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EX-3.2 - EXHIBIT 3.2 - Federal Home Loan Bank of Dallasfhlbdallas-123115xex_32.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Dallasfhlbdallas-123115xex_311.htm
EX-12.1 - EXHIBIT 12.1 - Federal Home Loan Bank of Dallasfhlbdallas-123115xex_121.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Dallasfhlbdallas-123115xex_312.htm
EX-32.1 - EXHIBIT 32.1 - Federal Home Loan Bank of Dallasfhlbdallas-123115xex_321.htm
EX-99.2 - EXHIBIT 99.2 - Federal Home Loan Bank of Dallasfhlbdallas-123115xex_992.htm
EX-99.1 - EXHIBIT 99.1 - Federal Home Loan Bank of Dallasfhlbdallas-123115xex_991.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
 
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
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-51405
FEDERAL HOME LOAN BANK OF DALLAS
(Exact name of registrant as specified in its charter)
Federally chartered corporation
(State or other jurisdiction of incorporation
or organization)
71-6013989
(I.R.S. Employer
Identification Number)
8500 Freeport Parkway South, Suite 600
Irving, TX
(Address of principal executive offices)
75063-2547
(Zip Code)
Registrant’s telephone number, including area code: (214) 441-8500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class B Capital Stock, $100 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
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 o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
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). Yes þ No o
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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o
Accelerated filer o
Non-accelerated filer þ
(Do not check if a smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The registrant’s capital 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 requirements. At March 11, 2016, the registrant had 15,733,717 shares of its capital stock outstanding. As of June 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate par value of the registrant’s capital stock outstanding was approximately $1.407 billion.
Documents Incorporated by Reference: None.
 
 
 
 
 



FEDERAL HOME LOAN BANK OF DALLAS
TABLE OF CONTENTS
 
Page
 
 
 
 
 EX-3.2
 
 EX-12.1
 
 EX-31.1
 
 EX-31.2
 
 EX-32.1
 
 EX-99.1
 
 EX-99.2
 
 EX-101
 



PART I

ITEM 1. BUSINESS
Background
The Federal Home Loan Bank of Dallas (the “Bank”) is one of 11 Federal Home Loan Banks (each individually a “FHLBank” and collectively the “FHLBanks,” and, together with the Office of Finance, a joint office of the FHLBanks, the “FHLBank System,” or the “System”). The FHLBanks were created by the Federal Home Loan Bank Act of 1932, as amended (the “FHLB Act”). Each of the 11 FHLBanks is a member-owned cooperative that operates as a separate federally chartered corporation with its own management, employees and board of directors. Each FHLBank helps finance housing, community lending, and community development needs in the specified states in its respective district. Federally insured commercial banks, savings banks, savings and loan associations, and credit unions, as well as insurance companies and Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994, are all eligible for membership in the FHLBank of the district in which the institution’s principal place of business is located. Housing associates, including state and local housing authorities, that meet certain statutory and regulatory criteria may also borrow from the FHLBanks.
The public purpose of the Bank is to promote housing, jobs and general prosperity through products and services that assist its members in providing affordable credit in their communities. The Bank’s primary business is to serve as a financial intermediary between the capital markets and its members. In its most basic form, this intermediation process involves raising funds by issuing debt in the capital markets and lending the proceeds to member institutions (in the form of loans known as advances) at rates that are slightly higher than the cost of the debt. The interest spread between the cost of the Bank’s liabilities and the yield on its assets, combined with the earnings on its invested capital, are the Bank’s primary sources of earnings. The Bank endeavors to manage its assets and liabilities in such a way that its net interest spread is consistent across a wide range of interest rate environments. The intermediation of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements. These agreements, commonly referred to as derivatives or derivative instruments, are discussed below in the section entitled “Use of Interest Rate Exchange Agreements.”
The Bank’s principal source of funds is debt issued in the capital markets. All 11 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent, and each FHLBank uses these funds to make loans to its members, invest in debt securities, or for other business purposes. Generally, consolidated obligations are traded in the over-the-counter market. All 11 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations. Although consolidated obligations are not obligations of or guaranteed by the U.S. government, FHLBanks are considered to be government-sponsored enterprises (“GSEs”) and thus have historically been able to borrow at the more favorable rates generally available to GSEs. Consolidated obligations are currently rated Aaa/P-1 by Moody’s Investors Service (“Moody’s”) and AA+/A-1+ by Standard & Poor’s (“S&P”). In the application of S&P's Government Related Entities criteria, the ratings of the FHLBanks are constrained by the long-term sovereign credit rating of the United States. These ratings indicate that each of these nationally recognized statistical rating organizations ("NRSROs") has concluded that the FHLBanks have a very strong capacity to meet their financial commitments on consolidated obligations. The ratings also reflect the FHLBank System’s status as a GSE. Historically, the FHLBanks' GSE status and very high credit ratings on consolidated obligations have provided the FHLBanks with excellent capital markets access. Deposits, other borrowings and the proceeds from the issuance of capital stock to members are also sources of funds for the Bank.
In addition to the ratings on the FHLBanks’ consolidated obligations, each FHLBank is rated individually by both S&P and Moody’s. These individual FHLBank ratings apply to the individual obligations of the respective FHLBanks, such as interest rate derivatives, deposits, and letters of credit. As of December 31, 2015, Moody’s had assigned a deposit rating of Aaa/P-1 to each of the FHLBanks and S&P had rated each of the FHLBanks AA+/A-1+.
Current and prospective shareholders and debtholders should understand that these credit ratings are not a recommendation to buy, hold or sell securities and they may be revised or withdrawn at any time by the NRSRO. The ratings from each of the NRSROs should be evaluated independently.
All members of the Bank are required to purchase capital stock in the Bank as a condition of membership and in proportion to their asset size and borrowing activity with the Bank. The Bank’s capital stock is not publicly traded and all stock is owned by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires.
The Federal Housing Finance Agency (“Finance Agency”), an independent agency in the executive branch of the U.S. government, is responsible for supervising and regulating the FHLBanks and the Office of Finance. The Finance Agency’s

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stated mission is to ensure that the housing GSEs, including the FHLBanks, operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. Consistent with this mission, the Finance Agency establishes policies and regulations covering the operations of the FHLBanks.
The Bank’s debt and equity securities are exempt from registration under the Securities Act of 1933 and are “exempted securities” under the Securities Exchange Act of 1934 (the “Exchange Act”). On June 23, 2004, the Finance Agency's predecessor, the Federal Housing Finance Board, adopted a rule requiring each FHLBank to voluntarily register a class of its equity securities with the Securities and Exchange Commission (“SEC”) under Section 12(g) of the Exchange Act and the Housing and Economic Recovery Act of 2008 (the “HER Act”) subsequently codified this requirement. The Bank’s registration with the SEC became effective on April 17, 2006. As a registrant, the Bank is subject to the periodic reporting and disclosure regime as administered and interpreted by the SEC. Materials that the Bank files with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site (http://www.sec.gov) that contains reports and other information filed with the SEC. Reports and other information that the Bank files with the SEC are also available free of charge through the Bank’s website at www.fhlb.com. To access these reports and other information through the Bank’s website, click on “News,” then “Investor Relations,” and then “SEC” under the heading SEC Filings. The information on the Bank's website is not, and shall not be deemed to be, a part hereof or incorporated into this or any of the Bank's other filings with the SEC.
Merger of Des Moines and Seattle FHLBanks
Prior to June 1, 2015, the FHLBank System included 12 FHLBanks. On September 25, 2014, the FHLBank of Des Moines and the FHLBank of Seattle announced that they had entered into a definitive agreement to merge the two FHLBanks. On December 19, 2014, the Finance Agency approved the merger application, subject to the satisfaction of certain closing conditions set forth in its approval letter, including the ratification of the merger agreement by members of both the Des Moines and Seattle FHLBanks. On February 27, 2015, the FHLBanks of Des Moines and Seattle announced that the merger agreement had been ratified by members of both FHLBanks. The merger was consummated effective May 31, 2015. At closing, the FHLBank of Seattle merged with and into the FHLBank of Des Moines, with the FHLBank of Des Moines surviving the merger as the continuing FHLBank. Headquartered in Des Moines, Iowa, the first day of operations for the combined FHLBank was June 1, 2015.
Membership
The Bank’s members are financial institutions with their principal place of business in the Ninth Federal Home Loan Bank District, which consists of Arkansas, Louisiana, Mississippi, New Mexico and Texas. The following table summarizes the Bank’s membership, by type of institution, as of December 31, 2015, 2014 and 2013.

MEMBERSHIP SUMMARY
 
December 31,
 
2015
 
2014
 
2013
Commercial banks
631

 
655

 
679

Thrifts
59

 
68

 
71

Credit unions
104

 
103

 
96

Insurance companies
36

 
31

 
26

Community Development Financial Institutions
5

 
4

 
3

 
 
 
 
 
 
Total members
835

 
861

 
875

 
 
 
 
 
 
Housing associates
8

 
8

 
8

Non-member borrowers
11

 
10

 
10

 
 
 
 
 
 
Total
854

 
879

 
893

 
 
 
 
 
 
Community Financial Institutions (“CFIs”) (1)
636

 
670

 
696

(1) 
The figures presented above reflect the number of members that were CFIs as of December 31, 2015, 2014 and 2013 based upon the definitions of CFIs that applied as of those dates.
As of December 31, 2015, approximately 76 percent of the Bank’s members were Community Financial Institutions ("CFIs"). CFIs are defined by the FHLB Act (as amended by the HER Act) to include all institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) with average total assets over the three-year period preceding measurement of less than

2


$1.0 billion, as adjusted annually for inflation. For 2015, CFIs were FDIC-insured institutions with average total assets as of December 31, 2014, 2013 and 2012 of less than $1.123 billion. For 2014 and 2013, the asset cap was $1.108 billion and $1.095 billion, respectively. For 2016, the asset cap is $1.128 billion.
As of December 31, 2015, 2014 and 2013, approximately 54.5 percent, 53.9 percent and 54.7 percent, respectively, of the Bank’s members had outstanding advances from the Bank. These usage rates are calculated excluding housing associates and non-member borrowers. While eligible to borrow, housing associates are not members of the Bank and, as such, are not required to hold capital stock. Non-member borrowers consist of institutions that have acquired former members and assumed the advances and/or other extensions of credit of those former members and former members who have withdrawn from membership but that continue to have advances and/or other extensions of credit outstanding. Non-member borrowers are required to hold capital stock to support outstanding advances or other extensions of credit until the time when those advances have been repaid or the extensions of credit have expired, as applicable. During the period that their obligations remain outstanding, non-member borrowers may not request new extensions of credit, nor are they permitted to extend or renew the assumed advances.
As of December 31, 2012, the Bank had 891 members. The decline in the Bank's membership during the three years ended December 31, 2015 was largely attributable to intra-district merger activity.
The Bank’s membership currently includes the majority of commercial bank and thrift institutions in its district that are eligible to become members. Eligible non-members are primarily insurance companies, credit unions and smaller commercial banks that have thus far elected not to join the Bank. While the Bank anticipates that some number of these eligible non-member institutions will apply for membership each year, the Bank also anticipates that some number of its existing members will be acquired or merge with other institutions and it does not currently anticipate a substantial increase in the number of member institutions.
As a cooperative, the Bank is managed with the primary objectives of enhancing the value of membership for member institutions and fulfilling its public purpose. The value of membership includes access to readily available credit and other services from the Bank, the value of the cost differential between Bank advances and other potential sources of funds, and the dividends paid on members’ investments in the Bank’s capital stock.
Business Segments
The Bank manages its operations as one business segment. Management and the Bank’s Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance. All of the Bank’s revenues are derived from U.S. operations.
Interest Income
The Bank’s interest income is derived primarily from advances and investment activities. Each of these revenue sources is more fully described below. During the years ended December 31, 2015, 2014 and 2013, interest income derived from each of these sources (expressed as a percentage of the Bank’s total interest income) was as follows:
 
Year Ended December 31,
 
2015
 
2014
 
2013
Advances (including prepayment fees)
60.9
%
 
64.8
%
 
64.8
%
Investments
37.5

 
33.0

 
32.8

Mortgage loans held for portfolio
1.6

 
2.2

 
2.4

Total
100.0
%
 
100.0
%
 
100.0
%
Total interest income (in thousands)
$
220,488

 
$
203,831

 
$
243,838

Substantially all of the Bank’s interest income from advances is derived from financial institutions domiciled in the Bank’s five-state district.

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Products and Services
Advances. The Bank’s primary function is to provide its members with a reliable source of secured credit in the form of loans known as advances. The Bank offers advances to its members with a wide variety of terms designed to meet members’ business and risk management needs. Standard offerings include the following types of advances:
Fixed-rate, fixed-term advances. The Bank offers fixed-rate, fixed-term advances with maturities ranging from overnight to 20 years, and with maturities as long as 40 years for Community Investment advances. Interest is generally paid monthly and principal repaid at maturity for fixed-rate, fixed-term advances.
Fixed-rate, amortizing advances. The Bank offers fixed-rate advances with a variety of final maturities and fixed amortization schedules. Standard advances offerings include fully amortizing advances with final maturities of 5, 7, 10, 15 or 20 years, and advances with amortization schedules based on those maturities but with shorter final maturities accompanied by balloon payments of the remaining outstanding principal balance. Borrowers may also request alternative amortization schedules and maturities. Interest is generally paid monthly and principal is repaid in accordance with the specified amortization schedule. Although these advances have fixed amortization schedules, borrowers may elect to pay a higher interest rate and have an option to prepay the advance without a fee after a specified lockout period (typically five years). Otherwise, early repayments are subject to the Bank’s standard prepayment fees.
Variable-rate advances. The Bank offers term variable-rate advances with maturities between one and ten years. Standard offerings include variable-rate advances indexed to either one-month LIBOR or three-month LIBOR that are priced at a constant spread to the relevant index. The Bank also offers variable-rate advances (discount note floating rate advances) that reset every 4, 8, 13 or 26 weeks based on the results of the FHLBank System's discount note auctions that typically occur twice every week. In addition to longer term variable-rate advances, the Bank offers short term variable-rate advances (maturities of 30 days or less) indexed to the daily federal funds rate. Variable-rate advances may also include embedded features such as caps, floors or provisions for the conversion of the advances to a fixed rate.
Putable advances. The Bank also makes advances that include a put feature that allows the Bank to terminate the advance at specified points in time. If the Bank exercises its option to terminate the putable advance, the Bank offers replacement funding to the member for a period selected by the member up to the remaining term to maturity of the putable advance, provided the Bank determines that the member is able to satisfy the normal credit and collateral requirements of the Bank for the replacement funding requested.
Symmetrical prepayment advances. The Bank also offers fixed-rate, fixed-term or amortizing advances that include a symmetrical prepayment feature which allows a member to prepay an advance at the lower of par value or fair value plus a make-whole amount, thus allowing the member to realize a portion of the decrease in fair value that would arise if interest rates have increased since the advance was originated.
Expander advances. The Bank also offers fixed-rate, fixed-term, non-amortizing advances that provide the member with a one-time option to increase the principal amount of the advance generally up to twice the amount of the original advance at the original interest rate for the remaining term of the advance.
Fixed-rate, fixed-term advances, including Community Investment Program and Economic Development Program advances, can be forward-starting, which allows a member to lock in a rate for an advance that will settle at a future date. Amortizing advances and certain advances containing the symmetrical prepayment feature are also available on a forward-starting basis.
Finance Agency regulations require the Bank to establish a formula for and to charge, if necessary, a prepayment fee on an advance that is repaid prior to maturity in an amount sufficient to make the Bank financially indifferent to the borrower’s decision to repay the advance prior to its scheduled maturity date. Currently, these fees are generally calculated as the present value of the difference (if positive) between the interest rate on the prepaid advance and the rate derived from the FHLBank System consolidated obligations curve for the remaining term to maturity of the repaid advance.
Members are required by statute and regulation to use the proceeds of advances with an original term to maturity of greater than five years to purchase or fund new or existing residential housing finance assets which, for CFIs, are defined by statute and regulation to include small business, small farm and small agribusiness loans, loans for community development activities (subject to the Finance Agency’s requirements as described below) and securities representing a whole interest in such loans. Community Investment Cash Advances (described below) are exempt from these requirements.
The Bank prices its credit products with the objective of providing benefits of membership that are greatest for those members that use the Bank’s products most actively, while maintaining sufficient profitability to pay dividends at a rate that makes members financially indifferent to holding the Bank’s capital stock and that will allow the Bank to increase its retained earnings over time. Generally, that set of objectives results in small mark-ups over the Bank’s cost of funds for its advances and dividends on capital stock at rates that have for the last several years been slightly above the upper end of the Federal Reserve’s

