrued interest, on a net basis by clearing agent and/or by counterparty when it has met the netting requirements.
109
Table 11.4 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. At December 31, 2016 and 2015, the FHLB did not receive or pledge any non-cash collateral. Any overcollateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.

Table 11.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands)
 December 31, 2016 December 31, 2015
 Derivative Assets Derivative Liabilities Derivative Assets Derivative Liabilities
Derivative instruments meeting netting requirements:       
Gross recognized amount:       
Uncleared derivatives$15,506
 $21,378
 $8,046
 $70,178
Cleared derivatives37,343
 69,893
 5,893
 11,801
Total gross recognized amount52,849
 91,271
 13,939
 81,979
Gross amounts of netting adjustments and cash collateral:       
Uncleared derivatives(14,737) (14,298) (7,844) (40,810)
Cleared derivatives65,641
 (69,893) 18,879
 (11,801)
Total gross amounts of netting adjustments and cash collateral50,904
 (84,191) 11,035
 (52,611)
Net amounts after netting adjustments and cash collateral:       
Uncleared derivatives769
 7,080
 202
 29,368
Cleared derivatives102,984
 —
 24,772
 —
Total net amounts after netting adjustments and cash collateral103,753
 7,080
 24,974
 29,368
Derivative instruments not meeting netting requirements (1):
       
Uncleared derivatives1,000
 10,794
 2,022
 1,719
Total derivative instruments not meeting netting requirements (1)
1,000
 10,794
 2,022
 1,719
Total derivative assets and total derivative liabilities:       
     Uncleared derivatives1,769
 17,874
 2,224
 31,087
     Cleared derivatives102,984
 —
 24,772
 —
   Total derivative assets and total derivative liabilities$104,753
 $17,874
 $26,996
 $31,087
(1)Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement.

Table of Contents


Note 12 - Deposits

The FHLBankFHLB offers demand and overnight deposits to members and qualifying nonmembers. In addition, the FHLBankFHLB offers short-term interest bearing deposit programs to members.members, and in certain cases, qualifying nonmembers. A member that services mortgage loans may deposit funds collected in connection with the mortgage loans at the FHLBank,FHLB, pending disbursement of such funds to the owners of the mortgage loans. The FHLBankFHLB classifies these items as other interest bearing deposits.

Certain financial institutions have agreed to maintain compensating balances in consideration for correspondent and other non-credit services. These balances are included in interest bearing deposits on the accompanying financial statements. The compensating balances required to be held by the FHLBankFHLB averaged (in thousands) $3,597,698$108,008 and $3,982,567$3,171,708 during 20142016 and 2013.2015.

Deposits classified as demand, overnight, and other pay interest based on a daily interest rate. Term deposits pay interest based on a fixed rate determined at the issuance of the deposit. The average interest raterates paid on interest bearing deposits was 0.16 percent, 0.04 percent, and 0.03 percent during 2014, 2013,2016, 2015, and 2012.2014.

Non-interest bearing deposits represent funds for which the FHLBankFHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks.

Table 12.1- Deposits (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Interest bearing:      
Demand and overnight$624,446
 $796,039
$611,432
 $646,902
Term99,600
 96,100
149,350
 151,825
Other5,592
 5,872
4,521
 5,377
Total interest bearing729,638
 898,011
765,303
 804,104
      
Non-interest bearing:      
Other298
 15,884
576
 238
Total non-interest bearing298
 15,884
576
 238
Total deposits$729,936
 $913,895
$765,879
 $804,342

The aggregate amount of time deposits with a denomination of $250 thousand or more was (in thousands) $99,550$149,300 and $96,000$151,775 as of December 31, 20142016 and 2013,2015, respectively.


Note 13 - Consolidated Obligations

Consolidated Obligations consist of Consolidated Bonds and Discount Notes. The FHLBanks issue Consolidated Obligations through the Office of Finance as their agent. In connection with each debt issuance, each FHLBank specifies the amount of debt it wants issued on its behalf. The Office of Finance tracks the amount of debt issued on behalf of each FHLBank. In addition, the FHLBank records as a liability its specific portion of Consolidated Obligations for which it is the primary obligor.

The Finance Agency and the U.S. Secretary of the Treasury oversee the issuance of FHLBank debt through the Office of Finance. Consolidated Bonds aremay be issued primarily to raise short-, intermediate-, and long-term funds for the FHLBanks and are not subject to any statutory or regulatory limits on maturity. Consolidated Discount Notes are issued primarily to raise short-term funds and have original maturities up to one year. These notes generally sell at less than their face amount and are redeemed at par value when they mature.

Although the FHLBankFHLB is primarily liable for its portion of Consolidated Obligations, the FHLBankFHLB is also jointly and severally liable with the other 1110 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any Consolidated Obligation whether or not the Consolidated Obligation represents a primary liability of such FHLBank. Although an FHLBank has never paid the principal or interest payments due on a Consolidated Obligation on behalf

110
Table of Contents

of another FHLBank, if that event should occur, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank for those payments and other associated costs, including interest to be

determined by the Finance Agency. If, however, the Finance Agency determines that the non-complying FHLBank is unable to satisfy its repayment obligations, the Finance Agency may allocate the outstanding liabilities of the non-complying FHLBank among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank's participation in all Consolidated Obligations outstanding or in any other manner it may determine to ensure that the FHLBanks operate in a safe and sound manner.

The par values of the 1211 FHLBanks' outstanding Consolidated Obligations were approximately $847.2$989.3 billion and $766.8$905.2 billion at December 31, 20142016 and 2013. Regulations2015. Finance Agency regulations require the FHLBankFHLB to maintain unpledged qualifying assets equal to its participation in the Consolidated Obligations outstanding. Qualifying assets are defined as cash; secured Advances; obligations of or fully guaranteed by the United States; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLBankFHLB is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of Consolidated Obligations are treated as if they were free from lien or pledge for purposes of compliance with these regulations.

Table 13.1 - Consolidated Discount Notes Outstanding (dollars in thousands)
 Book Value Par Value 
Weighted Average Interest Rate (1)
December 31, 2014$41,232,127
 $41,238,122
 0.09%
December 31, 2013$38,209,946
 $38,216,860
 0.09%
 Book Value Par Value 
Weighted Average Interest Rate (1)
December 31, 2016$44,689,662
 $44,710,521
 0.46%
December 31, 2015$77,199,208
 $77,225,334
 0.24%
(1)Represents an implied rate without consideration of concessions.

Table 13.2 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)
 December 31, 2014 December 31, 2013 December 31, 2016 December 31, 2015
Year of Contractual Maturity Amount Weighted Average Interest Rate Amount Weighted Average Interest Rate Amount Weighted Average Interest Rate Amount Weighted Average Interest Rate
Due in 1 year or less $32,477,000
 0.24% $35,691,500
 0.34% $20,970,750
 0.87% $9,808,000
 0.91%
Due after 1 year through 2 years 6,918,000
 1.19
 2,802,000
 1.66
 12,811,000
 1.12
 5,143,750
 1.42
Due after 2 years through 3 years 4,594,000
 1.56
 3,295,000
 2.12
 4,359,000
 1.81
 4,814,000
 1.64
Due after 3 years through 4 years 4,245,000
 1.79
 3,689,000
 1.67
 3,566,000
 1.95
 4,090,000
 1.89
Due after 4 years through 5 years 2,647,000
 2.08
 3,415,000
 1.86
 4,970,000
 1.87
 3,041,000
 2.09
Thereafter 8,217,000
 2.79
 9,102,000
 2.66
 6,496,000
 2.65
 8,139,000
 2.80
Index amortizing notes 25,297
 5.07
 32,746
 5.07
 —
 —
 943
 5.25
Total par value 59,123,297
 1.00
 58,027,246
 1.04
 53,172,750
 1.39
 35,036,693
 1.74
Premiums 103,477
   123,820
   84,275
   90,189
  
Discounts (25,161)   (22,781)   (32,804)   (37,567)  
Hedging adjustments 15,304
   31,084
   (2,865)   3,817
  
Fair value option valuation adjustment and
accrued interest
 (360)   3,370
   (30,490)   (1,410)  
Total $59,216,557
   $58,162,739
   $53,190,866
   $35,091,722
  

Consolidated Obligations outstanding were issued with either fixed-rate coupon payment terms or variable-rate coupon payment terms that may use a variety of indices for interest rate resets, includingsuch as LIBOR. To meet the expected specific needs of certain investors in Consolidated Obligations, both fixed-rate Bonds and variable-rate Bonds may contain features that result in complex coupon payment terms and call options. When these Consolidated Obligations are issued, the FHLBankFHLB may enter into derivatives containing features that offset the terms and embedded options, if any, of the Consolidated Obligations.


111
Table of Contents

Table 13.3 - Consolidated Bonds Outstanding by Call Features (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Par value of Consolidated Bonds:      
Non-callable$49,976,297
 $46,670,246
$46,007,750
 $28,235,693
Callable9,147,000
 11,357,000
7,165,000
 6,801,000
Total par value$59,123,297
 $58,027,246
$53,172,750
 $35,036,693

Table 13.4 - Consolidated Bonds Outstanding by Contractual Maturity or Next Call Date (in thousands)            
Year of Contractual Maturity or Next Call Date December 31, 2014 December 31, 2013 December 31, 2016 December 31, 2015
Due in 1 year or less $40,774,000
 $41,493,500
 $26,489,750
 $16,339,000
Due after 1 year through 2 years 5,413,000
 3,827,000
 12,006,000
 4,881,750
Due after 2 years through 3 years 3,317,000
 2,915,000
 3,894,000
 3,499,000
Due after 3 years through 4 years 2,685,000
 2,427,000
 2,805,000
 3,020,000
Due after 4 years through 5 years 1,992,000
 2,095,000
 3,964,000
 2,383,000
Thereafter 4,917,000
 5,237,000
 4,014,000
 4,913,000
Index amortizing notes 25,297
 32,746
 —
 943
Total par value $59,123,297
 $58,027,246
 $53,172,750
 $35,036,693

Consolidated Bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have a step-up interest-rate payment type. Step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the Consolidated Bond. These Consolidated Bonds generally contain provisions enabling the FHLBankFHLB to call the Consolidated Bonds at its option on the step-up dates.

Table 13.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Par value of Consolidated Bonds:      
Fixed-rate$31,363,297
 $29,362,246
$34,682,750
 $30,806,693
Variable-rate27,610,000
 28,650,000
18,290,000
 4,065,000
Step-up150,000
 15,000
200,000
 165,000
Total par value$59,123,297
 $58,027,246
$53,172,750
 $35,036,693

Concessions on Consolidated Obligations. Unamortized concessions included in other assets were (in thousands) $14,184 and $15,947 at December 31, 2014 and 2013. The amortization of these concessions is included in Consolidated Obligation interest expense and totaled (in thousands) $7,380, $7,026, and $21,704 for the years ended December 31, 2014, 2013, and 2012, respectively.


Note 14 - Affordable Housing Program (AHP)

The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate Advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of net earnings. For purposes of the AHP calculation, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The FHLBankFHLB accrues AHP expense monthly based on its net earnings. The FHLBankFHLB reduces the AHP liability as members use subsidies.

If the FHLBankFHLB experienced a net loss during a quarter, but still had net earnings for the year, the FHLBank'sFHLB's obligation to the AHP would be calculated based on the FHLBank'sFHLB's year-to-date net earnings. If the FHLBankFHLB had net earnings in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLBankFHLB experienced a net loss for a full year, the FHLBankFHLB would have no obligation to the AHP for the year, because each FHLBank's required annual AHP contribution is limited to its annual net earnings. If the aggregate 10 percent calculation described above was less than $100 million for the FHLBanks, each FHLBank would be required to contribute a pro rata amount sufficient to

112
Table of Contents

assure that the aggregate contributions of the FHLBanks equaled $100 million. The pro ration would be made on the basis of an FHLBank's income in relation to the income of all FHLBanks for the previous year.

There was no shortfall, as described above, in 2014, 20132016, 2015, or 2012.2014. If an FHLBank finds that its required AHP obligations are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its contributions. The FHLBank

FHLB has never made such an application. The FHLBankFHLB had outstanding principal in AHP-related Advances (in thousands) of $102,465$69,569 and $116,503$85,145 at December 31, 20142016 and 2013.2015.

Table 14.1 - Analysis of the FHLBank's AHP Liability (in thousands)
2014 20132016 2015
Balance at beginning of year$93,789
 $82,672
$107,352
 $98,103
Assessments (current year additions)27,605
 29,620
30,189
 27,906
Subsidy uses, net(23,291) (18,503)(32,658) (18,657)
Balance at end of year$98,103
 $93,789
$104,883
 $107,352


Note 15 - Capital

The FHLBankFHLB is subject to three capital requirements under its Capital Plan and the Finance Agency rules and regulations. Regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.

1.
Risk-based capital. The FHLBankFHLB must maintain at all times permanent capital, defined as Class B stock and retained earnings, in an amount at least equal to the sum of its credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency.

2.
Total regulatory capital. The FHLBankFHLB is required to maintain at all times a total regulatory capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, Class A stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.

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

The Finance Agency may require the FHLBankFHLB to maintain greater permanent capital than is required based on Finance Agency rules and regulations.

At December 31, 20142016 and 2013,2015, the FHLBankFHLB was in compliance with each of these capital requirements.

Table 15.1 - Capital Requirements (dollars in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Minimum Requirement Actual Minimum Requirement ActualMinimum Requirement Actual Minimum Requirement Actual
Risk-based capital$481,835
 $5,018,567
 $547,455
 $5,435,002
$579,629
 $5,026,133
 $630,604
 $5,204,297
Capital-to-assets ratio (regulatory)4.00% 4.71% 4.00% 5.27%4.00% 4.80% 4.00% 4.38%
Regulatory capital$4,265,617
 $5,018,567
 $4,127,228
 $5,435,002
$4,185,411
 $5,026,133
 $4,750,232
 $5,204,297
Leverage capital-to-assets ratio (regulatory)5.00% 7.06% 5.00% 7.90%5.00% 7.21% 5.00% 6.57%
Leverage capital$5,332,021
 $7,527,851
 $5,159,035
 $8,152,503
$5,231,764
 $7,539,200
 $5,937,790
 $7,806,446

The FHLBankFHLB currently offers only Class B stock, which is issued and redeemed at a par value of $100 per share. Class B stock may be issued to meet membership and activity stock purchase requirements, to pay dividends, and to pay interest on mandatorily redeemable capital stock. Membership stock is required to become a member of and maintain membership in the FHLBank.FHLB. The membership stock requirement is based upon a percentage of the member's total assets, currently determined

113
Table of Contents

within a declining range from 0.150.12 percent to 0.03 percent of each member's total assets, with a current minimum of $1 thousand and a current maximum of $25 million for each member. In addition to membership stock, a member may be required to hold activity stock to capitalize its Mission Asset Activity with the FHLBank.FHLB.


Mission Asset Activity includes Advances, certain funds and rate Advance commitments, and MPP activity that occurred after implementation of the Capital Plan on December 30, 2002. Members must maintain an activity stock balance at least equal to the minimum activity allocation percentage, which currently is zero percent for the MPP and two percent for all other Mission Asset Activity. If a member owns more than the maximum activity allocation percentage, which currently is four percent of all Mission Asset Activity, the additional stock is that member's excess stock. The FHLBank'sFHLB's unrestricted excess stock is defined as total Class B stock minus membership stock, activity stock calculated at the maximum allocation percentage, shares reserved for exclusive use after a stock dividend, and shares subject to redemption and withdrawal notices. The FHLBank'sFHLB's excess stock may normally be used by members to support a portion of their activity stock requirement as long as those members maintain at least their minimum activity stock allocation percentage.

A member may request redemption of all or part of its Class B stock or may withdraw from membership by giving five years' advance written notice. When the FHLBankFHLB repurchases capital stock, it must first repurchase shares for which a redemption or withdrawal notice's five-year redemption period or withdrawal period has expired. Since its Capital Plan was implemented, the FHLBankFHLB has repurchased, at its discretion, all member shares subject to outstanding redemption notices prior to the expiration of the five-year redemption period.

The Gramm-Leach-Bliley Act of 1999 (GLB Act) made membership in the FHLBanks voluntary for all members. Any member that has withdrawn from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that was held as a condition of membership, unless the institution has canceled its notice of withdrawal prior to the divestiture date. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.

In accordance with the FHLBank Act, each class of FHLBankFHLB stock is considered putable by the member and the FHLBankFHLB may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount. However, there are significant statutory and regulatory restrictions on the obligation to redeem, or right to repurchase, the outstanding stock. As a result, whether or not a member may have its capital stock in the FHLBankFHLB repurchased (at the FHLBank'sFHLB's discretion at any time before the end of the redemption period) or redeemed (at a member's request, completed at the end of a redemption period) will depend on whether the FHLBankFHLB is in compliance with those restrictions.

The FHLBank'sFHLB's retained earnings are owned proportionately by the current holders of Class B stock. The holders' interest in the retained earnings is realized at the time the FHLBankFHLB periodically declares dividends or at such time as the FHLBankFHLB is liquidated. The FHLBank'sFHLB's Board of Directors may declare and pay dividends in either cash or capital stock, assuming the FHLBankFHLB is in compliance with Finance Agency rules and regulations.

Restricted Retained Earnings. The Joint Capital Enhancement Agreement (Capital Agreement) is intended to enhance the capital position of each FHLBank. The Capital Agreement provides that each FHLBank contributes 20 percent of its net income each quarter to a separate restricted retained earnings account until the balance of that account equals at least one percent of that FHLBank's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends but are available to absorb unexpected losses, if any, that the FHLBank may experience. At December 31, 20142016 and 20132015 the FHLBankFHLB had (in thousands) $159,694260,285 and $110,843206,648 in restricted retained earnings.

Mandatorily Redeemable Capital Stock. The FHLBankFHLB is a cooperative whose members and former members own all of the FHLBank'sFHLB's capital stock. Member shares cannot be purchased or sold except between the FHLBankFHLB and its members at its $100 per share par value, as mandated by the FHLBank'sFHLB's Capital Plan. The FHLBankFHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member submits a written redemption request or withdrawal notice, or when the member attains nonmember status by merger or acquisition, relocation, charter termination, or involuntary termination of membership. A member may cancel or revoke its written redemption request or its withdrawal notice prior to the end of the five-year redemption period. Under the FHLBank'sFHLB's Capital Plan, there is a five calendar day “grace period” for revocation of a redemption request and a 30 calendar day “grace period” for revocation of a withdrawal notice during which the member may cancel the redemption request or withdrawal notice without a penalty or fee. The cancellation fee after the “grace period” is currently two percent of the requested amount in the first year and increases one percent a year until it reaches a maximum of six percent in the fifth year. The cancellation fee can be waived by the FHLBank'sFHLB's Board of Directors for a bona fide business purpose.


114
Table of Contents

Stock subject to a redemption or withdrawal notice that is within the “grace period” continues to be considered equity because there is no penalty or fee to retract these notices. Expiration of the “grace period” triggers the reclassification from equity to a liability (mandatorily redeemable capital stock) at fair value because after the “grace period” the penalty to retract these notices is considered substantive. If a member cancels its written notice of redemption or notice of withdrawal, the FHLBankFHLB will reclassify mandatorily redeemable capital stock from a liability to equity. Dividends related to capital stock classified as a

liability are accrued at the expected dividend rate and reported as interest expense in the Statements of Income. For the years ended December 31, 2014, 2013,2016, 2015, and 20122014 dividends on mandatorily redeemable capital stock in the amount (in thousands) of $4,190, $5,506$3,517, $2,432 and $11,690$4,190 were recorded as interest expense.

Table 15.2 - Mandatorily Redeemable Capital Stock Roll Forward (in thousands)
201420132012201620152014
Balance, beginning of year$115,853
$210,828
$274,781
$37,895
$62,963
$115,853
Capital stock subject to mandatory redemption reclassified
from equity
17,110
33,457
40,126
363,839
28,919
17,110
Redemption (or other reduction) of mandatorily redeemable
capital stock
(70,000)(128,432)(104,079)(366,952)(53,987)(70,000)
Balance, end of year$62,963
$115,853
$210,828
$34,782
$37,895
$62,963

The number of stockholders holding the mandatorily redeemable capital stock was 28, 15 and 11 at December 31, 2014, 2013,2016, 2015, and 2012.2014.

As of December 31, 20142016 there were no members or former members that had requested redemptions of capital stock whose stock had not been reclassified as mandatorily redeemable capital stock because the “grace periods” had not yet expired on these requests.

Table 15.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption. The year of redemption in the table is the end of the five-year redemption period. Consistent with the Capital Plan currently in effect, the FHLBankFHLB is not required to redeem membership stock until five years after either (i) the membership is terminated or (ii) the FHLBankFHLB receives notice of withdrawal. The FHLBankFHLB is not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the FHLBankFHLB may repurchase such shares, in its sole discretion, subject to the statutory and regulatory restrictions on capital stock redemption.

The GLB Act states that an FHLBank may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount.

