Attached files

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EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31210k2015.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32210k2015.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31310k2015.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32110k2015.htm
EX-12.1 - RATIO OF EARNINGS TO FIXED CHARGES - Federal Home Loan Bank of Pittsburghfhlbpitex12110k2015.htm
EX-3.2.1 - BYLAWS AS AMENDED EFFECTIVE 3/10/16 - Federal Home Loan Bank of Pittsburghfhlbpitexh32110k2015.htm
EX-10.6.3 - PENTEGRA DEFINED CONTRIBUTION PLAN SPD DATED 1/1/15 - Federal Home Loan Bank of Pittsburghfhlbpitex106310k2015.htm
EX-10.12.2 - 2016 EXECUTIVE INCENTIVE COMPENSATION PLAN - Federal Home Loan Bank of Pittsburghfhlbpitex1012210k2015.htm
EX-99.1 - AUDIT COMMITTEE CHARTER - Federal Home Loan Bank of Pittsburghfhlbpitex99110k2015.htm
EX-99.2 - REPORT OF THE AUDIT COMMITTEE - Federal Home Loan Bank of Pittsburghfhlbpitex99210k2015.htm
EX-24.0 - POWER OF ATTORNEY - Federal Home Loan Bank of Pittsburghfhlbpitex2410k2015.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31110k2015.htm
EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32310k2015.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                    to                                   
 
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
 
(Exact name of registrant as specified in its charter) 
Federally Chartered Corporation
 
25-6001324
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
601 Grant Street
Pittsburgh, PA 15219
 (Address of principal executive offices)
 
15219
 (Zip Code)
 
(412) 288-3400 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
None
Title of Each Class: None
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
Name of Each Exchange on
Capital Stock, putable, par value $100
 
Which Registered: None
(Title of Class)
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[]Yes [x]No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
[]Yes [x]No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [x]Yes []No
Indicate by check mark whether the registrant has submitted electronically 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 [] 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 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. (Check one):
o Large accelerated filer
 
o Accelerated filer
x Non-accelerated filer
 
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [] Yes [x] No

Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2015, the aggregate par value of the stock held by current and former members of the registrant was approximately $3,425.8 million. There were 34,294,094 shares of common stock outstanding at February 29, 2016.




FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

PART I
 
Item 1: Business
 
Item 1A: Risk Factors
 
Item 1B: Unresolved Staff Comments
 
Item 2: Properties
 
Item 3: Legal Proceedings
 
Item 4: Mine Safety Disclosures
 
PART II
 
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6: Selected Financial Data
 
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  Risk Management
 
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
 
Item 8: Financial Statements and Supplementary Financial Data
 
Financial Statements for the Years 2015, 2014, and 2013
 
Notes to Financial Statements
 
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A: Controls and Procedures
 
Item 9B: Other Information
 
PART III
 
Item 10: Directors, Executive Officers and Corporate Governance
 
Item 11: Executive Compensation
 
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13: Certain Relationships and Related Transactions, and Director Independence
 
Item 14: Principal Accountant Fees and Services
 
PART IV
 
Item 15: Exhibits and Financial Statement Schedules
 
Glossary
 
Signatures
 






i.


PART I – FINANCIAL INFORMATION

Forward-Looking Information

Statements contained in this Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the future of the Federal Home Loan Bank of Pittsburgh (the Bank), may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to, real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly other-than-temporary impairment (OTTI) process; risks related to mortgage-backed securities; changes in the assumptions used in the allowance for credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances’ prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the Federal Home Loan Bank (FHLBank) System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

Item 1: Business

The Bank’s mission is to provide its members with readily available liquidity, including serving as a low-cost source of funds for housing and community development. The Bank strives to enhance the availability of credit for residential mortgages and targeted community development. The Bank manages its own liquidity so that funds are available to meet members’ demand for advances (loans to members and eligible nonmember housing associates). By providing needed liquidity and enhancing competition in the mortgage market, the Bank’s lending programs benefit homebuyers and communities.

General
 
History.  The Bank is one of 11 Federal Home Loan Banks (FHLBanks). The FHLBanks operate as separate entities with their own managements, employees and boards of directors. The 11 FHLBanks, along with the Office of Finance (OF - the FHLBanks’ fiscal agent) comprise the FHLBank System. The FHLBanks were organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (the Act). The FHLBanks are commonly referred to as government-sponsored enterprises (GSEs), which generally mean they are a combination of private capital and public sponsorship. The public sponsorship attributes include: (1) being exempt from federal, state and local taxation, except real estate taxes; (2) being exempt from registration under the Securities Act of 1933 (the 1933 Act) (although the FHLBanks are required by Federal Housing Finance Agency (FHFA or Finance Agency) regulation and the Housing and Economic Recovery Act of 2008 (the Housing Act or HERA) to register a class of their equity securities under the Securities Exchange Act of 1934 (the 1934 Act)) and (3) having a line of credit with the U.S. Treasury. This line represents the U.S. Treasury’s authority to purchase consolidated obligations in an amount up to $4 billion.

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

Mission.  The Bank’s primary mission is to intermediate between the capital markets and the housing market through member financial institutions. The Bank provides credit for housing and community development through two primary programs. First, it provides members with advances against the security of residential mortgages and other types of high-quality

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collateral. Second, the Bank purchases residential mortgage loans originated by or through eligible member institutions. The Bank also offers other types of credit and noncredit products and services to member institutions. These include letters of credit, interest rate exchange agreements (interest rate swaps, caps, collars, floors, swaptions and similar transactions), affordable housing grants, securities safekeeping, and deposit products and services. The Bank issues debt to the public (consolidated obligation bonds and discount notes) in the capital markets through the OF and uses these funds to provide its member financial institutions with a reliable source of credit for these programs. The U.S. government does not guarantee the debt securities or other obligations of the Bank or the FHLBank System.

Overview.  As a GSE, the Bank’s principal strategic position has historically been derived from its ability to raise funds in the capital markets at narrow spreads to the U.S. Treasury yield curve. This fundamental competitive advantage, coupled with the joint and several cross-guarantee on FHLBank System debt, has distinguished the Bank in the capital markets and has enabled it to provide attractively priced funding to members.

 
Though chartered by Congress, the Bank is privately capitalized by its member institutions, which are voluntary participants in its cooperative structure. The characterization of the Bank as a voluntary cooperative with the status of a federal instrumentality differentiates the Bank from a traditional banking institution in three principal ways:

 
Members voluntarily commit capital required for membership principally to gain access to the funding and other services provided by the Bank. The value in membership is derived from the access to liquidity and the availability of favorably priced liquidity, as well as the potential for a dividend on the capital investment. Management recognizes that financial institutions choose membership in the Bank principally for access to attractively priced liquidity, the value of the products offered within this cooperative, and the potential to receive dividends.

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

 
The Bank is different from a traditional banking institution because its GSE charter is based on a public policy purpose to assure liquidity for its members and to enhance the availability of affordable housing for lower-income households. In upholding its public policy mission, the Bank offers a number of programs that consume a portion of earnings that might otherwise be available to its shareholders. The cooperative GSE character of this voluntary membership organization leads management to strive to optimize the primary purpose of membership, access to funding, as well as the overall value of Bank membership. 

Nonmember Borrowers.  In addition to member institutions, the Bank is permitted under the Act to make advances to nonmember housing associates that are approved mortgagees under Title II of the National Housing Act. These eligible housing associates must be chartered under law, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. The Bank must approve each applicant. Housing associates are not subject to certain provisions of the Act that are applicable to members, such as the capital stock purchase requirements. However, they are generally subject to more restrictive lending and collateral requirements than those applicable to members. Housing associates that are not state housing finance agencies are limited to pledging to the Bank as security for advances their Federal Housing Administration (FHA) mortgage loans and securities backed by FHA mortgage loans. Housing associates that are state housing finance agencies (that is, they are also instrumentalities of state or local governments) may, in addition to pledging FHA mortgages and securities backed by FHA mortgages, also pledge the following as collateral for Bank advances: (1) U.S. Treasury and agency securities; (2) single and multifamily mortgages; (3) AAA-rated securities backed by single and multifamily mortgages; and (4) deposits with the Bank. As of December 31, 2015, the Bank had approved three state housing finance agencies; two are currently eligible to borrow from the Bank but had no outstanding advance balances as of December 31, 2015.


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

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

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

Advances

Advance Products

The Bank makes advances on the security of pledged mortgage loans and other eligible types of collateral.

The following table summarizes the advance products offered by the Bank as of December 31, 2015. This information excludes mortgage loans purchased by the Bank and held for portfolio and loans relating to the Banking on Business (BOB) program, which are discussed separately in this Item 1.
Product
Description
Maturity
RepoPlus
Short-term fixed-rate advances(2); principal and interest paid at maturity
1 day to 89 days
Mid-Term Repo
Mid-term fixed-rate and adjustable-rate advances(2); principal paid at maturity; interest paid monthly or quarterly
3 months to 3 years
Core (Term)
Long-term fixed-rate and adjustable-rate advances(2)(3); principal paid at maturity; interest paid monthly or quarterly (Note: amortizing loans principal and interest paid monthly)
1 year to 30 years
Returnables
Short-term and long-term fixed-rate and adjustable-rate advances with returnable options owned by member; principal paid at maturity; interest paid monthly or quarterly
2 months to 30 years
Convertible Select
Long-term fixed-rate and adjustable-rate advances with conversion options sold by member; principal paid at maturity; interest paid quarterly
2 years to 15 years
Notes:
(1) Pricing spread over the Bank’s cost of funds at origination, quoted in basis points (bps). One basis point equals 0.01%.
(2) May include loans made under the Community Lending Program (CLP).
(3) May also include Affordable Housing Program (AHP) loans.

RepoPlus.  The Bank’s RepoPlus advance products serve member short-term liquidity needs. RepoPlus is typically a short-term (1-89 day) fixed-rate product while the Open RepoPlus is a revolving line of credit which allows members to borrow, repay and re-borrow based on the terms of the line of credit. As of December 31, 2015, the total par value of these advances was $14.1 billion, or 19% of the total advance portfolio. These short-term balances tend to be extremely volatile as members borrow and repay frequently.

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Mid-Term Repo.  The Mid-Term Repo product assists members with managing intermediate-term interest rate risk. To assist members with managing the basis risk, or the risk of a change in the spread relationship between two indices, the Bank offers adjustable-rate Mid-Term Repo advances with maturity terms between 3 months and 3 years. Adjustable-rate, Mid-Term Repo advances can be priced based on 1-month London Interbank Offered Rate (LIBOR) or 3-month LIBOR indices. As of December 31, 2015, the par value of Mid-Term Repo advances totaled $16.1 billion, or 22% of the total advance portfolio. These balances tend to be somewhat unpredictable as these advances are not always replaced as they mature; members’ liquidity needs drive these fluctuations.

 
Core (Term) Advances.  For managing longer-term interest rate risk and to assist with asset/liability management, the Bank offers long-term fixed-rate advances for terms from one year to 30 years. Amortizing long-term fixed-rate advances can be fully amortized on a monthly basis over the term of the loan or amortized balloon-style, based on an amortization term longer than the maturity of the loan. As of December 31, 2015, the par value of Core (Term) advances totaled $30.0 billion, or 40% of the total advance portfolio.

Returnables.  Some of the Bank's advances permit the member to prepay an advance on certain pre-determined dates without a fee. As of December 31, 2015, the Bank had $12.6 billion of Returnable advances or 17% of the total advance portfolio.

Convertible Select.  Some of the Bank’s advances contain embedded options which the member can sell to the Bank. If the option is exercised by the Bank (based on a predetermined frequency), the member can choose to either repay the advance or allow the advance to be converted into an adjustable-rate advance with a predetermined spread. As of December 31, 2015, the par value of these Convertible Select advances was $1.5 billion, or 2% of the total advance portfolio.


Collateral

The Bank makes advances to members and eligible nonmember housing associates based upon the security of pledged mortgage loans and other eligible types of collateral. In addition, the Bank has established lending policies and procedures to minimize risk of loss while balancing the members’ needs for funding. The Bank also protects against credit risk by fully collateralizing all member and nonmember housing associate advances and other credit products. The Act requires the Bank to obtain and maintain a security interest in eligible collateral at the time it originates or renews an advance.

 
Collateral Agreements.  The Bank provides members with two types of collateral agreements: a blanket lien collateral pledge agreement and a specific collateral pledge agreement. In both cases, the Bank perfects its security interest under Article 9 of the Uniform Commercial Code (UCC) by filing a financing statement. The specific agreement covers only those assets or categories of assets identified; the Bank therefore is relying on a specific subset of the member’s total eligible collateral as security for the member’s obligations to the Bank. The Bank requires housing finance agencies (HFAs) and insurance companies to sign a specific collateral pledge agreement. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for a description of blanket and specific agreements.

 
Collateral Status.  These collateral agreements require one of three types of collateral status: undelivered, detailed listing or specific pledge, and delivered status (all securities pledged must be delivered). A member is assigned a collateral status based on the member’s needs and on the Bank’s determination of the member’s current financial condition and credit product usage, as well as other available information.

The least restrictive collateral status, and the most widely used by the Bank’s members, is the undelivered collateral status. This status is generally assigned to lower risk institutions pledging collateral. Under undelivered collateral status, a member borrower is not required to deliver detailed reporting on pledged loans; rather, the Bank monitors eligible collateral using the Qualifying Collateral Report (QCR), derived from regulatory financial reports, which are submitted quarterly to the Bank by the member. Origination of new advances or renewal of advances must be secured by eligible collateral categories.

 
With respect to the Bank’s detailed listing practice, the Bank may require a member to provide a detailed listing of eligible collateral being pledged if the member is under a specific agreement, or if participating in the Bank’s market-value based pricing program, or as determined based on its credit condition. In this case, the member typically retains physical possession of collateral pledged to the Bank but provides a listing of assets pledged. In some cases, the member may benefit by choosing to list collateral, in lieu of non-listed status, since it may result in a higher collateral weighting being applied to the collateral.

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The Bank benefits from detailed listing collateral status because it provides more loan information to calculate a more precise valuation of the collateral.

 
The third collateral status is delivered collateral status. In this case, the Bank requires the member to deliver physical possession, or grant control of, eligible collateral (in an amount sufficient to fully secure TCE) to the Bank, including through a third party custodian for the Bank. Typically, the Bank would take physical possession/control of collateral if the financial condition of the member was deteriorating. Delivery of collateral also may be required if there is action taken against the member by its regulator that would indicate inadequate controls or other conditions that would be of concern to the Bank. Collateral delivery status is often required for members borrowing under specific pledge agreements, as a practical means for maintaining specifically listed collateral. For all securities pledged as collateral, the Bank requires delivery to either a restricted account at the Bank or an account with a third party custodian under the Bank’s control. The Bank also requires delivery of collateral from de novo institution members at least until two consecutive quarters of profitability are achieved and for any other new member where a pre-existing blanket lien is in force with another creditor unless an effective subordination agreement is executed with such other creditor.