4


target for the federal funds rate. In keeping with its cooperative philosophy, the Bank provides equal pricing for advances to all members regardless of asset or transaction size, charter type, or geographic location.
The Bank is required by the FHLB Act to obtain collateral that is sufficient, in the judgment of the Bank, to fully secure advances and other extensions of credit to members/borrowers. The Bank has not suffered any credit losses on advances in its 83-year history. In accordance with the Bank’s Capital Plan, members and former members must hold Class B-2 capital stock in proportion to their outstanding advances. In addition, members must hold Class B-1 capital stock to meet their membership investment requirement. Pursuant to the FHLB Act, the Bank has a lien upon and holds the Bank’s Class B-1 and Class B-2 capital stock owned by each of its shareholders as additional collateral for all of the respective shareholder’s obligations to the Bank.
In order to comply with the requirement to fully secure advances and other extensions of credit, the Bank and each of its members/borrowers execute a written security agreement that establishes the Bank’s security interest in a variety of the members’/borrowers’ assets. The Bank, pursuant to the FHLB Act and Finance Agency regulations, originates, renews, or extends advances only if it has obtained and is maintaining a security interest in sufficient eligible collateral at the time such advance is made, renewed, or extended. Eligible collateral includes whole first mortgages on improved residential real property or securities representing an undivided interest in such mortgages; securities issued, insured, or guaranteed by the U.S. government or any of its agencies, including mortgage-backed and other debt securities issued or guaranteed by the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or the Government National Mortgage Association; term deposits in the Bank; and other real estate-related collateral acceptable to the Bank, provided that such collateral has a readily ascertainable value and the Bank can perfect a security interest in such assets.
In the case of CFIs, the Bank may also accept as eligible collateral secured small business, small farm, and small agribusiness loans, secured loans for community development activities, and securities representing a whole interest in such loans, provided the collateral has a readily ascertainable value and the Bank can perfect a security interest in such collateral. At December 31, 2015 and 2014, total CFI obligations secured by these types of collateral, including commercial real estate, totaled approximately $2.2 billion and $1.6 billion, respectively, which represented approximately 6.9 percent and 7.0 percent, respectively, of the total advances and letters of credit outstanding as of those dates.
The HER Act added secured loans for community development activities as a new type of eligible collateral for CFIs. To the extent secured loans for community development activities represent a new class of collateral that the Bank has not previously accepted, the Bank would be required to seek the Finance Agency’s approval prior to accepting that collateral. To date, the Bank has not been requested to accept secured loans for community development activities as collateral.
Except as set forth in the next sentence, the FHLB Act affords any security interest granted to the Bank by any member/borrower of the Bank, or any affiliate of any such member/borrower, priority over the claims and rights of any party, including any receiver, conservator, trustee, or similar party having rights of a lien creditor. The Bank’s security interest is not entitled to priority over the claims and rights of a party that (i) would be entitled to priority under otherwise applicable law and (ii) is an actual bona fide purchaser for value or is a secured party who has a perfected security interest in such collateral in accordance with applicable law (e.g., a prior perfected security interest under the Uniform Commercial Code or other applicable law). For example, as discussed further below, the Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the borrower. If another secured party, without knowledge of the Bank's lien, perfected its security interest in that same collateral by taking possession of the collateral, rather than or in addition to filing a Uniform Commercial Code financing statement against the borrower, then that secured party’s security interest that was perfected by possession may be entitled to priority over the Bank’s security interest that was perfected by filing a Uniform Commercial Code financing statement.
From time to time, the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor (typically, a Federal Reserve Bank or another FHLBank). If the Bank agrees to subordinate its security interest in certain assets or categories of assets granted by a member/borrower of the Bank to the security interest of another creditor, the Bank will not extend credit against those assets or categories of assets.
As stated above, each member/borrower of the Bank executes a security agreement pursuant to which such member/borrower grants a security interest in favor of the Bank in certain assets of such member/borrower. The assets in which a member grants a security interest fall into one of two general structures. In the first structure, the member grants a security interest in all of its assets that are included in the eligible collateral categories, as described above, which the Bank refers to as a “blanket lien.” A member may request that its blanket lien be modified, such that the member grants in favor of the Bank a security interest limited to certain of the eligible collateral categories (i.e., whole first residential mortgages, securities, term deposits in the Bank and other real estate-related collateral). In the second structure, the member grants a security interest in specifically identified assets rather than in the broad categories of eligible collateral covered by the blanket lien and the Bank identifies those members as being on “specific collateral only status.”

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The basis upon which the Bank will lend to a member that has granted the Bank a blanket lien depends on numerous factors, including, among others, that member’s financial condition and general creditworthiness. Generally, and subject to certain limitations, a member that has granted the Bank a blanket lien may borrow up to a specified percentage of the value of eligible collateral categories, as determined from that member’s financial reports filed with its federal regulator, without specifically identifying each item of collateral or delivering the collateral to the Bank. Under certain circumstances, including, among others, a deterioration of a member’s financial condition or general creditworthiness, the amount a member may borrow is determined on the basis of only that portion of the collateral subject to the blanket lien that such member delivers to the Bank. Under these circumstances, the Bank places the member on “custody status.” In addition, members on blanket lien status may choose to deliver some or all of the collateral to the Bank.
The members/borrowers that are granted specific collateral only status by the Bank are generally either insurance companies or members/borrowers with an investment grade credit rating from an NRSRO that have requested this type of structure. Insurance companies are permitted to borrow only against the eligible collateral that is delivered to the Bank, and insurance companies generally grant a security interest only in collateral they have delivered. Members/borrowers with an investment grade credit rating from an NRSRO may grant a security interest in, and would be permitted to borrow only against, delivered eligible securities and specifically identified, eligible first-lien mortgage loans. Such loans must be delivered to the Bank or a third-party custodian approved by the Bank, or the Bank and the member/borrower must otherwise take actions that ensure the priority of the Bank’s security interest in the loans. Investment grade rated members/borrowers that choose this option are subject to fewer provisions that allow the Bank to demand additional collateral or exercise other remedies based on the Bank’s discretion.
As of December 31, 2015, 691 of the Bank’s borrowers/potential borrowers with a total of $21.7 billion in outstanding advances were on blanket lien status, 35 borrowers/potential borrowers with $1.7 billion in outstanding advances were on specific collateral only status and 131 borrowers/potential borrowers with $1.2 billion in outstanding advances were on custody status.
The Bank perfects its security interest in members'/borrowers’ collateral in a number of ways. The Bank usually perfects its security interest in collateral by filing a Uniform Commercial Code financing statement against the relevant assets of the member/borrower. In the case of certain borrowers, the Bank perfects its security interest by taking possession or control of the collateral, which may be in addition to the filing of a financing statement. In these cases, the Bank also generally takes assignments of most of the mortgages and deeds of trust that are designated as collateral. Instead of requiring delivery of the collateral to the Bank, the Bank may allow certain borrowers to deliver specific collateral to a third-party custodian approved by the Bank or otherwise take actions that ensure the priority of the Bank’s security interest in such collateral.
On at least a quarterly basis, the Bank obtains updated information relating to collateral pledged to the Bank by depository institution members/borrowers on blanket lien status. This information is either obtained directly from the member/borrower or obtained by the Bank from appropriate regulatory filings. On a monthly basis or as otherwise requested by the Bank, members/borrowers on custody status and members/borrowers on specific collateral only status must update information relating to collateral pledged to the Bank. Bank personnel regularly verify the existence and eligibility of collateral securing advances to members/borrowers on blanket lien status and members/borrowers on specific collateral only status with respect to any collateral not delivered to the Bank. The frequency and the extent of these collateral verifications depend on the average amount by which a member's/borrower’s outstanding obligations to the Bank during the year exceed the collateral value of its securities, loans and term deposits held by the Bank. Collateral verifications are not required for members/borrowers that have had no, or only a de minimis amount of, outstanding obligations to the Bank secured by a blanket lien during the prior calendar year, are on custody status, or are on blanket lien status but at all times have delivered to the Bank eligible loans, securities and term deposits with a collateral value in excess of the advances and other extensions of credit to the member/borrower.
As of December 31, 2015, the Bank’s outstanding advances (at par value) totaled $24.6 billion. As of that date, advances outstanding to the Bank’s five largest borrowers represented 26.2 percent of the Bank’s total outstanding advances. Advances to the Bank’s largest borrower (Texas Capital Bank, N.A.) represented 6.1 percent of the Bank’s total outstanding advances as of December 31, 2015. For additional information regarding the composition and concentration of the Bank’s advances, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Advances.
Community Investment Offerings. The Bank offers a Community Investment Cash Advances (“CICA”) program (which includes a Community Investment Program and an Economic Development Program) as authorized by Finance Agency regulations. Advances made under the CICA program benefit low- to moderate-income households by providing funds for housing or economic development projects. CICA advances are made at rates below the rates the Bank charges on standard advances. The Bank currently prices CICA advances at interest rates that are approximately 1 to 5 basis points above the Bank’s matched maturity cost of funds. CICA advances are provided separately from and do not count toward the Bank’s statutory obligations under the Affordable Housing Program, through which the Bank provides grants to support projects that benefit low-income households (see the “Affordable Housing Program” section below). As of December 31, 2015, the par

6


value of advances outstanding under the CICA program totaled approximately $388.7 million, representing approximately 1.6 percent of the Bank’s total advances outstanding as of that date.
If a member institution is approved for an Economic Development Program ("EDP") advance, the member's customer may then be eligible for an accompanying EDP Plus grant of up to $25,000.
The Bank also offers an Affordable Housing Program (“AHP”) as required by the FHLB Act and in accordance with Finance Agency regulations. The Bank sets aside 10 percent of each year’s earnings (as adjusted for interest expense on mandatorily redeemable capital stock) for its AHP, which provides grants for projects that facilitate development of rental and owner-occupied housing for low-income households. Each year, a portion of the amount set aside is typically allocated specifically for the Bank's Homebuyer Equity Leverage Partnership ("HELP") program and its Special Needs Assistance Program ("SNAP"). HELP provides grant funds for down payment and closing cost assistance for eligible first-time homebuyers. SNAP provides grant funds to special needs homeowners for rehabilitation costs. The calculation of the amount to be set aside is further discussed below in the section entitled “AHP Assessments.” Each year, the Bank conducts a competitive application process to allocate the AHP funds set aside from the prior year’s earnings. Applications submitted by Bank members and their community partners are scored in accordance with Finance Agency regulations and the Bank’s AHP Implementation Plan. The highest scoring proposals are approved to receive funds, which are disbursed upon receipt of documentation that the projects are progressing as specified in the original applications or in approved modifications thereto.
In addition, the Bank offers a Housing Assistance for Veterans program that is designed to provide grants to households of veterans or active service members who were disabled as a result of an injury during their active military service since September 11, 2001.
Further, the Bank offers a Partnership Grant Program which provides funding for the operational needs of community-based organizations ("CBOs"). CBOs include non-profit organizations involved in affordable housing, local community development funds and small business technical assistance providers.
Letters of Credit. The Bank’s credit services also include letters of credit issued or confirmed on behalf of members to facilitate business transactions with third parties that support residential housing finance, community lending, or asset/liability management or to provide liquidity to members. Letters of credit are also issued on behalf of members to secure the deposits of public entities that are held by such members. All letters of credit must be fully collateralized as though they were funded advances. At December 31, 2015 and 2014, outstanding letters of credit totaled $7.2 billion and $4.3 billion, respectively, of which $0.4 billion and $0.7 billion, respectively, had been issued or confirmed under the Bank’s CICA program.
Correspondent Banking and Collateral Services. The Bank provides its members with a variety of correspondent banking and collateral services. These services include overnight and term deposit accounts, wire transfer services, securities safekeeping, and securities pledging services.
SecureConnect. The Bank provides secure on-line access to many of its products, services and reports through SecureConnect, a proprietary, secure on-line product delivery system. A substantial portion of the Bank’s advances and wire transfers are initiated by members through SecureConnect. In addition, a large proportion of account statements and other reports are made available through SecureConnect. Further, members may manage securities held in safekeeping by the Bank and participate in auctions for Bank advances and deposits through SecureConnect.
Interest Rate Swaps, Caps and Floors. The Bank offers interest rate swaps, caps and floors to its member institutions. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties which, if required, will be a third party central clearinghouse. In order to be eligible, a member must have executed a master swap agreement with the Bank. The Bank requires the member to post eligible collateral in an amount equal to the sum of the net market value of the member’s derivative transactions with the Bank (if the value is positive to the Bank) plus a percentage of the notional amount of any interest rate swaps, with market values determined on at least a monthly basis. At December 31, 2015 and 2014, the total notional amount of interest rate exchange agreements with members totaled $1.0 billion and $0.5 billion, respectively.
Standby Bond Purchase Agreements. The Bank offers standby bond purchase services to state housing finance agencies within its district. In these transactions, in order to enhance the liquidity of bonds issued by a state housing finance agency, the Bank, for a fee, would agree to stand ready to purchase, in certain circumstances specified in the standby agreement, a state housing finance agency’s bonds that the remarketing agent for the bonds is unable to sell. The specific terms for any bonds purchased by the Bank would be specified in the standby bond purchase agreement entered into by the Bank and the state housing finance agency. The Bank would reserve the right to sell any bonds it purchased at any time, subject to any conditions the Bank might agree to in the standby bond purchase agreement. To date, the Bank has not entered into any standby bond purchase agreements.

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MPF Xtra. In December 2012, the Bank began offering the MPF Xtra® product to its members. MPF Xtra is offered under the Mortgage Partnership Finance® (“MPF”®) program offered by the FHLBank of Chicago, which is discussed on pages 9-10 of this report (“Mortgage Partnership Finance,” “MPF,” and "MPF Xtra" are registered trademarks of the FHLBank of Chicago). MPF Xtra provides members that participate in the MPF program (known as participating financial institutions or "PFIs") an opportunity to sell certain fixed-rate, conforming mortgage loans into the secondary market. Under this program, loans are sold to the FHLBank of Chicago and are concurrently sold to Fannie Mae as a third-party investor. These loans are not held by the Bank, nor are they recorded on the Bank's balance sheet. Unlike other products offered under the MPF program, PFIs are not required to provide credit enhancement and do not receive credit enhancement fees when using the MPF Xtra product. Under the MPF Xtra program, the Bank receives a fee for any loans sold by its PFIs. During 2015, 2014 and 2013, $52.8 million, $20.4 million and $1.2 million, respectively, of loans were sold through the MPF Xtra program and the fees earned on the sale of these loans totaled $37,000, $16,000 and $2,500, respectively.
Investment Activities
The Bank maintains a portfolio of investments to enhance interest income and meet liquidity needs, including certain regulatory liquidity requirements, as discussed in Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. To ensure the availability of funds to meet members’ credit needs, the Bank’s operating needs, and its other general and regulatory liquidity requirements, the Bank maintains a portfolio of short-term investments typically consisting of overnight federal funds issued by highly rated domestic banks and U.S. branches of foreign financial institutions and overnight reverse repurchase agreements. From time to time, the Bank may also invest in short-term commercial paper and/or U.S. Treasury Bills. At December 31, 2015, the Bank’s short-term investments were comprised of $2.2 billion of overnight federal funds sold, a $1.0 billion overnight reverse repurchase agreement and $0.8 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas.
To enhance net interest income, the Bank maintains a long-term investment portfolio, which currently includes mortgage-backed securities ("MBS") issued by U.S. government-sponsored enterprises (i.e., Fannie Mae and Freddie Mac) and, to a far lesser extent, U.S. government agencies, non-agency (i.e., private label) residential MBS, non-MBS debt instruments issued or guaranteed by the U.S. government or secured by U.S. government guaranteed obligations, non-MBS debt instruments issued by U.S. government-sponsored enterprises (i.e., Fannie Mae, Freddie Mac and the Farm Credit System), and state housing agency obligations. The interest rate and, in the case of MBS, prepayment risk inherent in the securities is managed through a variety of debt and interest rate derivative instruments. As of December 31, 2015 and 2014, the composition of the Bank’s long-term investment portfolio was as follows (dollars in millions):
 
December 31,
 
2015
 
2014
 
Amortized
Cost
 
Percentage
 
Amortized
Cost
 
Percentage
Government-sponsored enterprises
 
 


 
 
 


Debentures
$
5,328

 
40.2
%
 
$
4,890

 
44.2
%
Residential MBS
2,909

 
22.0

 
4,425

 
40.0

Commercial MBS
3,658

 
27.6

 
1,077

 
9.8

Non-agency residential MBS
143

 
1.1

 
169

 
1.5

Other
1,211

 
9.1

 
494

 
4.5

Total
$
13,249

 
100.0
%
 
$
11,055

 
100.0
%

The Bank is precluded from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed an amount equal to 300 percent of its total regulatory capital. At December 31, 2015, the Bank's MBS holdings (at amortized cost) represented 291 percent of its total regulatory capital.
The Bank’s non-agency residential MBS (“RMBS”) are collateralized by whole mortgage loans that generally do not conform to GSE pooling requirements. The Bank’s non-agency RMBS investments are all self-insured by a senior/subordinate structure in which the subordinate classes of securities provide credit support for the most senior class of securities, an interest in which is owned by the Bank. Losses in the underlying loan pool would generally have to exceed the credit support provided by the subordinate classes of securities before the most senior class of securities would experience any credit losses. If the Bank’s cash flow analyses indicate that it is likely to incur a credit loss on a security, the Bank records an other-than-temporary impairment loss in the period in which the expected credit loss is identified. For discussion of the accounting for other-than-temporary impairments of debt securities, see Note 1 to the Bank’s audited financial statements included in this report.
In addition to purchasing securities that were structured to provide the type of credit enhancement discussed above, the Bank further attempted to reduce the credit risk of its non-agency RMBS by purchasing securities with other risk-reducing attributes.

