Federal Home Loan Bank of Cincinnati - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnati	ex322015q310-q.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnati	ex3112015q310-q.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnati	ex3122015q310-q.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015



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)

(513) 852-7500

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes o No

Indicate by check mark whether the registrant has submitted electronically 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 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 October 31, 2015, the registrant had 44,661,836 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.



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Table of Contents



	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Statements of Condition - September 30, 2015 and December 31, 2014	3

	Statements of Income - Three and nine months ended September 30, 2015 and 2014	4

	Statements of Comprehensive Income - Three and nine months ended September 30, 2015 and 2014	5

	Statements of Capital - Nine months ended September 30, 2015 and 2014	6

	Statements of Cash Flows - Nine months ended September 30, 2015 and 2014	7

	Notes to Unaudited Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	76

Item 4.	Controls and Procedures	76

	PART II - OTHER INFORMATION

Item 1A.	Risk Factors	76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	77

Item 6.	Exhibits	77

Signatures		77

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CONDITION

(In thousands, except par value)

(Unaudited)



	September 30, 2015			December 31, 2014
ASSETS
Cash and due from banks	$	971,159		$	3,109,970
Interest-bearing deposits	153			119
Securities purchased under agreements to resell	2,724,000			3,343,000
Federal funds sold	5,390,000			6,600,000
Investment securities:
Trading securities	1,206			1,341
Available-for-sale securities	1,000,030			1,349,977
Held-to-maturity securities (includes $0 and $0 pledged as collateral at September 30, 2015 and December 31, 2014, respectively, that may be repledged) ^(a)	15,087,225			14,712,271
Total investment securities	16,088,461			16,063,589
Advances (includes $15,214 and $15,042 at fair value under fair value option at September 30, 2015 and December 31, 2014, respectively)	77,320,323			70,405,616
Mortgage loans held for portfolio:
Mortgage loans held for portfolio	8,014,462			6,989,602
Less: allowance for credit losses on mortgage loans	1,715			4,919
Mortgage loans held for portfolio, net	8,012,747			6,984,683
Accrued interest receivable	90,158			81,384
Premises, software, and equipment, net	10,494			11,282
Derivative assets	25,367			14,699
Other assets	18,859			26,077
TOTAL ASSETS	$	110,651,721		$	106,640,419
LIABILITIES
Deposits	$	755,651		$	729,936
Consolidated Obligations, net:
Discount Notes	60,086,261			41,232,127
Bonds (includes $5,757,546 and $4,209,640 at fair value under fair value option at September 30, 2015 and December 31, 2014, respectively)	44,142,498			59,216,557
Total Consolidated Obligations, net	104,228,759			100,448,684
Mandatorily redeemable capital stock	59,088			62,963
Accrued interest payable	126,037			114,781
Affordable Housing Program payable	104,132			98,103
Derivative liabilities	41,398			63,767
Other liabilities	209,382			183,177
Total liabilities	105,524,447			101,701,411
Commitments and contingencies
CAPITAL
Capital stock Class B putable ($100 par value); issued and outstanding shares: 43,952 shares at September 30, 2015 and 42,665 shares at December 31, 2014	4,395,176			4,266,543
Retained earnings:
Unrestricted	549,809			529,367
Restricted	196,869			159,694
Total retained earnings	746,678			689,061
Accumulated other comprehensive loss	(14,580		)	(16,596		)
Total capital	5,127,274			4,939,008
TOTAL LIABILITIES AND CAPITAL	$	110,651,721		$	106,640,419


(a)	Fair values: $15,219,796 and $14,794,326 at September 30, 2015 and December 31, 2014, respectively.