Table 15.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)
Contractual Year of Redemption December 31, 2014 December 31, 2013 December 31, 2016 December 31, 2015
Year 1 $130
 $114,531
 $—
 $—
Year 2  —
 130
 29
 —
Year 3 —
 —
 2,264
 41
Year 4  55
 —
 865
 2,265
Year 5  2,278
 71
 6,307
 2,876
Past contractual redemption date due to remaining activity(1)
 60,500
 1,121
Thereafter (1)
 623
 —
Past contractual redemption date due to remaining activity (2)
 24,694
 32,713
Total $62,963
 $115,853
 $34,782
 $37,895
(1)Represents mandatorily redeemable capital stock resulting from a Finance Agency rule effective February 2016, that makes captive insurance companies ineligible for FHLB membership and thereby terminates their membership no later than February 2017.
(2)Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

Excess Capital Stock. Finance Agency regulations limit the ability of an FHLBank to create member excess stock under certain circumstances. The FHLBankFHLB may not pay dividends in the form of capital stock or issue new excess stock to members if its excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLBank'sFHLB's excess stock to exceed one percent of its total assets. At December 31, 2014,2016, the FHLBankFHLB had excess capital stock outstanding totaling less

115
Table of Contents

than one percent of its total assets. At December 31, 2014,2016, the FHLBankFHLB was in compliance with the Finance Agency's excess stock rules.



Note 16 - Accumulated Other Comprehensive (Loss) Income

The following tables summarize the changes in accumulated other comprehensive (loss) income for the years endedDecember 31, 20142016, 20132015, and 2012.2014.

Table 16.1 - Accumulated Other Comprehensive (Loss) Income (in thousands)
      
Net unrealized gains (losses) on available-for-sale securities Pension and postretirement benefits Total accumulated other comprehensive (loss) incomeNet unrealized (losses) gains on available-for-sale securities Pension and postretirement benefits Total accumulated other comprehensive (loss) income
BALANCE, DECEMBER 31, 2011$(1,014) $(9,987) $(11,001)
Other comprehensive income before reclassification:     
Net unrealized gains1,014
 —
 1,014
Net actuarial loss—
 (2,701) (2,701)
Reclassifications from other comprehensive income to net income:     
Amortization - pension and postretirement benefits—
 954
 954
Net current period other comprehensive income (loss)1,014
 (1,747) (733)
BALANCE, DECEMBER 31, 2012—
 (11,734) (11,734)
Other comprehensive income before reclassification:     
Net unrealized losses(121) —
 (121)
Net actuarial gain—
 803
 803
Reclassifications from other comprehensive income to net income:     
Amortization - pension and postretirement benefits—
 2,010
 2,010
Net current period other comprehensive (loss) income(121) 2,813
 2,692
BALANCE, DECEMBER 31, 2013(121) (8,921) (9,042)$(121) $(8,921) $(9,042)
Other comprehensive income before reclassification:          
Net unrealized gains97
 —
 97
97
 —
 97
Net actuarial loss—
 (9,496) (9,496)
Net actuarial losses—
 (9,496) (9,496)
Reclassifications from other comprehensive income to net income:          
Amortization - pension and postretirement benefits—
 1,845
 1,845
—
 1,845
 1,845
Net current period other comprehensive income (loss)97
 (7,651) (7,554)97
 (7,651) (7,554)
BALANCE, DECEMBER 31, 2014$(24) $(16,572) $(16,596)(24) (16,572) (16,596)
Other comprehensive income before reclassification:     
Net unrealized gains105
 —
 105
Net actuarial gains—
 598
 598
Reclassifications from other comprehensive income to net income:     
Amortization - pension and postretirement benefits—
 2,616
 2,616
Net current period other comprehensive income105
 3,214
 3,319
BALANCE, DECEMBER 31, 201581
 (13,358) (13,277)
Other comprehensive income before reclassification:     
Net unrealized losses(58) —
 (58)
Net actuarial losses—
 (2,283) (2,283)
Reclassifications from other comprehensive income to net income:     
Amortization - pension and postretirement benefits—
 2,362
 2,362
Net current period other comprehensive (loss) income(58) 79
 21
BALANCE, DECEMBER 31, 2016$23
 $(13,279) $(13,256)
 

Note 17 - Pension and Postretirement Benefit Plans

Qualified Defined Benefit Multi-employer Plan. The FHLBankFHLB participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multi-employer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multi-employer plan disclosures, including the certified zone status, are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The

116
Table of Contents

Pentegra Defined Benefit Plan covers substantially all officers and employees of the FHLBankFHLB who meet certain eligibility requirements.


The Pentegra Defined Benefit Plan operates on a plan year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. There are no collective bargaining agreements in place at the FHLBank.FHLB.

The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the end of the prior plan year. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.
 
The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the year ended June 30, 2013.2015. The FHLBankFHLB did not contribute more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan year ended June 30, 20132015, 2014 and 2012.2013.

Table 17.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)
2014 2013 20122016 2015 2014
Net pension cost charged to compensation and benefit expense for
the year ended December 31
$6,041
 $5,516
 $4,638
$6,659
 $6,348
 $6,041
Pentegra Defined Benefit Plan funded status as of July 1111.31%
(a) 
101.31%
(b) 
108.39%104.12%
(a) 
107.01%
(b) 
111.44%
FHLBank's funded status as of July 1128.27% 107.36% 110.48%
FHLB's funded status as of July 1118.53% 124.97% 128.27%
(a)The Pentegra Defined Benefit Plan's funded status as of July 1, 20142016 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 20142016 through March 15, 2015.2017. Contributions made on or before March 15, 2015,2017, and designated for the plan year ended June 30, 2014,2016, will be included in the final valuation as of July 1, 2014.2016. The final funded status as of July 1, 20142016 will not be available until the Form 5500 for the plan year July 1, 20142016 through June 30, 20152017 is filed (this Form 5500 is due to be filed no later than April 2016)2018).
(b)The Pentegra Defined Benefit Plan's funded status as of July 1, 20132015 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 20132015 through March 15, 2014.2016. Contributions made on or before March 15, 2014,2016, and designated for the plan year ended June 30, 2013,2015, will be included in the final valuation as of July 1, 2013.2015. The final funded status as of July 1, 20132015 will not be available until the Form 5500 for the plan year July 1, 20132015 through June 30, 20142016 is filed (this Form 5500 is due to be filed no later than April 2015)2017).

Qualified Defined Contribution Plan. The FHLBankFHLB also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLBankFHLB contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLBankFHLB contributed $943,000, $875,000,$1,026,000, $992,000, and $848,000$943,000 in the years ended December 31, 2014, 2013,2016, 2015, and 2012,2014, respectively.

Nonqualified Supplemental Defined Benefit Retirement Plan (Defined Benefit Retirement Plan). The FHLBankFHLB maintains a nonqualified, unfunded defined benefit plan. The plan ensures that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit plan in the absence of limits on benefit levels imposed by the IRS. There are no funded plan assets. The FHLBankFHLB has established a grantor trust, which is included in held-to-maturity securities on the Statements of Condition, to meet future benefit obligations and current payments to beneficiaries.

Postretirement Benefits Plan. The FHLBankFHLB also sponsors a postretirement benefits plan that includes health care and life insurance benefits for eligible retirees. Future retirees are eligible for the postretirement benefits plan if they were hired prior to August 1, 1990, are age 55 or older, and their age plus years of continuous service at retirement are greater than or equal to 80. Spouses are covered subject to required contributions. There are no funded plan assets that have been designated to provide postretirement benefits.


117
Table of Contents

Table 17.2 presents the obligations and funding status of the FHLBank's nonqualified supplementalFHLB's defined benefit retirement plan and postretirement benefits plan. The benefit obligation represents projected benefit obligation for the nonqualified supplemental defined benefit retirement plan and accumulated postretirement benefit obligation for the postretirement benefits plan.

Table 17.2 - Benefit Obligation, Fair Value of Plan Assets and Funded Status (in thousands)
Defined Benefit Retirement Plan Postretirement Benefits PlanDefined Benefit Retirement Plan Postretirement Benefits Plan
Change in benefit obligation:20142013 2014201320162015 20162015
Benefit obligation at beginning of year$26,511
$27,293
 $3,957
$4,859
$32,540
$33,860
 $5,116
$5,197
Service cost524
494
 53
58
730
668
 50
74
Interest cost1,234
986
 190
199
1,317
1,222
 219
203
Actuarial loss (gain)8,335
215
 1,161
(1,018)2,617
(413) (334)(185)
Benefits paid(2,744)(2,477) (164)(141)(2,901)(2,797) (184)(173)
Benefit obligation at end of year33,860
26,511
 5,197
3,957
34,303
32,540
 4,867
5,116
Change in plan assets:      
Fair value of plan assets at beginning of year—
—
 —
—
—
—
 —
—
Employer contribution2,744
2,477
 164
141
2,901
2,797
 184
173
Benefits paid(2,744)(2,477) (164)(141)(2,901)(2,797) (184)(173)
Fair value of plan assets at end of year—
—
 —
—
—
—
 —
—
Funded status at end of year$(33,860)$(26,511) $(5,197)$(3,957)$(34,303)$(32,540) $(4,867)$(5,116)

Amounts recognized in “Other liabilities” on the Statements of Condition for the FHLBank'sFHLB's nonqualified supplemental defined benefit plan and postretirement benefits plan as of December 31, 20142016 and 20132015 were (in thousands) $39,057$39,170 and $30,468.$37,656.

Table 17.3 - Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)
 Defined Benefit Retirement Plan 
Postretirement
Benefits Plan
 2014 2013 2014 2013
Net actuarial loss (gain)$15,409
 $8,919
 $1,163
 $2
 Defined Benefit Retirement Plan 
Postretirement
Benefits Plan
 2016 2015 2016 2015
Net actuarial loss$12,748
 $12,447
 $531
 $911

118
Table of Contents


Table 17.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)
For the Years Ended December 31,For the Years Ended December 31,
Defined Benefit
Retirement Plan
 Postretirement Benefits Plan
Defined Benefit
Retirement Plan
 Postretirement Benefits Plan
2014 2013 2012 2014 2013 20122016 2015 2014 2016 2015 2014
Net Periodic Benefit Cost                      
Service cost$524
 $494
 $578
 $53
 $58
 $72
$730
 $668
 $524
 $50
 $74
 $53
Interest cost1,234
 986
 963
 190
 199
 200
1,317
 1,222
 1,234
 219
 203
 190
Amortization of net loss1,845
 1,948
 932
 —
 62
 22
2,316
 2,549
 1,845
 46
 67
 —
Net periodic benefit cost3,603
 3,428
 2,473
 243
 319
 294
$4,363
 $4,439
 $3,603
 $315
 $344
 $243
           
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income                      
Net loss (gain)8,335
 215
 2,261
 1,161
 (1,018) 440
$2,617
 $(413) $8,335
 $(334) $(185) $1,161
Amortization of net loss(1,845) (1,948) (932) —
 (62) (22)(2,316) (2,549) (1,845) (46) (67) —
Total recognized in other comprehensive income6,490
 (1,733) 1,329
 1,161
 (1,080) 418
301
 (2,962) 6,490
 (380) (252) 1,161
Total recognized in net periodic benefit cost and
other comprehensive income
$10,093
 $1,695
 $3,802
 $1,404
 $(761) $712
$4,664

$1,477

$10,093

$(65)
$92

$1,404


Table 17.5 presents the estimated net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year.

Table 17.5 - Amortization for Next Fiscal Year (in thousands)
 Defined Benefit Retirement Plan Postretirement Benefits Plan
Net actuarial loss$2,405
 $67
 Defined Benefit Retirement Plan Postretirement Benefits Plan
Net actuarial loss$1,368
 $6

Table 17.6 presents the key assumptions used for the actuarial calculations to determine benefit obligations for the nonqualified supplemental defined benefit retirement plan and postretirement benefits plan.

Table 17.6 - Benefit Obligation Key Assumptions
Defined Benefit Retirement Plan Postretirement Benefits PlanDefined Benefit Retirement Plan Postretirement Benefits Plan
2014 2013 2014 20132016 2015 2016 2015
Discount rate3.67% 4.32% 3.96% 4.88%3.91% 4.02% 4.10% 4.33%
Salary increases4.50% 4.50% N/A
 N/A
4.50% 4.50% N/A
 N/A

Table 17.7 presents the key assumptions used for the actuarial calculations to determine net periodic benefit cost for the FHLBank'sFHLB's defined benefit retirement plans and postretirement benefit plans.

Table 17.7 - Net Periodic Benefit Cost Key Assumptions
Defined Benefit Retirement Plan Postretirement Benefits PlanDefined Benefit Retirement Plan Postretirement Benefits Plan
2014 2013 2012 2014 2013 20122016 2015 2014 2016 2015 2014
Discount rate4.32% 3.26% 3.96% 4.88% 4.16% 4.73%4.02% 3.67% 4.32% 4.33% 3.96% 4.88%
Salary increases4.50% 4.50% 4.50% N/A
 N/A
 N/A
4.50% 4.50% 4.50% N/A
 N/A
 N/A


119
Table of Contents

Table 17.8 - Postretirement Benefits Plan Assumed Health Care Cost Trend Rates
2014 20132016 2015
Assumed for next year8.50% 9.00%7.50% 8.00%
Ultimate rate5.25% 5.25%5.50% 5.50%
Year that ultimate rate is reached2024
 2024
2020
 2020

The effect of a percentage point increase in the assumed health care trend rates would be an increase in net periodic postretirement benefit expense of $44,000$58,000 and in accumulated postretirement benefit obligation (APBO) of $1,027,000.$898,000. The effect of a percentage point decrease in the assumed health care trend rates would be a decrease in net periodic postretirement benefit expense of $35,000$46,000 and in APBO of $806,000.$717,000.

The discount rates for the disclosures as of December 31, 20142016 were determined by using a discounted cash flow approach, which incorporates the timing of each expected future benefit payment. Estimated future benefit payments are based on each plan's census data, benefit formulas and provisions, and valuation assumptions reflecting the probability of decrement and survival. The present value of the future benefit payments is determined by using weighted average duration based interest rate yields from a variety of highly rated relevant corporate bond indices as of December 31, 2014,2016, and solving for the single discount rate that produces the same present value.


Table 17.9 presents the estimated future benefits payments reflecting expected future services for the years ended after December 31, 2014.2016.

Table 17.9 - Estimated Future Benefit Payments (in thousands)
Years Defined Benefit Retirement Plan Postretirement Benefit Plan Defined Benefit Retirement Plan Postretirement Benefit Plan
2015 $2,874
 $158
2016 2,987
 163
2017 2,225
 178
 $2,242
 $173
2018 2,192
 172
 2,194
 186
2019 2,296
 181
 2,298
 181
2020 - 2024 8,825
 1,165
2020 1,940
 188
2021 2,054
 209
2022 - 2026 8,981
 1,237


Note 18 - Segment Information

The FHLBankFHLB has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLBank'sFHLB's two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the principal ways the FHLBankFHLB provides services to member stockholders. The FHLBank,FHLB, as an interest rate spread manager, considers a segment's net interest income, net interest rate spread and, ultimately, net income as the key factors in allocating resources. Resource allocation decisions are made by considering these profitability measures in the context of the historical, current and expected risk profile of each segment and the entire balance sheet, as well as current incremental profitability measures relative to the incremental market risk profile.

Overall financial performance and risk management are dynamically managed primarily at the level of, and within the context of, the entire balance sheet rather than at the level of individual business segments or product lines. Also, the FHLBankFHLB hedges specific asset purchases and specific subportfolios in the context of the entire mortgage asset portfolio and the entire balance sheet. Under this holistic approach, the market risk/return profile of each business segment does not correspond, in general, to the performance that each segment would generate if it were completely managed on a separate basis, and it is not possible to accurately determine what the performance would be if the two business segments were managed on a stand-alone basis. Further, because financial and risk management is a dynamic process, the performance of a segment over a single identified period may not reflect the long-term expected or actual future trends for the segment.

The Traditional Member Finance segment includes products such as Advances and investments and the borrowing costs related to those assets. The FHLBankFHLB assigns its investments to this segment primarily because they historically have been used to

120
Table of Contents

provide liquidity for Advances and to support the level and volatility of earnings from Advances. All interest rate swaps and a portion of swaptions, including their market value adjustments, are allocated to the Traditional Member Finance segment. The FHLB executed all of its interest rate swaps in its management of market risk for the Traditional Member Finance segment. The FHLB enters into swaptions to minimize the prepayment risk in its overall mortgage asset portfolio.

Income from the MPP is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing cost of Consolidated Obligations outstanding allocated to this segment at the time debt is issued. MPP income also includes the gains (losses) on derivatives associated with the MPP segment, comprising all mortgage delivery commitments and forward rate agreements and a portion of swaptions.

Both segments also earn income from investment of interest-free capital. Capital is allocated proportionate to each segment's average assets based on the total balance sheet's average capital-to-assets ratio. Expenses are allocated based on cost accounting techniques that include direct usage, time allocations and square footage of space used. AHP assessments are calculated using the current assessment rates based on the income before assessments for each segment. All interest rate swaps, including their market value adjustments, are allocated to the Traditional Member Finance segment because the FHLBank has not executed interest rate swaps in its management of the MPP's market risk. All derivatives classified as mandatory delivery commitments and forward rate agreements are allocated to the MPP segment.

121
Table of Contents


The following tables set forth the FHLBank'sFHLB's financial performance by operating segment for the years ended December 31.

Table 18.1 - Financial Performance by Operating Segment (in thousands)
 For the Years Ended December 31,
 
Traditional Member
Finance
 MPP Total
2014     
Net interest income$237,828
 $79,148
 $316,976
Reversal for credit losses—
 (500) (500)
Net interest income after reversal for credit losses237,828
 79,648
 317,476
Non-interest income22,460
 170
 22,630
Non-interest expense58,876
 9,372
 68,248
Income before assessments201,412
 70,446
 271,858
Affordable Housing Program assessments20,560
 7,045
 27,605
Net income$180,852
 $63,401
 $244,253
Average assets$94,333,213
 $6,824,283
 $101,157,496
Total assets$99,629,924
 $7,010,495
 $106,640,419
2013     
Net interest income$229,559
 $98,285
 $327,844
Reversal for credit losses—
 (7,450) (7,450)
Net interest income after reversal for credit losses229,559
 105,735
 335,294
Non-interest income (loss)30,505
 (10,714) 19,791
Non-interest expense55,459
 8,928
 64,387
Income before assessments204,605
 86,093
 290,698
Affordable Housing Program assessments21,011
 8,609
 29,620
Net income$183,594
 $77,484
 $261,078
Average assets$86,609,248
 $7,081,377
 $93,690,625
Total assets$96,336,915
 $6,843,787
 $103,180,702
2012     
Net interest income$209,636
 $98,484
 $308,120
Provision for credit losses—
 1,459
 1,459
Net interest income after provision for credit losses209,636
 97,025
 306,661
Non-interest income12,930
 482
 13,412
Non-interest expense50,082
 7,888
 57,970
Income before assessments172,484
 89,619
 262,103
Affordable Housing Program assessments18,417
 8,962
 27,379
Net income$154,067
 $80,657
 $234,724
Average assets$58,707,558
 $7,994,445
 $66,702,003
Total assets$74,003,271
 $7,558,879
 $81,562,150
      
 For the Years Ended December 31,
 
Traditional Member
Finance
 MPP Total
2016     
Net interest income after reversal for credit losses$287,721
 $75,483
 $363,204
Non-interest income40,423
 5,808
 46,231
Non-interest expense99,758
 11,305
 111,063
Income before assessments228,386
 69,986
 298,372
Affordable Housing Program assessments23,190
 6,999
 30,189
Net income$205,196
 $62,987
 $268,183
2015     
Net interest income after reversal for credit losses$250,076
 $77,923
 $327,999
Non-interest income28,586
 1,308
 29,894
Non-interest expense64,925
 10,626
 75,551
Income before assessments213,737
 68,605
 282,342
Affordable Housing Program assessments21,618
 6,288
 27,906
Net income$192,119
 $62,317
 $254,436
2014     
Net interest income$237,828
 $88,826
 $326,654
Reversal for credit losses—
 (500) (500)
Net interest income after reversal for credit losses237,828
 89,326
 327,154
Non-interest income22,460
 170
 22,630
Non-interest expense58,876
 9,372
 68,248
Income before assessments201,412
 80,124
 281,536
Affordable Housing Program assessments20,560
 7,045
 27,605
Net income$180,852
 $73,079
 $253,931


Table 18.2 - Asset Balances by Operating Segment (in thousands)
122
 Assets
 Traditional Member
Finance		 MPP Total
December 31, 2016$95,456,372
 $9,178,909
 $104,635,281
December 31, 2015110,776,396
 7,979,412
 118,755,808

Table of Contents

Note 19 - Fair Value Disclosures

The fair value amounts recorded on the Statements of Condition and presented in the related note disclosures have been determined by the FHLBankFHLB using available market information and the FHLBank'sFHLB's best judgment of appropriate valuation methods. The fair values reflect the FHLBank'sFHLB's judgment of how a market participant would estimate the fair values.

Fair Value Hierarchy. The FHLBankFHLB records trading securities, available-for-sale securities, derivative assets, derivative liabilities, certain Advances and certain Consolidated Obligation Bonds at fair value on a recurring basis, and on occasion, certain mortgage loans held for portfolio on a nonrecurring basis. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable

the fair value measurement is. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.
 
Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for the asset or liability.

The FHLBankFHLB reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLBankFHLB did not have any transfers of assets or liabilities recorded at fair value on a recurring basis during the years ended December 31, 20142016 or 20132015.


123
Table of Contents

Table 19.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLBank.FHLB. These values do not represent an estimate of the overall market value of the FHLBankFHLB as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.
 