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For instance, the Bank purchased RMBS backed by loan pools that featured a high percentage of relatively small loans, a high percentage of owner-occupied properties, and relatively low loan-to-value ratios. None of the Bank’s investments in RMBS are insured by third-party bond insurers. The risk of future credit losses is also mitigated to some extent by the seasoning of the loans underlying the Bank’s non-agency RMBS. Except for a single security issued in 2006, all of the Bank’s RMBS were issued in 2005 or before. Despite the deterioration in the residential real estate markets that occurred primarily during the period from 2007 through 2011, these risk mitigation strategies helped to limit the amount of credit losses associated with the Bank’s non-agency RMBS holdings. For further discussion and analysis of the Bank’s non-agency RMBS, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Long-Term Investments.
The Bank has not acquired any non-agency MBS since 2006 and it is currently prohibited by its Enterprise Credit Risk Management Policy from doing so in the future.
The Bank has historically attempted to maintain its investments in MBS close to the regulatory dollar limit. While the Finance Agency has established limits with respect to the types and structural characteristics of the FHLBanks’ MBS investments, the Bank has generally adhered to a more conservative set of guidelines.
The Bank is permitted to invest in the non-MBS debt obligations of any GSE provided such investments in any single GSE do not exceed the lesser of the Bank’s total regulatory capital or that GSE's total capital (taking into account the financial support provided by the U.S. Department of the Treasury, if applicable) at the time new investments are made. The Bank's investments in the non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System are each currently limited to an amount equal to 100 percent of the Bank's total regulatory capital.
In accordance with Finance Agency policy and regulations, total capital for purposes of determining the Bank’s MBS and non-MBS investment limitations excludes accumulated other comprehensive income (loss) and includes all amounts paid in for the Bank’s capital stock regardless of accounting classification (see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations). The Bank is not required to sell or otherwise reduce any investments that exceed these regulatory limits due to reductions in capital or changes in value after the investments are made, but it is precluded from making additional investments that exceed these limits.
Finance Agency regulations include a variety of restrictions and limitations on the FHLBanks’ investment activities, including limits on the types, amounts, and maturities of unsecured investments in private issuers. Finance Agency rules and regulations also prohibit the Bank from investing in 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-United States entities, other than those issued by United States branches and agency offices of foreign commercial banks;
debt instruments that are not investment quality, other than certain investments targeted to low-income persons or communities and instruments that became non-investment quality after purchase by the Bank;
whole mortgages or other whole loans, other than 1) those acquired by the Bank through a duly authorized Acquired Member Assets program such as the Mortgage Partnership Finance program discussed below; 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 investment quality; 4) MBS or asset-backed securities backed by manufactured housing loans or home equity loans; and 5) certain foreign housing loans authorized under Section 12(b) of the FHLB Act;
non-U.S. dollar denominated securities;
interest-only or principal-only stripped MBS;
residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits; and
fixed-rate MBS or floating-rate MBS that, on trade date, are at rates equal to their contractual cap and that have average lives that vary by more than 6 years under an assumed instantaneous interest rate change of 300 basis points.
Acquired Member Assets
During the period from 1998 to mid-2003, the Bank invested in government-guaranteed/insured mortgage loans (i.e., those insured or guaranteed by the Federal Housing Administration or the Department of Veterans Affairs) and conventional residential mortgage loans originated by its PFIs through the MPF program. Under its then existing arrangement with the FHLBank of Chicago, the Bank retained title to the fixed-rate, conforming mortgage loans, subject to any participation interest in such loans that was sold to the FHLBank of Chicago; the interest in the loans retained by the Bank ranged from 1 percent to

9


49 percent. Additionally, during the period from 1998 to 2000, the Bank also acquired from the FHLBank of Chicago a percentage interest (ranging up to 75 percent) in certain MPF loans originated by PFIs of other FHLBanks. The Bank manages the liquidity, interest rate and prepayment risk of these loans, while the PFIs retain the servicing activities. The Bank and the PFIs share in the credit risk of the retained portion of the loans with the Bank assuming the first loss obligation limited by the First Loss Account (“FLA”), and the PFIs assuming credit losses in excess of the FLA, up to the amount of the credit enhancement obligation as specified in the master agreement (“Second Loss Credit Enhancement”). The Bank assumes all losses in excess of the Second Loss Credit Enhancement. As further described below, the PFIs are paid a fee by the Bank for assuming a portion of the credit risk of the loans.
The PFI’s credit enhancement obligation (“CE Amount”) arises under its PFI Agreement while the amount and nature of the obligation are determined with respect to each master commitment. Under the Finance Agency’s Acquired Member Asset regulation (12 C.F.R. part 955) (“AMA Regulation”), the PFI must “bear the economic consequences” of certain credit losses with respect to a master commitment based upon the MPF product and other criteria. Under the MPF program, the PFI’s credit enhancement protection may take the form of the CE Amount, which represents the direct liability to pay credit losses incurred with respect to that master commitment, or may require the PFI to obtain and pay for a supplemental mortgage insurance (“SMI”) policy insuring the Bank for a portion of the credit losses arising from the master commitment, and/or the PFI may contract for a contingent performance-based credit enhancement fee whereby such fees are reduced by losses up to a certain amount arising under the master commitment. Under the AMA Regulation, any portion of the CE Amount that is a PFI’s direct liability must be collateralized by the PFI in the same way that advances are collateralized. The PFI Agreement provides that the PFI’s obligations under the PFI Agreement are secured along with other obligations of the PFI under its regular advances agreement with the Bank and, further, that the Bank may request additional collateral to secure the PFI’s obligations. PFIs are paid a credit enhancement fee (“CE fee”) as an incentive to minimize credit losses, to share in the risk of loss on MPF loans and to pay for SMI, rather than paying a guaranty fee to other secondary market purchasers. CE fees are paid monthly and are determined based on the remaining unpaid principal balance of the MPF loans. The required CE Amount may vary depending on the MPF product alternatives selected. The Bank also pays performance-based CE fees that are based on the actual performance of the pool of MPF loans under each individual master commitment. To the extent that losses in the current month exceed accrued performance-based CE fees, the remaining losses may be recovered from future performance-based CE fees payable to the PFI.
In some cases, a portion of the credit support for MPF loans is provided under a primary and/or SMI policy. Given the small amount of its mortgage loans held for portfolio that are insured by mortgage insurance companies and the historical performance of those loans, the Bank believes its credit exposure to these insurance companies, both individually and in the aggregate, was not significant as of December 31, 2015.
PFIs must comply with the requirements of the PFI agreement, MPF guides, applicable law and the terms of mortgage documents. If a PFI fails to comply with any of these requirements, it may be required to repurchase the MPF loans that are impacted by such failure. The reasons that a PFI could be required to repurchase an MPF loan include, but are not limited to, the failure of the loan to meet underwriting standards, the PFI’s failure to deliver a qualifying promissory note and certain other relevant documents to an approved custodian, a servicing breach, fraud or other misrepresentations by the PFI. In addition, a PFI may, under the terms of the MPF servicing guide, elect to repurchase any government-guaranteed/insured loan for an amount equal to the loan’s then current scheduled principal balance and accrued interest thereon, provided no payment has been made by the borrower for three consecutive months. This policy allows PFIs to comply with loss mitigation requirements of the applicable government agency in order to preserve the insurance guaranty coverage. During the years ended December 31, 2015, 2014 and 2013, the principal amount of mortgage loans held by the Bank that were repurchased by the Bank’s PFIs totaled $0.8 million, $1.3 million and $1.4 million, respectively.
As of December 31, 2015 and 2014, MPF loans held for portfolio (net of allowance for credit losses) were $55 million and $71 million, respectively, representing approximately 0.1 percent and 0.2 percent, respectively, of the Bank’s total assets at each of those dates. In early 2016, the Bank resumed acquiring mortgage loans through the MPF program. Thus far in 2016, the Bank's purchases have been in very small amounts; however, over time, the Bank expects to increase the balance of its mortgage loan portfolio to an amount that approximates 10 percent of its total assets. Unlike its earlier mortgage loan investments, the Bank intends to retain a 100 percent interest in the loans that it purchases.
Funding Sources
General. The principal funding source for the Bank is consolidated obligations issued in the capital markets through the Office of Finance. Member deposits and the proceeds from the issuance of capital stock are also funding sources for the Bank. Consolidated obligations consist of consolidated obligation bonds and consolidated obligation discount notes. Discount notes are consolidated obligations with maturities of one year or less, and consolidated obligation bonds typically have maturities in excess of one year.

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The Bank determines its participation in the issuance of consolidated obligations based upon, among other things, its own funding and operating requirements and the amounts, maturities, rates of interest and other terms available in the marketplace. The issuance terms for consolidated obligations are established by the Office of Finance, subject to policies established by its board of directors and the regulations of the Finance Agency. In addition, the Government Corporation Control Act provides that, before a government corporation issues and offers obligations to the public, the U.S. Secretary of the Treasury shall prescribe the form, denomination, maturity, interest rate, and conditions of the obligations, the way and time issued, and the selling price.
Consolidated obligation bonds generally satisfy long-term funding needs. Typically, the maturities of these securities range from 1 to 20 years, but their maturities are not subject to any statutory or regulatory limit. Consolidated obligation bonds can be fixed-rate or variable-rate and may be callable or non-callable.
Consolidated obligation bonds are issued and distributed through negotiated or competitively bid transactions with underwriters or bidding group members. The Bank receives 100 percent of the proceeds of bonds issued through direct negotiation with underwriters of System debt when it is the sole primary obligor on consolidated obligation bonds. When the Bank and one or more other FHLBanks jointly agree to the issuance of bonds directly negotiated with underwriters, the Bank receives the portion of the proceeds of the bonds agreed upon with the other FHLBanks; in those cases, the Bank is the primary obligor for a pro rata portion of the bonds based on the proceeds it receives. In these cases, the Bank records on its balance sheet only that portion of the bonds for which it is the primary obligor. The majority of the Bank’s consolidated obligation bond issuance has been conducted through direct negotiation with underwriters of System debt, and a majority of that issuance has been without participation by the other FHLBanks.
The Bank may also request that specific amounts of specific bonds be offered by the Office of Finance for sale through competitive auction conducted with underwriters that are bidding group members. One or more other FHLBanks may also request that amounts of these same bonds be offered for sale for their benefit through the same auction. The Bank may receive from zero to 100 percent of the proceeds of the bonds issued through competitive auction depending on the amounts and costs for the bonds bid by underwriters, the maximum costs the Bank or other FHLBanks, if any, participating in the same issue are willing to pay for the bonds, and Office of Finance guidelines for allocation of bond proceeds among multiple participating FHLBanks.
Consolidated obligation discount notes are a significant funding source for money market instruments and for advances with short-term maturities or repricing frequencies of less than one year. Discount notes are generally sold at a discount and mature at par, and are offered daily through a consolidated obligation discount notes selling group and through other authorized securities dealers.
On a daily basis, the Bank may request that specific amounts of consolidated obligation discount notes with specific maturity dates be offered by the Office of Finance at a specific cost for sale to securities dealers in the discount note selling group. One or more other FHLBanks may also request that amounts of discount notes with the same maturities be offered for sale for their benefit on the same day. The Office of Finance commits to issue discount notes on behalf of the participating FHLBanks when securities dealers in the selling group submit orders for the specific discount notes offered for sale. The Bank may receive from zero to 100 percent of the proceeds of the discount notes issued through this sales process depending on the maximum costs the Bank or other FHLBanks, if any, participating in the same discount notes are willing to pay for the discount notes, the amounts of orders for the discount notes submitted by securities dealers, and Office of Finance guidelines for allocation of discount notes proceeds among multiple participating FHLBanks. Under the Office of Finance guidelines, FHLBanks generally receive funding on a first-come-first-served basis subject to threshold limits within each category of discount notes. For overnight discount notes, sales are allocated to the FHLBanks in lots of $250 million. For all other discount note maturities, sales are allocated in lots of $50 million. Within each category of discount notes, the allocation process is repeated until all orders are filled or canceled.
Twice weekly, the Bank may also request that specific amounts of consolidated obligation discount notes with fixed maturity dates ranging from 4 to 26 weeks be offered by the Office of Finance through competitive auctions conducted through securities dealers in the discount note selling group. One or more other FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. Prior to July 14, 2015, the FHLBanks received funding based on their requests at a weighted average rate of the winning bids from the dealers. On and after July 14, 2015, the FHLBanks receive funding at a single price based on a Dutch auction format. If the bids submitted are less than the total of the FHLBanks’ requests, the Bank receives funding based on the ratio of the Bank’s regulatory capital (defined on page 32 of this report) relative to the regulatory capital of the other FHLBanks offering discount notes. The majority of the Bank’s discount note issuance in maturities of four weeks or longer is conducted through the auction process. Regardless of the method of issuance, as with consolidated obligation bonds, the Bank is the primary obligor for the portion of discount notes issued for which it has received the proceeds.

11


On occasion, and as an alternative to issuing new debt, the Bank may assume the outstanding consolidated obligations for which other FHLBanks are the original primary obligors. This occurs in cases where the original primary obligor may have participated in a large consolidated obligation issue to an extent that exceeded its immediate funding needs in order to facilitate better market execution for the issue. The original primary obligor might then warehouse the funds until they were needed, or make the funds available to other FHLBanks. Transfers may also occur when the original primary obligor’s funding needs change, and that FHLBank offers to transfer debt that is no longer needed to other FHLBanks. Transferred debt is typically fixed-rate, fixed-term, non-callable debt, and may be in the form of discount notes or bonds. In connection with these transactions, the Bank becomes the primary obligor for the transferred debt.
The Bank participates in such transfers of funding from other FHLBanks when the transfer represents favorable pricing relative to a new issue of consolidated obligations with similar features. The Bank did not assume any consolidated obligations from other FHLBanks during the years ended December 31, 2015, 2014 or 2013.
In addition, the Bank occasionally transfers debt that it no longer needs to other FHLBanks. The Bank did not transfer any consolidated obligations to other FHLBanks during the years ended December 31, 2015, 2014 or 2013.
Joint and Several Liability. Although the Bank is primarily liable only for its portion of consolidated obligations (i.e., those consolidated obligations issued on its behalf and those that have been assumed from other FHLBanks), it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all of the consolidated obligations issued by the FHLBanks. The Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligation, regardless of whether there has been a default by a FHLBank having primary liability. To the extent that a FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank shall be entitled to reimbursement from the FHLBank with primary liability. The FHLBank with primary liability would have a corresponding liability to reimburse the FHLBank providing assistance to the extent of such payment and other associated costs (including interest to be determined by the Finance Agency). However, if the Finance Agency determines that the primarily liable FHLBank is unable to satisfy its obligations, then the Finance Agency may allocate the outstanding liability among the remaining FHLBanks on a pro rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that the Finance Agency may determine. No FHLBank has ever failed to make any payment on a consolidated obligation for which it was the primary obligor; as a result, the regulatory provisions for directing other FHLBanks to make payments on behalf of another FHLBank or allocating the liability among other FHLBanks have never been invoked. Consequently, the Bank has no means to determine how the Finance Agency might allocate the obligations of a FHLBank that is unable to pay consolidated obligations for which such FHLBank is primarily liable. In the event the Bank is holding a consolidated obligation as an investment for which the Finance Agency would allocate liability among the FHLBanks, the Bank might be exposed to a credit loss to the extent of its share of the assigned liability for that particular consolidated obligation (the Bank has not held any consolidated obligations of other FHLBanks as investments since 2008). If principal of or interest on any consolidated obligation issued by the FHLBank System is not paid in full when due, the Bank may not pay dividends to, or repurchase shares of stock from, any shareholder of the Bank.
To facilitate the timely funding of principal and interest payments on FHLBank System consolidated obligations in the event that a FHLBank is not able to meet its funding obligations in a timely manner, the FHLBanks and the Office of Finance entered into the Federal Home Loan Banks P&I Funding and Contingency Plan Agreement on June 23, 2006. For additional information regarding this agreement, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.
According to the Office of Finance, the 11 FHLBanks had (at par value) approximately $905 billion and $847 billion in consolidated obligations outstanding at December 31, 2015 and 2014, respectively. The Bank was the primary obligor on $38.6 billion and $35.2 billion (at par value), respectively, of these consolidated obligations.
Certification and Reporting Obligations. Under Finance Agency regulations, before the end of each calendar quarter and before paying any dividends for that quarter, the President and Chief Executive Officer of the Bank must certify to the Finance Agency that, based upon known current facts and financial information, the Bank will remain in compliance with its depository and contingent liquidity requirements and will remain capable of making full and timely payment of all current obligations (which includes the Bank’s obligation to pay principal of and interest on consolidated obligations) coming due during the next quarter. The Bank is required to provide notice to the Finance Agency if it (i) is unable to provide the required certification, (ii) projects at any time that it will fail to comply with its liquidity requirements or will be unable to meet all of its current obligations due during the quarter, (iii) actually fails to comply with its liquidity requirements or to meet all of its current obligations due during the quarter, or (iv) negotiates to enter into or enters into an agreement with one or more other FHLBanks to obtain financial assistance to meet its current obligations due during the quarter. The Bank has been in compliance with the applicable reporting requirements at all times since they became effective in 1999.
A FHLBank must file a consolidated obligation payment plan for the Finance Agency’s approval if (i) the FHLBank becomes a non-complying FHLBank as a result of failing to provide the required certification, (ii) the FHLBank becomes a non-