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF INCOME

(In thousands)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
INTEREST INCOME:
Advances	$	93,204		$	78,887		$	264,471		$	232,084
Prepayment fees on Advances, net	439			383			1,731			2,454
Interest-bearing deposits	21			21			62			64
Securities purchased under agreements to resell	437			276			1,213			897
Federal funds sold	2,482			1,247			6,252			3,606
Trading securities	6			6			17			19
Available-for-sale securities	725			817			1,601			2,565
Held-to-maturity securities	81,348			83,855			241,113			261,208
Mortgage loans held for portfolio	59,291			62,860			180,784			180,569
Total interest income	237,953			228,352			697,244			683,466
INTEREST EXPENSE:
Consolidated Obligations - Discount Notes	15,132			6,243			35,401			20,939
Consolidated Obligations - Bonds	145,045			137,798			420,423			421,790
Deposits	83			63			260			190
Mandatorily redeemable capital stock	671			1,125			1,920			3,476
Total interest expense	160,931			145,229			458,004			446,395
NET INTEREST INCOME	77,022			83,123			239,240			237,071
Reversal for credit losses	—			—			—			(900		)
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES	77,022			83,123			239,240			237,971
NON-INTEREST INCOME:
Net losses on trading securities	(2		)	(2		)	(9		)	(6		)
Net (losses) gains on financial instruments held under fair value option	(101		)	(159		)	(1,711		)	1,121
Net gains on derivatives and hedging activities	5,392			89			12,975			2,338
Standby Letters of Credit fees	3,255			2,801			9,564			7,770
Other, net	830			1,052			2,221			2,626
Total non-interest income	9,374			3,781			23,040			13,849
NON-INTEREST EXPENSE:
Compensation and benefits	9,795			9,598			29,608			27,332
Other operating expenses	5,751			4,484			15,202			13,060
Finance Agency	1,676			1,625			5,029			5,190
Office of Finance	1,234			1,149			3,476			3,360
Other	364			562			2,223			2,237
Total non-interest expense	18,820			17,418			55,538			51,179
INCOME BEFORE ASSESSMENTS	67,576			69,486			206,742			200,641
Affordable Housing Program assessments	6,824			7,061			20,866			20,412
NET INCOME	$	60,752		$	62,425		$	185,876		$	180,229

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income	$	60,752	$	62,425	$	185,876	$	180,229
Other comprehensive income adjustments:
Net unrealized gains on available-for-sale securities	17		28		54		130
Pension and postretirement benefits	726		757		1,962		1,383
Total other comprehensive income adjustments	743		785		2,016		1,513
Comprehensive income	$	61,495	$	63,210	$	187,892	$	181,742

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CAPITAL

(In thousands)

(Unaudited)



	Capital Stock Class B - Putable					Retained Earnings								Accumulated Other Comprehensive			Total
	Shares		Par Value			Unrestricted			Restricted		Total			Loss			Capital
BALANCE, DECEMBER 31, 2013	46,980		$	4,697,985		$	510,321		$	110,843	$	621,164		$	(9,042	)	$	5,310,107
Proceeds from sale of capital stock	483		48,326														48,326
Repurchase of capital stock	(4,979	)	(497,875		)												(497,875		)
Net shares reclassified to mandatorily redeemable capital stock	(171	)	(17,110		)												(17,110		)
Comprehensive income						144,183			36,046		180,229			1,513			181,742
Cash dividends on capital stock						(133,800		)			(133,800		)				(133,800		)
BALANCE, SEPTEMBER 30, 2014	42,313		$	4,231,326		$	520,704		$	146,889	$	667,593		$	(7,529	)	$	4,891,390


BALANCE, DECEMBER 31, 2014	42,665		$	4,266,543		$	529,367		$	159,694	$	689,061		$	(16,596	)	$	4,939,008
Proceeds from sale of capital stock	1,522		152,164														152,164
Net shares reclassified to mandatorily redeemable capital stock	(235	)	(23,531		)												(23,531		)
Comprehensive income						148,701			37,175		185,876			2,016			187,892
Cash dividends on capital stock						(128,259		)			(128,259		)				(128,259		)
BALANCE, SEPTEMBER 30, 2015	43,952		$	4,395,176		$	549,809		$	196,869	$	746,678		$	(14,580	)	$	5,127,274

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



	Nine Months Ended September 30,
	2015			2014
OPERATING ACTIVITIES:
Net income	$	185,876		$	180,229
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	23,859			1,001
Net change in derivative and hedging activities	136			13,433
Net change in fair value adjustments on trading securities	9			6
Net change in fair value adjustments on financial instruments held under fair value option	1,711			(1,121		)
Other adjustments	(4		)	(794		)
Net change in:
Accrued interest receivable	(8,772		)	4,358
Other assets	6,500			3,635
Accrued interest payable	12,279			(2,864		)
Other liabilities	33,818			10,217
Total adjustments	69,536			27,871
Net cash provided by operating activities	255,412			208,100