Table 19.1 - Fair Value Summary (in thousands)
December 31, 2014December 31, 2016
  Fair Value  Fair Value
Financial InstrumentsCarrying Value Total Level 1 Level 2 Level 3 
Netting Adjustments and Cash Collateral (1) 
Carrying Value Total Level 1 Level 2 Level 3 
Netting Adjustments and Cash Collateral (1) 
Assets:                      
Cash and due from banks$3,109,970
 $3,109,970
 $3,109,970
 $—
 $—
 $—
$8,737
 $8,737
 $8,737
 $—
 $—
 $—
Interest-bearing deposits119
 119
 —
 119
 —
 —
129
 129
 —
 129
 —
 —
Securities purchased under agreements to resell3,343,000
 3,343,002
 —
 3,343,002
 —
 —
5,229,487
 5,229,487
 —
 5,229,487
 —
 —
Federal funds sold6,600,000
 6,600,000
 —
 6,600,000
 —
 —
4,257,000
 4,257,000
 —
 4,257,000
 —
 —
Trading securities1,341
 1,341
 —
 1,341
 —
 —
970
 970
 —
 970
 —
 —
Available-for-sale securities1,349,977
 1,349,977
 —
 1,349,977
 —
 —
1,300,023
 1,300,023
 —
 1,300,023
 —
 —
Held-to-maturity securities14,712,271
 14,794,326
 —
 14,794,326
 —
 —
14,546,979
 14,413,231
 —
 14,413,231
 —
 —
Advances (2)
70,405,616
 70,279,438
 —
 70,279,438
 —
 —
69,882,074
 69,842,730
 —
 69,842,730
 —
 —
Mortgage loans held for portfolio,
net
6,984,683
 7,219,198
 —
 7,178,047
 41,151
 —
9,148,718
 9,174,790
 —
 9,152,186
 22,604
 —
Accrued interest receivable81,384
 81,384
 —
 81,384
 —
 —
109,886
 109,886
 —
 109,886
 —
 —
Derivative assets14,699
 14,699
 —
 24,531
 —
 (9,832)104,753
 104,753
 —
 53,849
 —
 50,904
Liabilities:                      
Deposits729,936
 729,782
 —
 729,782
 —
 —
765,879
 765,628
 —
 765,628
 —
 —
Consolidated Obligations:                      
Discount Notes41,232,127
 41,224,739
 —
 41,224,739
 —
 —
44,689,662
 44,689,594
 —
 44,689,594
 —
 —
Bonds (3)
59,216,557
 59,496,247
 —
 59,496,247
 —
 —
53,190,866
 53,278,571
 —
 53,278,571
 —
 —
Mandatorily redeemable capital
stock
62,963
 62,963
 62,963
 —
 —
 —
34,782
 34,782
 34,782
 —
 —
 —
Accrued interest payable114,781
 114,781
 —
 114,781
 —
 —
119,322
 119,322
 —
 119,322
 —
 —
Derivative liabilities63,767
 63,767
 —
 149,634
 —
 (85,867)17,874
 17,874
 —
 102,065
 —
 (84,191)
Other:                      
Standby bond purchase agreements—
 1,381
 —
 1,381
 —
 —
—
 708
 —
 708
 —
 —
(1)Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same counterparty.
(2)
Includes (in thousands) $15,042$15,093 of Advances recorded under the fair value option at December 31, 20142016.
(3)
Includes (in thousands) $4,209,6407,895,510 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 20142016.



124
Table of Contents

December 31, 2013December 31, 2015
  Fair Value  Fair Value
Financial InstrumentsCarrying Value Total Level 1 Level 2 Level 3 
Netting Adjustments and Cash Collateral (1) 
Carrying Value Total Level 1 Level 2 Level 3 
Netting Adjustments and Cash Collateral (1) 
Assets:                      
Cash and due from banks$8,598,933
 $8,598,933
 $8,598,933
 $—
 $—
 $—
$10,136
 $10,136
 $10,136
 $—
 $—
 $—
Interest-bearing deposits166
 166
 —
 166
 —
 —
99
 99
 —
 99
 —
 —
Securities purchased under agreements to resell2,350,000

2,350,000
 —
 2,350,000
 —
 —
10,531,979

10,531,979
 —
 10,531,979
 —
 —
Federal funds sold1,740,000
 1,740,000
 —
 1,740,000
 —
 —
10,845,000
 10,845,000
 —
 10,845,000
 —
 —
Trading securities1,578
 1,578
 —
 1,578
 —
 —
1,159
 1,159
 —
 1,159
 —
 —
Available-for-sale securities2,184,879
 2,184,879
 —
 2,184,879
 —
 —
700,081
 700,081
 —
 700,081
 —
 —
Held-to-maturity securities16,087,162
 15,808,397
 —
 15,808,397
 —
 —
15,278,206
 15,229,965
 —
 15,229,965
 —
 —
Advances(2)65,270,390
 65,065,523
 —
 65,065,523
 —
 —
73,292,172
 73,089,912
 —
 73,089,912
 —
 —
Mortgage loans held for portfolio, net6,818,290
 6,827,406
 —
 6,774,514
 52,892
 —
7,951,676
 8,106,224
 —
 8,075,390
 30,834
 —
Accrued interest receivable85,151
 85,151
 —
 85,151
 —
 —
94,855
 94,855
 —
 94,855
 —
 —
Derivative assets3,241
 3,241
 —
 39,445
 —
 (36,204)26,996
 26,996
 —
 15,961
 —
 11,035
Liabilities:                      
Deposits913,895
 913,799
 —
 913,799
 —
 —
804,342
 804,140
 —
 804,140
 —
 —
Consolidated Obligations:                      
Discount Notes38,209,946
 38,200,971
 —
 38,200,971
 —
 —
77,199,208
 77,183,854
 —
 77,183,854
 —
 —
Bonds (2)(3)
58,162,739
 58,075,025
 —
 58,075,025
 —
 —
35,091,722
 35,317,688
 —
 35,317,688
 —
 —
Mandatorily redeemable capital stock115,853
 115,853
 115,853
 —
 —
 —
37,895
 37,895
 37,895
 —
 —
 —
Accrued interest payable116,381
 116,381
 —
 116,381
 —
 —
118,823
 118,823
 —
 118,823
 —
 —
Derivative liabilities97,766
 97,766
 —
 223,835
 —
 (126,069)31,087
 31,087
 —
 83,698
 —
 (52,611)
Other:                      
Standby bond purchase agreements—
 3,715
 —
 3,715
 —
 —
—
 698
 —
 698
 —
 —
(1)Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same counterparty.
(2)
Includes (in thousands) $4,018,37015,057 of Advances recorded under the fair value option at December 31, 2015.
(3)
Includes (in thousands) $2,214,590 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 20132015.

Summary of Valuation Methodologies and Primary Inputs.

Cash and due from banks: The fair value equals the carrying value.

Interest-bearing deposits: The fair value is determined based on each security's quoted prices, excluding accrued interest, as of the last business day of the period.

Securities purchased under agreements to resell: The fair value of overnight securities purchased under agreements to resell approximates the carrying value. The fair value of term securities purchased under agreements to resell is determined by calculating the present value of the future cash flows and reducing the amount for accrued interest receivable. The discount rates used in these calculations are the rates for securities with similar terms. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented.

Federal funds sold: The fair value of overnight Federal funds sold approximates the carrying value. The fair value of term Federal funds sold is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve for Federal funds with similar terms. The fair value excludes accrued interest.


125
Table of Contents

Trading securities: The FHLBank'sFHLB's trading portfolio generally consists of mortgage-backed securities issued by Ginnie Mae. Quoted market prices in active markets are not available for these securities.

To value mortgage-backed security holdings, the FHLBankFHLB obtains prices from four designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price mortgage-backed securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many mortgage-backed securities do not trade on a daily basis, the pricing vendors use available information such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all mortgage-backed security valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank.FHLB.

The FHLBankFHLB has conducted reviews of the pricing methods employed by the third-party vendors, to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for specific instruments.

The FHLBank'sFHLB's valuation technique first requires the establishment of a “median” price for each security. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.

All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.

If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

Four vendor prices were received for most of the FHLBank'sFHLB's mortgage-backed security holdings and the final prices for those securities were computed by averaging the prices received. Based on the FHLBank'sFHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLBankFHLB believes its final prices result in reasonable estimates of fair value and further that the fair value measurements are classified appropriately in the fair value hierarchy.

Available-for-sale securities: The FHLBank'sFHLB's available-for-sale portfolio generally consists of certificates of deposit. Quoted market prices in active markets are not available for these securities. Therefore, the fair value is determined based on each security's indicative fair value obtained from a third-party vendor. The FHLBankFHLB performs several validation steps in order to verify the accuracy and reasonableness of these fair values. These steps may include, but are not limited to, a detailed review of instruments with significant periodic price changes and a derived fair value from an option-adjusted discounted cash flow methodology using market-observed inputs for the interest rate environment and similar instruments.

Held-to-maturity securities: The FHLBank'sFHLB's held-to-maturity portfolio generally consists of discount notes issued by Freddie Mac and/or Fannie Mae (non-mortgage-backed securities), and mortgage-backed securities. Quoted market prices are not available for these securities. The fair value for each individual mortgage-backed security is determined by using the third-party vendor approach described above. In general, in order to determine the fair value of its non-mortgage backed securities, the FHLBankFHLB can use either (a) an income approach based on a market-observable interest rate curve that may be adjusted for a spread, or (b) prices received from third-party pricing vendors. The income approach uses indicative fair values derived from a discounted cash flow methodology. The FHLBankFHLB believes that both methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.


126
Table of Contents

For its discount notes issued by Freddie Mac, and/or Fannie Mae, the FHLBankFHLB determines the fair value using the income approach. The market-observable interest rate curve used by the FHLBankFHLB includes the U.S. Government Agency Fair Value Curve.

Advances: The FHLBankFHLB determines the fair values of Advances by calculating the present value of expected future cash flows from the Advances excluding accrued interest. The discount rates used in these calculations are the replacement rates for Advances with similar terms, as approximated either by adding an estimated current spread to the LIBOR Swap Curve or by using current indicative market yields, as indicated by the FHLBank'sFHLB's pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLBank'sFHLB's rates on Consolidated Obligations. In accordance with Finance Agency regulations, Advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLBankFHLB financially indifferent to the borrower's decision to prepay the Advances. Therefore, the fair value of Advances does not assume prepayment risk.

For swapped option-based Advances, the fair value is determined (independently of the related derivative) by the discounted cash flow methodology based on the LIBOR Swap Curve and forward rates at period end adjusted for the estimated current spread on new swapped Advances to the swap curve. For swapped Advances with a conversion option, the conversion option is valued by taking into account the LIBOR Swap Curve and forward rates at period end and the market's expectations of future interest rate volatility implied from current market prices of similar options.

Mortgage loans held for portfolio, net: The fair values of performing mortgage loans are determined based on quoted market prices offered to approved members as indicated by the FHLBank'sFHLB's MPP pricing methodologies for mortgage loans with similar current terms excluding accrued interest. The quoted prices offered to members are based on Fannie Mae price indications on to-be-announced (TBA) mortgage-backed securities and FHA price indications on government-guaranteed loans. The FHLBankFHLB then adjusts these indicative prices to account for particular features of the FHLBank'sFHLB's MPP that differ from the Fannie Mae and FHA securities. These features include, but may not be limited to, the MPP's credit enhancements, and marketing adjustments that reflect the FHLBank'sFHLB's cooperative business model and preferences for particular kinds of loans and mortgage note rates. These quoted prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions. In order to determine the fair values, the loan amounts are also reduced for the FHLBank'sFHLB's estimate of expected net credit losses. The fair value of conventional mortgage loans 90 days or more delinquent are based on the estimated values of the underlying collateral or the present value of future cash flows and as such are classified as Level 3 in the fair value hierarchy.

Impaired mortgage loans held for portfolio: The estimated fair values of impaired mortgage loans held for portfolio on a non-recurring basis are based on property values obtained from a third-party pricing vendor.

Accrued interest receivable and payable: The fair value approximates the carrying value.

Derivative assets/liabilities: The FHLBank'sFHLB's derivative assets/liabilities generally consist of interest rate swaps, interest rate swaptions, TBA mortgage-backed securities (forward rate agreements), and mortgage delivery commitments. The FHLBank'sFHLB's interest rate swapsrelated derivatives (swaps and swaptions) are traded in the over-the-counter market. Therefore, the FHLBankFHLB determines the fair value of each individual interest rate swapinstrument using market value models that use readily observable market inputs as their basis (inputs that are actively quoted and can be validated to external sources). The FHLBankFHLB uses a mid-market pricing convention as a practical expedient for fair value measurements within a bid-ask spread. These models reflect the contractual terms, of the interest rate swaps, including the period to maturity, as well as the significant inputs noted below. The fair value determination uses the standard valuation technique of discounted cash flow analysis.

The FHLBankFHLB performs several validation steps to verify the reasonableness of the fair value output generated by the primary market value model. In addition to an annual model validation, the FHLBankFHLB prepares a monthly reconciliation of the model's fair values to estimates of fair values provided by the derivative counterparties. The FHLBankFHLB believes these processes provide a reasonable basis for it to place continued reliance on the derivative fair values generated by the model.

The fair value of TBA mortgage-backed securities is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLBankFHLB determines the fair value of mortgage delivery commitments using market prices from the TBA/mortgage-backed security market or TBA/Ginnie Mae market and adjustments noted below.


The FHLBank'sFHLB's discounted cash flow analysis uses market-observable inputs. Inputs, by class of derivative, are as follows:

Interest-rate swaps:Interest rate swaps and interest rate swaptions:
▪Discount rate assumption. Overnight Index Swap Curve;
▪Forward interest rate assumption. LIBOR Swap Curve; and

127
Table of Contents

▪Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

TBA mortgage-backed securities:
▪Market-based prices by coupon class and expected term until settlement.

Mortgage delivery commitments:
▪TBA securities prices. Market-based prices by coupon class and expected term until settlement, adjusted to reflect the contractual terms of the mortgage delivery commitments, similar to the mortgage loans held for portfolio process. The adjustments to the market prices are market observable, or can be corroborated with observable market data.

The FHLBankFHLB is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For bilateraluncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLBankFHLB requires collateral agreements with collateral delivery thresholds on its bilateraluncleared derivatives. The FHLBankFHLB has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements.

The fair values of the FHLBank'sFHLB's derivatives include accrued interest receivable/payable and related cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. Derivatives are presented on a net basis by counterparty when it has met the netting requirements. If these netted amounts are positive, they are classified as an asset and if negative, they are classified as a liability.

Deposits: The FHLBankFHLB determines the fair values of FHLBankFHLB deposits with fixed rates by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations: The FHLBankFHLB determines the fair values of Discount Notes by calculating the present value of expected future cash flows from the Discount Notes excluding accrued interest. The discount rates used in these calculations are current replacement rates for Discount Notes with similar current terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve. Each month's cash flow is discounted at that month's replacement rate.

The FHLBankFHLB determines the fair values of non-option-based Consolidated Obligation Bonds by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest. Inputs used to determine fair value of these Consolidated Obligation Bonds are the discount rates, which are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms. 

The FHLBankFHLB determines the fair values of option-based Consolidated Obligation Bonds based on pricing received from designated third-party pricing vendors. The pricing vendors used apply various proprietary models to price Consolidated Obligation Bonds. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many Consolidated Obligation Bonds do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual Consolidated Obligation Bonds. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLBank.FHLB.

When pricing vendors are used, the FHLBank'sFHLB's valuation technique first requires the establishment of a “median” price for each Consolidated Obligation Bond. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that

are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.
All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the

128
Table of Contents

other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.

If all prices received for a Consolidated Obligation Bond are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

Four vendor prices were received for the FHLBank'sFHLB's Consolidated Obligation Bonds and the final prices for those bonds were computed by averaging the prices received. Based on the FHLBank'sFHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLBankFHLB believes its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.

The FHLBankFHLB has conducted reviews of its pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for Consolidated Obligation Bonds.

Adjustments may be necessary to reflect the 1211 FHLBanks' credit quality when valuing Consolidated Obligation Bonds measured at fair value. Due to the joint and several liability for Consolidated Obligations, the FHLBankFHLB monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in its fair value measurement of Consolidated Obligation Bonds. No adjustments were considered necessary at December 31, 20142016 or 2013.2015.

Mandatorily redeemable capital stock: The fair value of capital stock subject to mandatory redemption is par value for the dates presented, as indicated by member contemporaneous purchases and sales at par value. FHLBankFHLB stock can only be acquired by members at par value and redeemed at par value. FHLBankFHLB stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.

Commitments: The fair values of standby bond purchase agreements are based on the present value of the estimated fees taking into account the remaining terms of the agreements.

Subjectivity of estimates. Estimates of the fair values of financial assets and liabilities using the methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speeds, interest rate volatility, distributions of future interest rates used to value options, and discount rates that appropriately reflect market and credit risks. The judgments also include the parameters, methods, and assumptions used in models to value the options. The use of different assumptions could have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.





129
Table of Contents

Fair Value Measurements.

Table 19.2 presents the fair value of financial assets and liabilities whichthat are recorded on a recurring or nonrecurring basis at December 31, 20142016 or 2013,2015, by level within the fair value hierarchy. The FHLB records nonrecurring fair value adjustments to reflect partial write-downs on certain mortgage loans.

Table 19.2 - Fair Value Measurements (in thousands)

Fair Value Measurements at December 31, 2014Fair Value Measurements at December 31, 2016
Total   Level 1 Level 2 Level 3 
Netting Adjustment and Cash Collateral (1)
Total   Level 1 Level 2 Level 3 
Netting Adjustment and Cash Collateral (1)
Recurring fair value measurements - Assets                  
Trading securities:                  
Other U.S. obligation single-family mortgage-backed securities$1,341
 $—
 $1,341
 $—
 $—
$970
 $—
 $970
 $—
 $—
Available-for-sale securities:                  
Certificates of deposit1,349,977
 —
 1,349,977
 —
 —
1,300,023
 —
 1,300,023
 —
 —
Advances15,042
 —
 15,042
 —
 —
15,093
 —
 15,093
 —
 —
Derivative assets:                  
Interest rate swaps10,894
 —
 20,726
 —
 (9,832)
Interest rate related103,753
 —
 52,849
 —
 50,904
Forward rate agreements6
 —
 6
 —
 —
681
 —
 681
 —
 —
Mortgage delivery commitments3,799
 —
 3,799
 —
 —
319
 —
 319
 —
 —
Total derivative assets14,699
 —
 24,531
 —
 (9,832)104,753
 —
 53,849
 —
 50,904
Total assets at fair value$1,381,059
 $—
 $1,390,891
 $—
 $(9,832)$1,420,839
 $—
 $1,369,935
 $—
 $50,904
                  
Recurring fair value measurements - Liabilities                  
Consolidated Obligation Bonds$4,209,640
 $—
 $4,209,640
 $—
 $—
$7,895,510
 $—
 $7,895,510
 $—
 $—
Derivative liabilities:                  
Interest rate swaps58,842
 —
 144,709
 —
 (85,867)
Interest rate related7,080
 —
 91,271
 —
 (84,191)
Forward rate agreement4,924
 —
 4,924
 —
 —
166
 —
 166
 —
 —
Mortgage delivery commitments1
 —
 1
 —
 —
10,628
 —
 10,628
 —
 —
Total derivative liabilities63,767
 —
 149,634
 —
 (85,867)17,874
 —
 102,065
 —
 (84,191)
Total liabilities at fair value$4,273,407
 $—
 $4,359,274
 $—
 $(85,867)$7,913,384
 $—
 $7,997,575
 $—
 $(84,191)
         
Nonrecurring fair value measurements - Assets (2)
         
Mortgage loans held for portfolio$1,388
 $—
 $—
 $1,388
  
(1)Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same counterparty.
(2)The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2016.




130
Table of Contents

Fair Value Measurements at December 31, 2013Fair Value Measurements at December 31, 2015
Total   Level 1 Level 2 Level 3 
Netting Adjustment and Cash Collateral (1)
Total   Level 1 Level 2 Level 3 
Netting Adjustment and Cash Collateral (1)
Recurring fair value measurements - Assets                  
Trading securities:                  
Other U.S. obligation single-family mortgage-backed securities$1,578
 $—
 $1,578
 $—
 $—
$1,159
 $—
 $1,159
 $—
 $—
Available-for-sale securities:                  
Certificates of deposit2,184,879
 —
 2,184,879
 —
 —
700,081
 —
 700,081
 —
 —
Advances15,057
 —
 15,057
 —
 —
Derivative assets:                  
Interest rate swaps2,785
 —
 38,989
 —
 (36,204)
Interest rate related24,974
 —
 13,939
 —
 11,035
Forward rate agreements454
 —
 454
 —
 —
1,680
 —
 1,680
 —
 —
Mortgage delivery commitments2
 —
 2
 —
 —
342
 —
 342
 —
 —
Total derivative assets3,241
 —
 39,445
 —
 (36,204)26,996
 —
 15,961
 —
 11,035
Total assets at fair value$2,189,698
 $—
 $2,225,902
 $—
 $(36,204)$743,293
 $—
 $732,258
 $—
 $11,035
                  
Recurring fair value measurements - Liabilities                  
Consolidated Obligation Bonds$4,018,370
 $—
 $4,018,370
 $—
 $—
$2,214,590
 $—
 $2,214,590
 $—
 $—
Derivative liabilities:                  
Interest rate swaps97,354
 —
 223,423
 —
 (126,069)
Interest rate related29,368
 —
 81,979
 —
 (52,611)
Forward rate agreements69
 —
 69
 —
 —
Mortgage delivery commitments412
 —
 412
 —
 —
1,650
 —
 1,650
 —
 —
Total derivative liabilities97,766
 —
 223,835
 —
 (126,069)31,087
 —
 83,698
 —
 (52,611)
Total liabilities at fair value$4,116,136
 $—
 $4,242,205
 $—
 $(126,069)$2,245,677
 $—
 $2,298,288
 $—
 $(52,611)
         
Nonrecurring fair value measurements - Assets (2)
         
Mortgage loans held for portfolio$6,270
 $—
 $—
 $6,270
  

(1)Amounts represent the application of the netting requirements that allow the FHLBankFHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLBankFHLB with the same counterparty.
(2)The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2015.

Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid and anyunpaid. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense. Additionally, concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense.

The FHLBankFHLB has elected the fair value option for certain Advances and Consolidated Obligation Bond transactions. The FHLBank elected thefinancial instruments that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value option for these transactions so aselections were made primarily in an effort to mitigate the potential income statement volatility that can arise when only the corresponding derivatives are marked at fair value in transactions that do not, or may not, meet hedge effectiveness requirements or otherwise qualify for hedge accounting (i.e.,from economic hedging transactions).


131
Table of Contents

Table 19.3 – Fair Value Option - Financial Assets and Liabilities (in thousands)
 For the Years Ended December 31,
 2014 2013 2012
 Advances Consolidated Bonds Advances Consolidated Bonds Advances Consolidated Bonds
Balance at beginning of period$—
 $(4,018,370) $—
 $(3,402,366) $—
 $(4,900,296)
New transactions elected for fair value option15,000
 (6,480,000) —
 (4,015,000) —
 (3,365,000)
Maturities and terminations—
 6,285,000
 —
 3,400,000
 —
 4,860,000
Net gains on financial instruments held under fair value option20
 2,154
 —
 330
 —
 1,939
Change in accrued interest22
 1,576
 —
 (1,334) —
 991
Balance at end of period$15,042
 $(4,209,640) $—
 $(4,018,370) $—
 $(3,402,366)
Table 19.4 – Changesrelationships in Fair Values for Items Measured at Fair Value Pursuant towhich the Electioncarrying value of the Fair Value Option (in thousands)hedged item is not adjusted for changes in fair value.
 For the Years Ended December 31,
 2014 2013 2012
 Advances Consolidated Bonds Advances Consolidated Bonds Advances Consolidated Bonds
Interest income (expense)$82
 $(5,899) $—
 $(4,914) $—
 $(8,934)
Net gains on changes in fair value under fair value option20
 2,154
 —
 330
 —
 1,939
Total changes in fair value included in current period earnings$102
 $(3,745) $—
 $(4,584) $—
 $(6,995)


For instruments recorded under the fair value option, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net gains on financial instruments held under fair value option” in the Statements of Income. The FHLBanknet gains on financial instruments held under the fair value option were (in thousands) $40,503, $1,057 and $2,174 for the years ended December 31, 2016, 2015, and 2014. The FHLB has determined that no adjustments to the fair values of its instruments recorded under the fair value option for instrument-specific credit risk were necessary as of December 31, 20142016 or 2013.2015.

The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Advances and Consolidated Bonds for which the fair value option has been elected.

Table 19.519.3 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Aggregate Unpaid Principal Balance Aggregate Fair Value Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance Aggregate Unpaid Principal Balance Aggregate Fair Value Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal BalanceAggregate Unpaid Principal Balance Aggregate Fair Value Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance Aggregate Unpaid Principal Balance Aggregate Fair Value Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance
Advances (1)
$15,000
 $15,042
 $42
 $—
 $—
 $—
$15,000
 $15,093
 $93
 $15,000
 $15,057
 $57
Consolidated Bonds4,210,000
 4,209,640
 (360) 4,015,000
 4,018,370
 3,370
7,926,000
 7,895,510
 (30,490) 2,216,000
 2,214,590
 (1,410)

(1)At December 31, 20142016 and 2013,2015, none of the Advances were 90 days or more past due or had been placed on non-accrual status.


132
Table of Contents


Note 20 - Commitments and Contingencies

As previously described, Consolidated Obligations are backed only by the financial resources of the FHLBanks. The joint and several liability Finance Agency regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal and interest on Consolidated Obligations for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any Consolidated Obligation on behalf of another FHLBank, and as of December 31, 2014,2016, and through the filing date of this report, the FHLBankFHLB does not believe that it is probable that it will be asked to do so.

The FHLBankFHLB determined that it was not necessary to recognize a liability for the fair values of its joint and several obligation related to other FHLBanks' Consolidated Obligations at December 31, 20142016 or 2013.2015. The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation.

Table 20.1 - Off-Balance Sheet Commitments (in thousands)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Notional AmountExpire within one year Expire after one year Total Expire within one year Expire after one year TotalExpire within one year Expire after one year Total Expire within one year Expire after one year Total
Standby Letters of Credit outstanding$17,233,206
 $546,385
 $17,779,591
 $13,317,887
 $154,086
 $13,471,973
$17,029,024
 $479,119
 $17,508,143
 $19,417,093
 $137,995
 $19,555,088
Commitments for standby bond purchases37,490
 149,705
 187,195
 10,960
 273,025
 283,985
28,810
 77,240
 106,050
 85,865
 36,510
 122,375
Commitments to purchase mortgage loans451,292
 —
 451,292
 36,620
 —
 36,620
440,849
 —
 440,849
 449,856
 —
 449,856
Unsettled Consolidated Bonds, at par (2)(1)
17,000
 —
 17,000
 240,000
 —
 240,000
—
 —
 —
 60,000
 —
 60,000
Unsettled Consolidated Discount Notes, at par (1)
5,000
 —
 5,000
 1,122,298
 —
 1,122,298
5,500
 —
 5,500
 —
 —
 —
(1)Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations.
(2)
Of the total unsettled Consolidated Bonds, $17,000 and $0 (in thousands) were hedged with associated interest rate swaps at December 31, 2014 and 2013, respectively.

Standby Letters of Credit. A Standby Letter of Credit is a financing arrangement between the FHLBankFHLB and its member. Standby Letters of Credit are executed for members for a fee. If the FHLBankFHLB is required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized Advance to the member. The original terms of theseThese Standby Letters of Credit range from less than 1 monthhave original expiration periods of up to 19 years.years, currently expiring no later than 2024. Unearned fees and the value of guarantees related to

Standby Letters of Credit are recorded in other liabilities and amounted to (in thousands) $4,441$5,057 and $3,145$4,666 at December 31, 20142016 and 2013.2015.

The FHLBankFHLB monitors the creditworthiness of its members that have Standby Letters of Credit. In addition, Standby Letters of Credit are fully collateralized at the time of issuance. As a result, the FHLBankFHLB has deemed it unnecessary to record any additional liability on these commitments.

Standby Bond Purchase Agreements. The FHLBankFHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLBank,FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLBankFHLB to purchase the bonds. The bond purchase commitments entered into by the FHLBankFHLB have original expiration periods up to 65 years, currently no later than 2017,2020, although some are renewable at the option of the FHLBank.FHLB. During 20142016 and 2013,2015, the FHLBankFHLB was not required to purchase any bonds under these agreements.

Commitments to Purchase Mortgage Loans. The FHLBankFHLB enters into commitments that unconditionally obligate the FHLBankFHLB to purchase mortgage loans. Commitments are generally for periods not to exceed 90 days. The delivery commitments are recorded as derivatives at their fair values.

Pledged Collateral. The FHLBankFHLB may pledge securities, as collateral, related to derivatives. See Note 11 - Derivatives and Hedging Activities for additional information about the FHLBank'sFHLB's pledged collateral and other credit-risk-related contingent features.

Lease Commitments. The FHLBankFHLB charged to operating expenses net rental and related costs of approximately $1,816,000,$1,899,000, $1,713,000,1,966,000, and $1,905,000$1,816,000 for the years ending December 31, 2014, 2013,2016, 2015, and 2012.

133
Table of Contents


Table 20.2 - Future Minimum Rentals for Operating Leases (in thousands)
Year        
 Premises Equipment Total
2015 $831
 $146
 $977
2016 755
 143
 898
2017 758
 143
 901
2018 777
 72
 849
2019 796
 —
 796
Thereafter 5,865
 —
 5,865
Total $9,782
 $504
 $10,286

2014. Total future minimum operating lease payments were $8,825,000 at December 31, 2016. Lease agreements for FHLBankFHLB premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLBank.FHLB's financial condition or results of operations.

Legal ProceedingsLehman Bankruptcy. From time to time, the FHLBank is subject to legal proceedings arising in the normal course of business. In March 2010, the FHLBankFHLB was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLBankFHLB had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008 and that the bankruptcy estate was entitled to the $43 million difference between the settlement amount the FHLBankFHLB paid Lehman in connection with the close-out transactions and the market value payment the FHLBankFHLB received when replacing the swaps with other counterparties. In May 2010, the FHLBankFHLB received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $65.8 million, plus interest accruing primarily at LIBOR plus 14.5 percent since the bankruptcy filing, based on their view of how the settlement amount should have been calculated.filing. In accordance with the Alternative Dispute Resolution Order of the Bankruptcy Court administering the Lehman estate, senior management of the FHLBankFHLB participated in a non-binding mediation in New York in August 2010, and counsel for the FHLBank continued discussions with the court-appointed mediator for several weeks thereafter.2010. The mediation concluded in October 2010 without a settlement of the claims asserted by the Lehman bankruptcy estate.settlement. In April 2013, Lehman Brothers Special Financing Inc., through Lehman Brothers Holdings Inc. and the Plan Administrator, under the Modified Third Amended Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and its Affiliated Debtors, filed an adversary complaint in the United States Bankruptcy Court for the Southern District of New York against the FHLBankFHLB seeking (a) a declaratory judgment on the interpretation of certain provisions and the calculation of amounts due under the agreement governing the 2008 swap transactions described above, and (b) additional amounts alleged as due as part of the termination of such transactions. The FHLBank believes that it correctly calculated, and fully satisfied its obligation to Lehman in September 2008,In December 2016, the FHLB and the FHLBank intends to vigorously defend itself.Lehman estate entered into a settlement agreement and mutual release, whereby the FHLB paid $25.25 million in complete settlement of all claims. The Adversary Proceeding has been dismissed with prejudice.

The FHLBank alsoOther Legal Proceedings. From time to time, the FHLB is subject to other legal proceedings arising in the normal course of business. The FHLBankFHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the FHLBank'sFHLB's financial condition or results of operations.



Note 21 - Transactions with Other FHLBanks

The FHLBankFHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLBankFHLB loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at December 31, 2014, 2013,2016, 2015, or 2012.2014. The following table details the average daily balance of lending and borrowing between the FHLBankFHLB and other FHLBanks for the years ended December 31.

Table 21.1 - Lending and Borrowing Between the FHLBankFHLB and Other FHLBanks (in thousands)
Average Daily Balances for the Years Ended December 31,Average Daily Balances for the Years Ended December 31,
2014 2013 20122016 2015 2014
Loans to other FHLBanks$438
 $3,740
 $2,514
$3,142
 $—
 $438
Borrowings from other FHLBanks68
 4,110
 273
273
 68
 68

134
Table of Contents


The FHLBankIn addition, the FHLB may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issuing new debt for which the FHLBankFHLB is the primary obligor. The FHLBankFHLB then becomes the primary obligor on the transferred debt. There are no formal arrangements governing the transfer of Consolidated Obligations between the FHLBanks, and these transfers are not investments of one FHLBank in another FHLBank. Transferring debt at current market rates enables the FHLBank System to satisfy the debt issuance needs of individual FHLBanks without incurring the additional selling expenses (concession fees) associated with new debt. It also provides the transferring FHLBanks with outlets for extinguishing debt structures no longer required for their balance sheet management strategies.

There were no Consolidated Obligations transferred to the FHLBankFHLB during the years ended December 31, 20142016, 20132015, or 2012.2014. The FHLBankFHLB had no Consolidated Obligations transferred to other FHLBanks during these periods.


Note 22 - Transactions with Stockholders

As a cooperative, the FHLBank'sFHLB's capital stock is owned by its members, by former members that retain the stock as provided in the FHLBank'sFHLB's Capital Plan and by nonmember institutions that have acquired members and must retain the stock to support Advances or other activities with the FHLBank.FHLB. All Advances are issued to members and all mortgage loans held for portfolio are purchased from members. The FHLBankFHLB also maintains demand deposit accounts for members, primarily to facilitate settlement activities that are directly related to Advances and mortgage loan purchases. Additionally, the FHLBankFHLB may enter into interest rate swaps with its stockholders. The FHLBankFHLB may not invest in any equity securities issued by its stockholders and it has not purchased any mortgage-backed securities securitized by, or other direct long-term investments in, its stockholders.

For financial statement purposes, the FHLBankFHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLBankFHLB capital stock outstanding. Federal legislation prescribes the voting rights of members in the election of both member and independent directors. For member directorships, the Finance Agency designates the number of member directorships in a given year and an eligible voting member may vote only for candidates seeking election in its respective state. For independent directorships, the FHLBank'sFHLB's Board of Directors nominates candidates to be placed on the ballot in an at-large election. For both member and independent directorship elections, a member is entitled to vote one share of required capital stock, subject to a statutory limitation, for each applicable directorship. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLBank'sFHLB's capital stock that were required to be held by all members in that state as of the record date for voting. Nonmember stockholders are not eligible to vote in director elections. Due to the abovementioned statutory limitation, no member owned more than 10 percent of the voting interests of the FHLBankFHLB at December 31, 20142016 or 2013.2015.

All transactions with stockholders are entered into in the ordinary course of business. Finance Agency regulations require the FHLBankFHLB to offer the same pricing for Advances and other services to all members regardless of asset or transaction size, charter type, or geographic location. However, the FHLBankFHLB may, in pricing its Advances, distinguish among members based upon its assessment of the credit and other risks to the FHLBankFHLB of lending to any particular member or upon other reasonable criteria that may be applied equally to all members. The FHLBank'sFHLB's policies and procedures require that such standards and criteria be applied consistently and without discrimination to all members applying for Advances.

Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLBankFHLB may provide products and services to members whose officers or directors serve as directors of the FHLBankFHLB (Directors' Financial Institutions). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLBankFHLB had no mortgage-backed securities or derivatives transactions with Directors' Financial Institutions at December 31, 2014 and 2013.2016 or 2015.


135
Table of Contents

Table 22.1 - Transactions with Directors' Financial Institutions (dollars in millions)
December 31, 2014 December 31, 2013December 31, 2016 December 31, 2015
Balance 
% of Total (1)
 Balance 
% of Total (1)
Balance 
% of Total (1)
 Balance 
% of Total (1)
Advances$2,929
 4.2% $1,611
 2.5%$3,947
 5.6% $3,867
 5.3%
MPP154
 2.3
 57
 0.9
234
 2.6
 186
 2.4
Regulatory capital stock225
 5.2
 246
 5.1
166
 4.0
 236
 5.3
(1)Percentage of total principal (Advances), unpaid principal balance (MPP), and regulatory capital stock.

Concentrations. The following table shows regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of mortgage loans held for portfolio at the dates indicated toof stockholders holding five percent or more of regulatory capital stock and includeincludes any known affiliates that are members of the FHLBank.FHLB.

Table 22.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock (dollars in millions)
Regulatory Capital Stock Advance MPP UnpaidRegulatory Capital Stock Advance MPP Unpaid
December 31, 2014Balance % of Total  Principal Principal Balance
December 31, 2016Balance % of Total  Principal Principal Balance
JPMorgan Chase Bank, N.A.$1,533
 35% $41,300
 $—
$1,317
 31% $32,300
 $—
U.S. Bank, N.A.475
 11
 8,338
 38
475
 11
 8,563
 27
Fifth Third Bank248
 6
 24
 3
248
 6
 2,517
 2
The Huntington National Bank244
 6
 2,433
 388

Regulatory Capital Stock Advance MPP UnpaidRegulatory Capital Stock Advance MPP Unpaid
December 31, 2013Balance % of Total Principal Principal Balance
December 31, 2015Balance % of Total Principal Principal Balance
JPMorgan Chase Bank, N.A.$1,533
 32% $41,700
 $—
$1,533
 34% $35,350
 $—
U.S. Bank, N.A.592
 12
 4,584
 45
475
 11
 10,086
 33
Fifth Third Bank401
 8
 26
 4
248
 6
 20
 3

Nonmember Affiliates. The FHLBankFHLB has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLBankFHLB had no investments in or borrowings to any of these nonmember affiliates at December 31, 20142016 or 2013.2015. The FHLBankFHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLBank,FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. For the years ended December 31, 20142016 and 2013,2015, the FHLBankFHLB was not required to purchase any bonds under these agreements.

136
Table of Contents

SUPPLEMENTAL FINANCIAL DATA

Supplemental financial data required is set forth in the “Other Financial Information” caption at Part II, Item 7 of this report.

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

There were no changes in or disagreements with our accountants on accounting and financial disclosure during the two most recent fiscal years.

Item 9A.Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2014,2016, the FHLBank'sFHLB's management, including its principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, these two officers each concluded that, as of December 31, 2014,2016, the FHLBankFHLB maintained effective disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files under the Exchange Act is (1) accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.


MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the FHLBankFHLB is responsible for establishing and maintaining adequate internal control over financial reporting. The FHLBank'sFHLB's internal control over financial reporting is designed by, or under the supervision of, the FHLBank'sFHLB's management, including its principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The FHLBank'sFHLB's management assessed the effectiveness of the FHLBank'sFHLB's internal control over financial reporting as of December 31, 2014.2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management of the FHLBankFHLB determined that, as of December 31, 2014,2016, the FHLBank'sFHLB's internal control over financial reporting was effective based on those criteria.

The effectiveness of the FHLBank'sFHLB's internal control over financial reporting as of December 31, 20142016 has been audited by PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, as stated in their report which is included in “Item 8. Financial Statements and Supplementary Data."


CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the FHLBank'sFHLB's internal control over financial reporting that occurred during the fourth quarter ended December 31, 20142016 that materially affected, or are reasonably likely to materially affect, the FHLBank'sFHLB's internal control over financial reporting. On May 14, 2013, the COSO published an updated Internal Control - Integrated Framework (2013) and related illustrative documents. The FHLBank adopted the new framework in 2014.

Item 9B.Other Information.

Not applicable.PwC serves as the independent registered public accounting firm for the FHLB. Rule 201(c)(1)(ii)(A) of SEC Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement


137
Tableteam, personnel in the chain of Contentscommand, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.

PwC has advised the FHLB that as of December 31, 2016 PwC and certain covered persons had borrowing relationships with two FHLB members (referred below as the “lenders”) who own more than ten percent of the FHLB’s capital stock, which under the Loan Rule, may reasonably be thought to bear on PwC’s independence with respect to the FHLB. The FHLB is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the FHLB.

PwC advised the Audit Committee of the Board that it believes that, in light of the facts of these borrowing relationships, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement has not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:
▪the firm's borrowings are in good standing and neither lender has the right to take action against PwC, as borrower, in connection with the financings;
▪the debt balances outstanding are immaterial to PwC and to each lender;
▪PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and
▪the PwC audit engagement team has no involvement in PwC’s treasury function and PwC’s treasury function has no oversight or ability to influence the PwC audit engagement team.

Additionally, the Audit Committee assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the FHLB, the limited voting rights of members and the composition of the Board of Directors. In addition to the above listed considerations, the Audit Committee considered the following:
▪although the lenders owned more than ten percent of the FHLB’s capital stock, the lenders' voting rights are each less than ten percent;
▪no individual officer or director that serves on the Board of Directors has the ability to significantly influence the FHLB based on the composition of the Board of Directors; and
▪as of December 31, 2016, and as of the date of the filing of this Form 10-K, no officer or director of either lender served on the Board of Directors of the FHLB.

Based on this evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.


PART III


Item 10.Directors, Executive Officers and Corporate Governance.

NOMINATION AND ELECTION OF DIRECTORS

The Finance Agency has authorized us to have a total of 1718 directors: 10 member directors and seveneight independent directors. Two of our independent directors are designated as public interest directors and all 1718 directors are elected by our members.

For both member and independent directorship elections, a member institution may cast one vote per seat or directorship up for election for each share of stock that the member was required to hold as of December 31 of the calendar year immediately preceding the election year. However, the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of FHLBankFHLB stock that were required to be held by all members located in its state. The election process is conducted by mail. Our Board of Directors does not solicit proxies nor is any member institution permitted to solicit proxies in an election.

Finance Agency regulations also provide for two separate selection processes for member and independent director candidates.

Member director candidates are nominated by any officer or director of a member institution eligible to vote in the respective statewide election, including the candidate's own institution. After the FHLBankFHLB determines that the candidate meets all member director eligibility requirements per Finance Agency regulations, the candidate may run for election and the candidate's name is placed on the ballot.

Independent director candidates are self-nominated. Any individual may submit an independent director application form to the FHLBankFHLB and request to be considered for election. The FHLBankFHLB reviews all application forms to determine that the individual satisfies the appropriate public interest or non-public interest independent director eligibility requirements per Finance Agency regulations before forwarding the application form to the Board for review of the candidate's qualifications and skills. The Board then nominates an individual whose name will appear on the ballot after consultation with the Affordable Housing Advisory Council and after the nominee information has been submitted to the Finance Agency for review. As part of the nomination process, the Board may consider several factors including the individual's contributions and service on the Board, if a former or incumbent director, and the specific experience and qualifications of the candidate. The Board will also considerconsiders diversity in nominating independent directors and how the attributes of the candidate may add to the overall strength and skill set of the Board. These same factors are considered when the Board fills a member or independent director vacancy.