12


complying FHLBank as a result of being required to provide the notice described above to the Finance Agency, except in the case of a failure to make a payment on a consolidated obligation caused solely by an external event such as a power failure, or (iii) the Finance Agency determines that the FHLBank will cease to be in compliance with its liquidity requirements or will lack the capacity to meet all of its current obligations due during the quarter.
A non-complying FHLBank is permitted to continue to incur and pay normal operating expenses in the regular course of business, but may not incur or pay any extraordinary expenses, or declare or pay dividends, or redeem any capital stock, until such time as the Finance Agency has approved the FHLBank’s consolidated obligation payment plan or inter-FHLBank assistance agreement, or ordered another remedy, and all of the non-complying FHLBank’s direct obligations have been paid.
Negative Pledge Requirements. Each FHLBank must maintain specified assets free from any lien or pledge in an amount at least equal to its participation in outstanding consolidated obligations. Eligible assets for this purpose include (i) cash; (ii) obligations of, or fully guaranteed by, the U.S. government; (iii) secured advances; (iv) mortgages having any guaranty, insurance, or commitment from the U.S. government or any related agency; and (v) investments described in Section 16(a) of the FHLB Act, which, among other items, include securities that a fiduciary or trust fund may purchase under the laws of the state in which the FHLBank is located. At December 31, 2015 and 2014, the Bank had eligible assets free from pledge of $41.7 billion and $38.0 billion, respectively, compared to its participation in outstanding consolidated obligations of $38.6 billion and $35.2 billion, respectively. In addition, the Bank was in compliance with its negative pledge requirements at all times during the years ended December 31, 2015, 2014 and 2013.
Office of Finance. The Office of Finance (“OF”) is a joint office of the 11 FHLBanks that executes the issuance of consolidated obligations, as agent, on behalf of the FHLBanks. The OF also services all outstanding consolidated obligation debt, serves as a source of information for the FHLBanks on capital market developments, manages the FHLBank System’s relationship with rating agencies as it pertains to the consolidated obligations, and prepares and distributes the annual and quarterly combined financial reports for the FHLBanks.
The OF’s board of directors is comprised of 16 directors: the 11 FHLBank presidents, who serve ex officio, and 5 independent directors, who each serve five-year terms that are staggered so that not more than one independent directorship is scheduled to become vacant in any one year. Independent directors are limited to two consecutive full terms. Independent directors must be United States citizens. As a group, the independent directors must have substantial experience in financial and accounting matters and they must not have any material relationship with any FHLBank or the OF.
One of the responsibilities of the board of directors of the OF is to establish policies regarding consolidated obligations to ensure that, among other things, such obligations are issued efficiently and at the lowest all-in funding costs for the FHLBanks over time consistent with prudent risk management practices and other market and regulatory factors.
The Finance Agency has regulatory oversight and enforcement authority over the OF and its directors and officers generally to the same extent as it has such authority over a FHLBank and its respective directors and officers. The FHLBanks are responsible for jointly funding the expenses of the OF, which are shared on a pro rata basis with two-thirds based on each FHLBank’s total consolidated obligations outstanding (as of each month end) and one-third divided equally among all of the FHLBanks.
Use of Interest Rate Exchange Agreements
Finance Agency regulations authorize and establish general guidelines for the FHLBanks’ use of derivative instruments, and the Bank’s Enterprise Market Risk Management Policy establishes specific guidelines for their use. The Bank can use interest rate swaps, swaptions, cap and floor agreements, calls, puts, and futures and forward contracts as part of its interest rate risk management and funding strategies. Regulations prohibit derivative instruments that do not qualify as hedging instruments pursuant to generally accepted accounting principles unless a non-speculative use is documented.
Historically, the Bank has used interest rate exchange agreements primarily in two ways: either by designating them as a fair value hedge of an underlying financial instrument or by designating them as a hedge of some defined risk in the course of its balance sheet management. For example, the Bank uses interest rate exchange agreements in its overall interest rate risk management activities to adjust the interest rate sensitivity of consolidated obligations to approximate more closely the interest rate sensitivity of its assets, including advances and investments, and/or to adjust the interest rate sensitivity of advances and investments to approximate more closely the interest rate sensitivity of its liabilities. In addition to using interest rate exchange agreements to manage mismatches between the coupon features of its assets and liabilities, the Bank uses interest rate exchange agreements to manage embedded options in assets and liabilities, to preserve the market value of existing assets and liabilities and to reduce funding costs.
The Bank frequently enters into interest rate exchange agreements concurrently with the issuance of consolidated obligation bonds and it simultaneously designates the agreement as a fair value hedge. This strategy of issuing bonds while simultaneously entering into interest rate exchange agreements enables the Bank to offer a wider range of attractively priced advances to its members. The attractiveness of such debt generally depends on yield relationships between the consolidated

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obligation bond and interest rate exchange markets. As conditions in these markets change, the Bank may alter the types or terms of the consolidated obligations that it issues.
In September 2015, the Bank entered into its first cash flow hedge, wherein the Bank hedged the variability of cash flows associated with the forecasted issuances of consolidated obligation discount notes. Over time, the Bank expects to increase its use of cash flow hedges.
In addition, as discussed in the section above entitled “Products and Services,” the Bank offers interest rate swaps, caps and floors to its member institutions. In these transactions, the Bank acts as an intermediary for its members by entering into an interest rate exchange agreement with a member and then entering into an offsetting interest rate exchange agreement with one of the Bank’s approved derivative counterparties.
For further discussion of interest rate exchange agreements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition — Derivatives and Hedging Activities and the audited financial statements accompanying this report.
Competition
Demand for the Bank’s advances is affected by, among other things, the cost of other available sources of funds for its members, including deposits. The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including investment banking concerns, commercial banks and, in certain circumstances, other FHLBanks. Historically, sources of wholesale funds for its members have included unsecured long-term debt, unsecured short-term debt such as federal funds, repurchase agreements and deposits issued into the brokered certificate of deposit market. The availability of funds through these wholesale funding sources can vary from time to time as a result of a variety of factors including, among others, market conditions, members’ creditworthiness and availability of collateral. The availability of these alternative private funding sources could significantly influence the demand for the Bank’s advances. The Bank competes against other financing sources on the basis of cost, the relative ease by which the members can access the various sources of funds, collateral requirements, and the flexibility desired by the member when structuring the liability.
As a debt issuer, the Bank competes with Fannie Mae, Freddie Mac and other GSEs, as well as corporate, sovereign and supranational entities for funds raised in the national and global debt markets. Increases in the supply of competing debt products could, in the absence of increases in demand, result in higher debt costs for the FHLBanks. Although investor demand for FHLBank debt has historically been sufficient to meet the Bank’s funding needs, there can be no assurance that this will always be the case.
Capital
The Bank’s capital consists of capital stock owned by its members (and, in some cases, non-member borrowers or former members as described below), plus retained earnings and accumulated other comprehensive income (loss). Consistent with the FHLB Act and the Finance Agency's regulations, the Bank’s capital plan requires each member to own Class B stock (redeemable with five years’ written notice subject to certain restrictions) in an amount equal to the sum of a membership stock requirement and an activity-based stock requirement. Specifically, the Bank’s capital plan requires members to hold capital stock in proportion to their total asset size and borrowing activity with the Bank.
The Bank’s capital stock is not publicly traded and it may be issued, repurchased, redeemed and, with the prior approval of the Bank, transferred only at its par value. In addition, the Bank’s capital stock may only be held by members of the Bank, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other obligations that remain outstanding or until any applicable stock redemption or withdrawal notice period expires.
On December 3, 2014, the Bank's Board of Directors adopted several amendments to the Bank’s Capital Plan, subject to approval by the Finance Agency and certain notification requirements. The Finance Agency approved the amendments to the Bank’s Capital Plan on June 1, 2015. Among other things, the Bank’s Capital Plan was amended to allow for the creation of two sub-classes of the Bank’s Class B Stock (Class B-1 Stock and Class B-2 Stock). On August 31, 2015, the Bank gave notice to its shareholders that the amended Capital Plan would be implemented and the two sub-classes of capital stock would be created on October 1, 2015.
On October 1, 2015, the Bank exchanged all shares of outstanding Class B Stock at the open of business on that date for an equal number of shares of capital stock consisting of shares of Class B-1 Stock and Class B-2 Stock allocated as described in the next sentence. For each shareholder, (i) a number of shares of existing Class B Stock in an amount sufficient to meet such shareholder's activity-based investment requirement were exchanged for an equal number of shares of Class B-2 Stock and (ii) all other outstanding shares of existing Class B Stock held by such shareholder were exchanged for an equal number of shares of Class B-1 Stock. Immediately following these exchanges, all shares of previously outstanding Class B Stock were retired.

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From and after October 1, 2015, Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Subject to the limitations in the Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement. All excess stock is held as Class B-1 Stock at all times.
For more information about the Bank’s minimum capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements.
Retained Earnings. The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount sufficient to protect against potential identified accounting or economic losses due to specified interest rate, credit and operations risks. The Bank updates its retained earnings target calculations quarterly under an analytic framework that takes into account sources of potential realized and unrealized losses, including potential loss distributions for each. The Board of Directors reviews the Bank's retained earnings policy annually and revises the methodology as appropriate. The Bank’s current retained earnings policy target is described in Item 5 — Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
On February 28, 2011, the Bank entered into a Joint Capital Enhancement Agreement (the “JCE Agreement”) with the other FHLBanks. Effective August 5, 2011, the FHLBanks amended the JCE Agreement (the "Amended JCE Agreement"), and the Finance Agency approved an amendment to the Bank's Capital Plan to incorporate its provisions on that same date. The Amended JCE Agreement provides that the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a separate restricted retained earnings account (“RRE Account”). Pursuant to the provisions of the Amended JCE Agreement, the Bank is required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all consolidated obligations, excluding hedging adjustments (“Total Consolidated Obligations”).
The Amended JCE Agreement provides that any quarterly net losses incurred by the Bank may be netted against its net income, if any, for other quarters during the same calendar year to determine the minimum required year-to-date or annual allocation to its RRE Account. In the event the Bank incurs a net loss for a cumulative year-to-date or annual period, the Bank may decrease the amount of its RRE Account such that the cumulative year-to-date or annual addition to its RRE Account is zero and the Bank shall apply any remaining portion of the net loss first to reduce retained earnings that are not restricted retained earnings until such retained earnings are reduced to zero, and thereafter may apply any remaining portion of the net loss to reduce its RRE Account. For any subsequent calendar quarter in the same calendar year, the Bank may decrease the amount of its quarterly allocation to its RRE Account in that subsequent calendar quarter such that the cumulative year-to-date addition to the RRE Account is equal to 20 percent of the amount of such cumulative year-to-date net income. In the event the Bank sustains a net loss for a calendar year, any such net loss first shall be applied to reduce retained earnings that are not restricted retained earnings until such retained earnings are reduced to zero, and thereafter any remaining portion of the net loss for the calendar year may be applied to reduce the Bank’s RRE Account. If during a period in which the Bank’s RRE Account is less than one percent of its Total Consolidated Obligations, the Bank incurs a net loss for a cumulative year-to-date or annual period that results in a decrease to the balance of its RRE Account as of the beginning of that calendar year, the Bank’s quarterly allocation requirement shall thereafter increase to 50 percent of quarterly net income until the cumulative difference between the allocations made at the 50 percent rate and the allocations that would have been made at the regular 20 percent rate is equal to the amount of the decrease to the balance of its RRE Account at the beginning of that calendar year.
The Amended JCE Agreement provides that if the Bank’s RRE Account exceeds 1.5 percent of its Total Consolidated Obligations, the Bank may transfer amounts from its RRE Account to its unrestricted retained earnings account, but only to the extent that the balance of its RRE Account remains at least equal to 1.5 percent of the Bank’s Total Consolidated Obligations immediately following such transfer.
The Amended JCE Agreement further provides that the Bank may not pay dividends out of its RRE Account, nor may it reallocate or transfer amounts out of its RRE Account except as described above. In addition, during periods in which the Bank’s RRE Account is less than one percent of its Total Consolidated Obligations, the Bank may not pay dividends out of the amount of its quarterly net income that is required to be allocated to its RRE Account.
Dividends. Subject to the FHLB Act, Finance Agency regulations and other Finance Agency directives, the Bank pays dividends to holders of its capital stock quarterly or as otherwise determined by its Board of Directors. The Board of Directors may declare dividends at the same rate for all shares of Class B Stock, or at different rates for Class B-1 Stock and Class B-2 Stock, provided that in no event can the dividend rate on Class B-2 Stock be lower than the dividend rate on Class B-1 Stock. Dividends may be paid in the form of cash, additional shares of either, or both, sub-classes of Class B Stock, or a combination

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thereof as determined by the Bank’s Board of Directors. The dividend rates on Class B-1 Stock and Class B-2 Stock are paid on all shares of Class B-1 Stock and Class B-2 Stock, respectively, regardless of their classification for accounting purposes. As the Bank's shares of Class B-1 Stock and Class B-2 Stock were not issued until October 1, 2015, and dividends for any given quarter are based upon average capital stock outstanding during the previous quarter, the Bank's fourth quarter 2015 dividend, which was paid on December 31, 2015, was based upon average outstanding Class B Stock that was held during the third quarter of 2015 and, consequently, paid at a single rate. The Bank is permitted by statute and regulation to pay dividends only from previously retained earnings or current net earnings, and the payment of dividends is also subject to the terms of the Amended JCE Agreement.
Because the Bank’s returns from net interest income (excluding net prepayment fees on advances) generally track short-term interest rates, the Bank has had a long-standing practice of benchmarking the dividend rate that it pays on capital stock to the average federal funds rate. In conjunction with the implementation of the changes to the Bank’s Capital Plan, the Bank's Board of Directors adopted new dividend target ranges for the two sub-classes of Class B Stock. While there can be no assurances about future dividends or future dividend rates, the target for quarterly dividends on Class B-1 Stock is an annualized rate that approximates the average one-month LIBOR rate for the immediately preceding quarter, with the expectation that dividend rates on Class B-1 Stock will not be lower than the recent annualized rate of 0.375 percent on previously outstanding Class B shares. The target range for quarterly dividends on Class B-2 Stock is an annualized rate that approximates the average one-month LIBOR rate for the immediately preceding quarter plus 0.5 – 1.0 percent.
The Bank generally pays dividends in the form of capital stock. When dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. For a more detailed discussion of the Bank’s dividend policy and the restrictions relating to its payment of dividends, see Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Legislative and Regulatory Developments
Finance Agency Actions
Advisory Bulletin Regarding Core Mission Achievement
On July 14, 2015, the Finance Agency issued an Advisory Bulletin that provides guidance to the FHLBanks regarding core mission achievement. As stipulated in the Advisory Bulletin, the Finance Agency will assess each FHLBank’s core mission achievement by calculating the ratio of a FHLBank's primary mission assets (defined for this purpose as advances and mortgage loans held for portfolio) relative to its consolidated obligations (hereinafter referred to as the core mission asset or "CMA" ratio). The CMA ratio will be calculated for each calendar year (beginning with the year ended December 31, 2015) using annual average par values.
The Advisory Bulletin also provides the Finance Agency’s expectations for each FHLBank’s strategic plan based on the FHLBank's CMA ratio, which are:
when the CMA ratio is 70 percent or higher, the strategic plan should include an assessment of the FHLBank’s prospects for maintaining that level of core mission achievement;
when the CMA ratio is at least 55 percent but less than 70 percent, the strategic plan should explain the FHLBank’s plans to increase its mission focus; and
when the CMA ratio is below 55 percent, the strategic plan should include a robust explanation of the circumstances that caused the CMA ratio to be below that level, as well as a detailed description of the FHLBank's plans to increase the ratio. The Advisory Bulletin provides that if a FHLBank has a CMA ratio below 55 percent over the course of several consecutive reviews, then the FHLBank’s board of directors should consider possible strategic alternatives as part of its strategic planning.
Currently, the Bank's core mission assets are comprised almost entirely of advances. For the year ended December 31, 2015, the Bank's CMA ratio was 55.96 percent, as compared to 51.40 percent for the first six months of 2015. During the first six months of 2015, the amount of the Bank's short-term liquidity holdings was maintained at a level beyond that which was needed to satisfy Finance Agency liquidity requirements in order to generate additional earnings. In response to this Advisory Bulletin, the Bank reduced somewhat the average amount of its short-term liquidity holdings during the last six months of 2015 and in so doing reduced the amount of its outstanding consolidated obligations that were used to fund these non-mission investments. Further, average outstanding advances (at par value) increased approximately 18 percent in the last six months of 2015 as compared to the first six months of 2015. The combination of the reduction in the Bank's short-term liquidity holdings and the increase in its average outstanding advances contributed to the increase in the Bank's year-to-date CMA ratio from June 30, 2015 to December 31, 2015. As noted previously in the Acquired Member Assets section (and for reasons unrelated to the Advisory Bulletin), the Bank began to purchase mortgage loans through the MPF Program in early 2016. Over time, these purchases are expected to increase the Bank's core mission assets. The Bank currently expects that its CMA ratio will approximate 60 percent for the year ending December 31, 2016.