INVESTING ACTIVITIES:
Net change in:
Interest-bearing deposits	(28,745		)	27,568
Securities purchased under agreements to resell	619,000			1,550,000
Federal funds sold	1,210,000			(865,000		)
Premises, software, and equipment	(1,198		)	(622		)
Trading securities:
Proceeds from maturities of long-term	125			177
Available-for-sale securities:
Net decrease in short-term	350,000			40,000
Held-to-maturity securities:
Net (increase) decrease in short-term	(6,573		)	1,392
Proceeds from maturities of long-term	1,967,034			1,558,418
Purchases of long-term	(2,335,814		)	(561,789		)
Advances:
Proceeds	748,391,884			811,094,323
Made	(755,296,545		)	(817,323,372		)
Mortgage loans held for portfolio:
Principal collected	1,085,371			794,538
Purchases	(2,140,179		)	(895,796		)
Net cash used in investing activities	(6,185,640		)	(4,580,163		)




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

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(continued from previous page)
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
	Nine Months Ended September 30,
	2015			2014
FINANCING ACTIVITIES:
Net increase (decrease) in deposits and pass-through reserves	$	24,415		$	(163,045	)
Net payments on derivative contracts with financing elements	(18,667		)	(22,822		)
Net proceeds from issuance of Consolidated Obligations:
Discount Notes	210,125,772			208,014,633
Bonds	16,068,135			35,648,470
Payments for maturing and retiring Consolidated Obligations:
Discount Notes	(191,280,449		)	(209,343,905		)
Bonds	(31,124,288		)	(36,892,317		)
Proceeds from issuance of capital stock	152,164			48,326
Payments for repurchase/redemption of mandatorily redeemable capital stock	(27,406		)	(23,410		)
Payments for repurchase of capital stock	—			(497,875		)
Cash dividends paid	(128,259		)	(133,800		)
Net cash provided by (used in) financing activities	3,791,417			(3,365,745		)
Net decrease in cash and cash equivalents	(2,138,811		)	(7,737,808		)
Cash and cash equivalents at beginning of the period	3,109,970			8,598,933
Cash and cash equivalents at end of the period	$	971,159		$	861,125
Supplemental Disclosures:
Interest paid	$	465,369		$	473,738
Affordable Housing Program payments, net	$	14,837		$	19,787

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

NOTES TO UNAUDITED FINANCIAL STATEMENTS

Background Information

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

Note 1 - Basis of Presentation

The accompanying interim financial statements of the FHLB have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make assumptions and estimates. These assumptions and estimates affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates. The interim financial statements presented are unaudited, but they include all adjustments (consisting of only normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, and cash flows for such periods. These financial statements do not include all disclosures associated with annual financial statements and accordingly should be read in conjunction with the audited financial statements and notes included in the FHLB's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission (SEC). Results for the three and nine months ended September 30, 2015 are not necessarily indicative of operating results for the full year.

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

The net exposure for these financial instruments can change on a daily basis; therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in Note 10. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented. For more information about the FHLB's investments in securities purchased under agreements to resell, see “Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies” in the FHLB's 2014 Annual Report on Form 10-K.

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

Note 2 - Recently Issued Accounting Standards and Interpretations

Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. On April 15, 2015, the Financial Accounting Standards Board (FASB) issued amendments to clarify the accounting for cloud computing arrangements. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license. If the arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer should account for the arrangement as a service contract. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2015. The FHLB is in the process of evaluating this guidance and its effect on the FHLB's financial condition, results of operations, and cash flows.

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Simplifying the Presentation of Debt Issuance Costs. On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the Statement of Condition as a direct deduction from the carrying amount of the liability, consistent with the presentation of debt discounts. The adoption of this guidance will result in a reclassification of debt issuance costs from other assets to Consolidated Obligations on the FHLB's Statement of Condition. This guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2015. The guidance is required to be applied on a retrospective basis to each individual period presented on the Statement of Condition. The FHLB is in the process of evaluating this guidance and its effect on the FHLB's financial condition and cash flows.

Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. On August 8, 2014, the FASB issued amended guidance relating to the classification and measurement of certain government-guaranteed mortgage loans upon foreclosure. The amendments in this guidance require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance had no material effect on the FHLB's financial condition, results of operations, or cash flows.

Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. On June 12, 2014, the FASB issued amended guidance for repurchase-to-maturity transactions 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 nature of collateral pledged in repurchase agreements accounted for as secured borrowings. This guidance became effective for the FHLB for interim and annual periods beginning on January 1, 2015. The adoption of this guidance had no material effect on the FHLB's financial condition, results of operations, or 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 FHLB for interim and annual periods beginning on January 1, 2015, and was adopted prospectively. The adoption of this guidance had no material effect on the FHLB'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 had no material effect on the FHLB's financial condition, results of operations, or cash flows. The charge off requirements were implemented on January 1, 2015. The adoption of these requirements had no material effect on the FHLB's financial condition, results of operations, or cash flows.

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Note 3 - Trading Securities

Table 3.1 - Trading Securities by Major Security Types (in thousands)



Fair Value	September 30, 2015		December 31, 2014
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities ⁽¹⁾	$	1,206	$	1,341
Total	$	1,206	$	1,341


(1)	Consists of Government National Mortgage Association (Ginnie Mae) mortgage-backed securities.

Table 3.2 - Net Losses on Trading Securities (in thousands)



	Nine Months Ended September 30,
	2015			2014
Net losses on trading securities held at period end	$	(9	)	$	(6	)
Net losses on trading securities	$	(9	)	$	(6	)

Note 4 - Available-for-Sale Securities

Table 4.1 - Available-for-Sale Securities by Major Security Types (in thousands)



	September 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	1,000,000	$	30	$	—		$	1,000,030
Total	$	1,000,000	$	30	$	—		$	1,000,030

	December 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	1,350,001	$	3	$	(27	)	$	1,349,977
Total	$	1,350,001	$	3	$	(27	)	$	1,349,977

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

Table 4.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)



	September 30, 2015				December 31, 2014
Year of Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	1,000,000	$	1,000,030	$	1,350,001	$	1,349,977

Table 4.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)



	September 30, 2015		December 31, 2014
Amortized cost of available-for-sale securities:
Fixed-rate	$	1,000,000	$	1,350,001

Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the nine months ended September 30, 2015 or 2014.

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Note 5 - Held-to-Maturity Securities

Table 5.1 - Held-to-Maturity Securities by Major Security Types (in thousands)



	September 30, 2015
	Amortized Cost ⁽¹⁾		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
Non-mortgage-backed securities:
Government-sponsored enterprises (GSE) ⁽²⁾	$	32,672	$	8	$	—		$	32,680
Total non-mortgage-backed securities	32,672		8		—			32,680
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities ⁽³⁾	4,044,562		19,025		(3,148		)	4,060,439
GSE single-family mortgage-backed securities ⁽⁴⁾	11,009,991		174,461		(57,775		)	11,126,677
Total mortgage-backed securities	15,054,553		193,486		(60,923		)	15,187,116
Total	$	15,087,225	$	193,494	$	(60,923	)	$	15,219,796

	December 31, 2014
	Amortized Cost ⁽¹⁾		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
Non-mortgage-backed securities:
GSE ⁽²⁾	$	26,099	$	—	$	—		$	26,099
Total non-mortgage-backed securities	26,099		—		—			26,099
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities ⁽³⁾	2,038,960		10,021		(1,017		)	2,047,964
GSE single-family mortgage-backed securities ⁽⁴⁾	12,647,212		191,870		(118,819		)	12,720,263
Total mortgage-backed securities	14,686,172		201,891		(119,836		)	14,768,227
Total	$	14,712,271	$	201,891	$	(119,836	)	$	14,794,326


(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 5.2 - Net Purchased Premiums (Discounts) Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)



	September 30, 2015			December 31, 2014
Premiums	$	76,952		$	24,473
Discounts	(43,166		)	(51,357		)
Net purchased premiums (discounts)	$	33,786		$	(26,884	)

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Table 5.3 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 5.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)



	September 30, 2015
	Less than 12 Months					12 Months or more					Total
	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⁾	$	1,287,611	$	(3,148	)	$	—	$	—		$	1,287,611	$	(3,148	)
GSE single-family mortgage-backed securities ⁽²⁾	2,158,826		(20,012		)	2,173,093		(37,763		)	4,331,919		(57,775		)
Total	$	3,446,437	$	(23,160	)	$	2,173,093	$	(37,763	)	$	5,619,530	$	(60,923	)

	December 31, 2014
	Less than 12 Months					12 Months or more					Total
	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	)
GSE single-family mortgage-backed securities ⁽²⁾	631,907		(1,348		)	5,555,049		(117,471		)	6,186,956		(118,819		)
Total	$	631,907	$	(1,348	)	$	5,752,674	$	(118,488	)	$	6,384,581	$	(119,836	)