 
With respect to certain specific collateral pledge agreement borrowers (typically HFAs and insurance companies, as noted above), the Bank takes control of all collateral pledged at the time the loan is made through the delivery of securities or, where applicable, mortgage loans to the Bank or its custodian. Approximately 87% of total credit exposure (TCE) outstanding was secured by collateral pledged to the Bank under a blanket lien agreement and in undelivered status at December 31, 2015. The remaining 13% of TCE outstanding was secured by collateral pledged under detailed listing or specific pledge and delivery status.

As of December 31, 2015, eight of the Bank’s top ten borrowers (ranked by TCE and outstanding advances) were in undelivered collateral status; the remaining two were in detailed listing or specific pledge status. These included a banking institution member which elected to have residential loan collateral specifically pledged under a detailed listing affiliate pledge lending arrangement. In addition, an insurance company member has securities collateral specifically pledged to and controlled by the Bank in accordance with the Bank’s policy requiring all insurance companies to sign a specific pledge type master borrowing agreement.

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

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

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


See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details of eligible

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collateral, including amounts and percentages of eligible collateral securing members’ obligations to the Bank as of December 31, 2015.

 
As additional security for each member’s obligations to the Bank, the Bank has a statutory lien on the member’s capital stock in the Bank. In the event of deterioration in the financial condition of a member, the Bank will take possession or control of sufficient eligible collateral to further perfect its security interest in collateral pledged to secure the member’s obligations to the Bank. Members with deteriorating creditworthiness are required to deliver collateral to the Bank or the Bank’s custodian to secure the members’ obligations with the Bank. Furthermore, the Bank requires specific approval of each of such members’ new or renewed advances.

 
Priority.  The Act affords any security interest granted to the Bank by any member, or any affiliate of a member, priority over the claims and rights of any third party, including any receiver, conservator, trustee or similar party having rights of a lien creditor. The only two exceptions are: (1) claims and rights that would be entitled to priority under otherwise applicable law and are held by actual bona fide purchasers for value; and (2) parties that are secured by actual perfected security interests ahead of the Bank’s security interest. The Bank has detailed liquidation plans in place to promptly exercise the Bank’s rights regarding securities, loan collateral, and other collateral upon the failure of a member. At December 31, 2015 and 2014, respectively, on a borrower-by-borrower basis, the Bank had a perfected security interest in eligible collateral with an eligible collateral value (after collateral weightings) in excess of the book value of all members’ and nonmember housing associates’ obligations to the Bank. Management believes that adequate policies and procedures are in place to effectively manage the Bank’s credit risk associated with lending to members and nonmember housing associates. To ensure its position as a first-lien priority secured creditor, the Bank takes possession of collateral pledged by insurance companies.

 
Types of Collateral.  Single-family, residential mortgage loans may be used to secure members’ obligations to the Bank. The Bank contracts with a leading provider of comprehensive mortgage analytical pricing to provide more precise valuations of some listed and delivered residential mortgage loan collateral. In determining borrowing capacity for members with non-listed and non-delivered collateral, the Bank utilizes book value as reported on each member's regulatory call report.

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

A third category of eligible collateral is high quality investment securities, defined as U.S. Treasury and U.S. Agency securities, REFCORP bonds, GSE mortgage-backed securities (MBS), and commercial and residential private label MBS with a minimum credit rating of single A. In addition, municipal securities with a real estate nexus (e.g. proceeds used for real estate development) with a minimum credit rating of single A are included. Members have the option to deliver such high quality investment securities to the Bank to increase their MBC. Upon delivery, these securities are valued daily and private label residential MBS are subject to weekly ratings reviews.

The Bank also accepts FHLBank deposits and multi-family residential mortgage loans as eligible collateral. In addition, member CFIs may pledge a broader array of collateral to the Bank, including secured small business, small farm, small agri-business and community development loans. The Housing Act defines member CFIs as Federal Deposit Insurance Corporation (FDIC)-insured institutions with no more than $1.1 billion (the limit during 2015) in average assets over the past three years. This limit may be adjusted by the Finance Agency based on changes in the Consumer Price Index. The determination to accept such collateral is at the discretion of the Bank and is made on a case-by-case basis. These advances were also collateralized by sufficient levels of non-CFI collateral. All member advances are fully secured by residential mortgage assets, ORERC, eligible securities and/or CFI collateral. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for the percentage of each type of collateral held by the Bank at December 31, 2015.

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

Nontraditional residential mortgage loans are defined by the Bank’s Collateral Policy as mortgage loans that allow borrowers to defer payment of principal or interest. These loans, also referred to as “alternative” or “exotic” mortgage loans, may be interest-only loans, payment-option loans, negative-amortization, or have other features, such as, but not limited to,

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variable interest rates with below-market introductory rates, simultaneous second-lien loans and reduced documentation to support the repayment capacity of the borrower. Nontraditional residential mortgage loans exhibit characteristics that may result in increased risk relative to traditional residential mortgage loan products. They may pose even greater risk when granted to borrowers with undocumented or undemonstrated repayment capacity, for example, low or no documentation loans or credit characteristics that would be characterized as subprime. The potential for increased risk is particularly true if the nontraditional residential mortgage loans are not underwritten to the fully indexed rate.

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

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

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The various types of eligible collateral and related lending values as of December 31, 2015 are summarized below. Collateral includes wholly-owned member assets (or unencumbered assets of an affiliate or subsidiary of the member pledged to the Bank, if applicable and approved by FHLBank). The weightings are analyzed on at least a semi-annual basis and adjusted as necessary. At the discretion of the Bank, on a case-by-case basis, the collateral weighting on loan categories may be increased (up to a maximum of 95 percent) upon completion of specific market valuation of such collateral and authorization from the Bank’s Membership Credit Committee.
Types of Qualifying Collateral
Lending Value Assigned to the Collateral
(as a Percentage of Fair Value)
Securities Collateral
 
FHLBank deposit pledged to FHLBank and under the sole control of FHLBank
100%
U.S. Treasury securities; U.S. Agency securities, including securities of FNMA, FHLMC, FFCB, NCUA, SBA, USDA and FDIC notes; FHLBank consolidated obligations; REFCorp Bonds (1)
97%
MBS, including collateralized mortgage obligations (CMO) issued or guaranteed by Ginnie Mae (GNMA), FHLMC, and FNMA
95%
U.S. Treasury Strips (interest-only and principal only)
90%
Non-agency residential MBS, including CMOs, representing a whole interest in such mortgages.
AAA 85%
AA 75%
A 70%
Commercial mortgage-backed securities (CMBS)
AAA 85%
AA 75%
A 70%
Securities issued by a state or local government or their agencies, or authorities or instrumentalities in the United States (Municipals) with a real estate nexus.
AAA 92%
AA 90%
A 88%
Types of Qualifying Collateral
Lending Value Assigned to the Collateral (3)
Loan Collateral
Blanket - Lien Undelivered
Specific Pledge, Collateral Listing
or
Blanket Delivered (Policy)
Blanket Delivered (Credit)
Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Conventional whole, fully disbursed, first mortgage loans secured by 1-to-4 family residences
80%
75%
70%
Nontraditional mortgage loans and loans with unknown FICO® (2)
70%
65%
60%
Conventional and FHA whole, fully-disbursed mortgage loans secured by multifamily properties
70%
65%
60%
Farmland loans
70%
65%
60%
Commercial real estate loans (owner & non-owner occupied)
70%
65%
60%
Low FICO® loans with mitigating factors as defined by FHLBank
60%
55%
50%
Conventional, fully disbursed, second-mortgage loans secured by 1-to-4 family residences. Both term loans and revolving lines of credit (HELOC)
60%
55%
50%
Commercial business loans (CFI only)
60%
55%
50%
Note:
(1) Defined as Federal National Mortgage Association (Fannie Mae or FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC), Federal Farm Credit Bank (FFCB), National Credit Union Administration (NCUA), Small Business Administration (SBA), and U.S. Department of Agriculture (USDA), and Federal Deposit Insurance Corporation (FDIC).
(2) Nontraditional mortgage loan portfolios may be required to be independently identified for collateral review and valuation for inclusion in a member’s MBC. This may include a request for loan-level listing on a periodic basis.
(3) For the categories Blanket-Lien Undelivered, Blanket Delivered (Policy), and Blanket Delivered (Credit), lending value is assigned as a percentage of book value. For the Specific Pledge and Collateral Listing category, lending value is assigned as a percentage of fair market value.


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During 2015, the Bank implemented some changes to its collateral policies and practices. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for details regarding these changes.

Investments
 
Overview.  The Bank maintains a portfolio of investments for three main purposes: liquidity; collateral for derivative counterparties; and additional earnings. For liquidity purposes, the Bank invests in shorter-term instruments, including overnight Federal funds and overnight reverse repurchase agreements, to ensure the availability of funds to meet member borrowing requests. In addition, the Bank may invest in other short-term instruments, including term Federal funds, and interest-earning certificates of deposit. The Bank also maintains a secondary liquidity portfolio, which consists primarily of U.S. agency debentures that can be financed under normal market conditions in securities repurchase agreement transactions to raise additional funds. U.S. Treasury securities may be purchased and pledged as collateral for derivative transactions.
 
The Bank further enhances income by acquiring securities issued by GSEs and state and local government agencies as well as Agency MBS. The Bank's private label MBS portfolio continues to run-off; no private label MBS have been purchased since late 2007. Securities currently in the portfolio were required to carry one of the top two ratings from Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) or Fitch Ratings (Fitch) at the time of purchase. All MBS securities in the Bank’s investment portfolio were AAA rated at the time of purchase with the exception of one pre-2004 vintage security which was rated AA at the time of purchase. The long-term investment portfolio is intended to provide the Bank with higher returns than those available in the short-term money markets. Investment income also bolsters the Bank’s capacity to meet its commitment to affordable housing and community investment, and to cover operating expenses. See the Credit and Counterparty Risk – Investments discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for discussion of the credit risk of the investment portfolio and further information on these securities’ current ratings.
 
Prohibitions.  Under Finance Agency regulations, the Bank is prohibited from purchasing certain types of securities, including:
instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies or certain investments targeted to low-income persons or communities;
instruments issued by non-U.S. entities, other than those issued by United States branches and agency offices of foreign commercial banks;
non-investment-grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;
whole mortgages or other whole loans, other than: (1) those acquired under the Bank’s mortgage purchase program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local or tribal government units or agencies that are of investment quality; (4) MBS or asset-backed securities (ABS) backed by manufactured housing loans or home equity loans (HELOCs); and (5) certain foreign housing loans authorized under Section 12(b) of the Act; and
non-U.S. dollar denominated securities.
 
The provisions of Finance Agency regulation further limit the Bank’s investment in MBS and ABS. These provisions require that the total book value of MBS owned by the Bank not exceed 300% of the Bank’s previous month-end regulatory capital on the day of purchase of additional MBS. In addition, the Bank is prohibited from purchasing:
interest-only or principal-only strips of MBS;
residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits; and
fixed-rate or floating-rate MBS that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest rate change of 300 basis points.
 
The FHLBanks are prohibited from purchasing an FHLBank consolidated obligation as part of the consolidated obligation’s initial issuance. The Bank’s investment policy is even more restrictive, as it prohibits it from investing in another FHLBank consolidated obligation at any time. The Federal Reserve Board (Federal Reserve) requires Federal Reserve Banks (FRBs) to release interest and principal payments on the FHLBank System consolidated obligations only when there are sufficient funds in the FHLBanks’ account to cover these payments. The prohibitions on purchasing FHLBank consolidated obligations noted above will be temporarily waived if the Bank is obligated to accept the direct placement of consolidated obligation discount notes to assist in the management of any daily funding shortfall of another FHLBank.
 
The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.


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Mortgage Partnership Finance® (MPF®) Program
 
Under the MPF Program, the Bank purchases qualifying 5- to 30-year conventional conforming and government-insured fixed-rate mortgage loans secured by one-to-four family residential properties. The MPF Program provides participating members and eligible housing associates a secondary market alternative that allows for increased balance sheet liquidity and provides a method for removal of assets that carry interest rate and prepayment risks from their balance sheets. In addition, the MPF Program provides a greater degree of competition among mortgage purchasers and allows small and mid-sized community-based financial institutions to participate more effectively in the secondary mortgage market.
 
The Bank currently offers five products under the MPF Program to Participating Financial Institutions (PFIs): MPF Original, MPF 35, MPF Government, MPF Direct and MPF Xtra. Further details regarding the credit risk structure for each of the products, as well as additional information regarding the MPF Program and the products offered by the Bank, is provided in the Financial Condition section and the Credit and Counterparty Risk - Mortgage Loans discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K.
 
PFI. Members and eligible housing associates must specifically apply to become a PFI. The Bank reviews their eligibility including servicing qualifications and ability to supply documents, data and reports required to be delivered under the MPF Program. The Bank added seven new PFIs in 2015, and as of December 31, 2015, 132 members were approved participants in the MPF Program. Of the Bank’s ten largest members, based on asset size, three members have executed PFI agreements. The Bank purchased mortgage loans totaling $456.1 million during 2015, none of which were from these three members.

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

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

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

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

MPF Xtra. MPF Xtra allows PFIs to sell residential, conforming fixed-rate mortgages to FHLBank of Chicago, which concurrently sells them to Fannie Mae on a nonrecourse basis. MPF Xtra does not have the CE structure of the traditional MPF Program. Additionally, because these loans are sold from the PFI to FHLBank of Chicago to Fannie Mae, they are not reported on the Bank’s Statement of Condition. With the MPF Xtra product, there is no credit obligation assumed by the PFI or the Bank and no CE fees are paid. PFIs which have completed all required documentation and training are eligible to offer the product. As of December 31, 2015, 50 PFIs were eligible to offer the product. Of these, 12 PFIs sold $52.5 million of mortgage loans through MPF Xtra for 2015. The Bank receives a nominal fee for facilitating these MPF Xtra transactions.

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

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

MPF 35. This product is similar to the MPF Original product but has a CE fee structure that is based partly on performance, a FLA equal to 35 basis points, and an option for the PFI’s CE obligation to be covered by a third party.