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The reduction in the Bank's short-term liquidity holdings did not have a significant impact on its earnings for the last six months of 2015. Notwithstanding the negative impact that holding higher amounts of liquidity has on its CMA ratio, the Bank may from time to time maintain higher balances of liquidity if short-term debt markets are volatile or if, in management's judgment, they are expected to become more volatile, or if the returns from holding those higher balances are attractive.
Final Rule on Responsibilities of Boards of Directors, Corporate Practices and Corporate Governance Matters
On November 19, 2015, the Finance Agency issued a final rule that, among other things, requires each FHLBank to:
operate an enterprise wide risk management program and assign its Chief Risk Officer certain enumerated responsibilities;
maintain a compliance program headed by a Compliance Officer who reports directly to the Chief Executive Officer and who must regularly report to the board of directors (or a committee thereof);
maintain board committees specifically responsible for risk management, audit, compensation and corporate governance; and
designate in its bylaws a body of law to follow for its corporate governance and indemnification practices and procedures, choosing from the law of the jurisdiction in which the FHLBank maintains its principal office, the Delaware General Corporation Law or the Revised Model Business Corporation Act. The final rule required each FHLBank to make this designation by March 18, 2016. On March 11, 2016, the Bank's Board of Directors adopted the Delaware General Corporation Law for this purpose. As the Bank's By-Laws were originally patterned after the Delaware General Corporation Law, this adoption did not have any practical effect on the Bank.
The rule, which became effective on December 21, 2015, also provides that the Finance Agency has the authority to review a regulated entity’s indemnification policies, procedures and practices to ensure that they are conducted in a safe and sound manner, and that they are consistent with the body of law adopted by the board of directors of the FHLBank.
Proposed Rule on Acquired Member Assets
On December 17, 2015, the Finance Agency published a proposed rule that would amend the current AMA Regulation, which governs a FHLBank’s ability to purchase and hold certain types of mortgage loans from its members. The proposed rule would allow a FHLBank to utilize its own model in lieu of an NRSRO ratings model to determine the credit rating for AMA loan assets and loan pools.  The proposed rule would also eliminate the use of pool level insurance, such as supplemental mortgage insurance, as part of the required credit risk-sharing structure for AMA products; however, the FHLBanks (including the Bank) are not currently acquiring AMA loans using this structure.
Comments on the proposed rule are due by April 15, 2016.
Final Rule on FHLBank Membership
On January 20, 2016, the Finance Agency issued a final rule that, among other things:
makes captive insurance companies ineligible for FHLBank membership; and
defines the “principal place of business” of an institution eligible for FHLBank membership to be the state in which it maintains its home office and from which the institution conducts business operations.
The rule defines a captive insurance company as a company that is authorized under state law to conduct an insurance business but whose primary business is the underwriting of insurance for affiliated persons or entities.
Captive insurance company members that were admitted as FHLBank members prior to September 12, 2014 (the date of the Finance Agency's proposed rule on FHLBank Membership) will have their memberships terminated by February 18, 2021. Captive insurance company members that were admitted as FHLBank members on or after September 12, 2014 will have their memberships terminated by February 18, 2017. There are restrictions on the level and maturity of advances that FHLBanks can make to these members during the sunset periods.
In the final rule, which became effective on February 19, 2016, the Finance Agency elected not to adopt certain proposed provisions that would have required FHLBank members to hold specified levels of home mortgage loan assets on an ongoing basis.
The Bank does not have any captive insurance company members and the other provisions of the final rule are not expected to have any impact on the Bank's existing members.
Other Developments
Joint Final Rule on Margin and Capital Requirements for Covered Swap Entities
In October 2015, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the FDIC, the Farm Credit Administration, and the Finance Agency (each an “Agency” and, collectively, the “Agencies”) jointly adopted final rules to establish minimum margin and capital requirements for registered swap dealers, major swap participants, security-

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based swap dealers, and major security-based swap participants that are subject to the jurisdiction of one of the Agencies (such entities, “Covered Swap Entities,” and the joint final rules, the “Final Margin Rules”).
When they take effect, the Final Margin Rules will subject non-cleared derivatives and non-cleared security-based derivatives between Covered Swap Entities and financial end-users that have material derivatives exposure (i.e., an average daily aggregate notional of $8 billion or more in non-cleared derivatives calculated in accordance with the Final Margin Rules) to a mandatory two-way minimum initial margin requirement. The minimum amount of the initial margin required to be posted or collected would be either the amount calculated by the Covered Swap Entity using a standardized schedule set forth as an appendix to the Final Margin Rules, which provides the gross initial margin (as a percentage of total notional exposure) for certain asset classes, or an internal margin model of the Covered Swap Entity conforming to the requirements of the Final Margin Rules that is approved by the Agency having jurisdiction over the particular Covered Swap Entity.
The Final Margin Rules specify the types of collateral that may be posted or collected as initial margin for non-cleared derivatives and non-cleared security-based derivatives with financial end-users (generally cash, certain government and GSE securities, certain liquid debt, certain equity securities, certain eligible publicly traded debt, and gold) and set forth haircuts for certain collateral asset classes. Initial margin must be segregated with an independent, third-party custodian and, generally, may not be rehypothecated, except that cash may be placed with a custodian bank in return for a general deposit obligation under certain specified circumstances.
The Final Margin Rules will require minimum variation margin to be exchanged daily for non-cleared derivatives and non-cleared security-based derivatives between Covered Swap Entities and all financial end-users (without regard to the derivatives exposure of the particular financial end-user). The minimum variation margin amount is the daily mark-to-market change in the value of the derivative to the Covered Swap Entity, taking into account variation margin previously posted or collected. For non-cleared derivatives and security-based derivatives between Covered Swap Entities and financial end-users, variation margin may be posted or collected in cash or non-cash collateral that is considered eligible for initial margin purposes. Variation margin is not subject to segregation with an independent, third-party custodian and may, if permitted by contract, be rehypothecated.
The variation margin requirement under the Final Margin Rules will become effective for the Bank on March 1, 2017, and the initial margin requirement under the Final Margin Rules is expected to become effective for the Bank on September 1, 2020.
The Bank is not a Covered Swap Entity under the Final Margin Rules. However, the Bank is a financial end-user under the Final Margin Rules, and it is likely that it will have material derivatives exposure when the initial margin requirements under the Final Margin Rules become effective.
Because the Bank is currently posting and collecting variation margin on non-cleared derivatives, it is not anticipated that the variation margin requirement under the Final Margin Rules will have a significant impact on the Bank’s costs. However, when the initial margin requirement under the Final Margin Rules becomes effective, the Bank anticipates that its costs of engaging in non-cleared derivatives may increase.
The Commodity Futures Trading Commission (“CFTC”) and the SEC are expected to adopt their own versions of the Final Margin Rules that will be comparable to the Final Margin Rules. The CFTC’s and SEC’s rules will only apply to a limited number of registered swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants that are not subject to the jurisdiction of one of the Agencies.
Amendment of FHLBank Act to Make Privately-Insured Credit Unions Eligible for FHLBank Membership
On December 4, 2015, President Obama signed a bill known as the Fixing America’s Surface Transportation Act (“FAST Act”), which includes a provision that amends the FHLBank Act to allow privately-insured credit unions to be eligible for FHLBank membership. The FAST Act requires privately-insured credit unions to satisfy certain initial and ongoing eligibility and reporting requirements. The Finance Agency has indicated that it is reviewing the relevant portions of the FAST Act and that the FHLBanks should consult with the Finance Agency before acting on the membership application of any privately-insured credit union.
Regulatory Oversight
As discussed above, the Finance Agency supervises and regulates the FHLBanks and the OF. The Finance Agency has a statutory responsibility and corresponding authority to ensure that the FHLBanks operate in a safe and sound manner. Consistent with that duty, the Finance Agency has an additional responsibility to ensure the FHLBanks carry out their housing and community development finance mission. In order to carry out those responsibilities, the Finance Agency establishes regulations governing the entire range of operations of the FHLBanks, conducts ongoing off-site monitoring and supervisory reviews, performs annual on-site examinations and periodic interim on-site reviews, and requires the FHLBanks to submit monthly and quarterly information regarding their financial condition, results of operations and risk metrics.

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The Comptroller General of the United States (the “Comptroller General”) has authority under the FHLB 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 FHLB Act. Furthermore, the Government Corporation Control Act provides that the Comptroller General may review any audit of a FHLBank’s 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, and the FHLBank in question. The Comptroller General may also conduct his or her own audit of the financial statements of any FHLBank.
As an SEC registrant, the Bank is subject to the periodic reporting and disclosure regime as administered and interpreted by the SEC. The Bank must also submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General; these reports are required to include a statement of financial condition, a statement of operations, a statement of cash flows, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements. In addition, the Treasury receives the Finance Agency’s annual report to Congress and other reports reflecting the operations of the FHLBanks.
Employees
As of December 31, 2015, the Bank employed 207 people, all but one of whom was located in one office in Irving, Texas. None of the Bank’s employees are subject to a collective bargaining agreement and the Bank believes its relationship with its employees is good.
AHP Assessments
Although the Bank is exempt from all federal, state, and local income taxes, the FHLB Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks must collectively set aside for the AHP the greater of $100 million or 10 percent of their current year’s income before AHP expenses. Interest expense on capital stock that is classified as a liability (i.e., mandatorily redeemable capital stock) is added back to income for purposes of computing the Bank’s AHP assessment. The Bank’s AHP funds are made available to members in the form of direct grants to assist in the purchase, construction, or rehabilitation of housing for very low-, low- and moderate-income households.
Business Strategy and Outlook
The Bank maintains a Strategic Business Plan that provides the framework for its future business direction. The goals and strategies for the Bank’s major business activities are encompassed in this plan, which is updated and approved by the Board of Directors at least annually and at any other time that revisions are deemed necessary.
As described in its Strategic Business Plan, the Bank operates under a cooperative business model that is intended to maximize the overall value of membership in the Bank. This business model envisions that the Bank will limit and carefully manage its risk profile while generating sufficient profitability to maintain an appropriate level of retained earnings, to pay dividends on Class B-1 Stock at a rate at least equal to average one-month LIBOR (subject to a floor of 0.375 percent) and on Class B-2 Stock at a rate at least equal to average one-month LIBOR plus 0.5-1.0 percent, and to absorb periodic earnings volatility related to hedging and derivatives or other external shocks. Consistent with this business model, the Bank places the highest priority on being able to meet its members’ liquidity and funding needs.
The Bank intends to continue to operate under its cooperative business model for the foreseeable future. The Bank’s earnings are typically expected to rise and fall with the general level of market interest rates, particularly short-term money market rates. Developments that may have an effect on the extent to which the Bank’s return on average capital stock exceeds short-term interest rates include general economic and credit market conditions; the level, volatility of and relationships between short-term money market rates such as federal funds and one-month and three-month LIBOR; the future availability and cost of the Bank’s long-term debt relative to benchmark rates such as LIBOR; the availability of interest rate exchange agreements at competitive prices; whether the Bank’s larger borrowers continue to be members of the Bank and the level at which they maintain their borrowing activity; the impact of any future credit market disruptions; and the impact of ongoing economic conditions on demand for the Bank’s credit products from its members.
During 2015, the Bank's lending activities expanded due to increased demand for loans at member institutions which the Bank attributes to improving economic conditions and more robust activity in the housing markets served by its members. However, advances outstanding remain well below the peak levels experienced in 2008, due largely to high deposit levels at member institutions. If high deposit levels persist, the demand for advances may remain subdued. Further, the effects, if any, from the downturn in the oil and gas industry could reduce the demand for advances. Alternatively, continued improvement in regional economic conditions (excluding the oil and gas industry) may have a positive impact on advance demand. While the Bank cannot predict future economic conditions or future levels of advances demand from its members, based on its current expectations the Bank anticipates that its earnings will be sufficient both to pay quarterly dividends at targeted levels and to continue building retained earnings for the foreseeable future.

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While the Bank’s primary focus will be to continue to prudently meet the liquidity and funding needs of its members, the Bank continues to consider ways in which it can enhance its product and/or service offerings in order to become a more valuable resource to its members. To this end, the Bank introduced fluctuating balance letters of credit in 2014, several new advance products in 2014 and 2015 and, in 2016, it has begun to purchase mortgage loans from its members. The FHLB Act and Finance Agency regulations limit the products and services that the Bank can offer to its members and govern many of the terms of the products and services that the Bank offers. The Bank is also required by regulation to file new business activity notices with the Finance Agency for any new products or services that would constitute new business activities under the regulation and, therefore, it will have to assess any potential new products or services offerings in light of these statutory and regulatory restrictions.

ITEM 1A. RISK FACTORS
Our profitability is vulnerable to interest rate fluctuations.
We are subject to significant risks from changes in interest rates because most of our assets and liabilities are financial instruments. Our profitability depends significantly on our net interest income and is impacted by changes in the fair value of interest rate derivatives and any associated hedged items. Changes in interest rates can impact our net interest income as well as the values of our derivatives and certain other assets and liabilities. Changes in overall market interest rates, changes in the relationships between short-term and long-term market interest rates, changes in the relationship between different interest rate indices, or differences in the timing of rate resets for assets and liabilities or related interest rate derivatives with interest rates tied to those indices, can affect the interest rates received from our interest-earning assets differently than those paid on our interest-bearing liabilities. This difference could result in an increase in interest expense relative to interest income, which would result in a decrease in our net interest spread, or a net decrease in earnings related to the relationship between changes in the valuation of our derivatives and any associated hedged items.
Our profitability may be adversely affected if we are not successful in managing our interest rate risk.
Like most financial institutions, our results of operations are significantly affected by our ability to manage interest rate risk. We use a number of tools to monitor and manage interest rate risk, including income simulations and duration/market value sensitivity analyses. Given the unpredictability of the financial markets, capturing all potential outcomes in these analyses is extremely difficult. Key assumptions used in our market value sensitivity analyses include interest rate volatility, mortgage prepayment projections and the future direction of interest rates, among other factors. Key assumptions used in our income simulations include projections of advances volumes and pricing, MPF volumes and pricing, market conditions for our debt, prepayment speeds and cash flows on mortgage-related assets, and other factors. These assumptions are inherently uncertain and, as a result, the measures cannot precisely estimate net interest income or the market value of our equity nor can they precisely predict the effect of higher or lower interest rates or changes in other market factors on net interest income or the market value of our equity. Actual results will most likely 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. Our ability to maintain a positive spread between the interest earned on our earning assets and the interest paid on our interest-bearing liabilities may be affected by the unpredictability of changes in interest rates.
Exposure to credit risk from our customers could have a negative impact on our profitability and financial condition.
We are subject to credit risk from advances and other extensions of credit to members, non-member borrowers and housing associates (collectively, our customers). Other extensions of credit include letters of credit issued or confirmed on behalf of customers, customers’ credit enhancement obligations associated with MPF loans held in portfolio, and interest rate exchange agreements we enter into with our customers.
We require that all outstanding advances and other extensions of credit to our customers be fully collateralized. We evaluate the types of collateral pledged by our customers and assign a borrowing capacity to the collateral, generally based on either a percentage of its book value or estimated market value. The vast majority of the collateral is assigned a borrowing capacity based on its estimated market value. During economic downturns, the number of our member institutions exhibiting significant financial stress generally increases. If member institutions fail, and if the FDIC (or other receiver, conservator or acquiror) does not promptly repay all of the failed institution’s obligations to us or assume the outstanding extensions of credit, we might be required to liquidate the collateral pledged by the failed institution in order to satisfy its obligations to us. A devaluation of or our inability to liquidate collateral in a timely manner in the event of a default by the obligor could cause us to incur a credit loss and adversely affect our financial condition or results of operations.

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Loss of members or borrowers could adversely affect our earnings, which could result in lower investment returns and/or higher borrowing rates for remaining members.
One or more members or borrowers could withdraw their membership or decrease their business levels as a result of a merger with an institution that is not one of our members, or for other reasons, which could lead to a decrease in our total assets and capital.
As the financial services industry has consolidated, acquisitions involving some of our members have resulted in membership withdrawals or business level decreases. Additional acquisitions that lead to similar results are possible, including acquisitions in which the acquired institutions are merged into institutions located outside our district with which we cannot do business. We could also be adversely impacted by the reduction in business volume that would arise from the failure of one or more of our members.
The loss of one or more borrowers that represent a significant proportion of our business, or a significant reduction in the borrowing levels of one or more of these borrowers, could, depending on the magnitude of the impact, cause us to lower dividend rates, raise advances rates, attempt to reduce operating expenses (which could cause a reduction in service levels), or undertake some combination of these actions. The magnitude of the impact would depend, in part, on our size and profitability at the time such institution repays its advances to us.
Members’ funding needs may decline, which could reduce loan demand and adversely affect our earnings.
Market factors or regulatory changes could reduce loan demand from our member institutions, which could adversely affect our earnings. Demand for advances from all segments of our membership increased throughout the period of credit market disruption that began in the third quarter of 2007, peaked at the beginning of the fourth quarter of 2008 and declined to a cyclical low in the first quarter of 2014 before increasing over the remainder of 2014 and in 2015. At December 31, 2015, our outstanding advances were approximately 64 percent lower than they were at September 30, 2008. Continued high deposit levels and/or low demand for loans at member institutions could limit or further reduce members’ needs for funding. A further decline in the demand for advances, if significant, could negatively affect our results of operations.
We face competition for loan demand, which could adversely affect our earnings.
Our primary business is making advances to our members. We compete with other suppliers of wholesale funding, both secured and unsecured, including investment banks, commercial banks and, in certain circumstances, other FHLBanks. Our members have access to alternative funding sources, which may provide more favorable terms than we do on our advances, including more flexible credit or collateral standards.
The availability to our members of alternative funding sources that are more attractive than the funding products offered by us may significantly decrease the demand for our advances. Any change made by us in the pricing of our advances in an effort to compete more effectively with these competitive funding sources may decrease the profitability on advances. A decrease in the demand for advances or a decrease in our profitability on advances would negatively affect our financial condition and results of operations.
Changes in investors’ perceptions of the creditworthiness of the FHLBanks may adversely affect our ability to issue consolidated obligations on favorable terms.
We, and the other ten FHLBanks, currently have the highest credit rating from Moody’s and are rated AA+/A-1+ by S&P. The consolidated obligations issued by the FHLBanks are rated Aaa/P-1 by Moody’s and AA+/A-1+ by S&P. Each of these nationally recognized statistical rating organizations has assigned a stable outlook to its long-term credit rating on the FHLBank System's consolidated obligations and to its long-term rating of each of the FHLBanks.
Pursuant to criteria used by S&P and Moody's, the FHLBank System's debt rating and the credit ratings of the individual FHLBanks are linked closely to the U.S. sovereign credit rating because of the FHLBanks' GSE status. The U.S. government's fiscal challenges could negatively impact the credit rating of the U.S. government, which could in turn result in a downgrade of the rating assigned to us and/or the consolidated obligations of the FHLBank System.
Because the FHLBanks have joint and several liability for all of the FHLBanks' consolidated obligations, negative developments at any FHLBank could also adversely affect S&P's and/or Moody's credit ratings on us and/or the FHLBanks' consolidated obligations or result in one or both of these NRSROs issuing a negative credit report on the FHLBank System.
Our primary source of liquidity is the issuance of consolidated obligations. Historically, the FHLBank System’s status as a government-sponsored enterprise and its favorable credit ratings have provided us with excellent access to the capital markets. Any downgrades of the FHLBank System’s consolidated obligations by S&P and/or Moody’s, negative guidance from the rating agencies, or negative announcements by one or more of the FHLBanks could result in higher funding costs and/or disruptions in our access to the capital markets. To the extent that we cannot access funding when needed on acceptable terms, our financial condition and results of operations could be adversely impacted.