(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 5.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)



	September 30, 2015				December 31, 2014
Year of Maturity	Amortized Cost ⁽¹⁾		Fair Value		Amortized Cost ⁽¹⁾		Fair Value
Non-mortgage-backed securities:
Due in 1 year or less	$	32,672	$	32,680	$	26,099	$	26,099
Due after 1 year through 5 years	—		—		—		—
Due after 5 years through 10 years	—		—		—		—
Due after 10 years	—		—		—		—
Total non-mortgage-backed securities	32,672		32,680		26,099		26,099
Mortgage-backed securities ⁽²⁾	15,054,553		15,187,116		14,686,172		14,768,227
Total	$	15,087,225	$	15,219,796	$	14,712,271	$	14,794,326


(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.

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Table 5.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)



	September 30, 2015		December 31, 2014
Amortized cost of non-mortgage-backed securities:
Fixed-rate	$	32,672	$	26,099
Total amortized cost of non-mortgage-backed securities	32,672		26,099
Amortized cost of mortgage-backed securities:
Fixed-rate	12,821,910		12,091,591
Variable-rate	2,232,643		2,594,581
Total amortized cost of mortgage-backed securities	15,054,553		14,686,172
Total	$	15,087,225	$	14,712,271

Realized Gains and Losses. From time to time the FHLB may sell securities out of its held-to-maturity portfolio. These securities, generally, have less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification. For the nine months ended September 30, 2015 and 2014, the FHLB did not sell any held-to-maturity securities.

Note 6 - Other-Than-Temporary Impairment Analysis

The FHLB 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 Other U.S. obligations and GSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLB from losses based on current expectations. As a result, the FHLB determined that, as of September 30, 2015, 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 FHLB does not intend to sell the investments, and it is not more likely than not that the FHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLB did not consider any of these investments to be other-than-temporarily impaired at September 30, 2015.

The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2014.

Note 7 - Advances

The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.

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Table 7.1 - Advance Redemption Terms (dollars in thousands)



	September 30, 2015					December 31, 2014
Redemption Term	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in 1 year or less	$	26,158,998		0.36	%	$	14,139,630		0.40	%
Due after 1 year through 2 years	15,086,020			0.79		14,810,847			0.54
Due after 2 years through 3 years	15,549,138			0.66		12,829,760			0.69
Due after 3 years through 4 years	10,506,240			0.65		14,222,722			0.60
Due after 4 years through 5 years	6,462,680			0.75		10,724,619			0.54
Thereafter	3,440,450			1.66		3,570,929			1.51
Total par value	77,203,526			0.63		70,298,507			0.60
Commitment fees	(673		)			(699		)
Discount on AHP Advances	(10,043		)			(12,110		)
Premiums	2,824					3,058
Discounts	(9,132		)			(12,572		)
Hedging adjustments	133,607					129,390
Fair value option valuation adjustments and accrued interest	214					42
Total	$	77,320,323				$	70,405,616

The FHLB offers 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. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLB that makes the FHLB financially indifferent to the prepayment of the Advance. At September 30, 2015 and December 31, 2014, the FHLB had callable Advances (in thousands) of $16,059,645 and $15,098,357.

Table 7.2 - Advances by Year of Contractual Maturity or Next Call Date for Callable Advances (in thousands)



Year of Contractual Maturity or Next Call Date	September 30, 2015		December 31, 2014
Due in 1 year or less	$	34,804,247	$	23,003,946
Due after 1 year through 2 years	10,479,325		12,159,384
Due after 2 years through 3 years	15,034,193		9,659,975
Due after 3 years through 4 years	9,557,844		12,295,893
Due after 4 years through 5 years	5,748,467		9,970,280
Thereafter	1,579,450		3,209,029
Total par value	$	77,203,526	$	70,298,507

The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates. At September 30, 2015 and December 31, 2014, the FHLB had putable Advances, excluding those where the related put options have expired, totaling (in thousands) $1,556,900 and $1,617,400.