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

Specialized Programs
 
The Bank helps members meet their Community Reinvestment Act (CRA) responsibilities. Through community investment cash advance programs such as AHP and CLP, members have access to subsidized and other low-cost funding. Members use the funds from these programs to create affordable rental and homeownership opportunities, and for community and economic development activities that benefit low- and moderate-income neighborhoods and help revitalize their communities.
Banking on Business (BOB) Loans
 
See Note 1 - Summary of Significant Accounting Policies in Item 8. in this Form 10-K for a description of the BOB program. In 2015 and 2014, the Bank made $3.5 million and $2.8 million available, respectively, to assist small businesses through the BOB loan program.


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

Debt Financing — Consolidated Obligations
 
The primary source of funds for the Bank is the sale of debt securities, known as consolidated obligations. These consolidated obligations are issued as both bonds and discount notes, depending on maturity. Consolidated obligations are the joint and several obligations of the 11 FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them. Moody’s has rated consolidated obligations Aaa with stable outlook/P-1, and S&P has rated them AA+ with stable outlook/A-1+. The following table presents the total par value of the consolidated obligations of the Bank and the FHLBank System at December 31, 2015 and 2014.
 
(in millions)
December 31, 2015
December 31, 2014
Consolidated obligation bonds
$
48,515.7

$
43,602.1

Consolidated obligation discount notes
42,318.5

37,065.7

Total Bank consolidated obligations
90,834.2

80,667.8

Total FHLBank System combined consolidated obligations
$
905,201.8

$
847,174.8

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


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

The process for issuing bonds under the three methods above can vary depending on whether the bonds are non-callable or callable. For example, the Bank can request funding through the TAP auction program (quarterly debt issuances that reopen or “tap” into the same CUSIP number) for fixed-rate non-callable (bullet) bonds. This program uses specific maturities that may be reopened daily during a three-month period through competitive auctions. The goal of the TAP program is to aggregate frequent smaller issues into a larger bond issue that may have greater market liquidity.
 
Consolidated Obligation Discount Notes.  The OF also sells discount notes to provide short-term funds for advances for seasonal and cyclical fluctuations in deposit flows, mortgage financing, short-term investments and other funding needs. Discount notes are sold at a discount and mature at par. These securities have maturities of up to 365 days.
 
There are three methods for issuing discount notes:

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

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

Capital Resources

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

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

Each member is required to purchase and maintain activity stock equal to the percentage of the book value of the following transactions as shown in the table below:

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Range of activity stock requirement according to the Capital Plan
 
 
Minimum
Maximum
Current requirement
Outstanding advances
2.0%
6.0%
4.0%
Acquired member assets
0.0%
6.0%
4.0%
Letters of credit
0.0%
4.0%
0.75%
Outstanding advance commitments (settling more than 30 days after trade date)
0.0%
6.0%
0.0%

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

Dividends and Retained Earnings.  As prescribed in the Capital Plan, the Bank may pay dividends from current net earnings or previously retained earnings, subject to certain limitations and conditions. The Bank’s Board may declare and pay dividends in either cash or capital stock. The Bank’s practice has been to pay only a cash dividend. The amount of dividends the Board determines to pay out, if any, is affected by, among other factors, the level of retained earnings recommended under the Bank’s retained earnings policy. In addition, as set forth in the Capital Plan, the dividends paid on subclass B2 activity stock will be equal to or higher than the dividends being paid on subclass B1 membership stock at that time.

In February 2015, the Bank paid a quarterly dividend equal to an annual yield of 4.0%. This dividend was based on average member capital for the fourth quarter of 2014. In addition, the Bank paid a special dividend of 2.5%. The special dividend was based on average member capital stock for the full year of 2014. In April, July and October 2015, the Bank paid quarterly dividends equal to an annual yield of 5.0% on activity stock and 3.0% on membership stock. These dividends were based on stockholders' average balances for the first quarter (April dividend), second quarter (July dividend), and third quarter (October dividend). In February 2016, the Bank paid a quarterly dividend equal to an annual yield of 5.0% on activity stock and 3.0% on membership stock. The dividends were based on average member capital for the fourth quarter of 2015.

As of December 31, 2015, the balance in retained earnings was $881.2 million, of which $162.5 million was deemed restricted. Refer to the Capital Resources section and the Risk Governance discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K for additional discussion of the Bank’s capital-related metrics, retained earnings, dividend payments, capital levels and regulatory capital requirements.

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

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

Competition
 
Advances.  The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including the FRBs, commercial banks, investment banking divisions of commercial banks, and brokered deposits, largely on the basis of interest rates as well as types and weightings of collateral. Competition is often more significant when originating advances to larger members, which have greater access to the capital markets. Competition within the FHLBank System is somewhat limited; however, there may be some members of the Bank that have affiliates that are members of other FHLBanks. The Bank's ability to compete successfully with other FHLBanks for business depends primarily on pricing, dividends, capital stock requirements, credit and collateral terms, and products offered. Despite these competitive factors, advances rose 17.5% to

13



$74.5 billion at December 31, 2015 compared to $63.4 billion at December 31, 2014. This was primarily driven by increases in fixed- and floating-rate term advance borrowings by several members. Additional details regarding the advance portfolio are available in the Financial Condition discussion in Item 7. Management's Discussion and Analysis in this Form 10-K.

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

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

Major Customers

PNC Bank, N.A., Santander Bank, N.A., Chase Bank USA, N.A., and Ally Bank each had advance balances in excess of 10% of the Bank’s total portfolio as of December 31, 2015. See further discussion in Item 1A. Risk Factors and the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section in Item 7. Management’s Discussion and Analysis, both in this Form 10-K.

Personnel

As of December 31, 2015, the Bank had 213 full-time employee positions and two part-time employee positions, for a total of 214 full-time equivalents. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good.

Taxation

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

AHP

The FHLBanks must set aside for the AHP annually, on a combined basis, the greater of an aggregate of $100 million or 10% of current year’s net income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP). If the Bank experienced a full year net loss, as defined in Note 15 - Affordable Housing Program (AHP) to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K, the Bank would have no obligation to the AHP for the year except in the following circumstance: if the result of the aggregate 10% calculation described above is less than $100 million for all 11 FHLBanks, then the Act requires that each FHLBank contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equal $100 million. The proration would be made on the basis of an FHLBank’s net income in relation to the income of all FHLBanks for the previous year. Each FHLBank’s required annual AHP contribution is limited to its annual net income. If an FHLBank finds that its required contributions are negatively impacting the financial stability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. As allowed by AHP regulations, an FHLBank can elect to allot fundings based on future periods’ required AHP contributions to be awarded during a year (referred to as Accelerated AHP). The Accelerated AHP allows an FHLBank to commit and disburse AHP funds to meet the FHLBank’s mission when it would otherwise be unable to do so, based on its normal funding mechanism.
 
For additional details regarding the AHP assessment, please see the Earnings Performance discussion in Item 7. Management’s Discussion and Analysis and Note 15 - Affordable Housing Program (AHP) in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

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SEC Reports and Corporate Governance Information

The Bank is subject to the informational requirements of the 1934 Act and, in accordance with the 1934 Act, files annual, quarterly and current reports with the SEC. The Bank’s SEC File Number is 000-51395. Any document filed with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, information statements and other information regarding registrants that file electronically with the SEC, including the Bank’s filings. The SEC’s website address is www.sec.gov. Copies of such materials can also be obtained at prescribed rates from the public reference section of the SEC at 100 F Street NE, Washington, D.C. 20549.
 
The Bank also makes the Annual Report filed on Form 10-K, Quarterly Reports filed on Form 10-Q, Current Reports filed on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the 1934 Act available free of charge on or through its internet website as soon as reasonably practicable after such material is filed with, or furnished to, the SEC. The Bank’s internet website address is www.fhlb-pgh.com. The Bank filed the certifications of the President and Chief Executive Officer, Chief Financial Officer, and the Chief Accounting Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with respect to the Bank’s 2015 Annual Report on Form 10-K as exhibits to this Report.
 
Information about the Bank’s Board and its committees and corporate governance, as well as the Bank’s Code of Conduct, is available in the governance section of the “Investor Relations” link on the Bank’s website at www.fhlb-pgh.com. Printed copies of this information may be requested without charge upon written request to the Legal Department at the Bank.

Item 1A: Risk Factors

There are many factors - including those beyond the Bank's control - that could cause financial results to differ significantly from the Bank's expectations. The following discussion summarizes some of the more important factors that should be considered carefully in evaluating the Bank's business. This discussion is not exhaustive and there may be other factors not described or factors, such as credit, market, operations, business, liquidity, interest rate and other risks, changes in regulations, and changes in accounting requirements, which are described elsewhere in this report (see the Risk Management discussion in Item 7. Management's Discussion and Analysis in this Form 10-K), which could cause results to differ materially from the Bank's expectations. However, management believes that these risks represent the material risks relevant to the Bank, its business and industry. Any factor described in this report could by itself, or together with one or more other factors, adversely affect the Bank's business operations, future results of operations, financial condition or cash flows.

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

The FHLBanks' business operations, funding costs, rights, obligations, and the environment in which FHLBanks carry out their housing-finance mission continue to be impacted by the evolving regulations impacting the finance industry. To date, the Bank has effectively implemented all requirements for derivatives clearing including establishing relationships with Futures Commission Merchants (FCMs) and an integration of swap execution facilities. Final regulations regarding uncleared swaps were issued in October, 2015. When they take effect, the Final Margin Rules will subject uncleared swaps and uncleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and financial end-users that have material swaps exposure (i.e., an average daily aggregate notional of $8 billion or more in uncleared swaps) to a mandatory two-way initial margin requirement. The Final Margin Rules will require variation margin to be exchanged daily for uncleared swaps and uncleared security-based swaps between Covered Swap Entities and Swap Entities and between Covered Swap Entities and all financial end-users (without regard to the swaps exposure of the particular financial end-user). Variation margin requirement under the Final Margin Rules will become effective for the Bank on March 1, 2017, and the initial margin requirements under the Final Margin Rules are expected to become effective for the Bank on September 1, 2020. Since the Bank is currently posting and collecting variation margin on uncleared swaps, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a material impact on the Bank's costs. However, when the initial margin requirements under the Final Margin Rules become effective, the Bank anticipates that the cost of engaging in uncleared swaps may increase. Additional details regarding the Dodd-Frank Act and its implementing regulations are included in Legislative and Regulatory Developments in Item 7. Management's Discussion and Analysis in this Form 10-K.

The Bank continued to clear certain derivative transactions through a third-party central clearinghouse in 2015. These swaps are subject to mandatory reporting, record-keeping and documentation requirements established by applicable regulators, an initial and a variation margin requirement established by the clearinghouse and its clearing members. Guidance from the

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Commodity Futures Trading Commission (CFTC) also addressed treatment of customer collateral for cleared swaps and additional protections for such collateral.

The Bank's ability to achieve its risk management objectives has not been materially impacted by the initial derivative clearing requirements and these requirements have not negatively impacted the Bank's cost of funds. The impact of the recently adopted final regulations regarding uncleared swaps specifically the initial margin requirements that become effective for the Bank September 1, 2020, could have a material impact on the Bank’s cost of funds, results of operations and financial condition.

The Housing Act was intended to, among other things, address the housing finance crisis, expand the Finance Agency's authority and address GSE reform issues. Several GSE reform bills have been crafted, and the Administration and Congress will further address GSE reform going forward. Depending on the terms, such legislation could have a material effect on the Bank. The series of housing initiatives such as mortgage modification and refinancing programs enacted to aid homeowners have helped to stabilize and heal the housing market. In an attempt to boost credit availability for housing purchases, the FHA cut insurance premiums and continues to work toward clarifying putback and indemnification policies. The Housing GSEs, Fannie Mae and Freddie Mac also adopted clarifications to their putback policies. The effects on the mortgage market from these programs and policies, or the introduction of any new programs or policies may impact the value of the Bank's MBS holdings and how the Bank executes loan modifications on its portfolio of mortgages.

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

The Bank cannot predict whether new regulations will be promulgated nor the effect of any new regulations (including, without limitation, capital and liquidity requirements on the Bank’s members) on the Bank's operations. Regulatory requirements on the Bank’s members may affect their capacity and demand for Bank products, and as a result, impact the Bank’s operations and financial condition. Changes in Finance Agency regulations and other Finance Agency regulatory actions could result in, among other things, changes in the Bank's capital requirements, an increase in the Banks' cost of funding, a change in permissible business activities, a decrease in the size, scope, or nature of the Banks' lending, investment or mortgage purchase program activities, or a decrease in demand for the Bank's products and services, which could negatively affect its financial condition and results of operations and members' investment in the Bank. As discussed below, the Finance Agency has recently issued a final rule on membership.

Any future legislative changes to the Act may significantly affect the Bank's business, results of operations and financial condition.

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

One or more significant Bank borrowing members could choose to decrease their business activities with the Bank, move their business to another FHLBank, merge into a nonmember or withdraw their membership, which could lead to a significant decrease in the Bank's total assets. Membership withdrawal may be due to a move to another FHLBank district. If member institutions are acquired by institutions outside the Bank's district and the acquiring institution decides not to maintain membership (for example, by dissolving charters), the Bank may be adversely affected, resulting in lower demand for products and services and ultimately requiring the redemption of related capital stock. In the event the Bank would lose one or more large borrowers that represent a significant proportion of its business, the Bank could, depending on the magnitude of the impact, compensate for the loss by suspending, or otherwise restricting, dividend payments and repurchases of excess capital stock, raising advance rates, attempting to reduce operating expenses (which could cause a reduction in service levels or products offered) or by undertaking some combination of these actions. The magnitude of the impact would depend, in part, on the Bank's size and profitability at the time the financial institution ceases to be a borrower.

At December 31, 2015, the Bank's five largest customers, PNC Bank, N.A., Chase Bank USA, N.A., Santander Bank, N.A., TD Bank, N.A., and Ally Bank, accounted for 72% of its TCE and owned 68% of its outstanding capital stock. Of these

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members, PNC Bank, N.A., Santander Bank, N.A., Ally Bank and Chase Bank USA, N.A. each had outstanding advance balances in excess of 10% of the total portfolio. If any of the Bank’s five largest customers paid off their outstanding advances, reduced their letter of credit activity with the Bank or withdrew from membership, the Bank could experience a material adverse effect on its outstanding advance levels and TCE, which would impact the Bank's financial condition and results of operations. As discussed in the Legislative and Regulatory Developments section of this Form 10-K, the Finance Agency has issued a final membership regulation. Unlike the proposed rule, the final regulation does not impose ongoing asset tests on prospective and current Bank members. As a result, under this final regulation the Bank does not face the risk of losing existing members (with resulting potentially material reduction in advance balances) due to failing to meet an ongoing asset test requirement. The final regulation as with the proposed regulation prohibits captive insurance companies from becoming members of an FHLBank and establishes principal place of business requirements for new insurance company membership applicants to an FHLBank. Future legislative changes or Finance Agency regulatory actions regarding eligibility for membership in an FHLBank to the extent they result in a significant reduction in the Bank’s outstanding advances could affect the Bank’s financial condition and results of operations.