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Changes in overall credit market conditions and/or competition for funding may adversely affect our cost of funds and our access to the capital markets.
The cost of our consolidated obligations depends in part on prevailing conditions in the capital markets at the time of issuance, which are generally beyond our control. For instance, a decline in overall investor demand for debt issued by the FHLBanks and similar issuers could adversely affect our ability to issue consolidated obligations on favorable terms. Investor demand is influenced by many factors including changes or perceived changes in general economic conditions, changes in investors’ risk tolerances or balance sheet capacity, or, in the case of overseas investors, changes in preferences for holding dollar-denominated assets. Credit market disruptions similar to those that occurred during the period from late 2007 through early 2009 and which dampened investor demand for longer-term debt, including longer-term FHLBank consolidated obligations, could occur again, making it more difficult for us to match the maturities of our assets and liabilities. In addition, changes in the relationships between the cost of our consolidated obligations and interest rate swaps could increase our net cost of funds, which could negatively impact our results of operations. Further, higher long-term debt costs could cause us to fund some long-term assets with short-term debt, creating mismatches between the maturities of our assets and liabilities.
We compete with Fannie Mae, Freddie Mac and other GSEs, as well as commercial banking, corporate, sovereign and supranational entities for funds raised through the issuance of unsecured debt in the global debt markets. Increases in the supply of competing debt products may, in the absence of increased investor demand, result in higher debt costs, which could negatively affect our financial condition and results of operations. Further, if investors limit their demand for our debt, our ability to fund our operations and to meet the credit and liquidity needs of our members by accessing the capital markets could eventually be compromised.
Our inability to issue consolidated obligations for a relatively short period of time could jeopardize our ability to continue operating.
We typically issue consolidated obligations almost every day. As more fully described in the Liquidity and Capital Resources section of this report, we manage our liquidity to ensure that, at a minimum, we have sufficient funds to meet our obligations under 5- and 15-day scenarios in which we assume we are unable to access the market for consolidated obligations. We also maintain access to other sources of contingent liquidity. However, if we were unable to issue consolidated obligations for an extended period of time and our other sources of contingent liquidity were either not available or were not available in sufficient quantities, our ability to meet our obligations and otherwise conduct our operations would be compromised.
Our joint and several liability for all consolidated obligations may adversely impact our earnings, our ability to pay dividends, and our ability to redeem or repurchase capital stock.
Under the FHLB Act and Finance Agency regulations, we are jointly and severally liable with the other FHLBanks for the consolidated obligations issued by the FHLBanks through the Office of Finance regardless of whether we receive all or any portion of the proceeds from any particular issuance of consolidated obligations.
If another FHLBank were to default on its obligation to pay principal of or interest on any consolidated obligations, the Finance Agency may allocate the outstanding liability among one or more of the remaining FHLBanks on a pro rata basis or on any other basis the Finance Agency may determine. In addition, the Finance Agency, in its discretion, may require any FHLBank to make principal or interest payments due on any consolidated obligations, whether or not the primary obligor FHLBank has defaulted on the payment of that obligation. Accordingly, we could incur significant liability beyond our primary obligation under consolidated obligations due to the failure of other FHLBanks to meet their payment obligations, which could negatively affect our financial condition and results of operations.
Further, the FHLBanks may not pay any dividends to members or redeem or repurchase any shares of stock unless the principal and interest due on all consolidated obligations has been paid in full. Accordingly, our ability to pay dividends or to redeem or repurchase stock could be affected not only by our own financial condition but also by the financial condition of one or more of the other FHLBanks.
Exposure to credit risk on our investments and MPF loans could have a negative impact on our profitability and financial condition.
We are exposed to credit risk from our MPF loans held in portfolio (the balance of which is expected to grow beginning in 2016) and our secured and unsecured investment portfolio. A deterioration of economic conditions, declines in residential real estate values, changes in monetary policy or other events that could negatively impact the economy and the markets as a whole could lead to borrower defaults, which in turn could cause us to incur losses on our MPF loans or additional losses on our investment portfolio.
During 2009, 2010 and 2011, delinquencies and losses with respect to residential mortgage loans generally increased and residential property values declined in many states. Due to these deteriorating conditions, 14 of our non-agency residential mortgage-backed securities were deemed to be other-than-temporarily impaired during the period from January 1, 2009 through

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June 30, 2012. One additional non-agency residential mortgage-backed security was deemed to be other-than-temporarily impaired at December 31, 2014 and at each quarter-end in 2015. We recognized credit losses on these securities totaling $13.1 million. As of December 31, 2015, the unpaid principal balance of the Bank's 27 non-agency residential mortgage-backed securities totaled $153 million.
If the actual and/or projected performance of the loans underlying our non-agency residential mortgage-backed securities is worse than our current expectations, we could recognize additional losses on these 15 securities as well as losses on our other investments in non-agency residential mortgage-backed securities, which would negatively impact our results of operations and financial condition.
In addition, if delinquencies, default rates and loss severities on residential mortgage loans increase, and/or there is a decline in residential real estate values, we could experience losses on our MPF loans held in portfolio.
Changes in the regulatory environment could negatively impact our operations and financial results and condition.
On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which makes significant changes to a number of aspects of the regulation of financial institutions. This legislation contains several provisions that either have had or could have an impact on us and/or our members. Because the Dodd-Frank Act requires several entities (among them, the Financial Stability Oversight Council, the Board of Governors of the Federal Reserve System, and the SEC) to issue a number of regulations, orders, determinations, and reports, the full effect of this legislation on us and our activities, and on our members and their activities, will become known only after the required regulations, orders, determinations, and reports are issued and implemented.
We could be materially adversely affected by the adoption of new laws, policies or regulations or changes in existing laws, policies or regulations, including, but not limited to, changes in the interpretations or applications by the Finance Agency or as the result of judicial reviews that modify the present regulatory environment. For instance, in 2013, separate legislation was introduced in the U.S. House of Representatives and the U.S. Senate that would wind down Fannie Mae and Freddie Mac and replace them with a new finance system to support the secondary mortgage market. The role of the FHLBanks in the new finance system differs under the two proposals. In addition, the legislation contains provisions that could change the regulation and governance of the FHLBanks. On March 16, 2014, Senate Banking Committee leaders released the legislative text of a housing finance reform proposal that would wind down Fannie Mae and Freddie Mac and replace them with a new system of federally insured MBS in which private issuers would be required to bear initial losses before the governmental guarantee would be triggered. It is not possible to determine if or when legislation regarding housing reform will be enacted, nor are the ultimate provisions of any such legislation determinable at this time.
In addition, the regulatory environment affecting our members could change in a manner that could have a negative impact on their ability to own our stock or take advantage of our products and services. For example, recent regulations issued by the Consumer Financial Protection Bureau regarding mortgage lending may result in decreased participation in the mortgage lending market by community financial institutions over time, which could reduce demand for our advances.
For a discussion of recent legislative and regulatory developments, see Item 1 — Business — Legislative and Regulatory Developments beginning on page 16 of this report.
Changes in our access to the interest rate derivatives market on acceptable terms may adversely affect our ability to maintain our current hedging strategies.
We actively use derivative instruments to manage interest rate risk. The effectiveness of our interest rate risk management strategy depends to a significant extent upon our ability to enter into these instruments with acceptable counterparties in the necessary quantities and under satisfactory terms to hedge our corresponding assets and liabilities. We currently enjoy ready access to the interest rate derivatives market through a diverse group of investment grade rated counterparties. Several factors could have an adverse impact on our access to the derivatives market, including changes in our credit rating, changes in the current counterparties’ credit ratings, reductions in our counterparties’ allocation of resources to the interest rate derivatives business, and changes in the liquidity of that market created by a variety of regulatory or market factors. In addition, the financial market disruptions that occurred during the period from late 2007 through early 2009 resulted in mergers of several of our derivatives counterparties. Further consolidation of the financial services industry, if it occurs, could increase our concentration risk with respect to counterparties in this industry. Further, defaults by, or even negative rumors or questions about, one or more financial services institutions, or the financial services industry in general, could lead to market-wide disruptions in which it may be difficult for us to find acceptable counterparties for such transactions. If changes in our access to the derivatives market result in our inability to manage our hedging activities efficiently and economically, we may be unable to find economical alternative means to manage our interest rate risk effectively, which could adversely affect our financial condition and results of operations.
Prior to June 10, 2013, all of the derivatives we used to manage our interest rate risk were negotiated in the over-the-counter (“OTC”) derivatives market. Beginning on June 10, 2013, certain derivative transactions that we enter into are required to be

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cleared through a third-party clearinghouse, which exposes us to credit risk to other parties that we do not have when transacting in the OTC market. In addition, many of the other derivatives that we continue to trade in the OTC market could eventually be subject to central clearing. For our derivative transactions that are not cleared, we will be subject to an initial margin requirement beginning in September 2020 if those transactions have an aggregate notional balance of $8 billion or more. If applicable, this requirement may increase our hedging costs, which would negatively impact our results of operations.
Defaults by or the insolvency of one or more of our derivative counterparties could adversely affect our profitability and financial condition.
We regularly enter into derivative transactions with major financial institutions. Our financial condition and results of operations could be adversely affected if derivative counterparties to whom we have exposure fail.
We have entered into master agreements with all of our non-member bilateral derivative counterparties that require the delivery (or return) of collateral consisting of cash or very liquid, highly rated securities if credit risk exposures rise above certain minimum thresholds (generally ranging from $100,000 to $500,000). Upon a request made by the unsecured counterparty, the party that has the unsecured obligation to the counterparty bearing the risk of the unsecured credit exposure must deliver sufficient collateral to reduce the unsecured credit exposure to zero. In addition, excess collateral must be returned by a party in an oversecured position. Delivery or return of the collateral generally occurs within one business day and, until such delivery or return, we may be in an undersecured position, which could result in a loss in the event of a default by the counterparty, or we may be due excess collateral, which could result in a loss in the event that the counterparty is unable or unwilling to return the collateral.
Cleared trades are subject to initial and variation margin requirements established by the clearinghouse and its clearing members. Collateral is delivered (or returned) daily and, unlike bilateral derivatives, is not subject to any maximum unsecured credit exposure thresholds. With cleared transactions, we are exposed to credit risk in the event that the clearinghouse or the clearing member fails to meet its obligations to us.
Because derivative valuations are determined based on market conditions at particular points in time, they can change quickly. Even after the delivery or return of collateral, we may be in an undersecured position, or be due the return of excess collateral, as the values upon which the delivery or return was based may have changed since the valuation was performed. Further, we may incur additional losses if any non-cash collateral held by us cannot be readily liquidated at prices that are sufficient to fully recover the value of the derivatives.
An interruption in our access to the capital markets would limit our ability to obtain funds.
We conduct our business and fulfill our public purpose primarily by acting as an intermediary between our members and the capital markets. Certain events, such as a natural disaster or terrorist act, could limit or prevent us from accessing the capital markets in order to issue consolidated obligations for some period of time. An event that precludes us from accessing the capital markets may also limit our ability to enter into transactions to obtain funds from other sources. External forces are difficult to predict or prevent, but can have a significant impact on our ability to manage our financial needs and to meet the credit and liquidity needs of our members.
A failure or interruption in our information systems or other technology may adversely affect our ability to conduct and manage our business effectively.
We rely heavily upon information systems and other technology to conduct and manage our business and deliver a very large portion of our services to members on an automated basis. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions, including "cyberattacks" (e.g., breaches, unauthorized access, misuse, computer viruses or other malicious code and other events) that could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations. To the extent that we experience a failure or interruption in any of these systems or other technology, we may be unable to conduct and manage our business effectively, including, without limitation, our hedging and advances activities. We can make no assurance that we will be able to prevent or timely and adequately address any such failure or interruption. Any failure or interruption could significantly harm our customer relations, reputation, risk management, and profitability, which could negatively affect our financial condition and results of operations.
Lack of a public market and restrictions on transferring our stock could result in an illiquid investment for the holder.
Under the GLB Act, Finance Agency regulations, and our capital plan, our stock may be redeemed upon the expiration of a five-year redemption period following a redemption request. Only stock in excess of a member’s minimum investment requirement, stock held by a member that has submitted a notice to withdraw from membership, or stock held by a member whose membership has been terminated may be redeemed at the end of the redemption period. Further, we may elect to repurchase excess stock of a member at any time at our sole discretion.

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There is no guarantee, however, that we will be able to redeem stock held by an investor even at the end of the redemption period. If the redemption or repurchase of the stock would cause us to fail to meet our minimum capital requirements, then the redemption or repurchase is prohibited by Finance Agency regulations and our capital plan. Likewise, under such regulations and the terms of our capital plan, we could not honor a member’s capital stock redemption notice if the redemption would cause the member to fail to maintain its minimum investment requirement. Moreover, because our stock may only be owned by our members (or, under certain circumstances, former members and certain successor institutions), and our capital plan requires our approval before a member may transfer any of its stock to another member, there can be no assurance that a member would be allowed to sell or transfer any excess stock to another member at any point in time.
We may also suspend the redemption of stock if we reasonably believe that the redemption would prevent us from maintaining adequate capital against a potential risk, or would otherwise prevent us from operating in a safe and sound manner. In addition, approval from the Finance Agency for redemptions or repurchases would be required if the Finance Agency or our Board of Directors were to determine that we have incurred, or are likely to incur, losses that result in, or are likely to result in, charges against our capital. Under such circumstances, there can be no assurance that the Finance Agency would grant such approval or, if it did, upon what terms it might do so. Redemption and repurchase of our stock would also be prohibited if the principal and interest due on any consolidated obligations issued on behalf of any FHLBank through the Office of Finance have not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations.
Accordingly, there are a variety of circumstances that would preclude us from redeeming or repurchasing our stock that is held by a member. Because there is no public market for our stock and transfers require our approval, there can be no assurance that a member’s purchase of our stock would not effectively become an illiquid investment.
Failure by a member to comply with our minimum investment requirement could result in substantial penalties to that member and could cause us to fail to meet our capital requirements.
Members must comply with our minimum investment requirement at all times. Our Board of Directors may increase the members’ minimum investment requirement within certain ranges specified in our capital plan. The minimum investment requirement may also be increased beyond such ranges pursuant to an amendment to the capital plan, which would have to be adopted by our Board of Directors and approved by the Finance Agency. We would provide members with 30 days’ notice prior to the effective date of any increase in their minimum investment requirement. Under the capital plan, members are required to purchase an additional amount of our stock as necessary to comply with any new requirements or, alternatively, they may reduce their outstanding advances activity (subject to any prepayment fees applicable to the reduction in activity) on or prior to the effective date of the increase. To facilitate the purchase of additional stock to satisfy an increase in the minimum investment requirement, the capital plan authorizes us to issue stock in the name of the member and to correspondingly debit the member’s demand deposit account maintained with us.
The GLB Act requires members to “comply promptly” with any increase in the minimum investment requirement to ensure that we continue to satisfy our minimum capital requirements. However, the Finance Agency's predecessor stated, when it published the final regulation implementing this provision of the GLB Act, that it did not believe this provision provides the FHLBanks with an unlimited call on the assets of their members. As a result, it is not clear whether we or our regulator would have the legal authority to compel a member to invest additional amounts in our capital stock.
Thus, while the GLB Act and our capital plan contemplate that members would be required to purchase whatever amounts of stock are necessary to ensure that we continue to satisfy our capital requirements, and while we may seek to enforce this aspect of the capital plan, our ability ultimately to compel a member, either through automatic deductions from a member’s demand deposit account or otherwise, to purchase an additional amount of our stock is not free from doubt.
Nevertheless, even if a member could not be compelled to make additional stock purchases, the failure by a member to comply with the stock purchase requirements of our capital plan could subject it to substantial penalties, including the possible termination of its membership. In the event of termination for this reason, we may call any outstanding advances to the member prior to their maturity and the member would be subject to any fees applicable to the prepayment.
Furthermore, if our members fail to comply with the minimum investment requirement, we may not be able to satisfy our capital requirements, which could adversely affect our operations and financial condition.
Finance Agency authority to approve changes to our capital plan and to impose other restrictions and limitations on us and our capital management may adversely affect members.
Under Finance Agency regulations and our capital plan, amendments to the capital plan must be approved by the Finance Agency. However, amendments to our capital plan are not subject to member consent or approval. While amendments to our capital plan must be consistent with the FHLB Act and Finance Agency regulations, it is possible that they could result in changes to the capital plan that could adversely affect the rights and obligations of members.