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Table 7.3 - Advances by Year of Contractual Maturity or Next Put/Convert Date for Putable/Convertible Advances (in thousands)



Year of Contractual Maturity or Next Put/Convert Date	September 30, 2015		December 31, 2014
Due in 1 year or less	$	27,686,898	$	15,753,030
Due after 1 year through 2 years	14,392,620		14,663,847
Due after 2 years through 3 years	14,994,138		12,115,860
Due after 3 years through 4 years	10,396,740		13,649,722
Due after 4 years through 5 years	6,462,680		10,715,119
Thereafter	3,270,450		3,400,929
Total par value	$	77,203,526	$	70,298,507

Table 7.4 - Advances by Interest Rate Payment Terms (in thousands)



	September 30, 2015		December 31, 2014
Total fixed-rate ⁽¹⁾	$	27,325,281	$	17,945,050
Total variable-rate ⁽¹⁾	49,878,245		52,353,457
Total par value	$	77,203,526	$	70,298,507


(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.

Table 7.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLB (dollars in millions)



September 30, 2015					December 31, 2014
	Principal		% of Total			Principal		% of Total
JPMorgan Chase Bank, N.A.	$	37,300	48	%	JPMorgan Chase Bank, N.A.	$	41,300	59	%
U.S. Bank, N.A.	9,253		12		U.S. Bank, N.A.	8,338		12
Total	$	46,553	60	%	Total	$	49,638	71	%

Note 8 - Mortgage Loans Held for Portfolio

Table 8.1 - Mortgage Loans Held for Portfolio (in thousands)



	September 30, 2015			December 31, 2014
Unpaid principal balance:
Fixed rate medium-term single-family mortgage loans ⁽¹⁾	$	1,505,964		$	1,393,525
Fixed rate long-term single-family mortgage loans	6,283,218			5,402,479
Total unpaid principal balance	7,789,182			6,796,004
Premiums	206,921			179,540
Discounts	(2,131		)	(2,460		)
Hedging basis adjustments ⁽²⁾	20,490			16,518
Total mortgage loans held for portfolio	$	8,014,462		$	6,989,602


(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.

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Table 8.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)



	September 30, 2015		December 31, 2014
Unpaid principal balance:
Conventional mortgage loans	$	7,285,491	$	6,203,318
Federal Housing Administration (FHA) mortgage loans	503,691		592,686
Total unpaid principal balance	$	7,789,182	$	6,796,004

For information related to the FHLB's credit risk on mortgage loans and allowance for credit losses, see Note 9.

Table 8.3 - Members, Including Any Known Affiliates that are Members of the FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)



	September 30, 2015					December 31, 2014
	Principal		% of Total			Principal		% of Total
Union Savings Bank	$	2,264	29	%	Union Savings Bank	$	1,593	23	%
PNC Bank, N.A. ⁽¹⁾	894		11		PNC Bank, N.A. ⁽¹⁾	1,074		16
Guardian Savings Bank FSB	648		8		Guardian Savings Bank FSB	406		6


(1)	Former member.

Note 9 - Allowance for Credit Losses

The FHLB has established an allowance methodology for each of the FHLB'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 FHLB 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 collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the FHLB lends to eligible borrowers in accordance with federal statutes, including the Federal Home Loan Bank Act of 1932 (FHLBank Act) and Finance Agency regulations, which require the FHLB 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 FHLB 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 community development loans. The FHLB'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 FHLB can also require additional or substitute collateral to protect its security interest. Management of the FHLB believes that these policies effectively manage the FHLB's credit risk from credit products.

Members experiencing financial difficulties are subject to FHLB-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 FHLB or its agent, and/or may be required to provide details on these loans to facilitate an estimate of their fair value. The FHLB perfects its security interest in all pledged collateral. The FHLBank Act affords any security interest granted to the FHLB 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 FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At September 30, 2015 and December 31, 2014, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

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The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At September 30, 2015 and December 31, 2014, the FHLB 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 FHLB during the nine months ended September 30, 2015 or 2014.

The FHLB 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 and the repayment history on credit products, the FHLB did not record any credit losses on credit products as of September 30, 2015 or December 31, 2014. Accordingly, the FHLB did not record any allowance for credit losses on Advances.

At September 30, 2015 and December 31, 2014, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures. See Note 19 for additional information on the FHLB's off-balance sheet credit exposure.

Mortgage Loans Held for Portfolio - FHA

The FHLB invests in fixed-rate mortgage loans secured by one-to-four family residential properties insured by the FHA. The FHLB expects to recover any losses from such loans 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 FHLB 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 FHLB 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.