138
Table of Contents

DIRECTORS

The following table sets forth certain information (ages as of March 1, 2015)2017) regarding each of our current directors.
NameAgeDirector SinceExpiration of Term as a DirectorIndependent or Member (State)AgeDirector SinceExpiration of Term as a DirectorIndependent or Member (State)
J. Lynn Anderson51201112/31/16Member (OH)53
2017 (1)
12/31/20Independent (OH)
Grady P. Appleton67200712/31/17Independent (OH)69200712/31/17Independent (OH)
Brady T. Burt44201712/31/20Member (OH)
Greg W. Caudill56201412/31/17Member (KY)58201412/31/17Member (KY)
James R. DeRoberts58200812/31/18Member (OH)60200812/31/18Member (OH)
Mark N. DuHamel57200912/31/15Member (OH)
Leslie D. Dunn69200712/31/16Independent (OH)71200712/31/20Independent (OH)
James A. England63201112/31/18Member (TN)65201112/31/18Member (TN)
Charles J. Koch68
2008 (1)
12/31/18Independent (OH)70
2008 (2)
12/31/18Independent (OH)
Robert T. Lameier64201612/31/19Member (OH)
Michael R. Melvin70(1995-2001) 200612/31/15Member (OH)72(1995-2001) 200612/31/19Member (OH)
Thomas L. Moore68201312/31/16Member (OH)
Donald J. Mullineaux, Chair69201012/31/15Independent (KY)71201012/31/19Independent (KY)
Alvin J. Nance57200912/31/16Independent (TN)59200912/31/20Independent (TN)
Charles J. Ruma73(2002-2004) 200712/31/15Independent (OH)75(2002-2004) 200712/31/19Independent (OH)
David E. Sartore54201412/31/17Member (KY)56201412/31/17Member (KY)
William J. Small, Vice Chair64200712/31/17Member (OH)66200712/31/17Member (OH)
William S. Stuard, Jr.60201112/31/18Member (TN)62201112/31/18Member (TN)
Nancy E. Uridil63201512/31/18Independent (OH)65201512/31/18Independent (OH)
James J. Vance55201712/31/20Member (OH)
(1)Ms. Anderson, an independent director beginning in 2017, also served as a member director from 2011-2016.
(2)Mr. Koch, an independent director beginning in 2008, also served as a member director from 1990-1995 and 1998-2006.
            
Member Directors

Finance Agency regulations govern the eligibility requirements for our member directors. Each member director, and each nominee to a member directorship, must be a U.S. citizen and an officer or director of a member that: is located in the voting state to be represented by the member directorship, was a member of the FHLBankFHLB as of the record date, and meets all minimum capital requirements established by its appropriate Federal banking agency or state regulator.

Each member director is nominated and elected by our members through an annual voting process administered by us. Any member that is entitled to vote in the election may nominate an eligible individual to fill each available member directorship for its voting state, and all eligible nominees must be presented to the membership in the voting state. In accordance with Finance Agency regulations, except when acting in a personal capacity, no director, officer, attorney, employee or agent of the FHLBankFHLB may communicate in any manner that he or she directly or indirectly, supports or opposes the nomination or election of a particular individual for a member directorship or take any other action to influence the voting with respect to a particular individual. As a result, the FHLBankFHLB is not in a position to know which factors its member institutions considered in nominating candidates for member directorships or in voting to elect member directors.

Ms. Anderson Mr. Burthas been the Senior Vice President and Chief Financial Officer of NationwideThe Park National Bank, Columbus,Newark, Ohio, a subsidiary of Park National Corporation, since November 2009. SheDecember 2012. He also serves as the Secretary, Treasurer, and Chief Financial Officer of Park National Corporation. Prior to that, he served as the Senior Vice President-PropertyPresident and Casualty Product and Pricing for Nationwide Mutual Insurance CompanyChief Accounting Officer of The Park National Bank as well as the Chief Accounting Officer of Park National Corporation from March 2003 until November 2009.April 2007 to December 2012.

Mr. Caudill has been President and Chief Executive Officer of Farmers National Bank, Danville, Kentucky since December 2002. He also served as President of Farmers National Bank from December 2002 until April 2016.

Mr. DeRoberts has been Chairman of The Arlington Bank, Upper Arlington, Ohio since 1999 and a partner at Gardiner Allen DeRoberts Insurance LLC, Columbus, Ohio since 2006. He also serves as a director of Park National Corporation and its subsidiary, The Park National Bank, Newark, Ohio.Ohio since February 2015.

 
Mr. DuHamelEngland has been a director and the Executive Vice President of FirstMerit Bank, N.A., Akron, Ohio, since February 2005 and Treasurer of FirstMerit Bank, N.A. since March 1996.


139
Table of Contents

Mr. England has been Chairman of Decatur County Bank, Decaturville, Tennessee since 1990. He also served as Chief Executive Officer of Decatur County Bank from 1990 to 2013.

Mr. Lameier has been President, Chief Executive Officer, and a director of Miami Savings Bank, Miamitown, Ohio since 1993.

Mr. Melvin has been President and a director of Perpetual Federal Savings Bank, Urbana, Ohio since 1980.

Mr. Moore has been a director at First Federal Bank of Ohio, Galion, Ohio, since 1995, serving as Chairman from November 2011 to November 2014. He also served as President and Chief Executive Officer of First Federal Bank of Ohio from 1995 to January 2014.

Mr. Sartore became Executive Vice President and Chief Financial Officer of Field & Main Bank, Henderson, Kentucky in January 2015 when Ohio Valley Financial Group and BankTrust Financial merged to form Field & Main Bank. Previously, Mr. Sartore was Senior Vice President and Chief Financial Officer of Ohio Valley Financial Group since 1992.

Mr. Small has been Chairman of First Defiance Financial Corp. and its subsidiary bank, First Federal Bank of the Midwest, of Defiance, Ohio, since 1999. He also served as Chief Executive Officer of First Defiance Financial Corp. from 1999 to December 2013. In addition, he served as Chief Executive Officer of First Federal Bank of the Midwest from 1999 until 2008.

Mr. Stuardhas been Chairman of F&M Bank, Clarksville, Tennessee, since January 2016 and President and Chief Executive Officer of F&M Bank Clarksville, Tennessee, since January 1991.

Mr. Vance has been Senior Vice President and Treasurer of Western-Southern Life Assurance Company, Cincinnati, Ohio since March 2016. Previously, he served as Vice President and Treasurer of Western-Southern Life Assurance Company from 1999 to March 2016.

Independent Directors

Finance Agency regulations also govern the eligibility requirements of our independent directors. Each independent director, and each nominee to an independent directorship, must be a U.S. citizen and bona fide resident of our District. At least two of our independent directors must be designated by our Board as public interest directors. Public interest independent directors must have more than four years experience representing consumer or community interest in banking services, credit needs, housing, or consumer financial protections. All other independent directors must have knowledge of or experience in one or more of the following areas: auditing and accounting; derivatives; financial management; organizational management; project development; risk management practices; and the law. Our Board of Directors nominates candidates for independent directorships. Directors, officers, employees, attorneys, or agents of the FHLBankFHLB are permitted to support directly or indirectly the nomination or election of a particular individual for an independent directorship.

Ms. Anderson was the Senior Vice President-Member Solutions Integration for Nationwide Mutual Insurance Company, Columbus, Ohio from March 2016 to December 2016. She also served as President of Nationwide Bank from November 2009 to March 2016. Ms. Anderson is a certified public accountant and has six years of experience serving on the board of a non-profit entity which focuses on providing low- to moderate-income housing. Ms. Anderson's prior leadership positions within the banking and insurance industries contribute skills to the Board in the areas of auditing and accounting, operations and corporate governance.

Mr. Appleton has served as President and Chief Executive Officer of East Akron Neighborhood Development Corporation (EANDC), Akron, Ohio, since January 2014. He previously served as Executive Director of EANDC for more than 30 years. EANDC improves communities by providing quality and affordable housing, comprehensive homeownership services and economic development opportunities. Mr. Appleton's years of experience with EANDC bring insight to the Board that contributes to the FHLBank'sFHLB's corporate objective of maximizing the effectiveness of contributions to Housing and Community Investment programs. Mr. Appleton also served as a member of the FHLBank'sFHLB's Advisory Council from 1997 until 2006.

Ms. Dunn was Senior Vice President of Business Development, General Counsel and Secretary of Cole National Corporation, a New York Stock Exchange listed retailer now owned by Luxottica Group S.p.A., from September 1997 until October 2004. Prior to joining Cole, she had been a partner since 1985 in the Business Practice of the Jones Day law firm. She currently is engaged in various businesspublic and private company board activities and serves in leadership positions with a number of civic and philanthropic organizations. Ms. Dunn has served as a director of New York Community Bancorp, Inc. and on its Audit, Risk Assessment, Cyber, and Nominating and Corporate Governance Committees since September 2015. Ms. Dunn's experience as a director and senior officer of a publicly held companycompanies and as a law firm partner representing numerous publicly held companies brings perspective to the Board regarding the FHLBank'sFHLB's status as an SEC registrant, corporate governance matters, and the Board's responsibility to oversee the FHLBank'sFHLB's operations.

Mr. Koch is the retired Chairman of the Board and Chief Executive Officer of Charter One Bank, N.A., Cleveland, Ohio. He served as Charter One's Chief Executive Officer from 1987 to 2004, and as its Chairman of the Board from 1995 to 2004, when the bank was sold to Royal Bank of Scotland. Mr. Koch was a director of the Royal Bank of Scotland from 2004 until February 2009. He is currently a director of Assurant Inc. and Citizens Financial Group. In addition, he is the Chair of the Risk and Compliance Committees of Citizens Financial Group. Mr. Koch's substantial experience in risk management and his prior leadership positions within the banking industry and various board positions held contribute skills important to the Board's responsibility for approving a strategic business plan that supports the FHLBank'sFHLB's mission and corporate objectives.

Dr. Mullineaux is the Emeritus duPont Endowed Chair in Banking and Financial Services in the Gatton College of Business and Economics at the University of Kentucky. He held the duPont Endowed Chair from 1984 until 2014. Previously, he was on the staff of the Federal Reserve Bank of Philadelphia, where he served as Senior Vice President and Director of Research from 1979 until 1984. He also served as a director of Farmers Capital Bank Corporation from 2005 until 2009. He has published numerous articles and lectured on a variety of banking topics, including risk management, financial markets and economics. He

140
Table of Contents

has served as the Curriculum Director for the ABA's Stonier Graduate School of Banking since 2001.from 2001 to 2016. Dr. Mullineaux brings knowledge and experience to the Board in areas vital to the operation of financial institutions in today's economy.

Mr. Nance has been Chief Executive Officer of the Development and Property Management operating divisions of LHP Capital, Knoxville, Tennessee, since April 2015. Previously, he was Executive Director and the Chief Executive Officer of Knoxville's Community Development Corporation (KCDC) Knoxville, Tennessee since 2000.from 2000 to 2015. The KCDC is the public housing and redevelopment authority for the City of Knoxville and Knox County, which strives to improve Knoxville's neighborhoods and communities, including through providing quality affordable housing. Mr. Nance will leave KCDC to become Chief Executive Officer of the Development and Property Management operating divisions of Lawler Wood Housing Partners, LLC, Knoxville, Tennessee, effective April 1, 2015. Mr. Nance also served an eight-year term where he held the office of Vice Chairman on the Tennessee Housing Development Agency, the state's housing finance agency, which promotes the production of affordable housing for very low, low, and moderate, income individuals and families in the state. Mr. Nance also serves on the Board of Knoxville Habitat for Humanity. Mr. Nance's depth of experience with these organizations brings insight to the Board that contributes to the FHLBank'sFHLB's corporate objective of maximizing the effectiveness of its contributions to Housing and Community Investment programs.

Mr. Ruma has been President and Chief Executive Officer of Virginia Homes Ltd., a Columbus, Ohio area homebuilder, since 1975. He served on the board of the Ohio Housing Finance Agency (OHFA), the state's housing agency, from 2004 to 2009. OHFA helps Ohio's first-time homebuyers, renters, senior citizens, and others find quality, affordable housing that meets their needs. OHFA's programs also support developers and property managers of affordable housing throughout the state. Mr. Ruma's years of experience in the home building industry and with the OHFA bring insight to the Board that contributes to the FHLBank'sFHLB's mission and corporate objectives.

Ms. Uridilwas the Senior Vice President of Global Operation for Moen Incorporated, North Olmsted, Ohio, from September 2005 until March 2014. Ms. Uridil is currently on the Board of Directors of Flexsteel Industries, Inc., where she serves on the Compensation Committee and chairs the Nominations and Governance Committee. Previously, Ms. Uridil served as a Senior Vice President of Estée Lauder Companies, from 2000 to 2005. Ms. Uridil also served as a Senior Vice President of Mary Kay, Incorporated, from 1996 to 2000. Serving on executive teams for global businesses for more than 18 years, Ms. Uridil has extensive experience in strategy, expense and capital management, merger and acquisition integration and sourcing. Ms. Uridil's qualifications and insight provide valuable skills to the Board in the important areas of personnel, compensation, information technology and operations.



EXECUTIVE OFFICERS

The following table sets forth certain information (ages as of March 1, 2015)2017) regarding our executive officers.
NameAgePositionEmployee of the FHLBank SinceAgePositionEmployee of the FHLB Since
Andrew S. Howell53President and Chief Executive Officer198955President and Chief Executive Officer1989
Donald R. Able54Executive Vice President-Chief Operating Officer and Chief Financial Officer198156Executive Vice President-Chief Operating Officer and Chief Financial Officer1981
R. Kyle Lawler57Executive Vice President-Chief Business Officer200059Executive Vice President-Chief Business Officer2000
Stephen J. Sponaugle54Executive Vice President-Chief Risk and Compliance Officer1992
Damon v. Allen44Senior Vice President-Community Investment Officer199946Senior Vice President-Community Investment Officer1999
J. Christopher Bates39Senior Vice President-Chief Accounting Officer200541Senior Vice President-Chief Accounting Officer2005
Roger B. Batsel43Senior Vice President-Chief Information Officer201445Senior Vice President-Chief Information Officer2014
Thomas J. Ciresi61Senior Vice President-Member Services1981
James G. Dooley, Sr.61Senior Vice President-Internal Audit200663Senior Vice President-Internal Audit2006
David C. Eastland57Senior Vice President-Chief Credit Officer199959Senior Vice President-Chief Credit Officer1999
Tami L. Hendrickson54Senior Vice President-Treasurer200656Senior Vice President-Treasurer2006
Stephen J. Sponaugle52Senior Vice President-Chief Risk Officer1992
                            
Except as described below, all of the executive officers named above have held their current positions for at least the past five years.

Mr. Howell became President and Chief Executive Officer in June 2012. Previously, he served as the Executive Vice President-Chief Operating Officer since January 2008.


141
Table of Contents

Mr. Able became the Executive Vice President-Chief Operating Officer and Chief Financial Officer in January 2015. Mr. Able served as the Executive Vice President-Chief Operating Officer and Interim Chief Financial Officer since March 2014. He became Executive Vice President-Chief Operating Officer in August 2012 and has served as the Principal Financial Officer since January 2007. Prior to that, he had served as the Senior Vice President-Chief Accounting and Technology Officer since January 2011 and as the Senior Vice President-Controller since March 2006.2011.

Mr. Lawler became Executive Vice President-Chief Business Officer in August 2012. Previously, he served as the Senior Vice President-Chief Credit Officer since May 2007.

Mr. Sponaugle became Executive Vice President-Chief Risk and Compliance Officer in January 2017. Previously, he served as the FHLB's Senior Vice President-Chief Risk and Compliance Officer since November 2015, and as Senior Vice President-Chief Risk Officer from January 2007 to October 2015.

Mr. Allen became Senior Vice President-Community Investment Officer in January 2012. Previously, he served as the FHLBank'sFHLB's Vice President and Community Investment Officer since July 2011, and as Vice President-Housing and Community Investment from January 2009 to June 2011.

Mr. Bates became Senior Vice President-Chief Accounting Officer in January 2015. Previously, he served as the FHLBank'sFHLB's Vice President-Controller since January 2013 and as Vice President-Assistant Controller from January 2011 to January 2013. Prior to that, he was the Vice President-Financial Reporting from January 2009 to January 2011.December 2012.

Mr. Batselbecame Senior Vice President-Chief Information Officer in January 2014. Previously, he was the Senior Vice President, Chief Information Officer at MidCountry Financial Corp. from September 2011 to January 2014. Prior to that, he was the Senior Vice President and Managing Director of Information Systems at Republic Bank from April 2006 to September 2011.

Mr. Dooley became Senior Vice President-Internal Audit in January 2013. Previously, he served as Vice President-Internal Audit since 2006.

Mr. Eastland became the Senior Vice President-Chief Credit Officer in January 2015. Prior to that, he had served as the FHLBank'sFHLB's Vice President-Credit Risk Management since January 2002.

Ms. Hendrickson became Senior Vice President-Treasurer in January 2015. Previously, she served as the FHLBank'sFHLB's Vice President-Treasurer since January 2010.

All officers are appointed annually by our Board of Directors.


AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined (1) that each of Mr. Mark N. DuHamel, ChairmanMs. J. Lynn Anderson, Chair of the Audit Committee, and Committee member Ms. J. Lynn AndersonMr. David E. Sartore, have the relevant accounting and related financial management expertise, and therefore are qualified, to serve as the Audit Committee financial experts within the meaning of the regulations of the SEC and (2) that each is independent under SEC Rule 10A-3(b)(1). Mr. DuHamel's experience has principally been in the accounting, finance and treasury disciplines within the financial industry, and has included managing various accounting functions. Ms. Anderson's experience has principally been in the internal audit disciplines within the financial industry and is a Certified Public Accountant. Mr. Sartore's experience has principally been in the accounting and finance disciplines within the financial industry and is a Certified Public Accountant. For additional information regarding the independence of the directors of the FHLBank,FHLB, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

CODES OF ETHICS

The Board of Directors has adopted a “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer and the principal financial officer, as well as all other executive officers. This policy serves to promote honest and ethical conduct, full, fair and accurate disclosure in the FHLBank'sFHLB's reports to regulatory authorities and other public communications, and compliance with applicable laws, rules and regulations. The Code is posted on the FHLBank'sFHLB's Web site (www.fhlbcin.com). If a waiver of any provision of the Code is granted to a covered officer, information concerning the waiver will be posted on our Web site.

The Board of Directors has also adopted a “Standards of Conduct” policy that applies to all employees. The purpose of this policy is to promote a strong ethical climate that protects the FHLBankFHLB against fraudulent activities and fosters an environment in which open communication is expected and protected.

142
Table of Contents


Item 11.
Executive Compensation.
 
20142016 COMPENSATION DISCUSSION AND ANALYSIS
 
The following provides discussion and analysis regarding our compensation program for executive officers for 2014, including2016, and in particular the executive officers named in the Summary Compensation Table below (theour Named Executive Officers).Officers. Our Named Executive Officers for 2016 were: Andrew S. Howell, President and Chief Executive Officer; Donald R. Able, Executive Vice President- Chief Operating Officer and Chief Financial Officer; R. Kyle Lawler, Executive Vice President- Chief Business Officer; Stephen J. Sponaugle, Executive Vice President- Chief Risk and Compliance Officer and James G. Dooley, Sr., Senior Vice President- Internal Audit.
 
Compensation Program Overview (Philosophy and Objectives)
 
Our Board of Directors (the Board) is responsible for determining the philosophy and objectives of the compensation program. The philosophy of the program is to provide a flexible and market-based approach to compensation that attracts, retains and motivates high performing, accomplished financial services executives who, by their individual and collective performance, achieve strategic business initiatives and thereby enhance member stockholder value. The program is primarily designed to focus executives on achieving the FHLBank'sFHLB's mission through increased business with member institutions within established riskprofitability and profitabilityrisk tolerance levels, while also encouraging teamwork.
 
To achieve this, we compensate executive officers using a combination of base salary, short and long-term variable (incentive-based) cash compensation, retirement benefits and modest fringe benefits. We believe the compensation program communicates short and long-term goals and standards of performance for the FHLBank'sFHLB's mission and key business objectives and appropriately motivates and rewards executives commensurate with their contributions and achievements. The combination of base salary, which rewards individual performance, and short and long-term incentives, which reward teamwork, creates a total compensation opportunity for executives who contribute to and influence strategic plans and who are primarily responsible for the FHLBank'sFHLB's performance.
 
Oversight of the compensation program is the responsibility of the Personnel and Compensation Committee of the Board (the Committee). The Committee annually reviews the components of the compensation program to ensure that it is consistent with and supports the FHLBank'sFHLB's mission, strategic business objectives and annual goals. In carrying out its responsibilities, the

Committee may engage executive compensation consultants to assist in evaluating the effectiveness of the compensation program and in determining the appropriate mix of compensation provided to executive officers. Because individuals are not permitted to own the FHLBank'sFHLB's capital stock, all compensation is paid in cash and we have no equity compensation plans or arrangements.
 
The Committee recommends the President's annual compensation package to the Board, which is responsible for approving all compensation provided to the President. Additionally, the Committee is responsible for reviewing and approving the compensation programs for all officers, including the other Named Executive Officers, and submitting its recommendations to the Board for final approval. The compensation of the Senior Vice President- Internal Audit is reviewed and approved by the Audit Committee. Unless otherwise stated, references to the Committee with regard to Mr. Dooley refer to the Audit Committee.
 
Management Involvement - Executive Compensation
 
While the Board is ultimately responsible for determining the compensation of the President and all other executive officers, the President and the Human Resources department periodically advise the Committee regarding competitive and administrative issues affecting our compensation program. The President and the Human Resources department also present recommendations to the Committee regarding the compensation of all other executive officers, and administer programs approved by the Committee and the Board.
 