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Moreover, the Finance Agency has significant supervisory authority over us and may impose various limitations and restrictions on us, our operations, and our capital management as it deems appropriate to ensure our safety and soundness, and the safety and soundness of the FHLBank System. Among other things, the Finance Agency may impose higher capital requirements on us that might include, but not be limited to, the imposition of a minimum retained earnings requirement, and may suspend or otherwise limit stock repurchases, redemptions and/or dividends.
Limitations on our ability to pay dividends could result in lower investment returns for members.
Under Finance Agency regulations and our capital plan, we may pay dividends on our stock only out of unrestricted retained earnings or a portion of our current net earnings. However, if we are not in compliance with our minimum capital requirements or if the payment of dividends would make us noncompliant, we are precluded from paying dividends. In addition, we may not declare or pay a dividend if the par value of our stock is impaired or is projected to become impaired after paying such dividend. Further, we may not declare or pay any dividends in the form of capital stock if our excess stock is greater than one percent of our total assets or if, after the issuance of such shares, our outstanding excess stock would be greater than one percent of our total assets. Payment of dividends would also be suspended if the principal and interest due on any consolidated obligations issued on behalf of any FHLBank through the Office of Finance have not been paid in full or if we become unable to comply with regulatory liquidity requirements or satisfy our current obligations. In addition to these explicit limitations, it is also possible that the Finance Agency could restrict our ability to pay a dividend even if we have sufficient retained earnings to make the payment and are otherwise in compliance with the requirements for the payment of dividends.
The terms of any liquidation, merger or consolidation involving us may have an adverse impact on members’ investments in us.
Under the GLB Act, holders of Class B Stock own our retained earnings, if any. With respect to liquidation, our capital plan provides that, after payment of creditors, all Class B Stock will be redeemed at par, or pro rata if liquidation proceeds are insufficient to redeem all of the stock in full. Any remaining assets will be distributed to the shareholders in proportion to their stock holdings relative to the total outstanding Class B Stock.
Our capital plan also stipulates that its provisions governing liquidation are subject to the Finance Agency’s statutory authority to prescribe regulations or orders governing liquidations of a FHLBank, and that consolidations and mergers may be subject to any lawful order of the Finance Agency. We cannot predict how the Finance Agency might exercise its authority with respect to liquidations or reorganizations or whether any actions taken by the Finance Agency in this regard would be inconsistent with the provisions of our capital plan or the rights of holders of our Class B Stock. Consequently, there can be no assurance that any liquidation, merger or consolidation involving us will be consummated on terms that do not adversely affect our members’ investment in us.
An increase in our AHP contribution rate could adversely affect our ability to pay dividends to our shareholders.
The FHLB Act requires each FHLBank to establish and fund an AHP. Annually, the FHLBanks are required to set aside, in the aggregate, the greater of $100 million or 10 percent of their current year’s income (before charges for AHP, as adjusted for interest expense on mandatorily redeemable capital stock) for their AHPs. If the FHLBanks’ combined income does not result in an aggregate AHP contribution of at least $100 million in a given year, we could be required to contribute more than 10 percent of our income to the AHP. An increase in our AHP contribution would reduce our net income and could adversely affect our ability to pay dividends to our shareholders.
A natural or man-made disaster, especially one affecting our region, could adversely affect our profitability or financial condition.
Portions of our district are subject to risks from hurricanes, tornadoes, floods and other natural disasters. In addition to natural disasters, our business could be negatively impacted by man-made disasters. Natural or man-made disasters that occur within or outside our district may damage or dislocate our members’ facilities, may damage or destroy collateral pledged to secure advances or other extensions of credit, may adversely affect the livelihood of MPF borrowers or members’ customers or otherwise cause significant economic dislocation in the affected areas. If this were to occur, our business could be negatively impacted.
Significant borrower defaults on loans made by our members could cause members to fail. If one or more member institutions fail, and if the value of the collateral pledged to secure advances from us has declined below the amount borrowed, we could incur a credit loss that would adversely affect our financial condition and results of operations. A decline in the local economies in which our members operate could reduce members’ needs for funding, which could reduce demand for our advances. We could be adversely impacted by the reduction in business volume that would arise either from the failure of one or more of our members or from a decline in member funding needs.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

ITEM 2. PROPERTIES
The Bank owns a 157,000 square foot office building located at 8500 Freeport Parkway South, Irving, Texas. The Bank occupies approximately 89,000 square feet of space in this building.
The Bank also maintains leased off-site business resumption and storage facilities comprising approximately 18,000 and 5,000 square feet of space, respectively.

ITEM 3. LEGAL PROCEEDINGS
The Bank is not a party to any material pending legal proceedings.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Bank is a cooperative and all of its outstanding capital stock, which is known as Class B Stock, is owned by its members or, in some cases, by non-member institutions that acquire stock by virtue of acquiring member institutions, by a federal or state agency or insurer acting as a receiver of a closed institution, or by former members of the Bank that retain capital stock to support advances or other extensions of credit that remain outstanding or until any applicable stock redemption or withdrawal notice period expires. All members must hold stock in the Bank. All of the Bank’s shareholders are financial institutions; no individual may own any of the Bank’s capital stock. The Bank’s capital stock is not publicly traded, nor is there an established market for the stock. The Bank’s capital stock has a par value of $100 per share and it may be purchased, redeemed, repurchased and transferred only at its par value. By regulation, the parties to a transaction involving the Bank’s stock can include only the Bank and its member institutions (or non-member institutions or former members, as described above). While a member could transfer stock to another member of the Bank, such transfer could occur only upon approval of the Bank and then only at par value. Members may redeem excess stock, or withdraw from membership and redeem all outstanding capital stock, with five years' written notice to the Bank. The Bank does not issue options, warrants or rights relating to its capital stock, nor does it provide any type of equity compensation plan. As of March 11, 2016, the Bank had 843 shareholders and 15,733,717 shares of capital stock outstanding.
On December 3, 2014, the Bank's Board of Directors adopted several amendments to the Bank’s Capital Plan, subject to approval by the Finance Agency and certain notification requirements. The Finance Agency approved the amendments to the Bank’s Capital Plan on June 1, 2015. Among other things, the Bank’s Capital Plan was amended to allow for the creation of two sub-classes of the Bank’s Class B Stock (Class B-1 Stock and Class B-2 Stock). On August 31, 2015, the Bank gave notice to its shareholders that the amended Capital Plan would be implemented and the two sub-classes of capital stock would be created on October 1, 2015.
On October 1, 2015, the Bank exchanged all shares of outstanding Class B Stock at the open of business on that date for an equal number of shares of capital stock consisting of shares of Class B-1 Stock and Class B-2 Stock allocated as described in the next sentence. For each shareholder, (i) a number of shares of existing Class B Stock in an amount sufficient to meet such shareholder’s activity-based investment requirement were exchanged for an equal number of shares of Class B-2 Stock and (ii) all other outstanding shares of existing Class B Stock held by such shareholder were exchanged for an equal number of shares of Class B-1 Stock. Immediately following these exchanges, all shares of previously outstanding Class B Stock were retired.
From and after October 1, 2015, Class B-1 Stock is used to meet the membership investment requirement and Class B-2 Stock is used to meet the activity-based investment requirement. Subject to the limitations in the Capital Plan, the Bank converts shares of one sub-class of Class B Stock to the other sub-class of Class B Stock under the following circumstances: (i) shares of Class B-2 Stock held by a shareholder in excess of its activity-based investment requirement are converted into Class B-1 Stock, if necessary, to meet that shareholder’s membership investment requirement and (ii) shares of Class B-1 Stock held by a shareholder in excess of the amount required to meet its membership investment requirement are converted into Class B-2 Stock as needed in order to satisfy that shareholder’s activity-based investment requirement. All excess stock is held as Class B-1 Stock at all times.
Subject to Finance Agency directives and the terms of the Amended Joint Capital Enhancement Agreement described below, the Bank is permitted by statute and regulation to pay dividends on members’ capital stock in either cash or capital stock only from previously retained earnings or a portion of current net earnings. The Bank’s Board of Directors may not declare or pay a dividend based on projected or anticipated earnings, nor may it declare or pay a dividend if the Bank is not in compliance with its minimum capital requirements or if the Bank would fail to meet its minimum capital requirements after paying such dividend (for a discussion of the Bank’s minimum capital requirements, see Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk-Based Capital Rules and Other Capital Requirements). Further, the Bank may not declare or pay any dividends in the form of capital stock if excess stock held by its shareholders is greater than one percent of the Bank’s total assets or if, after the issuance of such shares, excess stock held by its shareholders would be greater than one percent of the Bank’s total assets. Shares of capital stock issued as dividend payments have the same rights, obligations, and restrictions as all other shares of capital stock, including rights, privileges, and restrictions related to the repurchase and redemption of capital stock. To the extent such shares represent excess stock, they may be repurchased or redeemed by the Bank in accordance with the provisions of the Bank’s Capital Plan.
The Bank, and the other FHLBanks, are parties to a Joint Capital Enhancement Agreement, as amended (the "Amended JCE Agreement"), which provides that the Bank (and each of the other FHLBanks) will, on a quarterly basis, allocate at least 20 percent of its net income to a restricted retained earnings account ("RRE Account"). Pursuant to the provisions of the Amended JCE Agreement, the Bank is required to build its RRE Account to an amount equal to one percent of its total outstanding consolidated obligations, which for this purpose is based on the most recent quarter’s average carrying value of all

28


outstanding consolidated obligations, excluding hedging adjustments. The Amended JCE Agreement provides that during periods in which the Bank’s RRE Account is less than the amount prescribed in the preceding sentence, it may pay dividends only from unrestricted retained earnings or from the portion of its quarterly net income that exceeds the amount required to be allocated to its RRE Account. The allocations to, and restrictions associated with, its RRE Account have not had nor are they currently expected to have an effect on the Bank’s dividend payment practices. For additional information regarding the Amended JCE Agreement, see Item 1 — Business — Capital — Retained Earnings.
The Bank has had a long-standing practice of paying quarterly dividends in the form of capital stock. Prior to the fourth quarter of 2015, the Bank also had a long-standing practice of benchmarking the dividend rate that it pays on its capital stock to the average federal funds rate. In conjunction with the implementation of the changes to the Bank’s Capital Plan discussed above, the Bank's Board of Directors adopted new dividend target ranges for the two sub-classes of Class B Stock. While there can be no assurances about future dividends or future dividend rates, the target for quarterly dividends on Class B-1 Stock is an annualized rate that approximates average one-month LIBOR, with the expectation that dividend rates on Class B-1 Stock will not be lower than the recent annualized rate of 0.375 percent on previously outstanding Class B shares. The target range for quarterly dividends on Class B-2 Stock is an annualized rate that approximates average one-month LIBOR plus 0.5 – 1.0 percent. When stock dividends are paid, capital stock is issued in full shares and any fractional shares are paid in cash. Dividends are typically paid on the last business day of each quarter and are based upon the Bank’s operating results, shareholders’ average capital stock holdings and the applicable rate for the preceding quarter. Beginning with the dividend that was paid on December 31, 2015, capital stock dividends are paid in the form of Class B-1 shares.
The following table sets forth certain information regarding the quarterly dividends that were declared and paid by the Bank during the years ended December 31, 2015 and 2014. During each of the first three quarters of 2015 and all four quarters of 2014, the Bank paid dividends at an annualized rate equal to the upper end of the Federal Reserve’s target range for the federal funds rate for the immediately preceding quarter plus 12.5 basis points. The average effective federal funds rates for the fourth quarter of 2013, each quarter in 2014, and each of the first two quarters in 2015 were below the upper end of the Federal Reserve’s target range of 0.25 percent for the federal funds rate for those periods, which was also the rate that depository institutions could earn on both required and excess reserves maintained at the Federal Reserve during those periods. As a result of this disparity, the Bank elected to benchmark its dividends in the first three quarters of 2015 and all four quarters of 2014 to the upper end of the Federal Reserve’s target range for the federal funds rate. For the fourth quarter of 2015, the Bank paid dividends on average Class B Stock outstanding during the third quarter of 2015 at an annualized rate of 0.375 percent as average one-month LIBOR for the third quarter of 2015 was below 0.375 percent. All dividends in 2015 and 2014 were paid in the form of capital stock except for fractional shares, which were paid in cash.
DIVIDENDS PAID
(dollars in thousands)
 
2015
 
2014
 
Amount(1)
 
Annualized
Rate(3)
 
Amount(2)
 
Annualized
Rate(3)
First Quarter
$
1,100

 
0.375
%
 
$
1,019

 
0.375
%
Second Quarter
1,123

 
0.375
%
 
984

 
0.375
%
Third Quarter
1,200

 
0.375
%
 
1,065

 
0.375
%
Fourth Quarter
1,343

 
0.375
%
 
1,135

 
0.375
%
____________________________________
(1) 
Amounts exclude (in thousands) $4, $5, $4 and $4 of dividends paid on mandatorily redeemable capital stock for the first, second, third and fourth quarters of 2015, respectively. For financial reporting purposes, these dividends were classified as interest expense.
(2) 
Amounts exclude (in thousands) $6, $4, $4 and $4 of dividends paid on mandatorily redeemable capital stock for the first, second, third and fourth quarters of 2014, respectively. For financial reporting purposes, these dividends were classified as interest expense.
(3) 
Reflects the annualized rate paid on all of the Bank’s average capital stock outstanding regardless of its classification for financial reporting purposes as either capital stock or mandatorily redeemable capital stock.
The Bank has a retained earnings policy that calls for the Bank to maintain retained earnings in an amount sufficient to protect against potential identified economic or accounting losses due to specified interest rate, credit or operations risks. The results of the Bank's annual stress test mandated by the Dodd-Frank Act are also considered when establishing the Bank's retained earnings targets. With certain exceptions, the Bank’s policy calls for the Bank to maintain its total retained earnings balance at or above its policy target when determining the amount of funds available to pay dividends. The Bank’s current retained earnings policy target, which was last updated in December 2015, calls for the Bank to maintain a total retained earnings balance of at least $520 million to protect against the risks identified in the policy. Notwithstanding the fact that the Bank’s

29


December 31, 2015 retained earnings balance of $762.2 million exceeds the policy target balance, the Bank currently expects to continue to build its retained earnings in keeping with its long-term strategic objectives and the provisions of the Amended JCE Agreement.
While there can be no assurances, taking into consideration its current earnings expectations and anticipated market conditions, the Bank currently expects to pay dividends on Class B-1 Stock in 2016 at a rate at least equal to average one-month LIBOR for the applicable dividend period, with the expectation that annualized dividend rates for Class B-1 Stock will not be lower than 0.375 percent. The Bank expects to pay dividends on Class B-2 Stock at an annualized rate that approximates average one-month LIBOR for the applicable dividend period plus 0.5 - 1.0 percent.
On March 21, 2016, the Bank’s Board of Directors approved dividends on Class B-1 and Class B-2 Stock in the form of capital stock (i.e., Class B-1 Stock) for the first quarter of 2016 at annualized rates of 0.375 percent (as average one-month LIBOR for the fourth quarter of 2015 was 0.251 percent) and 1.251 percent (a rate equal to average one-month LIBOR for the fourth quarter of 2015 plus 1.0 percent), respectively. The first quarter 2016 dividend, to be applied to average Class B-1 Stock and Class B-2 Stock held during the period from October 1, 2015 through December 31, 2015, will be paid on March 31, 2016.
Pursuant to the terms of an SEC no-action letter dated September 13, 2005, the Bank is exempt from the requirements to report: (1) sales of its equity securities under Item 701 of Regulation S-K and (2) repurchases of its equity securities under Item 703 of Regulation S-K. In addition, the HER Act specifically exempts the Bank from periodic reporting requirements under the securities laws pertaining to the disclosure of unregistered sales of equity securities.