See further discussion of the final membership regulation in Legislative and Regulatory Developments in Item 7. Management's Discussion and Analysis in this Form 10-K.

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

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

The availability of alternative funding sources that is more attractive than those funding products offered by the Bank may significantly decrease the demand for advances. Any changes made by the Bank in the pricing of its advances in an effort to compete effectively with these competitive funding sources may decrease advance profitability. A decrease in advance demand or a decrease in the Bank's profitability on advances could negatively affect its financial condition and results of operations.

In connection with the MPF Program, the Bank is subject to competition regarding the purchase of conventional, conforming fixed-rate mortgage loans. In this regard, the Bank faces competition in the areas of customer service, purchase prices for the MPF loans and ancillary services such as automated underwriting. The Bank's strongest competitors are large mortgage aggregators and the other housing GSEs, Fannie Mae and Freddie Mac. The Bank may also compete with other FHLBanks with which members have a relationship through affiliates. Most of the FHLBanks participate in the MPF Program or a similar program known as the Mortgage Purchase Program (MPP). Competition among FHLBanks for MPF business may be affected by the requirement that a member and its affiliates can sell loans into the MPF Program through only one FHLBank relationship at a time. Some of these mortgage loan competitors have greater resources, larger volumes of business, longer operating histories and more product offerings. In addition, because the volume of conventional, conforming fixed-rate mortgages fluctuates depending on the level of interest rates, the demand for MPF Program products could diminish. Increased competition can result in a reduction in the amount of mortgage loans the Bank is able to purchase and consequently lower net income.

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

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

The Bank's business and earnings are affected by international, domestic and district-specific business and economic conditions. These economic conditions, which may also affect counterparty and members' business, include real estate values, residential mortgage originations, short-term and long-term interest rates, inflation and inflation expectations, unemployment

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levels, money supply, fluctuations in both debt and equity markets, and the strength of the foreign, domestic and local economies in which the Bank operates.

The Bank is affected by the global economy through member ownership and investor appetite. Changes in perception regarding the stability of the U.S. economy, the creditworthiness of the U.S. government, the degree of government support of financial institutions or the depletion of funds available for investment by overseas investors could lead to changes in foreign interest in investing in, or supporting, U.S. financial institutions or holding FHLBank debt. While the Bank’s debt costs are still at historical lows, the swap spreads on debt have tightened as the yield curve for U.S. Treasuries has flattened due to increased corporate debt issuance and selling of U.S. Treasuries.

Geopolitical conditions can also affect earnings. Acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of terrorism, or military conflicts, could affect business and economic conditions in the U.S., including both debt and equity markets.

Damage caused by acts of terrorism or natural disasters could adversely impact the Bank or its members, leading to impairment of assets and potential loss exposure. Real property that could be damaged in these events may serve as collateral for advances, or security for the mortgage loans the Bank purchases from its members and the MBS held as investments. If this real property is not sufficiently insured to cover the damages that may occur, there may be insufficient collateral to secure the Bank's advances or investment securities and the Bank may be severely impaired with respect to the value of these assets.

The Bank is also exposed to risk related to a changing interest rate environment, especially in difficult economic times. If this risk is not properly monitored and managed, it could affect the Bank's results of operations and financial condition.

State and municipal governments continue to experience significant budgetary problems. These entities may be forced to cut expenses, raise taxes, or both. The expense reductions could include reduced government employment levels. Any of the above actions or the inability of state and municipal governments to address budgetary problems could have a negative effect on the economy. Many of these government entities have already suffered credit downgrades and funding challenges over the past several years. Many member banks invest in securities of, or lend directly to, these state and municipal government entities; these members could be negatively impacted by additional credit deterioration.

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

Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for all consolidated obligations issued, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of consolidated obligations. As of December 31, 2015, out of a total of $905.2 billion in par value of consolidated obligations outstanding, the Bank was the primary obligor on $90.8 billion, or approximately 10.0% of the total.

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

The Bank or any other FHLBank may be required to, or may voluntarily decide to, provide financial assistance to one or more other FHLBanks. The Bank could be in the position of either receiving or providing such financial assistance, which could have a material effect on the Bank's financial condition and the members' investment in the Bank.

As of March 9, 2016, FHLBank System consolidated obligation bonds have been assigned Aaa/Stable Outlook and AA+/Stable Outlook ratings by Moody's and S&P, respectively. Consolidated obligation discount notes have been assigned a P-1 and A-1+ rating by Moody's and S&P, respectively. In addition, all FHLBanks have been assigned a long-term rating of Aaa/Stable Outlook and AA+/Stable Outlook by Moody’s and S&P, respectively. All FHLBanks have been assigned a short-term rating of P-1 and A-1+ by Moody’s and S&P, respectively. These ratings indicate that the FHLBanks have a strong capacity to meet their

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commitments to pay principal of and interest on consolidated obligations and that the consolidated obligations are judged to be of high quality with minimal credit risk. The ratings also reflect the FHLBanks' status as GSEs.

It is possible that the credit rating of an FHLBank, another GSE or the U.S. government could be lowered further by at least one NRSRO. This could adversely affect the Bank's costs of doing business as described above. In addition, further downgrades could negatively impact the Bank's reputation and may result in heightened scrutiny by the regulator.

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

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

The Bank's business is dependent upon its ability to effectively exchange and process information using its computer information systems. The Bank's products and services require a complex and sophisticated computing environment, which includes purchased and custom-developed software. Maintaining the effectiveness and efficiency of the Bank's operations is dependent upon the continued timely implementation of technology solutions and systems, which may require ongoing capital expenditures, as well as the ability to sustain ongoing operations during technology solution implementations or upgrades. As interest rates continue to be at historic lows, there is the potential for negative interest rates. If that occurs, certain automated processes in the Bank may have to be completed manually which may increase operational risk. If the Bank were unable to sustain its technological capabilities, it may not be able to remain competitive, and its business, financial condition and profitability may be significantly compromised.

The Bank's dependence on computer systems and technologies to engage in business transactions and to communicate with its stakeholders has increased the Bank's exposure to cyber-security risks and cyber incidents. For example, the Bank provides on-line banking transactional capability to enable its members to execute borrowing and other transactions with the Bank. Although the Bank has security measures in place and devotes significant resources to secure the Bank's computer systems and networks, it might not be able to anticipate or implement effective preventive measures against all security breaches. To date, the Bank has not experienced a successful cyber-security incident related to malicious code, unauthorized access or other various cyber-attack vectors that affected Bank systems or operations in any material manner. The Bank’s technology control environment, along with security policies and standards, incident response procedures, security controls testing and dedicated information security resources, have protected the Bank against cyber-security attacks. If a successful penetration were to occur, it might result in unauthorized access to digital systems for purposes of misappropriating assets or sensitive information (including confidential information of the Bank, members, counterparties or mortgage loan borrowers), corrupt data or cause operational disruption. This may result in financial loss or a violation of privacy or other laws. The Bank could incur substantial costs and suffer other negative consequences as a result, including but not limited to remediation costs, increased security costs, litigation, penalties, and reputational damage.

In addition to internal computer systems, the Bank relies on third party vendors and service providers for many of its communications and information systems needs. Any failure or interruption of these systems, or any disruption of service, could result in failures or interruptions in the Bank's ability to conduct and manage its business effectively, including, and without limitation, its hedging, advances and wire activities. While the Bank has implemented a Business Continuity Plan, there is no assurance that such failure or interruptions will not occur or, if they do occur, that they will be adequately addressed by the Bank or the third parties on which the Bank relies. Any failure or interruption could significantly harm the Bank's customer relations and business operations, which could negatively affect its financial condition, profitability and cash flows. Additionally, any breach of sensitive Bank data stored at a third party could result in financial loss, damage to the Bank’s reputation, litigation, potential legal or regulatory actions and penalties, increased regulatory scrutiny and increased expense in terms of incident response costs and damages. While the Bank does assess the adequacy of security controls for its significant third parties, there is no assurance that such a breach will not occur.


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Regulatory changes are resulting in necessary updates to the Bank's current computer information systems to support the requirements. Given the timing of these requirements, changes to the Bank's existing infrastructure may not be fully implemented and the Bank may need to implement work-arounds, at least in the short term. Recent legislative and regulatory proposals regarding enhanced cybersecurity standards and requirements may result in increased costs to the Bank as well as additional work-arounds until the Bank fully implements technology necessary to meet these additional requirements.

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

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

The Bank's ability to anticipate changes regarding the direction and speed of interest rate changes, or to hedge the related exposures, significantly affects the success of the asset and liability management activities and the level of net interest income. The Bank uses derivative instruments to reduce interest rate risk. The Bank has strategies which reduce the amount of one-sided fair value adjustments and the resulting impact to the Bank's income. However, market movements and volatility affecting the valuation of instruments in hedging relationships can cause income volatility in the form of hedge ineffectiveness. Should the use of derivatives be limited, with that activity being replaced with a higher volume of debt funding, the Bank may still experience income volatility driven by the market and interest rate sensitivities.

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

With respect to the Bank’s MBS portfolio, increases in interest rates may slow prepayments and extend mortgage cash flows. If the debt funding the mortgage assets matures, it could be re-issued at a higher rate and decrease the Bank's net interest income.

Decreases in interest rates may cause an increase in mortgage prepayments and may result in increased premium amortization expense and substandard performance in the Bank's mortgage portfolio as the Bank experiences a return of principal that it must re-invest in a lower rate environment, adversely affecting net interest income over time, if associated debt remains outstanding (i.e., debt overhang).

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

The Bank relies on both internally and externally developed models to manage market and other risks, to make business decisions and for financial accounting and reporting purposes. The Bank's business could be adversely affected if these models fail to produce reliable and useful results.

The Bank makes significant use of business and financial models for making business decisions and managing risk. For example, the Bank uses models to measure and monitor exposures to interest rate and other market risks and credit risk, including prepayment risk. A credit scoring model is also used in part as a basis for credit decisions. The Bank also uses models in determining the fair value of certain financial instruments. The information provided by these models is also used in making business decisions relating to strategies, initiatives, transactions and products and in financial reporting.

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Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. The risk metrics, valuations, OTTI and loan loss reserve estimations produced by the Bank's models may be different from actual results, which could adversely affect the Bank's business results, cash flows, fair value of net assets, business prospects and future earnings. Outdated information or inaccurate internal scoring could result in poor credit decisions. Changes in any models or in any of the assumptions, judgments or estimates used in the models may cause the results generated by the model to be materially different. Changes to the Bank’s model inputs could occur due to changes in market participants’ valuation practices.

If the models are not reliable or the Bank does not use them appropriately, the Bank could make poor business decisions, including asset and liability management decisions, or other decisions, which could result in an adverse financial impact. Further, any strategies that the Bank employs to attempt to manage the risks associated with the use of models may not be effective. See Quantitative Disclosures Regarding Market Risk - The Bank's Market Risk Model discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K for more information.

The Bank invests in MBS and is subject to the risk of credit deterioration. The Bank is also subject to the risk that MBS servicers may fail to perform their obligations to service mortgage loans as collateral for MBS. These risks have adversely impacted the Bank's results of operations and could impact the Bank’s capital position.

The Bank currently invests in Agency and other U.S. obligation MBS, which support the Bank’s mission. Prior to 2008, the Bank also had invested in private label MBS, which exposed the Bank to a higher level of credit risk relative to the other investments within the Bank’s portfolio, and resulted in credit-related OTTI losses over the last several years. However, this portion of the Bank’s portfolio has continued to run off, with no new investments purchased since 2007; minimal credit-related OTTI losses were recognized in 2015. Given the profile of the current portfolio, the Bank is subject to less credit risk.

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

MBS servicers have a significant role in servicing the mortgage loans that serve as collateral for the Bank's MBS portfolio, including playing an active role in loss mitigation efforts and making servicer advances. The Bank's credit risk exposure to the servicer counterparties includes the risk that they will not perform their obligation to service these mortgage loans, which could adversely affect the Bank's financial condition or results of operations.

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

The Bank participates in the MPF Program with the FHLBank of Chicago as MPF provider. Net mortgage loans held for portfolio accounted for 3.2% of the Bank's total assets as of December 31, 2015 and approximately 17.3% of the Bank's total interest income in 2015. In contrast to the Bank's traditional member advance business, the MPF Program is highly subject to competitive pressures, more susceptible to loan losses, and also carries more interest rate risk, prepayment risk and operational complexity. The residential mortgage loan origination business historically has been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. General changes in market conditions could have a negative effect on the mortgage loan market. These would include, but are not limited to: rising interest rates slowing mortgage loan originations; an economic downturn creating increased defaults and lowered housing prices; innovative products that do not currently meet the criteria of the MPF Program; and new government programs or mandates. Any of these changes could have a negative impact on the profitability of the MPF Program. The Finance Agency made a series of changes to the Home Affordable Refinance Program (HARP) in an effort to assist more eligible borrowers who can benefit from refinancing of their home mortgage and extended the program through December 31, 2016. Other agencies have also implemented programs over the last few years aimed at preventing foreclosure. The Bank offers a loan modification program for its MPF Program loans. To date, the Bank has not experienced any significant impact on its portfolio levels from the HARP program, the Bank's MPF loan modification program or the existing foreclosure prevention programs. However, program execution and related changes, as well as any new programs at either the federal or state level, may change that experience.


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

The MPF loan portfolio is analyzed for risk of loss due to credit factors through the allowance for loan losses process. If delinquency and loss rates on MPF loans increase, or there are additional declines in residential real estate values, the Bank will likely experience increases in the allowance for loan losses on its MPF loan portfolio.

As a part of the MPF Program, mortgage loans with an LTV ratio of 80% or greater at origination are required to have Primary Mortgage Insurance (PMI) to provide a limited amount of credit protection to the Bank. PMI companies experienced significant credit deterioration due to the mortgage crisis. If PMI companies are unable to pay claims at the contractual rate, additional loan losses could occur.

For the MPF Plus product Master Commitments, Supplemental Mortgage Insurance (SMI) coverage was typically available for PFIs to purchase. Due to a lack of insurers writing new SMI policies, the MPF Plus product is not currently being offered to members and the Bank has not purchased loans under MPF Plus commitments since July 2006. For any legacy MPF Plus SMI exposure with ratings issues, the Bank required the affected PFIs to secure the SMI exposure.