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

The FHLB determines the allowance for conventional loans through 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 FHLB's best estimate of probable incurred losses at the reporting date. The FHLB performs the credit risk analysis of all conventional mortgage loans 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 every attempt to sell a specific dollar amount of loans to the FHLB over a one-year period. Migration analysis is a methodology for determining, through the FHLB's experience over a historical period, the rate of default on loans. The FHLB applies migration analysis to loans based on payment status categories such as current, 30, 60, and 90 days past due. The FHLB 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 FHLB 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. The FHLB removes specifically identified loans evaluated for impairment from the collectively evaluated mortgage loan population.

Qualitative Factors. The FHLB 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,

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

Table 9.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)



	Three Months Ended September 30,
	2015			2014
Balance, beginning of period	$	1,701		$	5,441
Net recoveries (charge offs) ⁽¹⁾	14			(414		)
Reversal for credit losses	—			—
Balance, end of period	$	1,715		$	5,027

	Nine Months Ended September 30,
	2015			2014
Balance, beginning of period	$	4,919		$	7,233
Net charge offs ⁽¹⁾	(3,204		)	(1,306		)
Reversal for credit losses	—			(900		)
Balance, end of period	$	1,715		$	5,027


(1)	On January 1, 2015, the FHLB adopted the charge off provisions of the Finance Agency's Advisory Bulletin 2012-02, which require the FHLB to charge off the estimated loss portion of loans 180 days or more past due and certain loans in which the borrower has filed for bankruptcy.

Table 9.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)



	September 30, 2015		December 31, 2014
Allowance for credit losses, end of period:
Collectively evaluated for impairment	$	1,713	$	4,766
Individually evaluated for impairment	2		153
Total	$	1,715	$	4,919
Recorded investment, end of period:
Collectively evaluated for impairment	$	7,518,868	$	6,402,994
Individually evaluated for impairment	9,718		8,639
Total recorded investment	$	7,528,586	$	6,411,633

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 FHLB 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 FHLB 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 FHLB 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.

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Table 9.3 - Changes in the LRA (in thousands)



	Nine Months Ended
	September 30, 2015
LRA at beginning of year	$	129,213
Additions	29,723
Claims	(1,323		)
Scheduled distributions	(1,487		)
LRA at end of period	$	156,126

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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. The table below summarizes the FHLB's key credit quality indicators for mortgage loans.

Table 9.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)



	September 30, 2015
	Conventional MPP Loans			FHA Loans			Total
Past due 30-59 days delinquent	$	43,183		$	33,621		$	76,804
Past due 60-89 days delinquent	8,090			8,421			16,511
Past due 90 days or more delinquent	32,016			17,001			49,017
Total past due	83,289			59,043			142,332
Total current mortgage loans	7,445,297			453,710			7,899,007
Total mortgage loans	$	7,528,586		$	512,753		$	8,041,339
Other delinquency statistics:
In process of foreclosure, included above ⁽¹⁾	$	24,130		$	7,784		$	31,914
Serious delinquency rate ⁽²⁾	0.44		%	3.38		%	0.62		%
Past due 90 days or more still accruing interest ⁽³⁾	$	25,986		$	17,001		$	42,987
Loans on non-accrual status, included above	$	7,096		$	—		$	7,096

	December 31, 2014
	Conventional MPP Loans			FHA Loans			Total
Past due 30-59 days delinquent	$	49,053		$	42,744		$	91,797
Past due 60-89 days delinquent	13,597			12,881			26,478
Past due 90 days or more delinquent	42,991			25,045			68,036
Total past due	105,641			80,670			186,311
Total current mortgage loans	6,305,992			522,042			6,828,034
Total mortgage loans	$	6,411,633		$	602,712		$	7,014,345
Other delinquency statistics:
In process of foreclosure, included above ⁽¹⁾	$	34,854		$	11,687		$	46,541
Serious delinquency rate ⁽²⁾	0.68		%	4.27		%	0.99		%
Past due 90 days or more still accruing interest ⁽³⁾	$	41,857		$	25,045		$	66,902
Loans on non-accrual status, included above	$	3,574		$	—		$	3,574


(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 FHLB did not have any real estate owned at September 30, 2015 or December 31, 2014.

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Individually Evaluated Impaired Loans. Table 9.5 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment.