Finance Agency Oversight - Executive Compensation
 
The Director of the Finance Agency is required by regulation to prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. Finance Agency rules direct the FHLBanks to provide all compensation actions affecting their Named Executive Officers to the Finance Agency for review. Accordingly, following our Board's November 20142016 and January 20152017 meetings, we submitted the 20152017 base salaries as well as short and long-term incentive payments earned for 20142016 for our Named Executive Officers to the Finance Agency. At this time, we do not expect the statutoryregulatory requirements to have a material impact on our executive compensation plans.programs.
 

143
Table of Contents

Use of Comparative Compensation Data
 
The compensation program is designed to provide a market competitive compensation package when recruiting and retaining highly talented executives seeking stable, long-term employment. To this end, we gather compensation data from a wide variety of sources, including broad-based national and regional surveys, presentations at FHLBank System meetings, and formal and informal interactions with our compensation consultant. Our consultant, McLagan, is a nationally recognized compensation consulting firm specializing in the financial services industry. When determining compensation for our executive officers, the Committee and the President use this information to inform themselves regarding trends in compensation practices and as a comparison check against general market data (market check) to evaluate the reasonableness and effectiveness of our total compensation program and its components.
 
We also participate in multiple surveys including the annual McLagan Federal Home Loan Bank Custom Survey and the annual Federal Home Loan Bank System Key Position Compensation Survey. Both surveys contain executive and non-executive compensation information for various key positions across the 12all FHLBanks.
 
In setting 20152017 compensation, we concentrated our attention onprimarily relied upon information from the McLagan Federal Home Loan Bank Custom Survey as it encompassed information relating to 20142016 compensation from mortgage banks, commercial financial institutions, and other FHLBanks. While McLagan's compensation analysis included those financial institutions that typically had assets of less than $20 billion, we believe the positions at other FHLBanks generally are more directly comparable to ours given the unique nature of the FHLBank System. The FHLBanks share the same public policy mission, interact routinely with each other, and share a common regulator and regulatory constraints, including the need for Finance Agency review of all compensation actions affecting our executive officers. However, there are significant differences across the FHLBank System, including the sizes of the various FHLBanks, the complexity of their operations, their organizational and cost structures and the types of compensation packages offered. Thus, we do not and, as a practical matter could not, calculate compensation packages for our Named Executive Officers based solely on comparisons to the other FHLBanks.


Compensation Program Approach
 
The Committee utilizes a balanced approach for delivering base salary and short and long-term incentive pay with our compensation program. While ourthe annual (short-term) incentive compensation component rewards all officers and staff for the achievement of FHLBankFHLB annual strategic business goals, ourthe deferred (long-term) incentive compensation component is provided to executive and senior officers for achievement of specific, strategic and mission-related goals for which FHLBankFHLB performance is measured over a three-year period. The Committee has not established or assigned specific percentages to each element of the FHLBank'sFHLB's executive compensation program. Instead, the Committee strives to create a program that generally delivers a total compensation opportunity, i.e., base salary, annual and deferred incentive compensation and other benefits (including retirement plan), to each executive officer that, when the FHLBankFHLB meets its target performance goals, is at or near the median of the other FHLBanks and is generally consistent with our market check. However, individual elements of compensation as well as total compensation for individual executives may vary from the median due to an executive's tenure, experience and responsibilities.
 
While the competitiveness of the compensation program is considered an important factor for attracting and retaining executives, the Committee also reviews all elements of compensation to ensure the program is well designed and fiscally responsible from both a regulatory and corporate governance perspective.

Impact of Risk-Taking on Compensation Program
 
The Committee reviews the overall program to ensure the compensation of executive officers does not encourage unnecessary or excessive risk-taking that could threaten the long-term value of the FHLBank.FHLB. Risk management is an integral part of our culture. The Committee believes that base salary is a sufficient percentage of total compensation to discourage such risk-taking by our executive officers. The Committee also believes the mix of incentive goals, which include risk-related metrics, does not encourage unnecessary or excessive risk-taking and achieves an appropriate balance of incentive for performance between the short and long-term organizational goals. Moreover, the Committee retainsand the Board retain the discretion to reduce or withhold incentive compensation payments if it determinesa determination is made that an executive has caused the FHLBankFHLB to incur such a risk that could threaten the long-term value of the FHLBank.FHLB.
 

144
Table of Contents

Elements of Total Compensation Program
 
The following table summarizes all compensation to the FHLBank'sFHLB's Named Executive Officers for the years ended December 31, 2014, 20132016, 2015 and 2012.2014. Discussion of each component follows the table.
 
Summary Compensation Table
Name and Principal PositionYear 
Salary(1)
 Bonus 
Non-Equity Incentive Plan Compensation(2)
 
Change in Pension Value & Non-Qualified Deferred Compensation Earnings(3)
 
All Other Compensation(4)
 TotalYear 
Salary(1)
 
Bonus (2)
 
Non-Equity Incentive Plan Compensation(3)
 
Change in Pension Value & Non-Qualified Deferred Compensation Earnings(4)
 
All Other Compensation(5)
 Total
Andrew S. Howell2014 $692,016
 $—
 $479,622
 $2,431,000
 $15,600
 $3,618,238
2016 $800,625
 $—
 $648,357
 $1,426,000
 $27,215
 $2,902,197
President and Chief Executive Officer2013 617,775
 —
 340,546
 189,000
 15,300
 1,162,621
2015 728,482
 —
 544,843
 889,000
 29,536
 2,191,861
2012 491,055
 —
 271,561
 810,000
 15,000
 1,587,616
2014 692,016
 —
 479,622
 2,431,000
 15,600
 3,618,238
                        
Donald R. Able2014 358,788
 —
 207,972
 1,498,000
 15,600
 2,080,360
2016 418,952
 50,000
 278,474
 943,000
 15,900
 1,706,326
Executive Vice President-2013 320,800
 —
 160,354
 —
 15,300
 496,454
2015 383,125
 —
 242,198
 465,000
 15,900
 1,106,223
Chief Operating Officer and Chief Financial Officer2012 291,989
 —
 135,824
 680,000
 15,000
 1,122,813
2014 358,788
 —
 207,972
 1,498,000
 15,600
 2,080,360
                        
R. Kyle Lawler2014 331,154
 —
 199,572
 646,000
 15,600
 1,192,326
2016 379,385
 —
 261,931
 438,000
 15,900
 1,095,216
Executive Vice President-2013 315,087
 —
 157,180
 26,000
 15,300
 513,567
2015 357,885
 —
 229,316
 244,000
 15,900
 847,101
Chief Business Officer2012 277,020
 —
 133,056
 227,000
 15,000
 652,076
2014 331,154
 —
 199,572
 646,000
 15,600
 1,192,326
                        
Stephen J. Sponaugle2014 281,292
 —
 138,781
 694,000
 15,600
 1,129,673
2016 337,692
 —
 191,269
 494,000
 15,900
 1,038,861
Executive Vice President-2015 306,752
 —
 176,417
 181,000
 15,900
 680,069
Chief Risk and Compliance Officer2014 281,292
 —
 138,781
 694,000
 15,600
 1,129,673
            
James G. Dooley, Sr. (6)
2016 251,333
 —
 162,790
 68,000
 15,900
 498,023
Senior Vice President-2013 245,725
 —
 117,640
 —
 11,922
 375,287
2015 233,627
 —
 118,814
 39,000
 15,900
 407,341
Chief Risk Officer2012 224,339
 —
 107,451
 232,000
 15,000
 578,790
            
Roger B. Batsel (5)
2014 235,577
 45,000
 73,442
 —
 —
 354,019
Senior Vice President-           

Chief Information Officer           

Internal Audit           

(1)Includes excess accrued vacation benefits automatically paid in accordance with established policy (applicable to all employees), which for 20142016 were as follows: Mr. Howell, $50,246;$50,625; Mr. Able, $21,288;$18,952; Mr. Lawler, $9,231;$14,385; Mr. Sponaugle $12,692; and Mr. Sponaugle $6,100.Dooley $1,333.
(2)As permitted under the non-equity incentive compensation plan, the Board awarded Mr. Able a discretionary bonus in recognition of additional responsibilities assigned to him by the President and Board during 2016. This bonus was paid in 2017.
(3)Amounts shown for 20142016 reflect total payments pursuant to the current portion of the 20142016 Incentive Plan and the 2012-2014 Transitional Long-Term Non-Equitydeferred portion of the 2013 Incentive Plan (Transition Plan)(2014 - 2016 performance period), as follows:
Name Annual Incentive Plan Transitional Long-Term Incentive Plan Total 2016 Incentive Plan (current incentive) 
2013 Incentive Plan
 (three-year deferred incentive)
 Total
Andrew S. Howell $282,370
 $197,252
 $479,622
 $362,111
 $286,246
 $648,357
Donald R. Able 118,797
 89,175
 207,972
 154,500
 123,974
 278,474
R. Kyle Lawler 113,314
 86,258
 199,572
 140,981
 120,950
 261,931
Stephen J. Sponaugle 82,586
 56,195
 138,781
 106,337
 84,932
 191,269
Roger B. Batsel 73,442
 —
 73,442
James G. Dooley, Sr. 87,500
 75,290
 162,790
(3)(4)Represents change in the actuarial present value of accumulated pension benefits only, which is primarily dependent on changes in interest rates, years of benefit service salary and mortality assumptions. In 2014, there was a decline in the discount rates assumed and new mortality tables projecting longer life expectancies were issued by the Society of Actuaries, both of which increased pension values.salary.
(4)(5)Amounts represent matching contributions to the qualified defined contribution pension plan in 2014.2016. For Mr. Howell, 2016 also includes perquisites totaling $11,315, which consisted of personal use of an FHLB-owned vehicle, premiums for an Executive long-term disability plan, spousal travel expenses and an airline program membership. The value of perquisites are based on the actual cash cost to the FHLB.
(5)(6)Mr. Batsel joined the FHLBankDooley's 2014 compensation amount is not included as he was not a Named Executive Officer in January 2014 as the Senior Vice President-Chief Information Officer. The amount set forth under Bonus represents a one-time signing/relocation bonus.that year.

Salary
Base salary is both a key component of the total compensation program and a key factor when attracting and retaining executive talent. While base salaries for the Named Executive Officers are influenced by a number of factors, theythe Board generally targettargets the median of the competitive market. Other factors affecting an executive's base salary include length of time in position, relevant experience, individual achievement, and the size and scope of assigned responsibilities as compared to the

responsibilities of other executives. Base salary increases traditionally take effect at the beginning of each calendar year and are granted after a review of the individual's performance and leadership contributions to the achievement of our annual business plan goals and strategic objectives.

145
Table of Contents

 
Each of the Named Executive Officers received a base salary increase at the beginning of 2014.2016. Total salary increases, including merit and market adjustments, ranged from 3.337.35 percent to 8.8011.11 percent. For the Named Executive Officers other than the President, the Committee's actions were based on the President's recommendation for each executive, which took into consideration market data, and an evaluation of each executive's annual performance. Individually, directors provided feedback to the Chair, and the Committee recommended, and the Board subsequently approved a salary increase of 8.8011.11 percent for Mr. Howell. In recommending and approving the 20142016 increase, the Committee and Board took into consideration competitive market analysis and the directors' appraisals of Mr. Howell's performance during the year and noted, in particular, the sound performance of the FHLBank under his leadership as President.year.
  
In October 2014,2016, the Committee recommended and the Board approved a 4.50 percent salary increase pool for 20152017 for all employees, comprised of 3.00 percent for merit increases and 1.50 percent for market and promotional adjustments. Using the same process as described above, the Committee recommended, and the Board approved, the following 20152017 base salaries and percent increases for the Named Executive Officers: Mr. Howell, $675,000 (9.22$800,000 (6.67 percent); Mr. Able, $365,000 (12.31$420,000 (5.00 percent); Mr. Lawler, $340,000 (9.68$385,000 (5.48 percent); Mr. Sponaugle, $300,000 (13.21$360,000 (10.77 percent); and Mr. Batsel, $260,000 (4.00Dooley, $260,625 (4.25 percent). On January 8, 2015,December 14, 2016, we were informed that the Finance Agency had completed its review of the Board-approved compensation actions affecting the Named Executive Officers in 2015.2017.
 
Non-Equity Incentive Compensation Plan (Incentive Plan)
The 2014 Incentive Plan is a cash-based total incentive award that is divided into two equal parts: (1) a current incentive award, and (2) a three-year deferred incentive award. The current component of the Incentive Plan is awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved shorter-term goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote higher levels of long-term performance and serve as an employment retention tool for selected executive and senior officers, including the Named Executive Officers.

The Incentive Plan goals generally reflect desired financial, operational, risk and public mission objectives for the current and future fiscal years. Each goal is weighted reflecting its relative importance and potential impact on our strategic initiatives and annual business plan, and each is assigned a quantitative threshold, target and maximum level of performance. Each Named Executive Officer's award opportunity is based entirely on bank-wide performance. However, the Chief Risk Officer's (CRO) award opportunity is weighted 75 percent on bank-wide goals and 25 percent on Enterprise Risk Management (ERM) specific goals, which are developed with the Risk Committee in order to provide incentive and maintain a certain level of independence for risk management initiatives. Additionally, the Senior Vice President- Internal Audit's award opportunity is based entirely on Internal Audit specific goals, which are developed with the Audit Committee, to maintain independence for the internal audit function.
 
When establishing the Incentive Plan goals and corresponding performance levels, the Board anticipates that we will successfully achieve a threshold level of performance nearly every year. The target level is aligned with expected performance and is anticipated to be reasonably achievable in a majority of plan years. The maximum level of performance reflects a graduated level of difficulty from the target performance level and requires superior performance to achieve.
 
Each executive officer, including the Named Executive Officers, is assigned a total incentive award opportunity, stated as a percentage of base salary, which corresponds to the individual's level of organizational responsibility and ability to contribute to and influence overall performance. The total incentive award opportunity established for executives is designed to be comparable to incentive opportunities for executives with similar duties and responsibilities at other financial institutions, primarily other FHLBanks, and generally consistent with our market check. The Board believes the total incentive opportunity and plan design provide an appropriate, competitive reward to all officers, including the Named Executive Officers, commensurate with the achievement levels expected for the incentive goals.
 
The authorization for payment of current and/or deferred incentive plan awards, if any, is generally granted following certification of the period-end performance results by the Board at its January meeting. The total incentive award earned is determined based on the actual achievement level for each goal in comparison with the performance levels established for that goal.


The total incentive award opportunities for the 2016 plan year stated as a percentage of base salary were as follows:
  Incentive Opportunity
Name Threshold Target Maximum
Andrew S. Howell 50.0% 75.0% 100.0%
Donald R. Able 40.0
 60.0
 80.0
R. Kyle Lawler 40.0
 60.0
 80.0
Stephen J. Sponaugle 30.0
 50.0
 70.0
James G. Dooley, Sr. 30.0
 50.0
 70.0
 
If actual performance falls below the threshold level of performance, no payment is made for that goal. If actual performance exceeds the maximum level, only the value assigned as the performance maximum is paid. When actual performance falls between the assigned threshold, target and maximum performance levels, an interpolated achievement is calculated for that goal. The achievement for each goal is then multiplied by the corresponding incentive weight assigned to that goal and the results for each goal are summed to arrive at the final incentive award payable to the executive. No final awards (or payments) will be made to executives under the Incentive Plan if we receive the lowest "Composite Rating" during the most recent examination by the Finance Agency. Such a rating would indicate that we have been found to be operating in an unacceptable manner, that we exhibit serious deficiencies in corporate governance, risk management or financial condition and performance, or that we are in substantial noncompliance with laws, Finance Agency regulations or supervisory guidance.

Fifty percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year (current incentive award) and 50 percent is mandatorily deferred for three years after the end of the Plan year (deferred incentive award). Deferred incentive awards are calculated based on the actual performance or achievement level for each deferred plan goal at the end of each three-year performance period, with interpolations made for results between achievement levels. The achievement level for each goal then is multiplied by the corresponding incentive weight assigned to that goal. The final value of the deferred award can be increased, decreased or remain the same based on the goal achievement level determined using separate performance measures over the three-year deferral period. For all Named Executive Officers, the final value of the deferred award is 75 percent for a Threshold level of achievement, 100 percent for a Target level of achievement, or 125 percent for a Maximum level of achievement. If a goal achievement level over the three-year deferral period is below the threshold, no payment is made for that deferred goal.

Except as noted above with respect to exam ratings, the Board has ultimate authority over the Incentive Plan and may modify or terminate the Plan at any time or for any reason. The Board also has sole discretion to increase or decrease any Incentive Plan awards. In addition, payments under the Plan are subject to certain claw back provisions which allow the FHLB to recover any incentive plan awards.paid to a participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. Our Board believes these claw back requirements serve as deterrents to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.


146
Table of Contents

2016 Incentive Award.For calendar year 2014,2016, the Board approved a total of six performance measures in the functional areas of Franchise Value Promotion, MemberMission Asset Activity and Stockholder Risk/Return. The mix of financial and non-financial goals measures performance across our mission and corporate objectives and is intended to discourage unnecessary or excessive risk-taking. Because we consider risk management to be an essential component in the achievement of our mission and corporate objectives, the goals below include a separate risk-related metric.

At its January 20152017 meeting, following certification of the 20142016 performance results and in accordance with those results, the Board authorized the distribution to the Named Executive Officers of the current awards shown in Note 23 to the Summary Compensation Table. For the 20142016 plan year, we cumulatively achieved approximately 9197 percent of the available maximum incentive opportunity.opportunity for FHLB goals. This was a slight decrease insimilar to the 96 percent overall FHLBankFHLB performance from the 92 percent achieved for 2013 even though the FHLBank continued to exceed the threshold level of performance for all six goals.2015.
 

The following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for the 20142016 Incentive Plan performance measures.measures for all Named Executive Officers other than the Senior Vice President- Internal Audit.

20142016 Incentive Plan Performance Levels and Results
(Dollars in thousands)                  
Incentive Weight Threshold Performance Target Performance Maximum Performance Results AchievedIncentive Weight Threshold Performance Target Performance Maximum Performance Results Achieved
Franchise Value Promotion                  
1) Mission Outreach10.0% 75
 87
 105
 104
10.0% 82
 95
 110
 100
2) Mission Asset Participation10.0
 62% 67% 73% 76%10.0
 65% 72% 80% 77%
Member Asset Activity         
3) Average Advance Balances for Members with Assets of $50 Billion or less15.0
 $12,500,000
 $13,200,000
 $14,000,000
 $15,538,761
Mission Asset Activity         
3) Average Advance Balances for Members with Assets of $50 billion or less15.0
 $17,000,000
 $18,000,000
 $19,000,000
 $19,517,367
4) Mortgage Purchase Program New Mandatory Delivery Commitments15.0
 500,000
 850,000
 1,250,000
 694,448
15.0
 1,980,000
 2,150,000
 2,700,000
 2,879,126
Stockholder Risk/Return                  
5) Decline in Market Value of Equity25.0
 < 10%
 < 8%
 4% or less
 5.4%25.0
 < 9%
 < 7%
 4% or less
 4.4%
6) Profitability-Available Earnings vs. Average 3-month LIBOR rate25.0
 350 bps
 400 bps
 450 bps
 443 bps
25.0
 350 bps
 390 bps
 450 bps
 473 bps
 
During 2014,2016, the Board, the Committee and the President periodically reviewed the Incentive Plan goals presented above to determine progress toward the goals. Although the Board and the President discussed various external factors that were affecting achievement of the performance measures, the Board did not take any actions to revise or change the Incentive Plan goals.

The incentive program for the CRO is weighted 75 percent on bank-wide goals, shown above, and 25 percent on the ERM department goal.goal, as follows:

Implement specific initiatives of the FHLBank'sFHLB's ERM program within the ERM Department.

Weight of Goal:
100 percent

Threshold:54 initiatives satisfactorily completed*
Target:76 initiatives satisfactorily completed*    
Maximum:107 initiatives satisfactorily completed*    

20142016 Results Achieved:8.56.5 initiatives satisfactorily completed*

*Specific initiatives include efforts inin: 1) risk management integration; 2) development of more extensive risk dashboards; 3) improved communication to management about operational risk market risk, credit risk,and compliance; 4) enhancing model risk, end user computing, records management and improvementvendor management programs; 5) evaluation of the FHLBank's general ERM program.market risk/return positioning; 6) analyzing earnings volatility; and 7) development of additional asset/liability decision-making analytics.


147
Table of Contents

The total incentive award opportunities2016 Incentive Plan measures for the 2014 plan year stated asSenior Vice President - Internal Audit were based entirely on achievement of specific internal audit function goals, including issuance of a percentagecertain number of base salary were as follows:
  Incentive Opportunity
Name Threshold Target Maximum
Andrew S. Howell 50.0% 75.0% 100.0%
Donald R. Able 40.0
 60.0
 80.0
R. Kyle Lawler 40.0
 60.0
 80.0
Stephen J. Sponaugle 30.0
 50.0
 70.0
Roger B. Batsel 30.0
 50.0
 70.0

The current componentaudit reports, complete testing of identified internal controls, compliance with regulatory standards, and general effectiveness and leadership of the Incentive Plan is awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote higher levels of performance and long-term employment retention of selected executive and senior officers, including the Named Executive Officers.