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

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

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

The Bank's ability to operate its business, meet its obligations and generate net interest income depends primarily on the ability to issue large amounts of debt frequently, with a variety of maturities and call features and at attractive rates. The Bank actively manages its liquidity position to maintain stable, reliable, and cost-effective sources of funds, while taking into account market conditions, member credit demand for short-and long-term advances, investment opportunities and the maturity profile of the Bank's assets and liabilities. The Bank recognizes that managing liquidity is critical to achieving its statutory mission of providing low-cost funding to its members. In managing liquidity risk, the Bank is required to maintain a level of liquidity in accordance with policies established by management and the Board and Finance Agency guidance. See the Liquidity and Funding Risk discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K for additional information on the Finance Agency guidance.

The ability to obtain funds through the sale of consolidated obligations depends in part on current conditions in the capital markets and the short-term capital markets in particular. Accordingly, the Bank may not be able to obtain funding on acceptable terms, if at all. If the Bank cannot access funding when needed, its ability to support and continue its operations, including providing term funding to members, would be adversely affected, which would negatively affect its financial condition and results of operations.

Regulations related to capital and liquidity have impacted how dealers are managing their balance sheets. The capacity for FHLBank debt is lower, as dealers have directed their focus on those assets that provide a higher return on equity. The

22


FHLBanks are engaged in discussions with dealers to identify issues and provide strategies that could provide benefits to the business needs of those entities and maintain the level of FHLBank debt on the dealers’ balance sheets.

The U.S. Treasury has the authority to prescribe the form, denomination, maturity, interest rate and conditions of consolidated obligations issued by the FHLBanks. The U.S. Treasury can, at any time, impose either limits or changes in the manner in which the FHLBanks may access the capital markets. For example, the U.S. Treasury could require the Bank to hold additional liquidity, which could adversely impact the type, amount and profitability of various advance products the Bank could make available to its members.

The Administration and Congress may continue deliberating GSE reform. The outcome of those deliberations and resulting legislation, if any, could have a material impact on the issuance of and costs associated with FHLBank debt.

Ineffective or inadequate Bank governance, risk identification and management may negatively impact the Bank's results of operations and financial condition.

The Bank is subject to the risk of ineffective or inadequate leadership or governance. Management could: make poor business decisions, engage in poor succession planning, or make decisions based on inaccurate or incomplete data; adopt ill-formed policy without understanding the implications to the Bank and its members; fail to identify and properly manage and mitigate risks to the Bank, all of which could negatively impact the Bank's results of operations and financial condition. The Bank develops and monitors a periodic strategic plan, an annual operating plan and an ongoing financial forecast to generate the proper level of information and background with which to manage the Bank effectively and identify risks and concerns to be monitored. Improper alignment of the Bank's strategic plan and operating plan with the Bank's risk profile and appetite may result in inconsistent management or governance.

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

The Bank faces credit risk on advances, mortgage loans, investment securities, derivatives, certificates of deposit, and other financial instruments. The Bank protects against credit risk on advances through credit underwriting standards and collateralization. In addition, under certain circumstances the Bank has the right to obtain additional or substitute collateral during the life of an advance to protect its security interest. The Act defines eligible collateral as certain investment securities, residential mortgage loans, deposits with the Bank, and other real estate related assets. All capital stock of the Bank owned by the borrower is also available as supplemental collateral. In addition, members that qualify as CFIs may pledge secured small-business, small-farm, and small-agribusiness loans as collateral for advances. The Bank is also allowed to make advances to nonmember housing associates and requires them to deliver adequate collateral.

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

If member institution failures and mergers or consolidations occur affecting the Bank's district, particularly out-of-district acquirers, this activity may reduce the number of current and potential members in the Bank's district. The resulting loss of business could negatively impact the Bank's financial condition and results of operations. Additionally, if a Bank member fails and the FDIC or the member (or another applicable entity) does not either (1) promptly repay all of the failed institution's obligations to the Bank or (2) assume the outstanding advances, the Bank may be required to liquidate the collateral pledged by the failed institution to satisfy its obligations to the Bank. If that were the case, the proceeds realized from the liquidation of pledged collateral may not be sufficient to fully satisfy the amount of the failed institution's obligations and the operational cost of liquidating the collateral. The Bank did not experience any member failure in 2015.

The Bank has expanded its number of insurance company members. There are several unique risks the Bank may be exposed to regarding members in the insurance industry. To the extent the Bank determines that the risk it faces in regard to an insurance company or insurance company members in a specific state requires additional mitigation, the Bank takes steps to

23


mitigate this risk. These steps may include limits on eligible collateral and establishing over-collateralization levels to address risk of collateral volatility.

In 2014, the Bank approved its first Community Development Financial Institution (CDFI) member and in 2015 added a second. CDFIs are not generally subject to a banking or insurance primary regulatory scheme. The Bank’s lending practices for CDFIs recognize risk differences such as the potential application of the federal bankruptcy code for the insolvency of a CDFI. The Bank takes steps to mitigate this risk, which may include requiring specific over-collateralization levels or limits on eligible collateral. For all insurance company and CDFI members, the Bank requires delivery of collateral pledged to secure the Bank’s advances and other credit products provided to such members.

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

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

If the number of high quality counterparties available for uncleared hedging transactions decreases, the Bank's ability to enter into hedging transactions may be constrained. As a result, the Bank may not be able to effectively manage interest rate risk, which could negatively affect its results of operations and financial condition. In addition, the Bank may be limited in the number of counterparties available with which it can conduct business with respect to money market investments, liquidity positions and other business transactions. It may also affect the Bank's credit risk position and the advance products the Bank can offer to members. The Bank has limited its unsecured investment activity to overnight maturities only with European counterparties in AAA- or AA-rated Eurozone countries; term investment exposure is limited to counterparties in the U.S., Canada and Australia. The Bank also requires all derivatives to be collateralized.

For additional discussion regarding the Bank's credit and counterparty risk, see the Credit and Counterparty Risk discussion in Risk Management in Item 7. Management's Discussion and Analysis in this Form 10-K.

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

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

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

24


in changes in the Bank's member lending, investment or MPF Program purchase activities and changes in permissible business activities, as well as restrictions on dividend payments and capital stock redemptions and repurchases.

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

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

The Finance Agency now requires the FHLBanks to conduct annual stress tests, which are used to evaluate each FHLBank's capital adequacy under adverse economic and financial conditions. Each FHLBank is required to provide an annual report on the results of the stress tests to the Finance Agency and Federal Reserve. The Bank first reported stress test results in April 2014 and the latest results were reported April 2015. The regulator moved the next stress test reporting to August 2016. See the Risk Governance discussion in Item 7. Management's Discussion and Analysis in this Form 10-K for additional details regarding the current year stress test results.

The Bank's accounting policies and methods are fundamental to how the Bank reports its market value of equity, financial condition and results of operations, and they require management to make estimates about matters that are inherently uncertain.

The Bank has identified several accounting policies as being critical to the presentation of its financial statements because they require management to make particularly subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be recorded under different conditions or using different assumptions. These critical accounting policies relate to the Bank's determination of fair values, accounting for derivatives, and accounting for OTTI for investment securities, among others. Additional information is included in the Critical Accounting Polices and Estimates section in Item 7. Management's Discussion and Analysis in this Form 10-K.

Bank management exercises significant judgment in assigning fair value to all of its financial assets and liabilities. These fair values are reported in Note 19 - Estimated Fair Values to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. The fair values assigned to financial assets and liabilities have a considerable impact on the Bank's market value of equity. If market values are inaccurate, decisions regarding management of the balance sheet may be negatively affected. Management monitors market conditions and takes what it deems to be appropriate action to preserve the value of equity and earnings. The ability to appropriately manage the market value of equity is dependent on reliable information regarding the market conditions in which the Bank is operating. For additional discussion regarding market value of equity and OTTI, see Risk Management in Item 7. Management's Discussion and Analysis and Note 7 - OTTI to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data, in this Form 10-K.

The Bank may be adversely affected by litigation.

From time to time, the Bank's customers or counterparties may make claims or take legal action relating to performance of contractual responsibilities. The Bank may also face other legal claims, regulatory or governmental inquiries or investigations. In any such claims or actions, demands for substantial monetary damages may be asserted against the Bank and may result in financial liability or an adverse effect on the Bank's reputation. In regulatory enforcement matters, claims for disgorgement, the imposition of penalties and the imposition of other remedial sanctions are possible.


25


The Bank's controls and procedures may fail or be circumvented, risk management policies and procedures may be inadequate and circumstances beyond the Bank's control could cause unexpected operating losses. Failures of critical vendors and other third parties could disrupt the Bank’s ability to conduct business. In addition, the loss of key employees may have an adverse effect on the Bank's business and operations.

The Bank may fail to identify and manage risks related to a variety of aspects of its business, including, but not limited to, operational risk, interest rate risk, legal and compliance risk, liquidity risk, market risk and credit risk. The Bank has adopted many controls, procedures, policies and systems to monitor and manage risk. Management cannot provide complete assurance that those controls, procedures, policies and systems are adequate to identify and manage the risks inherent in the Bank's various businesses. In addition, these businesses are continuously evolving. The Bank may fail to fully understand the implications of changes in the businesses and fail to enhance the risk governance framework in a timely or adequate fashion to address those changes. If the risk governance framework is ineffective, the Bank could incur losses.

Operating risk is the risk of unexpected operating losses attributable to human error; systems failures; fraud; noncompliance with laws, regulations and the Bank's internal Code of Conduct; unenforceability of contracts; or inadequate internal controls and procedures. Although management has systems and procedures in place to address each of these risks, some operational risks are beyond the Bank's control, and the failure of other parties to adequately address their operational risks could adversely affect the Bank as well.

The Bank relies on vendors and other third parties to perform certain critical services. A failure in, or interruption to, one or more of those services provided could constrain, disrupt or otherwise negatively affect the Bank’s ongoing operations. Additionally, the use of vendors and other third parties could expose the Bank to the risk of a loss of intellectual property or
confidential information or other harm.

Certain employees are especially important to the continued successful operation of the Bank. Failure to attract or retain such key individuals may adversely affect the Bank's business operations. It may result in increased operating expenses (i.e., consultant expense to address new hire) and operational risks as responsibilities are transitioned between employees. The loss of a key employee may also result in incremental regulatory scrutiny of the quality of the Bank's overall corporate governance.

Item 1B: Unresolved Staff Comments

None

Item 2: Properties

The Bank leases 96,240 square feet of office space at 601 Grant Street, Pittsburgh, Pennsylvania, 15219 and additional office space at the following locations: (1) 1301 Pennsylvania Avenue, Washington, DC 20004; (2) 2300 Computer Avenue, Willow Grove, Pennsylvania, 19090; (3) 435 N. DuPont Highway, Dover, Delaware 19904; (4) 1286 Suncrest Town Center, Morgantown, WV 26505; and (5) 580 and 768 Vista Park Drive, Pittsburgh, Pennsylvania 15205. The Washington, DC office space is shared with the FHLBanks of Atlanta and Des Moines. Essentially all of the Bank’s operations are housed at the Bank’s headquarters at the Grant Street location.

Item 3: Legal Proceedings

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

Item 4: Mine Safety Disclosures

Not applicable.


26



PART II – OTHER INFORMATION

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

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

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

The members’ minimum stock purchase requirement is subject to change from time to time at the discretion of the Board of Directors of the Bank in accordance with the Capital Plan. Par value of each share of capital stock is $100. As of December 31, 2015, the total mandatorily redeemable capital stock reflected the balance for three institutions, two of which were merged out of district and considered to be nonmembers. One other institution has notified the Bank of its intention to voluntary redeem its capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.

The total number of shares of capital stock outstanding as of December 31, 2015 was 35,457,007 of which members held 35,397,178 shares and nonmembers held 59,829 shares.

The Bank’s cash dividends declared in each quarter are reflected in the table below.
(in millions)
2015
2014
First quarter
$99.7
$16.8
Second quarter
34.7
28.7
Third quarter
38.1
28.0
Fourth quarter
40.3
30.4

See Note 16 - Capital to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for further information regarding statutory and regulatory restrictions on capital stock redemption.


27



Item 6: Selected Financial Data

The following should be read in conjunction with the financial statements and Item 7. Management’s Discussion and Analysis, each included in this Form 10-K. The Condensed Statements of Income data for 2015, 2014 and 2013, and the Condensed Statements of Condition data as of December 31, 2015 and 2014 are derived from the financial statements included in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. The Statements of Income data for 2012 and 2011 and the Condensed Statements of Condition data as of December 31, 2013 and 2012 are derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2013 Form 10-K. The Condensed Statements of Condition data as of December 31, 2011 is derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2012 Form 10-K.

Condensed Statements of Income
 
 
Year Ended December 31,
(in millions, except per share data)
2015
2014
2013
2012
2011
Net interest income
$
317.8

$
283.1

$
195.1

$
209.8

$
154.4

Provision (benefit) for credit losses
(0.2
)
(4.1
)
(1.8
)
0.4

10.0

Other noninterest income (loss):
 
 
 
 
 
  Net OTTI losses, credit portion (1)
(1.8
)

(0.4
)
(11.4
)
(45.1
)
  Net gains (losses) on trading securities
1.6

22.4

(4.6
)
0.4

(0.1
)
  Net realized gains from sale of
    available-for-sale (AFS) securities




7.3

  Net gains (losses) on derivatives and
    hedging activities
3.4

(37.5
)
30.2

10.7

(5.7
)
  Net gains (losses) on extinguishment of debt


9.6



  Gains on litigation settlements, net
15.3

70.9

1.5



  Other, net
26.0

19.8

11.2

7.4

10.6

Total other noninterest income (loss)
44.5

75.6

47.5

7.1

(33.0
)
Other expense
77.5

78.6

80.0

72.3

65.0

Income before assessments
285.0

284.2

164.4

144.2

46.4

AHP Assessment (2)
28.5

28.4

16.6

14.5

8.4

Net income
$
256.5

$
255.8

$
147.8

$
129.7

$
38.0

Earnings per share (3)
$
8.04

$
8.89

$
5.40

$
4.28

$
1.05

Dividends (4)
$
212.8

$
103.9

$
21.4

$
5.8

$

Dividend payout ratio(5)
82.96
%
40.64
%
14.49
%
4.30
%
%
Return on average equity
6.16
%
6.83
%
4.32
%
3.75
%
0.98
%
Return on average assets
0.29
%
0.36
%
0.24
%
0.23
%
0.07
%
Net interest margin (6)
0.36
%
0.40
%
0.32
%
0.37
%
0.30
%
Regulatory capital ratio (7)
4.60
%
4.53
%
5.16
%
5.89
%
7.44
%
GAAP capital ratio(8)
4.67
%
4.67
%
5.22
%
5.31
%
6.47
%
Total average equity to average assets
4.66
%
5.22
%
5.60
%
6.02
%
7.53
%
Notes:
(1) Represents the credit-related portion of OTTI losses on private label MBS portfolio.
(2) Includes Resolution Funding Corporation (REFCORP) assessments through second quarter 2011. On August 5, 2011, the FHLBanks fully satisfied the REFCORP obligation; as a result, the Bank did not record any REFCORP assessments after the second quarter of 2011. Although the Bank is not subject to federal or state income taxes, by regulation, the Bank is required to allocate 10% of its income before assessments to fund AHP. AHP assessments are included for all periods presented.
(3) Calculated based on net income and weighted average shares outstanding.
(4) The Bank temporarily suspended dividend payments effective December 2008 and resumed paying dividends in 2012.
(5) Represents dividends paid as a percentage of net income for the respective periods presented.
(6) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(7) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(8) GAAP capital ratio is sum of capital stock, retained earnings and accumulated other comprehensive income (AOCI) as a percentage of total assets at period-end.