Table 9.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)



	September 30, 2015						December 31, 2014
Conventional MPP loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance	$	9,626	$	9,432	$	—	$	5,297	$	5,165	$	—
With an allowance	92		89		2		3,342		3,293		153
Total	$	9,718	$	9,521	$	2	$	8,639	$	8,458	$	153

Table 9.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)



	Three Months Ended September 30,
	2015				2014
Individually impaired loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Conventional MPP Loans	$	9,445	$	123	$	8,575	$	111

	Nine Months Ended September 30,
	2015				2014
Individually impaired loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Conventional MPP Loans	$	8,758	$	342	$	8,096	$	315

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 FHLB'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. 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 as of the reporting date.

The FHLB's recorded investment in modified loans considered troubled debt restructurings was (in thousands) $9,718 and $8,639 at September 30, 2015 and December 31, 2014, respectively. The amount of troubled debt restructurings is not considered material to the FHLB's financial condition, results of operations, or cash flows.

Note 10 - Derivatives and Hedging Activities

Nature of Business Activity

The FHLB is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and on the interest-bearing liabilities that finance these assets. The goal of the FHLB'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 FHLB 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 FHLB monitors the risk to its interest income, net interest margin and average maturity of interest-earning assets and interest-bearing liabilities.

The FHLB 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

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(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 FHLB enters into derivatives to manage the interest rate risk exposures inherent in otherwise unhedged assets and funding positions, to achieve the FHLB'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 FHLB's financial management strategy. However, Finance Agency regulations and the FHLB'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 FHLB 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 the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the Advance does not match a change in the interest rate on the Bond; and


▪	protect the value of existing asset or liability positions.

Types of Derivatives

The FHLB 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.

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 FHLB in its derivatives is LIBOR.

Application of Interest Rate Swaps

The FHLB may use derivatives as fair value hedges of associated financial instruments. However, because the FHLB uses interest rate swaps 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 interest rate swaps 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 FHLB 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 FHLB 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 FHLB currently uses regression analyses to assess the effectiveness of its hedges. The types of assets and liabilities currently hedged with derivatives are:


▪	Consolidated Obligations;


▪	Advances; and

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▪	Firm Commitments.

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 FHLB's involvement in the various classes of financial instruments and represents neither the actual amounts exchanged nor the overall exposure of the FHLB 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 derivatives, the items being hedged and any offsets between the derivatives and the items being hedged.

Table 10.1 summarizes the 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 10.1 - Fair Value of Derivative Instruments (in thousands)



	September 30, 2015
	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as fair value hedging instruments:
Interest rate swaps	$	5,817,628	$	20,409		$	140,758
Derivatives not designated as hedging instruments:
Interest rate swaps	6,398,000		3,421			5,265
Forward rate agreements	166,000		—			1,137
Mortgage delivery commitments	160,810		1,253			—
Total derivatives not designated as hedging instruments	6,724,810		4,674			6,402
Total derivatives before netting and collateral adjustments	$	12,542,438	25,083			147,160
Netting adjustments and cash collateral ⁽¹⁾			284			(105,762		)
Total derivative assets and total derivative liabilities			$	25,367		$	41,398

	December 31, 2014
	Notional Amount of Derivatives		Derivative Assets			Derivative Liabilities
Derivatives designated as fair value hedging instruments:
Interest rate swaps	$	4,301,547	$	19,826		$	138,150
Derivatives not designated as hedging instruments:
Interest rate swaps	4,635,000		900			6,559
Forward rate agreements	439,000		6			4,924
Mortgage delivery commitments	451,292		3,799			1
Total derivatives not designated as hedging instruments	5,525,292		4,705			11,484
Total derivatives before netting and collateral adjustments	$	9,826,839	24,531			149,634
Netting adjustments and cash collateral ⁽¹⁾			(9,832		)	(85,867		)
Total derivative assets and total derivative liabilities			$	14,699		$	63,767

(1)

Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $107,465 and $78,755 at September 30, 2015 and December 31, 2014. Cash collateral received and related accrued interest was (in thousands) $1,420 and $2,720 at September 30, 2015 and December 31, 2014.

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Table 10.2 presents the components of net gains on derivatives and hedging activities as presented in the Statements of Income.

Table 10.2 - Net Gains on Derivatives and Hedging Activities (in thousands)



	Three Months Ended September 30, </

Federal Home Loan Bank of Cincinnati - FORM 10-Q - November 5, 2015

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