Fiftyinternal auditor. Based on these goals, 100 percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year and 50 percent is mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same based on the goal achievement levelmaximum performance was achieved during the three-year period. If the goal achievement level over the three-year deferral period is below the threshold, no payment of the deferred award will be made. The following table presents the percentages, categorized by achievement level, in which the deferred award will be adjusted:
  
Achievement Levels (1)
Name Threshold Target Maximum
Andrew S. Howell 75.0% 100.0% 125.0%
Donald R. Able 75.0
 100.0
 125.0
R. Kyle Lawler 75.0
 100.0
 125.0
Stephen J. Sponaugle 75.0
 100.0
 125.0
Roger B. Batsel 75.0
 100.0
 125.0
(1)Earned incentive awards that fall between any of the designated achievement levels (i.e. threshold, target, and maximum) will be interpolated.

The achievement levels presented above are determined using separate performance measures over the three-year deferral period (2015-2017).2016.

The following table presents the performance measures and incentive weights used to determine the achievement level reached during the three-year deferral period:

2014 Deferred Annual2017 Incentive Plan Goals (2015 - 2017 Performance Period)
1) OPERATING EFFICIENCY:
Ranking of Operating Efficiency Ratio in comparison to other FHLBanksWeight: 20%
2) RISK ADJUSTED PROFITABILITY:
Ranking of Risk Adjusted Profitability in comparison to other FHLBanksWeight: 20%
3) MARKET CAPITALIZATION RATIO:
Ratio of Market Value of Equity (MVE) to Par Value of Regulatory Capital StockWeight: 20%
4) ADVANCE UTILIZATION RATIO:
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanksWeight: 20%
5) STRATEGIC BUSINESS PLAN ACHIEVEMENT:
Percentage of Strategic Business Plan strategies achievedWeight: 20%

The Board has ultimate authority over the Incentive Plan described above and the Transition Plan (described below) and may modify or terminate the Plans at any time or for any reason. In addition, payments under the Plans are subject to certain claw back provisions which allow the FHLBank to recover any incentive paid to a participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. Our Board believes these claw back

148
Table of Contents

requirements serve as deterrents to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.

Award.At its November 20142016 meeting, the Board established the 20152017 Incentive Plan goals, the incentive weights and the performance levels (measures)measures corresponding to each Incentive Plan goal and award opportunity for the 20152017 Incentive Plan. In December 2014,2016, the 20152017 Incentive Plan was sent to the Finance Agency.Agency and we received notification of the completion of their review in January 2017. The Finance Agency has not yet provided its non-objection, and therefore, the plan is subject to change. The 2015 incentive award opportunities2017 Incentive Plan goals for our executives are set forth below.

2015
2017 Incentive Plan Goals
Franchise Value Promotion 
Mission OutreachWeight:    10.0%
Mission Asset ParticipationWeight:    10.0%
MemberMission Asset Activity 
Average Advances Balances for Members with Assets of $50 billion or lessWeight:    15.0%
Mortgage Purchase Program New Mandatory Delivery CommitmentsWeight:    15.0%
Stockholder Risk/Return 
Decline in Market Value of EquityWeight:    25.0%
Profitability-Available Earnings vs. Average 3-month LIBOR RaterateWeight:    25.0%

As reflected above, the Board decided to keep all of the 20152017 goals the same as those in 20142016 although the performance metrics have been adjusted.adjusted and the Mission Outreach goal was expanded upon to include initiatives related to minority and women inclusion. In setting the performance measures for the 20152017 Incentive Plan, the Board reviewed the results against target for 20142016 and considered relevant aspects of our financial outlook for 20152017 including the continued uncertainty of the economy and the government's liquidity programs that continue to affect Mission Asset Activity and profitability. The Board also considered opportunities to facilitate outreach to membership and increase mission asset participation by members. The goals for the deferred component of the 2015 Incentive Plan, which include the 2016 - 2018 performance period, are expected to be set at the November 2015 Board meeting.

The Board also approved a separate ERM department goal for the CRO, whose annual incentive is weighted 75 percent on bank-wide goals and 25 percent on the ERM goal.

20152017 CRO's Goal

Implement specific initiatives of the FHLBank'sFHLB's ERM program within the ERM Department.

Weight of Goal:100 percent

Threshold:43 initiatives satisfactorily completed*
Target:54 initiatives satisfactorily completed*    
Maximum:76 initiatives satisfactorily completed*

*
Specific initiatives include efforts in improvementin: 1) the comprehensive review of the FHLBank's general ERM program,FHLB's risk management programs; 2) risk management integration; 3) enhancing key risk metrics; 4) improving the modeling of collateral maintenance requirements; 5) the company-wide implementation of new operational risk initiatives; and compliance and6) enhancing market risk.risk analytics.

Residual/Transitional Long-Term Non-Equity Incentive Plan Compensation
The former Executive Long-Term Incentive Plan (LTI Plan) was a cash-based, performance unit plan designed to promote higher levelsFinally, upon recommendation of performance and long-term employment retention by selected executive and senior officers, including the Named Executive Officers, for accomplishing Board-approved long-term goals. Since the LTI Plan was initially created,Audit Committee, the Board had established a new three-year performance period annually, commencing each January 1, so that three overlapping performance periods are in effect at one time. However, in May 2012, we received notificationapproved the separate 2017 Internal Audit department goals for the Senior Vice President - Internal Audit. The Board decided to keep all of the completion2016 goals for 2017, although some of the review byperformance metrics and weightings have been adjusted. Additionally, the Board added two new goals for 2017 related to compliance with the Finance Agency of certain 2012 executive compensation actions, which effectively discontinued long-term plans for all FHLBanks. In order to assist in the transition of our executive incentive plans, the 2012 - 2014 Transition Plan was adopted to bridge the participants' cash compensation levels in 2015 to close what otherwise would be a gap in compensation until the deferred componentAgency's Internal Audit Governance guidance and results of the 2012 Incentive Plan is fully implemented in 2016.External Quality Assurance Review.

At the beginning of the 2012 - 2014 Transition Plan, the Board established a base award opportunity for each executive officer in the form of a grant of a fixed number of performance units, with an assigned value of $100 per unit, equal to a percentage of

149
Table of Contents

the participant's base salary. The value of each performance unit then fluctuates as a function of the actual performance in comparison with the performance levels established for each goal with interpolations made for results between achievement levels. The achievement level for each goal then is multiplied by the corresponding incentive weight assigned to that goal. The results for each goal are summed and multiplied by the executive officer's respective number of performance units to arrive at the final award payable.
If actual performance falls below the threshold level of performance for any of the goals, no payment is made for that goal. If actual performance exceeds the performance maximum for a goal, only the maximum for that goal is paid. The Board has sole discretion to increase or decrease awards up to 10 percent to recognize performance not captured by the total achievement level of the goals. Three-Year Deferred Incentive Award.During 2014,2016, the Board, the Committee and the President periodically reviewed progress toward the Transition Plan goals.deferred plan goals for each ongoing performance period. At its January 20152017 meeting, following certification of the performance results for the 2012deferred portion of the 2013 Incentive Plan (2014 - 20142016 performance periodperiod) and in accordance with those results, the Board authorized the distribution of Transition Plan payments to eligible officers including the Named Executive Officers. Cumulatively, we achieved approximately 8588 percent of the available maximum incentive opportunity for FHLBankFHLB goals. The 2012deferred payments for the 2014 - 2014 Transition Plan payments2016 performance period are shown in Note 23 to the Summary Compensation Table.
 

The following table presents, for all Named Executive Officers, except the Senior Vice President - Internal Audit, the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the goals in the deferred portion of the 2013 Incentive Plan (2014 - 2016 performance period):
 Incentive Weight Threshold Performance Target Performance Maximum Performance Results Achieved
OPERATING EFFICIENCY:         
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks20% 
6th
 
4th
 
1st 
 
1st
RISK ADJUSTED PROFITABILITY:         
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks20% 
8th
 
4th
 
1st
 
4th
MARKET CAPITALIZATION RATIO:         
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock20% 95% 100% 110% 107%
ADVANCE UTILIZATION RATIO:         
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks20% 
8th
 
4th
 
1st
 
5th
STRATEGIC BUSINESS PLAN ACHIEVEMENT:         
Percentage of Strategic Business Plan strategies achieved20% 70% 80% 100% 90%

For the Senior Vice President - Internal Audit, the following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the 2012Internal Audit goals in the deferred portion of the 2013 Incentive Plan (2014 - 2014 Transition Plan goals.2016 performance period):

 Incentive Weight Threshold Performance Target Performance Maximum Performance Results Achieved
OPERATING EFFICIENCY:         
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks30% 
8th of 12
 
4th of 12
 
1st of 12
 
1st of 12
RISK ADJUSTED PROFITABILITY:         
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks30% 
8th of 12
 
4th of 12
 
1st of 12
 
2nd of 12
MARKET CAPITALIZATION RATIO:         
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock30% 95% 100% 110% 108%
MARKET PENETRATION:         
Ratio of Member Advances to Member Assets10% 3.5% 3.7% 4.0% 3.2%
 Incentive Weight Threshold Performance Target Performance Maximum Performance Results Achieved
AUDIT COMMITTEE CHARTER FULFILLMENT:         
Average of the Audit Committee's annual performance review ratings50% 3 4 5 4.77
FINDINGS TRACKING:         
Results of Audit Committee's evaluation of monitoring, tracking and reporting on findings as a result of audits and examinations25% 3 4 5 4.76
SUCCESSION PLANNING AND READINESS:         
Level of readiness based on Audit Committee assessment25% Minimally Prepared (3) Prepared (4) Highly Prepared (5) 4.50


At its November 2016 meeting, the Board established the goals, incentive weights and performance measures to determine the achievement level reached during the 2017 - 2019 deferral period of the 2016 Incentive Plan. The following table presents the goals and incentive weights for all Named Executive Officers, except the Senior Vice President - Internal Audit:

2016 Deferred Incentive Plan Goals (2017 - 2019 Performance Period)
OPERATING EFFICIENCY:
Ranking of Operating Efficiency Ratio in comparison to other FHLBanksWeight: 20%
EARNINGS VOLATILITY ADJUSTED PROFITABILITY:
Ranking of Earnings Volatility Adjusted Profitability in comparison to other FHLBanksWeight: 20%
MARKET CAPITALIZATION RATIO:
Ratio of Market Value of Equity to Par Value of Regulatory Capital StockWeight: 20%
ADVANCE UTILIZATION RATIO:
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanksWeight: 20%
STRATEGIC BUSINESS PLAN ACHIEVEMENT:
Percentage of Strategic Business Plan strategies achievedWeight: 20%

The performance measures and incentive weights used to determine the achievement level reached during the three-year deferral period for the Senior Vice President - Internal Audit included: (1) fulfillment of the Audit Committee Charter (50 percent weighting) and (2) tracking of findings from internal audits, external audits and examination findings (50 percent weighting).

The goals for the deferred component of the 2017 Incentive Plan, which include the 2018 - 2020 performance period, are expected to be set at the November 2017 Board meeting.

Non-Equity Incentive Plan Compensation Grants
The following table provides information on grants made under our Incentive Plans.
 
Grants of Plan-Based Awards
 
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
 
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Name 
Grant Date (1)
 Threshold Target Maximum 
Grant Date (1)
 Threshold Target Maximum
Andrew S. Howell November 20, 2014 $337,500
 $506,250
 $675,000
 November 17, 2016 $400,000
 $600,000
 $800,000
Donald R. Able November 20, 2014 146,000
 219,000
 292,000
 November 17, 2016 168,000
 252,000
 336,000
R. Kyle Lawler November 20, 2014 136,000
 204,000
 272,000
 November 17, 2016 154,000
 231,000
 308,000
Stephen J. Sponaugle November 20, 2014 90,000
 150,000
 210,000
 November 17, 2016 144,000
 216,000
 288,000
Roger B. Batsel November 20, 2014 78,000
 130,000
 182,000
James G. Dooley, Sr. November 17, 2016 78,188
 130,313
 182,438
(1)
Awards granted on this date are for the 20152017 Incentive Plan.

Under the awards shown above, 50 percent of the estimated future payout will be awarded in cash following the Plan year. The other 50 percent of the estimated future payout will be mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same based on the achievement level of the deferred goals during the three-year period. See the "Non-Equity Incentive Compensation Plan (Incentive Plan)" section above for further detail.


150
Table of Contents

Retirement Benefits
We maintain a comprehensive retirement program for executive officers comprised of two qualified retirement plans (a defined benefit plan and a defined contribution plan) and a non-qualified pension plan. For our qualified plans, we participate in the Pentegra Defined Benefit Plan for Financial Institutions and the Pentegra Defined Contribution Plan for Financial Institutions. The non-qualified plan, the Benefit Equalization Plan (BEP), restores benefits that eligible highly compensated employees would have received were it not for Internal Revenue Service limitations on benefits from the defined benefit plan (DB/BEP).plan. Generally, benefits under the BEP vest and are payable according to the corresponding provisions of the qualified plans.
 

The plans provide benefits based on a combination of an employee's tenure and annual compensation. As such, the benefits provided by the plans are one component of the total compensation opportunity for executive officers and, the Board believes, serve as valuable retention tools since retirement benefits increase as executives' tenure and compensation with the FHLBankFHLB grow.
 
Qualified Defined Benefit Pension Plan. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB) is a funded tax-qualified plan that is maintained on a non-contributory basis, i.e.,meaning, employee contributions are not required. Participants' pension benefits vest upon completion of five years of service.
 
The pension benefits payable under the Pentegra DB plan are determined using a pre-established formula that provides a single life annuity payable monthly at age 65 or normal retirement. The benefit formula for employees hired prior to January 1, 2006, which includes Messrs. Howell, Able, Lawler, and Sponaugle, is 2.50 percent for each year of benefit service multiplied by the highest three-year average compensation. Compensation is defined as base salary, excess accrued vacation benefits and annual incentive compensation and excludes any long-term or deferred incentive payments. In the event of retirement prior to attainment of age 65, a reduced pension benefit is payable under the plan, with payments commencing as early as age 45. For employees who are hired after January 1, 2006, which includes Mr. Batsel,Dooley, the Pentegra DB was amended. The current benefit formula is 1.25 percent for each year of benefit service multiplied by the highest five-year average compensation, where compensation is defined as base salary only and excludes all other forms of compensation. In addition, the current plan provides for a reduced pension benefit in the event of retirement prior to attainment of age 65 with payment commencing as early as age 55 if the participant has 10 years or more of service. Lastly, the Pentegra DB plan provides certain actuarially equivalent forms of benefit payments other than a single life annuity, including a limited lump sum distribution option, which is available only to employees, including Named Executive Officers, hired prior to February 1, 2006.
 
Non-Qualified Defined Benefit Pension Plan. Executive officers and other employees whose pay exceeds IRS pension limitations are eligible to participate in the Defined Benefit component of the Benefit Equalization Plan (DB/BEP), an unfunded, non-qualified pension plan that mirrors the Pentegra DB plan in all material respects. In determining whether a restoration of retirement benefits is due an eligible employee, the DB/BEP utilizes the identical benefit formula applicable to the Pentegra DB plan. In the event that the benefits payable from the Pentegra DB plan have been reduced or otherwise limited, the executive's lost benefits are payable under the terms of the DB/BEP. Because the DB/BEP is a non-qualified plan, the benefits received from this plan do not receive the same tax treatment and funding protection associated with the qualified plan.
 

151
Table of Contents

The following table provides the present value of benefits payable to the Named Executive Officers upon retirement at age 65 from the Pentegra DB plan and the DB/BEP, and is calculated in accordance with the formula currently in effect for specified years-of-service and remuneration for participating in both plans. Our pension benefits do not include any reduction for a participant's Social Security benefits.
 
20142016 Pension Benefits

Name  Plan Name 
Number of Years Credited Service (1)
 
Present Value (2) of Accumulated Benefits
  Plan Name 
Number of Years Credited Service (1)
 
Present Value (2) of Accumulated Benefits
Andrew S. Howell Pentegra DB 24.50
 $1,650,000
 Pentegra DB 26.50
 $1,888,000
 DB/BEP 24.50
 3,774,000
 DB/BEP 26.50
 5,851,000
        
Donald R. Able Pentegra DB 33.42
 1,866,000
 Pentegra DB 35.42
 1,982,000
 DB/BEP 33.42
 2,122,000
 DB/BEP 35.42
 3,414,000
        
R. Kyle Lawler Pentegra DB 13.50
 1,055,000
 Pentegra DB 15.50
 1,286,000
 DB/BEP 13.50
 626,000
 DB/BEP 15.50
 1,077,000
        
Stephen J. Sponaugle Pentegra DB 21.33
 1,380,000
 Pentegra DB 23.33
 1,591,000
 DB/BEP 21.33
 380,000
 DB/BEP 23.33
 844,000
        
Roger B. Batsel Pentegra DB —
 —
James G. Dooley, Sr. Pentegra DB 9.33
 333,000
 DB/BEP —
 —
 DB/BEP 9.33
 —
(1)For pension plan purposes, the calculation of credited service begins upon completion of a required waiting period following the date of employment. Accordingly, the years shown are less than the executive's actual years of employment. Because IRS regulations generally prohibit the crediting of additional years of service under the qualified plan, such additional service also is precluded under the DB/BEP, which only restores those benefits lost under the qualified plan.
(2)See Note 17 of the Notes to Financial Statements for details regarding valuation assumptions.
 
Qualified Defined Contribution Plan. The Pentegra Defined Contribution Plan for Financial Institutions (Pentegra DC) is a tax-qualified defined contribution plan to which we make tenure-based matching contributions. MatchingFor 2016, matching contributions begin upon completion of one year of employment and subsequently increase based on length of employment to a maximum of six percent of eligible compensation. For 2017, the one-year waiting period does not apply. Eligible compensation in the Pentegra DC plan is defined as base salary and annual bonus (STI compensation)(current incentive award) and excludes any deferred incentive payments or payments received from the LTI or Transition Plan.awards.
 
Under the Pentegra DC plan, a participant may elect to contribute up to 100 percent of eligible compensation (75 percent for 2017) on either a before-tax or after-tax basis. The plan permits participants to self-direct investment elections into one or more investment funds. All returns are at the market rate of the related fund. Investment fund elections may be changed daily by the participants. A participant may withdraw vested account balances while employed, subject to certain plan limitations, which include those under IRS regulations. Participants also are permitted to revise their contribution/deferral election once each pay period. However, the revised election is only applicable to future earnings and may also be limited by IRS regulations.  

Fringe Benefits and Perquisites
Executive officers are eligible to participate in the traditional fringe benefit plans made available to all other employees, including participation in the pensionretirement plans, medical, dental and vision insurance program and group term life and standard long term disability (LTD) insurance plans, as well as annual leave (i.e., vacation) and sick leave policies. Executives participate in our subsidized medical, dental and vision insurance and group term life and standard LTD insurance programs on the same basis and terms as all of our employees. However, executives are required to pay higher premiums for medical coverage. Executive officers also receive on-site parking at our expense. The perquisites provided by the FHLBank represent a small fraction of an executive officer's annual compensation.

During 2014,2016, the President was also provided with an FHLBank-ownedFHLB-owned vehicle for his business and personal use. The operating expenses associated with the vehicle, including an automobile club membership for emergency roadside assistance, also were provided. An executive officer's personal use of an FHLBank-ownedFHLB-owned vehicle, including use for the daily commute to and from work, is reported as a taxable fringe benefit. In addition to the standard LTD insurance plan provided to all FHLB employees, Named Executive Officers may elect to receive additional LTD coverage. The premiums the FHLB pays for the additional LTD

coverage are considered a taxable fringe benefit. Additionally, with prior approval, our current Travel Policy permits a spouse to accompany an executive officer on authorized business trips. The transportation and other related expenses associated

152
Table of Contents

with the spouse's travel are reimbursed by the FHLBankFHLB and reported as a taxable fringe benefit.

The perquisites provided by the FHLB represent a small fraction of an executive officer's annual compensation. During 2016, perquisites totaled $11,315 for Mr. Howell, as shown in the Summary Compensation Table. Perquisites did not individually or collectively exceed $10,000 for any of theother Named Executive Officers and are therefore excluded from the Summary Compensation Table.
Other than normal pension benefits and eligibility to participate in our retiree supplemental benefits program (if hired prior to August 1, 1990), no perquisites or other special benefits are provided to our executive officers in the event of a change in control, resignation, retirement or other termination of employment.

Employment Arrangements and Severance Benefits
 
Pursuant to the FHLBank Act, all employees of the FHLBankFHLB are “at will” employees. Accordingly, an employee may resign employment at any time and an employee's employment may be terminated at any time for any reason, with or without cause and with or without notice.

We have no employment arrangements with any Named Executive Officer. Other than normal pension benefits and eligibility to participate in our retiree medical and life insurance programs (if hired prior to August 1, 1990), no perquisites, tax gross-ups or other special benefits are provided to our executive officers in the event of a change in control, resignation, retirement or other termination of employment.
 
We have a severance policy under which employees, including executive officers, may receive benefits in the event of termination of employment resulting from job elimination, substantial job modification, job relocation or a planned reduction in staff that causes an involuntary termination of employment. Under this policy, an executive officer is entitled to a lump sum payment of one month's pay for every full year of employment, pro-rated for partial years of employment, with a minimum of one month and a maximum of six months' severance pay if a general release of any claims against the FHLBank is signed.pay. At our discretion, executive officers and employees receiving benefits under this policy may also receive outplacement assistance as well as continuation of health insurance coverage on a limited basis.
We have no termination of employment, severance or change-in-control arrangements with any Named Executive Officer.