28



Condensed Statements of Condition
 
December 31,
(in millions)
2015
2014
2013
2012
2011
Cash and due from banks
$
2,377.0

$
2,451.1

$
3,121.3

$
1,350.6

$
634.3

Investments(1)
16,144.0

16,528.4

13,875.2

19,057.2

16,639.5

Advances
74,504.8

63,408.4

50,247.5

40,497.8

30,604.8

Mortgage loans held for portfolio, net(2)
3,086.9

3,123.3

3,224.1

3,532.5

3,883.1

Total assets
96,336.3

85,677.1

70,670.9

64,616.3

51,994.3

Consolidated obligations, net:
 
 
 
 
 
  Discount notes
42,276.8

37,058.1

28,236.3

24,148.5

10,921.5

  Bonds
48,606.0

43,714.5

37,698.3

35,135.6

35,613.0

Total consolidated obligations, net(3)
90,882.8

80,772.6

65,934.6

59,284.1

46,534.5

Deposits
686.0

641.2

694.4

999.9

1,099.7

Mandatorily redeemable capital stock
6.0

0.6


431.6

45.7

AHP payable
70.9

56.0

36.3

24.5

13.6

Total liabilities
91,834.7

81,674.1

66,978.7

61,187.3

48,331.4

Capital stock - putable
3,539.7

3,041.0

2,962.2

2,816.0

3,389.9

Unrestricted retained earnings
718.7

726.3

625.6

528.8

430.8

Restricted retained earnings
162.5

111.2

60.1

30.5

4.5

AOCI
80.7

124.5

44.3

53.7

(162.3
)
Total capital
4,501.6

4,003.0

3,692.2

3,429.0

3,662.9

Notes:
(1) Includes trading, AFS and Held-to-maturity (HTM) investment securities, securities purchased under agreements to resell, Federal funds sold, and interest-bearing deposits.
(2) Net of allowance for loan losses of $5.7 million, $7.3 million, $11.4 million, $14.2 million and $14.3 million at December 31, 2015 through 2011, respectively.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $905.2 billion, $847.2 billion, $766.8 billion, $687.9 billion and $691.9 billion at December 31, 2015 through 2011, respectively.




29


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

Forward-Looking Information

Statements contained in this Form 10-K, including statements describing the objectives, projections, estimates, or predictions of the future of the Bank, may be “forward-looking statements.” These statements may use forward-looking terms, such as “anticipates,” “believes,” “could,” “estimates,” “may,” “should,” “will,” or their negatives or other variations on these terms. The Bank cautions that, by their nature, forward-looking statements involve risk or uncertainty and that actual results could differ materially from those expressed or implied in these forward-looking statements or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: economic and market conditions, including, but not limited to, real estate, credit and mortgage markets; volatility of market prices, rates, and indices related to financial instruments; political, legislative, regulatory, litigation, or judicial events or actions; changes in assumptions used in the quarterly OTTI process; risks related to mortgage-backed securities; changes in the assumptions used in the allowance for credit losses; changes in the Bank’s capital structure; changes in the Bank’s capital requirements; membership changes; changes in the demand by Bank members for Bank advances; an increase in advances’ prepayments; competitive forces, including the availability of other sources of funding for Bank members; changes in investor demand for consolidated obligations and/or the terms of interest rate exchange agreements and similar agreements; changes in the FHLBank System’s debt rating or the Bank’s rating; the ability of the Bank to introduce new products and services to meet market demand and to manage successfully the risks associated with new products and services; the ability of each of the other FHLBanks to repay the principal and interest on consolidated obligations for which it is the primary obligor and with respect to which the Bank has joint and several liability; applicable Bank policy requirements for retained earnings and the ratio of the market value of equity to par value of capital stock; the Bank’s ability to maintain adequate capital levels (including meeting applicable regulatory capital requirements); business and capital plan adjustments and amendments; technology and cyber-security risks; and timing and volume of market activity.

This Management’s Discussion and Analysis should be read in conjunction with the Bank’s audited financial statements in Item 8. Financial Statements and Supplementary Data and footnotes and Item 1A. Risk Factors included herein.

Executive Summary

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

The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 1-month or 3-month LIBOR is received (advances) or paid (debt). Short-term interest rates also directly affect the Bank's earnings on invested capital. Finally, the Bank's mortgage-related assets make it sensitive to changes in mortgage rates. The Bank earns relatively narrow spreads between yields on assets (particularly advances, its largest asset) and the rates paid on corresponding liabilities. During 2015, funding spreads (i.e., the cost of FHLBank debt relative to LIBOR) deteriorated compared to 2014 as a result of swap spreads moving closer to U.S. Treasury rates.

The Bank's earnings are affected not only by rising or falling interest rates but also by the particular path and volatility of changes in market interest rates and the prevailing shape of the yield curve. The flattening of the yield curve tends to compress the Bank's net interest margin, while steepening of the curve offers better opportunities to purchase assets with wider net interest spreads. The performance of the Bank's mortgage asset portfolios is particularly affected by shifts in the 10-year maturity range of the yield curve, which is the point that heavily influences mortgage rates and potential refinancings. Yield curve shape can also influence the pace at which borrowers refinance or prepay their existing loans, as borrowers may select shorter-duration mortgage products. The Bank continues to adjust as necessary its prepayment estimates in its models to ensure they reflect actual borrower activity. In addition, the Bank’s higher yielding private label mortgage backed securities (MBS) portfolio continues its expected runoff. As higher coupon mortgage loans prepay and mature along with higher yielding private label MBS, the return of principal cannot be invested in assets with a comparable yield, resulting in a decline in the aggregate yield on the remaining loan portfolio and investments and a possible decrease in the net interest margin. However, the Bank has accretion of interest income on certain private label residential MBS as a result of significant projected increases in cash flows. During 2015, this accretion resulted in additional interest income of $27.4 million compared to $23.6 million in 2014.


30


Results of Operations. The Bank’s net income for 2015, totaled $256.5 million, slightly higher than $255.8 million in 2014. In the year-over-year comparison, the primary earnings factors were higher net gains on derivatives and hedging activities and higher net interest income, offset by lower gains on the resolution of litigation settlements (net of legal fees and expenses) and lower net gains on trading securities. Net interest income was $317.8 million for 2015, an increase of $34.7 million compared to $283.1 million in 2014, primarily due to higher interest income on advances partially offset by higher interest expense on consolidated obligations.

For the fourth quarter of 2015, net income was $54.4 million, compared to $64.3 million in the fourth quarter of 2014. This $9.9 million decrease was primarily driven by net losses on trading securities and lower net interest income, partially offset by net gains on derivatives and hedging activities. In addition, there were no gains from the resolution of litigation settlements (net of legal fees and expenses) in the fourth quarter of 2015 compared to gains of $20.2 million in the fourth quarter 2014. Net interest income was $78.1 million for the fourth quarter of 2015, compared to $82.7 million in the fourth quarter of 2014, a decrease of $4.6 million. The decline in net interest income reflected higher interest expense of $24.8 million due to consolidated obligations, which more than offset higher interest income of $20.2 million, primarily due to advances.

The net interest margin for 2015 was 36 basis points compared to 40 basis points in 2014. The four basis point decrease was due primarily to lower advance prepayment fees and a large increase in lower-spread assets, mainly advances.

Financial Condition. Advances. Advances totaled $74.5 billion at December 31, 2015, an increase of $11.1 billion compared to $63.4 billion at December 31, 2014. Advance volume growth in 2015 was driven primarily by demand from larger members; however, advance volumes increased in all member classifications. Along with an increase in the size of the advance portfolio during 2015, the term of advances also increased modestly. At December 31, 2015, approximately 55% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 53% at December 31, 2014.

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

Investments. At December 31, 2015, the Bank held $16.1 billion of total investment securities, including trading, AFS and HTM investment securities as well as securities purchased under agreements to resell, interest-bearing deposits and Federal funds sold. By comparison, at December 31, 2014, these investments totaled $16.5 billion. The decrease of $0.4 billion was primarily driven by decreases in Federal funds sold due to market-driven demand.

Consolidated Obligations. The Bank's consolidated obligations totaled $90.9 billion at December 31, 2015, an increase of $10.1 billion from December 31, 2014. This growth in consolidated obligations was due to increases in both discount notes and bonds, primarily to support advance activity. At December 31, 2015, bonds represented 53% of the Bank's consolidated obligations, compared with 54% at December 31, 2014. Discount notes represented 47% of the Bank's consolidated obligations at December 31, 2015 compared with 46% at year-end 2014.

Capital Position and Regulatory Requirements. Total retained earnings at December 31, 2015 were $881.2 million, up from $837.5 million at year-end 2014 reflecting the Bank's net income for 2015 which was partially offset by dividends paid. AOCI was $80.7 million at December 31, 2015 a decrease of $43.8 million from December 31, 2014. This decrease was primarily due to the changes in the fair values of securities within the AFS portfolio.

In February 2015, the Bank paid a quarterly dividend equal to an annual yield of 4.0%. In addition, the Bank paid a special dividend of 2.5%. The special dividend was based on average member capital stock for the full year of 2014. In April, July, and October 2015, the Bank paid quarterly dividends equal to an annual yield of 5.0% on activity stock and 3.0% on membership stock. These dividends were based on stockholders' average balances for the first quarter (April dividend), second quarter (July dividend), and third quarter (October dividend). In February 2016, the Bank paid quarterly dividends of 5.0% annualized on activity stock and 3.0% annualized on membership stock. The dividends were based on average member capital for the fourth quarter of 2015.

The Bank met all of its capital requirements as of December 31, 2015, and in the Finance Agency’s most recent determination, as of September 30, 2015, the Bank was deemed "adequately capitalized."


31


2016 Outlook

Generally, the Bank’s members have experienced a heightened focus on liquidity and capital management by their regulators and other important market constituencies. This has resulted in certain members utilizing additional advance products at the Bank. For 2016, the Bank anticipates that certain members will continue to utilize advances to meet liquidity needs. If the economy continues to improve loan growth opportunities and strong competition for retail deposits should also be beneficial for advance demand at regional banks and CFIs.
The Bank has been, and will continue to be, mission driven. Advances are central to the Bank’s mission and, along with other key activities, are crucial to the Bank continuing to meet the needs of its membership and communities.
Earnings Performance

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

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income for 2015 was $256.5 million, slightly higher than 2014’s $255.8 million. In a year-over-year comparison, the primary earnings factors were higher net gains on derivatives and hedging activities and higher net interest income, offset by lower gains on the resolution of litigation settlements (net of legal fees and expenses) and lower net gains on trading securities. Net gains on derivatives and hedging activities were $3.4 million in 2015, an increase of $40.9 million compared to a net loss of $37.5 million in 2014. Net interest income was $317.8 million for 2015, an increase of $34.7 million compared to $283.1 million in 2014. Higher net interest income was primarily due to higher interest income on advances partially offset by higher interest expense on consolidated obligations. In 2015, the Bank recorded $15.3 million related to the resolution of litigation (net of legal fees and expenses) related to matters arising from investments the Bank made in private label MBS, a decrease of $55.6 million compared to $70.9 million in 2014. Net gains on trading securities were $1.6 million for 2015, a decrease of $20.8 million compared to a net gain of $22.4 million in 2014. The Bank’s return on average equity for 2015 was 6.16% compared to 6.83% for the prior year period.

2014 vs. 2013. The Bank recorded net income of $255.8 million in 2014 compared to $147.8 million in 2013, an increase of $108.0 million. The increase was primarily due to higher net interest income, gains on litigation settlements (net of legal fees and expenses), and net gains on trading securities, partially offset by net losses on derivatives and hedging activities. The Bank’s return on average equity for 2014 was 6.83%, compared to 4.32% for 2013.

32


Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications and the net interest margin for 2015, 2014 and 2013.
Average Balances and Interest Yields/Rates Paid
 
2015
2014
2013


(dollars in millions)

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

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

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell(1)
$
7,486.3

$
8.2

0.11
$
5,734.2

$
3.9

0.07
$
5,815.3

$
5.2

0.09
Interest-bearing deposits(2)
308.8

0.4

0.11
443.3

0.4

0.08
458.5

0.5

0.10
Investment securities(3)
11,056.8

217.0

1.96
11,208.7

219.5

1.96
11,493.9

219.1

1.91
Advances(4) 
65,739.9

349.5

0.53
50,376.8

272.9

0.54
39,353.1

230.0

0.58
Mortgage loans held for portfolio(5)
3,079.3

120.5

3.91
3,160.1

129.4

4.09
3,400.1

141.7

4.17
Total interest-earning assets
87,671.1

695.6

0.79
70,923.1

626.1

0.88
60,520.9

596.5

0.99
Allowance for credit losses
(8.2
)
 
 
(10.4
)
 
 
(15.1
)
 
 
Other assets(6)
1,569.4

 
 
850.7

 
 
650.4

 
 
Total assets
$
89,232.3

 
 
$
71,763.4

 
 
$
61,156.2

 
 
Liabilities and capital:
 
 
 
 
 
 
 
 
 
Deposits (2)
$
675.9

$
0.3

0.04
$
700.5

$
0.2

0.03
$
813.8

$
0.3

0.04
Consolidated obligation discount notes
35,181.0

54.1

0.15
27,793.8

24.2

0.09
18,733.5

18.5

0.10
Consolidated obligation bonds(7)
48,376.4

323.2

0.67
38,618.7

318.4

0.82
36,999.8

381.3

1.03
Other borrowings
3.5

0.2

4.76
2.9

0.2

6.73
198.9

1.3

0.67
Total interest-bearing liabilities
84,236.8

377.8

0.45
67,115.9

343.0

0.51
56,746.0

401.4

0.71
Other liabilities
834.2

 
 
902.2

 
 
983.3

 
 
Total capital
4,161.3

 
 
3,745.3

 
 
3,426.9

 
 
Total liabilities and capital
$
89,232.3

 
 
$
71,763.4


 
$
61,156.2

 
 
Net interest spread
 
 
0.34
 
 
0.37
 
 
0.28
Impact of noninterest-bearing funds
 
 
0.02
 
 
0.03
 
 
0.04
Net interest income/net interest margin
 
$
317.8

0.36
 
$
283.1

0.40
 
$
195.1

0.32
Average interest-bearing assets to interest-bearing liabilities
104.1
%
 
 
105.7
%
 
 
106.7
%
 
 
Notes:
(1) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $0.3 billion, $0.5 billion and $0.7 billion in 2015, 2014 and 2013, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $13.6 million, $(28.2) million and $53.1 million in 2015, 2014 and 2013, respectively.

Net interest income increased $34.7 million in 2015 compared to 2014 primarily due to an increase in interest income on advances partially offset by an increase in interest expense on consolidated obligations. Interest-earning assets increased 23.6% with higher demand for advances and increased purchases of Federal funds sold and securities purchased under agreement to resell partially offset by a lower amount of investments and mortgage loans. Higher interest income on advances was partially offset by lower interest income on mortgage loans held for portfolio. Interest income on advances increased as advance volume more than offset a slight decline in yield. Interest income on mortgage loans declined due to both lower volume and the run-off

33


of higher-yielding assets that have been replaced with lower-yielding assets. Interest expense increased due to an increased level of discount notes and bonds which more than offset a six basis point decline in the rate paid on interest-bearing liabilities.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between 2015, 2014 and 2013.
 
Increase (Decrease) in Interest Income/Expense Due to Changes in
Rate/Volume
 
2015 Compared to 2014
2014 Compared to 2013
(in millions)
Volume
Rate
Total
Volume
Rate
Total
Federal funds sold
$
1.5

$
2.8

$
4.3

$
(0.1
)
$
(1.2
)
$
(1.3
)
Interest-bearing deposits
(0.1
)
0.1



(0.1
)
(0.1
)
Investment securities
(3.0
)
0.5

(2.5
)
(5.5
)
5.9

0.4

Advances
81.7

(5.1
)
76.6

60.7

(17.8
)
42.9

Mortgage loans held for portfolio
(3.2
)
(5.7
)
(8.9
)
(9.9
)
(2.4
)
(12.3
)
 Total interest-earning assets
$
76.9

$
(7.4
)
$
69.5

$
45.2

$
(15.6
)
$
29.6

 
 
 
 
 
 
 
Interest-bearing deposits
$

$
0.1

$
0.1

$

$
(0.1
)
$
(0.1
)
Consolidated obligation discount notes
7.7

22.2

29.9

8.1

(2.4
)
5.7

Consolidated obligation bonds
71.7

(66.9
)
4.8

16.1

(79.0
)
(62.9
)
Other borrowings



(2.5
)
1.4

(1.1
)
 Total interest-bearing liabilities
$
79.4

$
(44.6
)
$
34.8

$
21.7

$
(80.1
)
$
(58.4
)
Total increase (decrease) in net interest income
$
(2.5
)
$
37.2

$
34.7

$
23.5

$
64.5

$
88.0


Interest income increased in 2015 compared to 2014 due to a volume increase partially offset by a rate decrease. Higher advance volume drove the interest income increase. Interest expense increased in 2015 compared to 2014 due to higher volumes partially offset by lower rates. The increase reflected higher consolidated obligation volumes partially offset by a rate decrease.

The following table presents the average par balances of the Bank's advance portfolio for 2015, 2014 and 2013. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Change 2015 vs. 2014
Change 2014 vs. 2013
Product
2015
2014
2013
%
%
Repo/Mid-Term Repo
$
20,466.2

$
17,903.4

$
12,687.7

14.3
41.1
Core (Term)
43,547.7

30,091.4

23,627.7

44.7
27.4
Convertible Select
1,462.0

1,929.0

2,351.7

(24.2)
(18.0)
Total par value
$
65,475.9

$
49,923.8

$
38,667.1

31.2
29.1
The increase in advance volume in 2015 compared to 2014 led to an increase in interest income, partially offset by a small decrease in the yield related to prepayment fees. Advance volume growth in 2015 was driven primarily by demand from larger members; however, advance volumes increased in all member classifications.

The average mortgage loans held for portfolio balance declined in 2015 due to the continued run-off of the Mortgage Partnership Finance (MPF) Plus portfolio. The Bank has not purchased loans into this portion of the portfolio since July 2006, and the run-off more than offset purchases of new loans into the MPF Original and MPF 35 portions of the portfolio. Interest income decreased as the newer loans have generally lower yields than those that are paying down.
Interest expense on the average consolidated obligations portfolio increased in 2015 compared to 2014 as average discount note and bond balances both increased. Rates paid on discount notes rose as the Federal funds target rate increase in mid-December 2015 was reflected in discount note pricing earlier in the fourth quarter of 2015. These increases were partially offset by a decline in rates paid on bonds. The rate decrease on bonds was primarily due to longer term debt that was called or matured and replaced with lower cost debt. A portion of the bond portfolio is currently swapped to 3-month LIBOR; therefore,

34


as the LIBOR rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Interest Income Derivatives Effects” discussion below.
2014 vs. 2013. Interest income increased in 2014 compared to 2013 driven by volume increases partially offset by rate decreases. The increase was primarily driven by an increase in advance volume partially offset by lower advance yields. The investment securities portfolio experienced a rate increase that was mostly offset by a volume decrease while interest income in the mortgage loans held for portfolio declined due to both volume and rate decreases. Interest expense decreased in 2014 compared to 2013 as a rate decrease more than offset a volume increase. The primary interest expense driver was a decrease in rates paid on consolidated obligation bonds. Members’ liquidity needs contributed to the increase in advance volume, while the rate decline was driven by changes in the composition of the portfolio. Mortgage loans held for portfolio decreased as the run-off of existing loans exceeded the purchase of new loans. The rate decline in consolidated obligation bonds was primarily due to longer-term debt that was called or matured and replaced with lower cost debt. Consolidated obligation balances overall increased in 2014 commensurate with the increase in interest-earning assets.

Interest Income Derivative Effects. The following tables quantify the effects of the Bank’s derivative activities on interest income and interest expense for 2015, 2014 and 2013. Derivative and hedging activities are discussed below.
2015

(dollars in millions)

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

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
65,739.9

$
349.5

0.53
$
553.0

0.84
$
(203.5
)
(0.31
)
Mortgage loans held for
 portfolio
3,079.3

120.5

3.91
124.6

4.04
(4.1
)
(0.13
)
All other interest-earning
 assets
18,851.9

225.6

1.20
244.6

1.30
(19.0
)
(0.10
)
Total interest-earning
 assets
$
87,671.1

$
695.6

0.79
$
922.2

1.05
$
(226.6
)
(0.26
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
48,376.4

$
323.2

0.67
$
551.3

1.14
$
(228.1
)
(0.47
)
All other interest-bearing
 liabilities
35,860.4

54.6

0.15
54.6

0.15


Total interest-bearing
 liabilities
$
84,236.8

$
377.8

0.45
$
605.9

0.72
$
(228.1
)
(0.27
)
Net interest income/net
 interest spread
 
$
317.8

0.34
$
316.3

0.33
$
1.5

0.01




35


2014

(dollars in millions)

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

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
50,376.8

$
272.9

0.54
$
507.5

1.01
$
(234.6
)
(0.47
)
Mortgage loans held for
 portfolio
3,160.1

129.4

4.09
132.5

4.19
(3.1
)
(0.10
)
All other interest-earning
 assets
17,386.2

223.8

1.29
235.3

1.35
(11.5
)
(0.06
)
Total interest-earning
 assets
$
70,923.1

$
626.1

0.88
$
875.3

1.23
$
(249.2
)
(0.35
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
38,618.7

$
318.4

0.82
$
577.9

1.50
$
(259.5
)
(0.68
)
All other interest-bearing
 liabilities
28,497.2

24.6

0.09
24.6

0.09


Total interest-bearing
 liabilities
$
67,115.9

$
343.0

0.51
$
602.5

0.90
$
(259.5
)
(0.39
)
Net interest income/net
 interest spread
 
$
283.1

0.37
$
272.8

0.33
$
10.3

0.04

2013

(dollars in millions)

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

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
39,353.1

$
230.0

0.58
$
494.5

1.26
$
(264.5
)
(0.68
)
Mortgage loans held for
 portfolio
3,400.1

141.7

4.17
145.5

4.28
(3.8
)
(0.11
)
All other interest-earning
 assets
17,767.7

224.8

1.27
228.0

1.28
(3.2
)
(0.01
)
Total interest-earning
 assets
$
60,520.9

$
596.5

0.99
868.0

1.44
$
(271.5
)
(0.45
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
36,999.8

$
381.3

1.03
$
631.2

1.71
$
(249.9
)
(0.68
)
All other interest-bearing
 liabilities
19,746.2

20.1

0.10
20.1

0.10


Total interest-bearing
 liabilities
56,746.0

401.4

0.71
651.3

1.15
(249.9
)
(0.44
)
Net interest income/net
 interest spread
 
195.1

0.28
216.7

0.29
$
(21.6
)
(0.01
)
Note:
(1) Impact of Derivatives includes net interest settlements, amortization of basis adjustments resulting from previously terminated hedging relationships and the amortization of the market value of mortgage purchase commitments classified as derivatives at the time the commitment settled.

The use of derivatives had little impact on net interest income and net interest spread in 2015. In 2014, the use of derivatives resulted in increases to both net interest income and net interest spread. By comparison, in 2013, both net interest income and net interest spread were negatively impacted by the use of derivatives. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

The Bank uses derivatives to hedge the fair market value changes attributable to the change in the LIBOR benchmark interest rate. The Bank generally uses interest rate swaps to hedge a portion of advances and consolidated obligations which convert the interest rates on those instruments from a fixed rate to a LIBOR-based variable rate. The purpose of this strategy is

36


to protect the interest rate spread. Using derivatives to convert interest rates from fixed to variable can increase or decrease net interest income.

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

Provision (Benefit) for Credit Losses. The provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans for 2015 was $(0.2) million compared to $(4.1) million in 2014. The benefit in 2015 was primarily due to continued improvement in the housing market and the related reduction in mortgage loan delinquencies and loss levels. The benefit in 2014 was primarily due to the adoption of certain provisions of AB 2012-02 which is discussed in more detail in the Financial Condition section of this Item 7.

2014 vs. 2013. The provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans was $(4.1) million in 2014 compared to $(1.9) million in 2013. The 2013 benefit was due primarily to the MPF Plus portion of the portfolio which had a benefit of $(2.4) million partially offset by the MPF Original portion of the portfolio which had a provision of $0.4 million. The benefit on MPF Plus is due primarily to lower estimated losses given default as a result of the improved housing market and an increase in the estimated life of the portfolio due to rising interest rates. The provision on MPF Original is due to the growth of the first loss account (FLA) during 2013 in accordance with the credit structure terms of the product.

Other Noninterest Income
(in millions)
2015
2014
2013
Net OTTI losses, credit portion
$
(1.8
)
$

$
(0.4
)
Net gains (losses) on trading securities
1.6

22.4

(4.6
)
Net gains (losses) on derivatives and hedging activities
3.4

(37.5
)
30.2

Net gains on extinguishment of debt


9.6

Gains on litigation settlements, net
15.3

70.9

1.5

Standby letters of credit fees
23.6

17.4

9.1

Other, net
2.4

2.4

2.1

Total other noninterest income
$
44.5

$
75.6

$
47.5


The Bank's lower total other noninterest income for 2015 compared to 2014 was due primarily to lower gains on litigation settlements, net of legal fees and expenses, and lower net gains on trading securities partially offset by higher net gains on derivatives and hedging activities and higher standby letters of credit fees. The litigation settlements relate to investments the Bank made in private label MBS. The net gains on trading securities reflects the impact of fair market value changes on Agency investments held in the Bank’s trading portfolio. The activity related to derivatives and hedging activities is discussed in more detail below. The increase in standby letters of credit fees was due to higher volume and an increase in the fee on letters of credit.

2014 vs. 2013. The Bank's higher total other noninterest income for 2014 compared to 2013 was due primarily to the settlement of litigation claims, net of legal fees and expenses, net gains on trading securities, and standby letter of credit fees, partially offset by net losses on derivatives and hedging activities. The increase in standby letter of credit fees was due to higher volume.

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

The Bank's hedging strategies consist of fair value accounting hedges and economic hedges. Fair value hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but they do not qualify for hedge accounting or the Bank does not elect to apply hedge accounting. As a result, income recognition on the

37


derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes nor does it have any cash flow hedges.

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

The following tables detail the net effect of derivatives and hedging activities for 2015, 2014 and 2013.
 
2015
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(5.0
)
$

$
(4.1
)
$
9.9

$

$
0.8

  Net interest settlements included in net interest income (2)
(198.5
)
(19.0
)

218.2


0.7

Total effect on net interest income (loss)
$
(203.5
)
$
(19.0
)
$
(4.1
)
$
228.1

$

$
1.5

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains on fair value hedges
$
0.9

$
1.0

$

$
2.9

$

$
4.8

Gains (losses) on derivatives not receiving hedge accounting
(5.0
)
(37.3
)
(0.8
)
42.8

(1.1
)
(1.4
)
Total net gains (losses) on derivatives and hedging activities
$
(4.1
)
$
(36.3
)
$
(0.8
)
$
45.7

$
(1.1
)
$
3.4

Total net effect of derivatives and hedging activities
$
(207.6
)
$
(55.3
)
$
(4.9
)
$
273.8

$
(1.1
)
$
4.9

 
2014
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest income (1)
$
(8.9
)
$

$
(3.1
)
$
25.7

$

$
13.7

  Net interest settlements included in net interest income (2)
(225.7
)
(11.5
)

233.8


(3.4
)
Total effect on net interest income (loss)
$
(234.6
)
$
(11.5
)
$
(3.1
)
$
259.5

$

$
10.3

Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains (losses) on fair value hedges
$
3.9

$
(1.6
)
$

$
2.0

$

$
4.3

Gains (losses) on derivatives not receiving hedge accounting
(7.2
)
(81.4
)
(10.3
)
56.7

0.4

(41.8
)
Total net gains (losses) on derivatives and hedging activities
$
(3.3
)
$
(83.0
)
$
(10.3
)
$
58.7

$
0.4

$
(37.5
)
Total net effect of derivatives and hedging activities
$
(237.9
)
$
(94.5
)
$
(13.4
)
$
318.2

$
0.4

$
(27.2
)

38


 
2013
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Total
Net interest income:
 
 
 
 
 
  Amortization/accretion of hedging activities in net interest
    income (1)
$
(9.4
)
$

$
(3.8
)
$
32.1

$
18.9

  Net interest settlements included in net interest income (2)
(255.1
)
(3.2
)

217.8

(40.5
)
Total effect on net interest income (loss)
$
(264.5
)
$
(3.2
)
$
(3.8
)
$
249.9

$
(21.6
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
Gains on fair value hedges
$
3.1

$
1.4

$

$
1.2

$
5.7

Gains (losses) on derivatives not receiving hedge accounting

25.9

18.6

(20.0
)
24.5

Total net gains (losses) on derivatives and hedging activities
$
3.1

$
27.3

$
18.6

$
(18.8
)
$
30.2

Total net effect of derivatives and hedging activities
$
(261.4
)
$
24.1

$
14.8

$
231.1

$
8.6

Notes:
(1) Represents the amortization/accretion of hedging fair value adjustments.
(2) Represents interest income/expense on derivatives included in net interest income.