COMPENSATION COMMITTEE REPORT
 
The Personnel and Compensation Committee of the Board of Directors (the Committee) of the FHLBankFHLB has furnished the following report for inclusion in this annual report on Form 10-K:
The Committee has reviewed and discussed the 20142016 Compensation Discussion and Analysis set forth above with the FHLBank'sFHLB's management. Based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.
Donald J. Mullineaux (Chair)
Grady P. Appleton
Leslie D. Dunn
Charles J. Koch
Michael R. Melvin
Donald J. Mullineaux (Chair)
Grady P. Appleton
Leslie D. Dunn
Charles J. Koch
Michael R. Melvin
William J. Small (Vice Chair)
Nancy E. Uridil


COMPENSATION OF DIRECTORS
 
As required by Finance Agency regulations and the FHLBank Act, we have established a formal policy governing the compensation and travel reimbursement provided to our directors. The goal of the policy is to compensate Board members for work performed on behalf of the FHLBank.FHLB. Under our policy, compensation is comprised of a maximum base fee that is divided into two equal parts: (1) a quarterly retainer fee, and (2) a per meeting fees,fee, subject to an annual cap, and reimbursement for reasonable FHLBankFHLB travel-related expenses. The meeting fees are intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLBankFHLB activities and attending the meetings of the Board of Directors and its committees.


153
Table of Contents

The following table sets forth the quarterly retainer fees, per meeting fees, and the annual capsmaximum base fees for 20142016 and 2015:2017:
2014 2015
Per Meeting Fee  Annual Cap Per Meeting Fee  Annual CapQuarterly Retainer Fee Per Meeting Fee Maximum Base Fees
Chair$14,000
 $98,000
 $15,000
 $105,000
$16,875
 $9,650
 $135,000
Vice Chair12,200
 85,000
 13,750
 95,000
15,000
 8,580
 120,000
Other Members10,000
 70,000
 10,500
 72,500
12,500
 7,150
 100,000

In addition to the base fees, annual fees whichare paid to the Audit Committee Chair and Other Committee Chairs of $17,000 and $14,000, respectively. These fees are subject to certain attendance requirements, are paid as follows for certain Board Committee assignments that involve significant time and responsibilities.requirements.
 2014 2015
Audit Committee:   
Chair$17,000
 $17,000
Other members9,500
 9,500
Finance and Risk Management Committee:   
Chair14,000
 14,000
Other members7,000
 7,000
All other committees:   
Chair14,000
 14,000
However, the Board Chair does not receive additional compensation for chairing any committee and no director may receive fees totaling more than the annual amount paid to the Board Chair.

During 2014,2016, total directors' fees and travel expenses incurred by the FHLBankFHLB were $1,414,000$1,828,000 and $264,036,$262,222, respectively.
 
With prior approval, our current Travel Policy permits a spouse to accompany a director on authorized business trips. The transportation and other related expenses associated with the spouse's travel are reimbursed by the FHLBankFHLB, subject to certain limitations, and reported as a taxable fringe benefit. During 2014,2016, there were 1514 directors that received reimbursement for spousal travel expenses. These expenses did not individually or collectively exceed $10,000 for any director and are therefore excluded from the Directors Compensation Table below.
 

154
Table of Contents

The following table sets forth the meeting fees earned by each director and expenses paid to each director for the year ended December 31, 2014.2016.
 
20142016 Directors Compensation Table
Name Fees Earned or Paid in Cash 
Total Expenses (1)
 Total Fees Earned or Paid in Cash Total
J. Lynn Anderson $86,500
 $—
 $86,500
 $117,000
 $117,000
Grady P. Appleton 79,500
 764
 80,264
 100,000
 100,000
Greg W. Caudill 79,500
 540
 80,040
 100,000
 100,000
James R. DeRoberts 69,500
 1,090
 70,590
 114,000
 114,000
Mark N. DuHamel 94,000
 857
 94,857
Leslie D. Dunn 93,500
 1,088
 94,588
 114,000
 114,000
James A. England 79,500
 845
 80,345
 100,000
 100,000
Charles J. Koch 77,000
 1,332
 78,332
 100,000
 100,000
Robert T. Lameier 100,000
 100,000
Michael R. Melvin 77,000
 753
 77,753
 100,000
 100,000
Thomas L. Moore 77,000
 658
 77,658
 100,000
 100,000
Donald J. Mullineaux 93,500
 1,627
 95,127
Donald J. Mullineaux, Chair 135,000
 135,000
Alvin J. Nance 70,000
 961
 70,961
 100,000
 100,000
Charles J. Ruma 91,000
 —
 91,000
 114,000
 114,000
David E. Sartore 86,500
 1,005
 87,505
 100,000
 100,000
William J. Small, Vice Chair 85,000
 686
 85,686
 120,000
 120,000
William S. Stuard, Jr. 77,000
 744
 77,744
 114,000
 114,000
Carl F. Wick, Chair 98,000
 757
 98,757
Nancy E. Uridil 100,000
 100,000
Total $1,414,000
 $13,707
 $1,427,707
 $1,828,000
 $1,828,000
(1)Total expenses are comprised of spousal travel expenses reimbursed to the director by the FHLBank; directors' travel expenses are not included.


The following table summarizes the total number of board meetings and meetings of its designated committees held in 20132015 and 2014.2016.
 Number of Meetings Held Number of Meetings Held
Meeting Type 2013 2014 2015 2016
Board Meeting 10 9 9 9
Audit Committee 13 11 11 10
Finance and Risk Management Committee(1) 7 7 7 N/A
Risk Committee N/A 7
Business and Operations Committee N/A 6
Governance 6 7 6 6
Housing and Community Development Committee 5 5 5 5
Personnel and Compensation Committee 5 8 6 5
Executive Committee — 1 1 —
(1)The Finance and Risk Management Committee was split into two new committees in 2016 to form the Risk Committee and Business and Operations Committee.



155
Table of Contents

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
The Personnel and Compensation Committee of the Board of Directors is charged with responsibility for the FHLBank'sFHLB's compensation policies and programs. None of the 20142016 or 20152017 Personnel and Compensation Committee members are or previously were officers or employees of the FHLBank.FHLB. Additionally, none of the FHLBank'sFHLB's executive officers served or serve on the board of directors or the compensation committee of any entity whose executive officers served on the FHLBank'sFHLB's Personnel and Compensation Committee or Board of Directors. This Committee was and is composed of the following members:
2014 2015
Carl F. Wick (Chair) Donald J. Mullineaux (Chair)
2016 2017
Donald J. Mullineaux (Chair) Donald J. Mullineaux (Chair)
Grady P. Appleton Grady P. Appleton Grady P. Appleton
Leslie D. Dunn Leslie D. Dunn Leslie D. Dunn
Charles J. Koch Charles J. Koch Charles J. Koch
Michael R. Melvin Michael R. Melvin Michael R. Melvin
William J. Small (Vice Chair) William J. Small (Vice Chair) William J. Small (Vice Chair)
 Nancy E. Uridil


156
Table of Contents

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We have one class of capital stock, Class B Stock, all of which is owned by our current and former member institutions. Individuals, including directors and officers of the FHLBank,FHLB, are not permitted to own our capital stock. Therefore, we have no equity compensation plans.

The following table lists institutions holding five percent or more of outstanding capital stock at February 28, 20152017 and includes any known affiliates that are members of the FHLBank:FHLB:
(Dollars in thousands)      
 CapitalPercent of TotalNumber CapitalPercent of TotalNumber
NameAddressStockCapital Stockof SharesAddressStockCapital Stockof Shares
JPMorgan Chase Bank, N.A.1111 Polaris Parkway
Columbus, OH 43240		$1,533,000
35%15,330,000
1111 Polaris Parkway
Columbus, OH 43240		$1,317,000
31%13,170,000
U.S. Bank, N.A.425 Walnut Street Cincinnati, OH 45202475,393
11
4,753,927
425 Walnut Street Cincinnati, OH 45202475,393
11
4,753,927
Fifth Third Bank38 Fountain Square Plaza Cincinnati, OH 45263247,687
6
2,476,870
38 Fountain Square Plaza Cincinnati, OH 45202247,687
6
2,476,870
The Huntington National Bank41 South High Street
Columbus, OH 43215		243,684
6
2,436,836

The following table lists capital stock outstanding as of February 28, 20152017 held by member institutions that have an officer or director who serves as a director of the FHLBank:FHLB:     
(Dollars in thousands)      
 CapitalPercent of Total CapitalPercent of Total
NameAddressStockCapital StockAddressStockCapital Stock
Nationwide (1)
One Nationwide Plaza
Columbus, OH 43215		$113,557
2.6%
FirstMerit Bank, N.A.111 Cascade Plaza, 7th Floor Akron, OH 4430886,660
2.0
Western & Southern Financial Group (1)
400 Broadway Street
Cincinnati, OH 45202		$94,166
2.2%
The Park National Bank50 North Third Street
Newark, OH 43058		50,086
1.2
First Federal Bank of the Midwest601 Clinton Street
Defiance, OH 43512		13,792
0.3
601 Clinton Street
Defiance, OH 43512		13,792
0.3
F&M Bank50 Franklin Street
Clarksville, TN 37040		3,378
0.1
50 Franklin Street
Clarksville, TN 37040		3,378
0.1
Perpetual Federal Savings Bank120 North Main Street
Urbana, OH 43078		2,794
0.1
120 North Main Street
Urbana, OH 43078		2,794
0.1
First Federal Bank of Ohio140 North Columbus Street
Galion, OH 44833		1,902
0.0
Field & Main Bank140 North Main Street
Henderson, KY 42420		1,799
0.0
Farmers National Bank304 West Main Street
Danville, KY 40422		1,722
0.0
304 West Main Street
Danville, KY 40423		1,722
0.0
Field & Main Bank140 North Main Street
Henderson, KY 42420		1,628
0.0
The Arlington Bank2130 Tremont Center
Upper Arlington, OH 43221		1,055
0.0
2130 Tremont Center
Upper Arlington, OH 43221		1,063
0.0
Miami Savings Bank8008 Ferry Street
Miamitown, OH 45041		730
0.0
Decatur County Bank56 North Pleasant Street
Decaturville, TN 38329		646
0.0
56 North Pleasant Street
Decaturville, TN 38329		646
0.0
The Plateau Group (2)
2701 North Main Street
Crossville, TN 38555		93
0.0
2701 North Main Street
Crossville, TN 38555		93
0.0
(1)Includes Nationwide Bank, Nationwidefive subsidiaries (Western-Southern Life Assurance Co., Integrity Life Insurance Co.,Company, Lafayette Life Insurance Company, Columbus Life Insurance Company and Nationwide MutualNational Integrity Life Insurance Co.Company), which are FHLBankFHLB members.

(2)Includes two subsidiaries (Plateau Casualty Insurance Company and Plateau Insurance Company), which are FHLBankFHLB members.


157
Table of Contents

Item 13.
Certain Relationships and Related Transactions, and Director Independence.

DIRECTOR INDEPENDENCE

Because we are a cooperative, capital stock ownership is a prerequisite to transacting any business with us. Transactions with our stockholders are part of the ordinary course of - and are essential to the purpose of - our business.
Our capital stock is not permitted to be publicly traded and is not listed on any stock exchange. Therefore, we are not governed by stock exchange rules relating to director independence. If we were so governed, arguably none of our industry directors, who are elected by our members, would be deemed independent because all are directors and/or officers of members that do business with us. Messrs. Appleton, Koch, Mullineaux, Nance and Ruma and Mses. Anderson, Dunn and Uridil, our seveneight non-industry directors, have no material transactions, relationships or arrangements with the FHLBankFHLB other than in their capacity as directors. Therefore, our Board of Directors has determined that each of them is independent under the independence standards of the New York Stock Exchange.
The Finance Agency director independence standards specify independence criteria for members of our Audit Committee. Under these criteria, all of our directors serving on the Audit Committee are independent.

TRANSACTIONS WITH RELATED PERSONS

See Note 22 of the Notes to Financial Statements for information on transactions with stockholders, including information on transactions with Directors' Financial Institutions and concentrations of business, and transactions with nonmember affiliates, which information is incorporated herein by reference.

See also “Item 11. Executive Compensation - Compensation Committee Interlocks and Insider Participation.”

Review and Approval of Related Persons Transactions. Ordinary course transactions with Directors' Financial Institutions and with members holding five percent or more of our capital stock are reviewed and approved by our management in the normal course of events so as to assure compliance with Finance Agency regulations.

As required by Finance Agency regulations, we have a written conflict of interest policy. This policy requires directors (1) to disclose to the Board of Directors any known personal financial interests that they, their immediate family members or their business associates have in any matter to be considered by the Board and in any other matter in which another person or entity does or proposes to do business with the FHLBankFHLB and (2) to recuse themselves from considering or voting on any such matter. The scope of the Finance Agency's conflict of interest Regulation (available at www.fhfa.gov) and our conflict of interest policy (posted on our Web site at www.fhlbcin.com) is similar, although not identical, to the scope of the SEC's requirements governing transactions with related persons. In March 2007, our Board of Directors adopted a written related person transaction policy that is intended to close any gaps between Finance Agency and SEC requirements. The policy includes procedures for identifying, approving and reporting related person transactions as defined by the SEC. One of the tools that we used to monitor non-ordinary course transactions and other relationships with our directors and executive officers is an annual questionnaire that uses the New York Stock Exchange criteria for independence. Finally, our Insider Trading Policy provides that any request for redemption of excess stock (except for de minimis amounts) held by a Director's Financial Institution must be approved by the Board of Directors or by the Executive Committee of the Board.

We believe these policies are effective in bringing to the attention of management and the Board any non-ordinary course transactions that require Board review and approval and that all such transactions since January 1, 20142016 have been so reviewed and approved.



158
Table of Contents

Item 14.
Principal Accountant Fees and Services.

The following table sets forth the aggregate fees billed to the FHLBankFHLB for the years ended December 31, 20142016 and 20132015 by its independent registered public accounting firm, PricewaterhouseCoopers LLP:
    
For the Years EndedFor the Years Ended
(In thousands)December 31,December 31,
2014 20132016 2015
Audit fees$661
 $659
$689
 $695
Audit-related fees67
 59
125
 53
Tax fees—
 —
—
 —
All other fees—
 —
6
 20
Total fees$728
 $718
$820
 $768

Audit fees were for professional services rendered for the audits of the FHLBank'sFHLB's financial statements.

Audit-related fees were for assurance and related services primarily related to the performance of the audit and review of the FHLB's financial statements and primarily consisted of accounting consultations, control advisory services and fees related to participation in and presentations at conferences.

The FHLBankFHLB is exempt from all federal, state and local income taxation. Therefore, no fees were paid for tax services during the years presented.

There were noAll other fees paidrepresent non-audit services related to an FHLBank System project on certain employee benefits during the years presented.2016 and 2015.
 
The Audit Committee approves the annual engagement letter for the FHLBank'sFHLB's audit. The Audit Committee also establishes a fixed dollar limit for other recurring annual accounting related consultations, which include the FHLBank'sFHLB's share of FHLBank System-related accounting issues. The status of these services is periodically reviewed by the Audit Committee throughout the year with any increase in these services requiring pre-approval. All other services provided by the independent accounting firm are specifically approved by the Audit Committee in advance of commitment.

The FHLBankFHLB paid additional fees to PricewaterhouseCoopers LLP in the form of assessments paid to the Office of Finance. The FHLBankFHLB is assessed its proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the 12 FHLBanks. These assessments, which totaled $49,000 and $51,000 in 2016 and $52,000 in 2014 and 2013,2015, respectively, are not included in the table above.


PART IV


Item 15.
Exhibits and Financial Statement Schedules.

(a)
Financial Statements. The following financial statements of the Federal Home Loan Bank of Cincinnati, set forth in Item 8 above, are filed as a part of this registration statement.

Report of Independent Registered Public Accounting Firm
Statements of Condition as of December 31, 20142016 and 20132015
Statements of Income for the years ended December 31, 2014, 20132016, 2015 and 20122014
Statements of Comprehensive Income for the years ended December 31, 2014, 20132016, 2015 and 20122014
Statements of Capital for the years ended December 31, 2014, 20132016, 2015 and 20122014
Statements of Cash Flows for the years ended December 31, 2014, 20132016, 2015 and 20122014
Notes to Financial Statements

(b)
Exhibits.
    
See Index of Exhibits


159

Item 16.Form 10-K Summary.
Table of Contents
None.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 19th16th day of March 2015.2017.

FEDERAL HOME LOAN BANK OF CINCINNATI
(Registrant)
By: /s/ Andrew S. Howell
 Andrew S. Howell
 President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 19th16th day of March 2015.2017.
 Signatures Title
    
  /s/ Andrew S. Howell President and Chief Executive Officer
 Andrew S. Howell (principal executive officer)
    
  /s/ Donald R. Able Executive Vice President - ChiefPresident-Chief Operating Officer and Chief Financial Officer
 Donald R. Able (principal financial officer)
    
  /s/ J. Christopher Bates Senior Vice President - ChiefPresident-Chief Accounting Officer
 J. Christopher Bates (principal accounting officer)
    
  /s/ J. Lynn Anderson* Director
 J. Lynn Anderson  
    
  /s/ Grady P. Appleton* Director
 Grady P. Appleton  
    
  /s/ Brady T. Burt*Director
Brady T. Burt
 /s/ Greg W. Caudill* Director
 Greg W. Caudill  
    
  /s/ James R. DeRoberts* Director
 James R. DeRoberts
 /s/ Mark N. DuHamel*Director
Mark N. DuHamel  
    
  /s/ Leslie D. Dunn* Director
 Leslie D. Dunn  
    
  /s/ James A. England* Director
 James A. England  
    
  /s/ Charles J. Koch* Director
 Charles J. Koch  
    
  /s/ Robert T. Lameier*Director
Robert T. Lameier
 /s/ Michael R. Melvin* Director
 Michael R. Melvin  
 /s/ Thomas L. Moore*Director
Thomas L. Moore

160
Table of Contents

  /s/ Donald J. Mullineaux* Director (Chair)
 Donald J. Mullineaux  
    
  /s/ Alvin J. Nance* Director
 Alvin J. Nance  
    
  /s/ Charles J. Ruma* Director
 Charles J. Ruma  
    
  /s/ David E. Sartore* Director
 David E. Sartore  
    
  /s/ William J. Small* Director (Vice Chair)
 William J. Small  
    
  /s/ William S. Stuard, Jr.* Director
 William S. Stuard, Jr.  
    
  /s/ Nancy E. Uridil* Director
 Nancy E. Uridil  
    
  /s/ James J. Vance*Director
James J. Vance
* Pursuant to Power of Attorney  
    
  /s/ Andrew S. Howell  
 Andrew S. Howell  
 Attorney-in-fact  



161
Table of Contents

INDEX OF EXHIBITS
Exhibit
Number (1)
 Description of exhibit 
Document filed or
furnished, as indicated below
     
3.1 Organization Certificate 
Form 10, filed
December 5, 2005
     
3.2 Bylaws, as amended through March 18, 2010January 21, 2016 
Form 10-K, filed
March 18, 2010
17, 2016
     
4 Capital Plan, as amended through November 25, 2013of September 15, 2016 Form 8-K,10-Q, filed January 31, 2014November 10, 2016
     
10.1.A Form of Blanket Agreement for Advances and Security Agreement, as in effect for signatories prior to November 21, 2005 
Form 10, filed
December 5, 2005
     
10.1.B Form of Blanket Security Agreement, for new signatories on and after November 21, 2005 
Form 10, filed
December 5, 2005
     
10.2 Form of Mortgage Purchase Program Master Selling and Servicing Master Agreement 
Form 10, filed
December 5, 2005
     
10.3 Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, entered into as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks, as amended and restated on January 1, 2017 
Form 8-K, filed
June 28, 2006
Filed Herewith
     
10.4 Joint Capital Enhancement Agreement, as amended on August 5, 2011, by and among each of the Federal Home Loan Banks Form 8-K, filed August 5, 2011
     
10.5 (2)
 Incentive Compensation Plan Form 10-Q, filed August 9, 2012
     
10.6 (2)
 Transitional Executive Long-Term Incentive Plan Form 10-Q, filed August 9, 2012
     
10.7 (2)
 Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement) 
Form 10-K, filed
March 18, 2010
     
10.8 (2)
 First Amendment to the Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement) 
Form 10-K, filed
March 18, 2010
     
10.9(2)
 Form of indemnification agreement effective as of July 29, 2009 between the Federal Home Loan Bank and each of its directors and executive officers (used from July 29, 2009 to December 31, 2016) 
Form 8-K, filed

July 30, 2009
10.10Form of indemnification agreement between the Federal Home Loan Bank and each of its directors and executive officers (used after December 31, 2016)Filed Herewith
     
12 Statements of Computation of Ratio of Earnings to Fixed ChargesFiled Herewith
18Preferability letter from PricewaterhouseCoopers LLP dated March 16, 2017 Filed Herewith
     
24 Powers of Attorney Filed Herewith
     
31.1 Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer Filed Herewith
     
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer Filed Herewith
     
32 Section 1350 Certifications Furnished Herewith

162
Table of Contents

Exhibit
Number (1)
 Description of exhibit 
Document filed or
furnished, as indicated below
     
99.1 Audit Committee Letter Furnished Herewith
     
99.2 Audit Committee Charter Furnished Herewith
     
101.INS XBRL Instance Document Filed Herewith
     
101.SCH XBRL Taxonomy Extension Schema Document Filed Herewith
     
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Filed Herewith
     
101.LAB XBRL Taxonomy Extension Label Linkbase Document Filed Herewith
     
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Filed Herewith
     
101.DEF XBRL Taxonomy Extension Definition Linkbase Document Filed Herewith
(1)Numbers coincide with Item 601 of Regulation S-K.
(2)Indicates management compensation plan or arrangement.




163166