Fair Value Hedges. The Bank uses fair value hedge accounting treatment for most of its fixed-rate advances and consolidated obligations using interest rate swaps. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e. LIBOR). During 2015, total ineffectiveness related to these fair value hedges resulted in net gains of $4.8 million compared to net gains of $4.3 million during 2014. The total notional amount decreased to $30.4 billion at December 31, 2015 from $32.2 billion at December 31, 2014. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative compared to the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as “economic hedges,” the Bank includes the net interest settlements and the changes in the fair value of the hedges in the “Net gains (losses) on derivatives and hedging activities” financial statement line item. For economic hedges, the Bank recorded net losses of $(1.4) million in 2015 compared to $(41.8) million for 2014. For 2015 and 2014, the change in net losses on economic hedges was driven by changes to the composition of the economic hedge portfolio as well as changes in interest rates. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $14.2 billion at December 31, 2015 and $12.7 billion at December 31, 2014.

2014 vs. 2013. Fair Value Hedges. In 2014 and 2013, total ineffectiveness related to fair value hedges resulted in net gains of $4.3 million and $5.7 million, respectively. The total notional amount increased to $32.2 billion in 2014 from $25.4 billion in 2013.

2014 vs. 2013. Derivatives not receiving hedge accounting. For economic hedges, the Bank recorded a net loss of $(41.8) million in 2014 and a net gain of $24.5 million in 2013. The total notional amount of economic hedges was $12.7 billion and $11.8 billion at December 31, 2014 and 2013, respectively.


39


Other Expense
(in millions)
2015
2014
2013
Compensation and benefits
$
43.2

$
43.1

$
44.7

Occupancy
2.7

2.6

2.7

Other
21.5

24.6

24.9

Finance Agency
5.4

4.5

4.0

Office of Finance
4.7

3.8

3.7

Total other expenses
$
77.5

$
78.6

$
80.0


The Bank's total other expenses for 2015 decreased slightly compared to 2014. The decline was primarily due to lower legal expenses related to the Bank’s private label MBS litigation and lower voluntary contributions to the Bank’s pension plan, partially offset by higher total compensation expense, including incentive payments. The voluntary contributions to the Bank’s pension plan in 2015 were $4.3 million.

2014 vs 2013. The Bank's total other expenses for 2014 decreased slightly compared to 2013 primarily due to lower compensation and benefits. The decrease included the impact of $6.9 million in voluntary contributions to the Bank’s pension plan in 2014.

Collectively, the 11 FHLBanks are responsible for the operating expenses of the Finance Agency and the OF. These payments, allocated among the FHLBanks according to a cost-sharing formula, are reported as other expense on the Bank’s Statement of Income. The Bank has no control over the operating expenses of the Finance Agency. The FHLBanks are able to exert a limited degree of control over the operating expenses of the OF as two directors of the OF are also FHLBank presidents.

AHP Assessment

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

The AHP, mandated by the Act, is the largest and primary public policy program of the Bank. The AHP funds, which are offered on a competitive basis, provide grants and below-market loans for both rental and owner-occupied housing for households at 80% or less of the area median income. The Bank is required to contribute approximately 10% of its net income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP) to AHP and makes these funds available for use in the subsequent year. Each year, the Bank’s Board adopts an implementation plan that defines the structure of the program pursuant to the AHP regulations. The Bank’s contribution was $28.5 million, $28.4 million and $16.6 million for 2015, 2014 and 2013, respectively. The following table details the funding rounds the Bank conducted and the distribution of AHP funds for 2015, 2014, and 2013.
 
2015
2014
2013
Funding rounds
1
1
1
Eligible applications
163
116
132
Grants
$23.8 million
$15.0 million
$13.6 million
Projects
63
38
42
Project development costs
$351.7 million
$280.9 million
$207.9 million
Units of affordable housing
2,390
1,954
1,430

The CLP offers advances at low-cost (i.e., the Bank’s cost of funds), providing the full advantage of a low-cost funding source. CLP loans help member institutions finance housing construction and rehabilitation, infrastructure improvement, and economic and community development projects that benefit targeted neighborhoods and households. At December 31, 2015, the CLP loan balance totaled $726.0 million, compared to $524.3 million at December 31, 2014, reflecting an increase of $201.7 million, or 38%.


40


The First Front Door Program (FFD) offers grants to first time homebuyers up to $5,000 to assist with the purchase of a home. FFD grants are available to households earning 80% or less of the area median income. During 2015, $2.9 million in FFD grants were disbursed.

Financial Condition

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

Assets

Total assets were $96.3 billion at December 31, 2015, compared to $85.7 billion at December 31, 2014. The increase of $10.6 billion was primarily due to higher advances. Advances increased to $74.5 billion at December 31, 2015 from $63.4 billion at December 31, 2014. Advance volume growth in 2015 was driven primarily by demand from larger members; however, advance volumes increased in all member classifications.

The Finance Agency has communicated its interest in keeping all of the FHLBanks focused on activities related to their missions, such as making advances. For additional information, refer to the Legislative and Regulatory Developments section of Item 7. Management’s Discussion and Analysis in this Form 10-K .

Advances. Advances (par) totaled $74.3 billion at December 31, 2015 compared to $63.1 billion at December 31, 2014. At December 31, 2015, the Bank had advances to 199 borrowing members, compared to 189 borrowing members at December 31, 2014. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Total advances outstanding to the Bank’s five largest members represented 74.1% of total advances as of December 31, 2015, compared to 73.8% at December 31, 2014.

The following table provides information on advances at par by product type at December 31, 2015 and December 31, 2014.
 
December 31,
December 31,
in millions
2015
2014
Adjustable/variable-rate indexed:
 
 
    Repo/Mid-Term Repo
$
9,233.8

$
9,314.7

    Core (Term)
21,163.6

21,242.2

    Returnables
11,900.0


      Total adjustable/variable-rate indexed
$
42,297.4

$
30,556.9

Fixed rate:
 
 
    Repo/Mid-Term Repo
$
21,047.8

$
23,672.3

    Core (Term)
8,533.9

6,723.8

    Returnables
650.0


      Total fixed rate
$
30,231.7

$
30,396.1

Convertible
$
1,462.0

$
1,923.0

Amortizing/mortgage-matched:
 
 
    Core (Term)
342.2

250.0

Total par balance
$
74,333.3

$
63,126.0


The Bank had no putable advances at December 31, 2015 or 2014. In 2015, the Bank introduced a new adjustable, returnable advance product which has a floating rate and can be returned at a predetermined time.


41


The following table provides a distribution of the number of members, categorized by individual member asset size that had an outstanding advance balance during 2015 and 2014.
 
December 31,
December 31,
Member Asset Size
2015
2014
Less than $100 million
24

25

Between $100 million and $500 million
132

130

Between $500 million and $1 billion
44

45

Between $1 billion and $5 billion
35

33

Greater than $5 billion
21

19

Total borrowing members during the year
256

252

Total membership
307

304

Percentage of members borrowing during the period
83.4
%
82.9
%
Total borrowing members with outstanding loan balances at period-end
199

189

Percentage of members borrowing at period-end
64.8
%
62.2
%

During 2015, the Bank has experienced a net increase of three members. The Bank added 15 new members and lost 12 members. Of these 12, ten members merged with other institutions within the Bank's district and two members merged out of district.

The following table provides information at par on advances by member classification at December 31, 2015 and December 31, 2014. Commercial Bank, Thrift, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 to $25 billion), Mid-size ($1.1 to $4 billion) and CFI (under $1.1 billion).
(in thousands)
December 31, 2015
December 31, 2014
Increase/(Decrease)
Member Classification
Large
$
55,075.1

$
47,825.2

15.2
 %
Regional
9,090.3

8,041.9

13.0
 %
Mid-size
3,443.7

2,657.6

29.6
 %
CFI (1)
4,262.2

3,963.9

7.5
 %
Insurance
2,459.8

633.4

288.3
 %
Non-member
2.2

4.0

(45.0
)%
Total
$
74,333.3

$
63,126.0

17.8
 %
Notes:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

As of December 31, 2015, total advances increased 18% compared with balances at December 31, 2014. Advances increased across all member classifications. The largest increases were in fixed- and floating-rate term advance borrowings by several members.

See the Credit and Counterparty Risk - TCE and Collateral discussion in the Risk Management section of this Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of December 31, 2015.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses was $3.1 billion at both December 31, 2015 and December 31, 2014. The Bank’s focus is on purchasing MPF loans from community and regional member banks in its district. In the second quarter of 2015, the Bank introduced a new MPF product called MPF 35. It is similar to the MPF Original product but has a CE fee structure that is based partly on performance, a FLA equal to 35 basis points, and an option for the participating financial institution's (PFI) CE obligation to be covered by a third party. In the third quarter of 2015, the Bank introduced a new MPF product called MPF Direct. It is operationally similar to MPF Xtra and allows PFIs to sell residential, jumbo fixed-rate mortgages to FHLBank Chicago, which concurrently sells them to a third party on a nonrecourse basis. PFIs which have completed all required documentation and training are eligible to offer the product. MPF Dire

42


ct does not have the credit structure of the traditional MPF Program, and there is no CE obligation assumed by the PFI or the Bank and no CE fees are paid. The Bank receives a nominal fee for facilitating MPF Direct transactions. Given the arrangement, these loans will not be reported on the Bank's Statement of Condition.

The Bank places conventional mortgage loans that are 90 days or more delinquent on nonaccrual status. In addition, the Bank records cash payments received as a reduction of principal until the remaining principal amount due is expected to be collected and then as a recovery of any charge-off, if applicable, followed by the recording of interest income. However, government mortgage loans that are 90 days or more delinquent remain in accrual status due to government guarantees or insurance. The Bank has a loan modification program for PFIs under the MPF Program. The Bank considers loan modifications or Chapter 7 bankruptcies where the obligation is discharged under the MPF program to be troubled debt restructurings (TDRs), since some form of concession has been made by the Bank.

Foregone interest represents income the Bank would have recorded if the loan was paying according to its contractual terms. Foregone interest for the Bank’s mortgage loans was $0.6 million, $1.3 million, $2.5 million, $2.9 million and $4.0 million, for years 2015 through 2011, respectively. Foregone interest for the Bank’s BOB loans was immaterial. Balances regarding the Bank’s loan products are summarized below.
 
December 31,
(in millions)
2015
2014
2013
2012
2011
Advances(1)
$
74,504.8

$
63,408.4

$
50,247.5

$
40,497.8

$
30,604.8

Mortgage loans held for portfolio, net(2)
3,086.9

3,123.3

3,224.1

3,532.5

3,883.1
Nonaccrual mortgage loans(3)
32.5

44.6

57.8

72.5

86.1

Mortgage loans 90 days or more delinquent and still accruing interest(4)
4.2

6.8

8.3

7.2

8.5

BOB loans, net
11.3

11.6

11.4

12.8

14.0

Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and does not include performing TDRs of $14.8 million, $12.8 million, $12.0 million, $10.2 million and $4.1 million at December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
(4) Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable since year-end 2014, and the MPF Original portfolio continues to out-perform the market based on national delinquency statistics. As of December 31, 2015, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.5% of the MPF Original portfolio and 3.3% of the MPF Plus portfolio compared with 0.6% and 3.8%, respectively, at December 31, 2014.

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

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

The Bank’s conventional mortgage loan portfolio is comprised of large groups of smaller-balance homogeneous loans made to borrowers by PFIs that are secured by residential real estate. A mortgage loan is considered impaired when it is probable that all contractual principal and interest payments will not be collected as scheduled based on current information and events. The Bank evaluates certain conventional mortgage loans for impairment individually. Beginning January 1, 2015, the Bank adopted the charge-off provisions of AB 2012-02. As a result, the estimated credit loss on individually evaluated MPF loans is charged-off against the reserve. However, if the estimated loss can be recovered through CE, a receivable is established, resulting in a net charge-off. The CE receivable is evaluated for collectibility, and a reserve, included as part of the allowance for credit losses, is established, if required.

43



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

The following table presents the rollforward of ACL on the mortgage loans held for portfolio for the years 2011 through 2015.
(in millions)
2015
2014
2013
2012
2011
Balance, beginning of year
$
7.3

$
11.4

$
14.2

$
14.3

$
3.2

(Charge-offs) Recoveries, net
(0.8
)
0.3

(1.0
)
(0.5
)
(0.5
)
Provision (benefit) for credit losses
(0.8
)
(4.4
)
(1.8
)
0.4

11.6

Balance, end of year
$
5.7

$
7.3

$
11.4

$
14.2

$
14.3

As a % of mortgage loans held for portfolio
0.2
%
0.2
%
0.4
%
0.4
%
0.4
%

The CE structure of the MPF Program is designed such that initial losses on mortgage loans are incurred by the Bank up to an agreed upon amount, referred to as the FLA. Additional eligible credit losses are covered by CEs provided by PFIs (available CE) until exhausted. Certain losses incurred by the Bank on MPF Plus can be recaptured by withholding fees paid to the PFI for its retention of credit risk. All additional losses are incurred by the Bank. The following table presents the impact of the CE structure on the ACL and the balance of the FLA and available CE at December 31, 2015 and December 31, 2014.
 
MPF CE structure
December 31, 2015
ACL
December 31, 2015
(in millions)
FLA
Available CE
Estimate of Credit Loss
Charge -offs
Reduction to the ACL due
to CE
ACL
MPF Original
$
3.7

$
177.1

$
4.3

$
(0.9
)
$
(4.1