30


ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(dollars in thousands)
 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Balance sheet (at year end)
 
 
 
 
 
 
 
 
 
Advances
$
24,746,802

 
$
18,942,400

 
$
15,978,945

 
$
18,394,797

 
$
18,797,834

Investments (1)
16,323,518

 
17,422,344

 
13,130,343

 
16,198,823

 
13,537,564

Mortgage loans
55,258

 
71,554

 
91,275

 
121,661

 
162,837

Allowance for credit losses on mortgage loans
141

 
143

 
165

 
183

 
192

Total assets
42,083,294

 
38,045,868

 
30,221,824

 
35,755,329

 
33,769,967

Consolidated obligations — discount notes
20,541,329

 
19,131,832

 
5,984,530

 
6,984,378

 
9,799,010

Consolidated obligations — bonds
18,025,959

 
16,078,700

 
21,486,712

 
25,697,936

 
20,070,056

Total consolidated obligations(2)
38,567,288

 
35,210,532

 
27,471,242

 
32,682,314

 
29,869,066

Mandatorily redeemable capital stock(3)
8,929

 
5,059

 
3,065

 
4,504

 
14,980

Capital stock — putable
1,540,132

 
1,222,738

 
1,123,675

 
1,216,986

 
1,255,793

Unrestricted retained earnings
699,213

 
650,224

 
615,620

 
549,617

 
488,739

Restricted retained earnings
62,990

 
49,552

 
39,850

 
22,276

 
5,918

Total retained earnings
762,203

 
699,776

 
655,470

 
571,893

 
494,657

Accumulated other comprehensive income (loss)
(103,023
)
 
(3,601
)
 
(32,641
)
 
(18,245
)
 
(45,615
)
Total capital
2,199,312

 
1,918,913

 
1,746,504

 
1,770,634

 
1,704,835

Dividends paid(3)
4,766

 
4,203

 
4,293

 
4,555

 
5,378

Income statement
 
 
 
 
 
 
 
 
 
Net interest income (4)
$
121,589

 
$
120,583

 
$
147,857

 
$
161,389

 
$
151,981

Other income (loss)
29,774

 
8,042

 
20,692

 
2,203

 
(16,917
)
Other expense
76,702

 
74,725

 
70,913

 
72,711

 
77,419

Assessments (5)
7,468

 
5,391

 
9,766

 
9,090

 
9,815

Net income
67,193

 
48,509

 
87,870

 
81,791

 
47,830

Performance ratios
 
 
 
 
 
 
 
 
 
Net interest margin(6)
0.29
%
 
0.35
%
 
0.45
%
 
0.45
%
 
0.46
%
Return on average assets
0.16
%
 
0.14
%
 
0.27
%
 
0.23
%
 
0.14
%
Return on average equity
3.26
%
 
2.67
%
 
5.15
%
 
4.77
%
 
2.73
%
Return on average capital stock (7)
4.98
%
 
4.25
%
 
7.92
%
 
6.76
%
 
3.59
%
Total average equity to average assets
4.88
%
 
5.29
%
 
5.27
%
 
4.83
%
 
5.24
%
Regulatory capital ratio(8)
5.49
%
 
5.07
%
 
5.90
%
 
5.02
%
 
5.23
%
Dividend payout ratio (3)(9)
7.09
%
 
8.66
%
 
4.89
%
 
5.57
%
 
11.24
%
Ratio of earnings to fixed charges
1.75 x

 
1.65 x

 
2.02 x

 
1.61 x

 
1.34 x

Interest rates
 
 
 
 
 
 
 
 
 
Average effective federal funds rate(10)
0.13
%
 
0.09
%
 
0.11
%
 
0.14
%
 
0.10
%
Average one-month LIBOR (11)
0.20
%
 
0.16
%
 
0.19
%
 
0.24
%
 
0.23
%
Average three-month LIBOR (11)
0.32
%
 
0.23
%
 
0.27
%
 
0.43
%
 
0.34
%


31





____________________________________
(1) 
Investments consist of federal funds sold, securities purchased under agreements to resell, loans to other FHLBanks, interest-bearing deposits and securities classified as held-to-maturity, available-for-sale and trading.
(2) 
The Bank is jointly and severally liable with the other FHLBanks for the payment of principal and interest on the consolidated obligations of all of the FHLBanks. At December 31, 2015, 2014, 2013, 2012 and 2011, the outstanding consolidated obligations (at par value) of all of the FHLBanks totaled approximately $905 billion, $847 billion, $767 billion, $688 billion and $692 billion, respectively. As of those dates, the Bank’s outstanding consolidated obligations (at par value) were $38.6 billion, $35.2 billion, $27.6 billion, $32.6 billion and $29.7 billion, respectively.
(3) 
Mandatorily redeemable capital stock represents capital stock that is classified as a liability under accounting principles generally accepted in the United States of America. Dividends on mandatorily redeemable capital stock are recorded as interest expense and excluded from dividends paid. Dividends paid on mandatorily redeemable capital stock totaled $17 thousand, $18 thousand, $22 thousand, $27 thousand and $54 thousand for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
(4) 
Net interest income (expense) excludes the net interest income/expense associated with interest rate exchange agreements that do not qualify for hedge accounting. The net interest income (expense) associated with such agreements totaled $(0.02) million, $1.36 million, $3.63 million, $10.41 million and $6.62 million for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
(5) 
Prior to the third quarter of 2011, the Bank was required to contribute a portion of its earnings to the Resolution Funding Corporation ("REFCORP"). On August 5, 2011, the Finance Agency certified that the FHLBanks had fully satisfied their obligations to REFCORP with their July 2011 payments to REFCORP, which were derived from the FHLBanks' earnings for the second quarter of 2011. Accordingly, beginning July 1, 2011, the Bank's earnings are no longer reduced by a REFCORP assessment. Assessments includes $4.5 million of REFCORP assessments for the year ended December 31, 2011.
(6) 
Net interest margin is net interest income as a percentage of average earning assets.
(7) 
Return on average capital stock is derived by dividing net income by average capital stock balances excluding mandatorily redeemable capital stock.
(8) 
The regulatory capital ratio is computed by dividing regulatory capital (the sum of capital stock — putable, mandatorily redeemable capital stock and retained earnings) by total assets at each year-end.
(9) 
Dividend payout ratio is computed by dividing dividends paid by net income for the year.
(10) 
Rates obtained from the Federal Reserve Statistical Release.
(11) 
Rates obtained from Bloomberg.


32


ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the annual audited financial statements and notes thereto for the years ended December 31, 2015, 2014 and 2013 beginning on page F-1 of this Annual Report on Form 10-K.

Forward-Looking Information
This annual report contains forward-looking statements that reflect current beliefs and expectations of the Bank about its future results, performance, liquidity, financial condition, prospects and opportunities. These statements are identified by the use of forward-looking terminology, such as “anticipates,” “plans,” “believes,” “could,” “estimates,” “may,” “should,” “would,” “will,” “might,” “expects,” “intends” or their negatives or other similar terms. The Bank cautions that forward-looking statements involve risks or uncertainties that could cause the Bank’s actual future results to 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. As a result, undue reliance should not be placed on such statements.
These risks and uncertainties include, without limitation, evolving economic and market conditions, political events, and the impact of competitive business forces. The risks and uncertainties related to evolving economic and market conditions include, but are not limited to, changes in interest rates, changes in the Bank’s access to the capital markets, changes in the cost of the Bank’s debt, changes in the ratings on the Bank's debt, adverse consequences resulting from a significant regional, national or global economic downturn (including, but not limited to, reduced demand for the Bank's products and services), credit and prepayment risks, or changes in the financial health of the Bank’s members or non-member borrowers. Among other things, political events could possibly lead to changes in the Bank’s regulatory environment or its status as a GSE, or to changes in the regulatory environment for the Bank’s members or non-member borrowers. Risks and uncertainties related to competitive business forces include, but are not limited to, the potential loss of a significant amount of member borrowings through acquisitions or other means or changes in the relative competitiveness of the Bank’s products and services for member institutions. For a more detailed discussion of the risk factors applicable to the Bank, see Item 1A — Risk Factors. The Bank undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances, or any other reason.
Overview
The Bank serves eligible financial institutions in Arkansas, Louisiana, Mississippi, New Mexico and Texas (collectively, the Ninth District of the FHLBank System). The Bank’s primary business is lending relatively low cost funds (known as advances) to its member institutions, which include commercial banks, thrifts, insurance companies and credit unions. Community Development Financial Institutions that are certified under the Community Development Banking and Financial Institutions Act of 1994 are also eligible for membership in the Bank. While not members of the Bank, housing associates, including state and local housing authorities, that meet certain statutory criteria may also borrow from the Bank. The Bank also maintains a portfolio of investments, the vast majority of which are highly rated, for liquidity purposes and to provide additional earnings. Additionally, the Bank holds interests in a small portfolio of government-guaranteed/insured and conventional mortgage loans that were acquired during the period from 1998 to mid-2003 through the Mortgage Partnership Finance® (“MPF”®) Program offered by the FHLBank of Chicago. In the first quarter of 2016, the Bank resumed acquiring conventional mortgage loans through the MPF program. Thus far in 2016, the Bank has acquired a very small amount of mortgage loans. Shareholders’ return on their investment includes dividends (which are typically paid quarterly in the form of capital stock) and the value derived from access to the Bank’s products and services. Historically, the Bank has balanced the financial rewards to shareholders by seeking to pay a dividend that meets or exceeds the return on alternative short-term money market investments available to shareholders, while lending funds at the lowest rates expected to be compatible with that objective and its objective to build retained earnings over time.
The Bank's principal source of funds is debt issued in the capital markets. All 11 FHLBanks issue debt in the form of consolidated obligations through the Office of Finance as their agent and all 11 FHLBanks are jointly and severally liable for the repayment of all consolidated obligations.
The Bank conducts its business and fulfills its public purpose primarily by acting as a financial intermediary between its members and the capital markets. The intermediation of the timing, structure, and amount of its members’ credit needs with the investment requirements of the Bank’s creditors is made possible by the extensive use of interest rate exchange agreements, including interest rate swaps and caps. The Bank’s interest rate exchange agreements are accounted for in accordance with the provisions of Topic 815 of the Financial Accounting Standards Board Accounting Standards Codification entitled “Derivatives and Hedging” (“ASC 815”). For a discussion of ASC 815, see the sections below entitled “Financial Condition — Derivatives and Hedging Activities” and “Critical Accounting Policies and Estimates.”

33



Financial Market Conditions
Economic growth in the United States expanded moderately during 2015, 2014 and 2013. The gross domestic product increased 1.5 percent, 2.4 percent and 2.4 percent in 2013, 2014 and 2015, respectively. The nationwide unemployment rate fell from 7.9 percent at the end of 2012 to 6.7 percent at the end of 2013, 5.6 percent at the end of 2014 and 5.0 percent at the end of 2015. Housing prices improved in most major metropolitan areas during 2013, 2014 and 2015.
The Federal Open Market Committee ("FOMC") maintained its target for the federal funds rate at a range between 0 and 0.25 percent throughout 2013, 2014 and most of 2015. During these years, the Federal Reserve paid interest on required and excess reserves held by depository institutions at a rate equivalent to the upper boundary of the target range for federal funds. A sustained increase in bank reserves during those years combined with the rate of interest being paid on those reserves has contributed to a decline in the volume of transactions taking place in the overnight federal funds market and an effective federal funds rate that has generally been below the upper end of the targeted range for all of 2013, 2014 and 2015. In December 2015, the FOMC raised the target range for the federal funds rate from 0.25 percent to 0.50 percent. At its March 2016 meeting, the FOMC stated that it expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
One-month and three-month LIBOR rates declined from 0.21 percent and 0.31 percent, respectively, as of December 31, 2012 to 0.17 percent and 0.25 percent, respectively, at the end of 2013. One-month and three-month LIBOR were 0.17 percent and 0.26 percent, respectively, at the end of 2014 and increased to 0.43 percent and 0.61 percent, respectively, at the end of 2015. Relatively stable one-month and three-month LIBOR rates, combined with relatively small spreads between those two indices and between those indices and overnight lending rates, suggest that inter-bank lending markets are reasonably stable.
The following table presents information on various market interest rates at December 31, 2015 and 2014 and various average market interest rates for the years ended December 31, 2015, 2014 and 2013.
 
Ending Rate
 
Average Rate
 
December 31,
 
December 31,
 
For the Year Ended December 31,
 
2015
 
2014
 
2015
 
2014
 
2013
Federal Funds Target (1)
0.50%
 
0.25%
 
0.26%
 
0.25%
 
0.25%
Average Effective Federal Funds Rate (2)
0.20%
 
0.06%
 
0.13%
 
0.09%
 
0.11%
1-month LIBOR (1)
0.43%
 
0.17%
 
0.20%
 
0.16%
 
0.19%
3-month LIBOR (1)
0.61%
 
0.26%
 
0.32%
 
0.23%
 
0.27%
2-year LIBOR (1)
1.18%
 
0.90%
 
0.88%
 
0.62%
 
0.44%
5-year LIBOR (1)
1.74%
 
1.77%
 
1.62%
 
1.75%
 
1.32%
10-year LIBOR (1)
2.19%
 
2.28%
 
2.18%
 
2.65%
 
2.47%
3-month U.S. Treasury (1)
0.16%
 
0.04%
 
0.05%
 
0.03%
 
0.06%
2-year U.S. Treasury (1)
1.06%
 
0.67%
 
0.69%
 
0.46%
 
0.31%
5-year U.S. Treasury (1)
1.76%
 
1.65%
 
1.53%
 
1.64%
 
1.17%
10-year U.S. Treasury (1)
2.27%
 
2.17%
 
2.14%
 
2.54%
 
2.35%
____________________________________
(1) 
Source: Bloomberg
(2) 
Source: Federal Reserve Statistical Release
2015 In Summary
The Bank ended 2015 with total assets of $42.1 billion compared with $38.0 billion at the end of 2014. The $4.1 billion increase in total assets was attributable primarily to increases in the Bank's advances ($5.8 billion) and long-term investments ($2.0 billion), offset by a decrease in the Bank's short-term liquidity portfolio ($3.8 billion).
Total advances at December 31, 2015 were $24.7 billion, compared to $18.9 billion at the end of 2014. During 2015, the Bank's lending activities expanded due to increased demand for loans at member institutions, which the Bank attributes to improving economic conditions and more robust activity in the housing markets served by its members.
The Bank’s net income for 2015 was $67.2 million, which represented a return on average capital stock of 4.98 percent. In comparison, the Bank's net income for 2014 was $48.5 million, which represented a return on average capital stock of 4.25 percent for that year. The $18.7 million increase in net income from 2014 to 2015 was attributable in large part to $18.4

34


million in gains on the sales of long-term investment securities in 2015. The Bank did not sell any long-term investment securities in 2014.
At all times during 2015, the Bank was in compliance with all of its regulatory capital requirements. In addition, the Bank’s total retained earnings increased to $762.2 million at December 31, 2015 from $699.8 million at December 31, 2014. Retained earnings represented 1.8 percent of total assets at both December 31, 2015 and 2014. At December 31, 2015, the balance of the Bank's restricted retained earnings account was $63.0 million.
In 2015, the Bank paid dividends totaling $4.8 million; the quarterly dividends during the year were each paid at an annualized rate of 0.375 percent.
Financial Condition
The following table provides selected period-end balances as of December 31, 2015, 2014 and 2013, as well as selected average balances for the years ended December 31, 2015, 2014 and 2013. As shown in the table, the Bank’s total assets increased by 10.6 percent (or $4.0 billion) during the year ended December 31, 2015 after increasing by 25.9 percent (or $7.8 billion) during the year ended December 31, 2014. The increase in total assets during the year ended December 31, 2015 was attributable primarily to increases in the Bank's advances ($5.8 billion), long-term available-for-sale securities portfolio ($3.3 billion) and holdings of U.S. Treasury Notes ($0.2 billion), partially offset by decreases in the Bank's short-term liquidity portfolio ($3.8 billion) and long-term held-to-maturity securities portfolio ($1.4 billion). As the Bank’s assets increased, the funding for those assets also increased. During the year ended December 31, 2015, total consolidated obligations increased by $3.4 billion, as consolidated obligation discount notes and consolidated obligation bonds increased by $1.4 billion and $2.0 billion, respectively.
The increase in total assets during the year ended December 31, 2014 was attributable primarily to increases in the Bank's short-term liquidity portfolio ($4.5 billion), advances ($2.9 billion) and long-term available-for-sale securities portfolio ($0.9 billion), partially offset by a decrease in the Bank's long-term held-to-maturity securities portfolio ($0.5 billion). As the Bank’s assets increased, the funding for those assets also increased. During the year ended December 31, 2014, total consolidated obligations increased by $7.7 billion, as consolidated obligation discount notes increased by $13.1 billion and consolidated obligation bonds decreased by $5.4 billion.

35


The activity in each of the major balance sheet captions is discussed in the sections following the table.
SUMMARY OF CHANGES IN FINANCIAL CONDITION
(dollars in millions)
 
December 31, 2015
 
December 31, 2014
 
Balance at
December 31, 2013
 
 
 
Increase (Decrease)
 
 
 
Increase (Decrease)
 
 
Balance
 
Amount
 
Percentage
 
Balance
 
Amount
 
Percentage
 
Advances
$
24,747

 
$
5,805

 
30.6
 %
 
$
18,942

 
$
2,963

 
18.5
 %
 
$
15,979

Short-term liquidity holdings
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest bearing excess cash balances (1)
800

 
(680
)
 
(45.9
)
 
1,480

 
630

 
74.1

 
850

Securities purchased under agreements to resell
1,000

 
650

 
185.7

 
350

 
350

 
*

 

Federal funds sold
2,171

 
(3,442
)
 
(61.3
)
 
5,613

 
4,145

 
282.4

 
1,468

U.S Treasury Bills

 
(400
)
 
(100.0
)
 
400

 
(600
)
 
(60.0
)
 
1,000

Long-term investments
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading securities
202

 
202

 
*

 

 

 

 

Available-for-sale securities
9,713

 
3,324

 
52.0

 
6,389

 
933

 
17.1

 
5,456

Held-to-maturity securities
3,228

 
(1,434
)
 
(30.8
)
 
4,662

 
(537
)
 
(10.3
)
 
5,199

Mortgage loans, net
55

 
(16
)
 
(22.5
)
 
71

 
(20
)
 
(22.0
)
 
91

Total assets
42,083

 
4,037

 
10.6

 
38,046

 
7,824

 
25.9

 
30,222

Consolidated obligations — bonds
18,026

 
1,947

 
12.1

 
16,079

 
(5,408
)
 
(25.2
)
 
21,487

Consolidated obligations — discount notes
20,541

 
1,409

 
7.4

 
19,132

 
13,148

 
219.7

 
5,984

Total consolidated obligations
38,567

 
3,356

 
9.5

 
35,211

 
7,740

 
28.2

 
27,471

Mandatorily redeemable capital stock
9

 
4

 
80.0

 
5

 
2

 
66.7

 
3

Capital stock
1,540

 
317

 
25.9

 
1,223

 
99

 
8.8

 
1,124

Retained earnings
762

 
62

 
8.9

 
700

 
45

 
6.9

 
655

Average total assets
42,186

 
7,776

 
22.6

 
34,410

 
2,046

 
6.3

 
32,364

Average capital stock
1,350

 
208

 
18.2

 
1,142

 
32

 
2.9

 
1,110

Average mandatorily redeemable capital stock
4

 

 

 
4

 
(1
)
 
(20.0
)
 
5

____________________________________
*
The percentage increase is not meaningful.
(1) 
Represents excess cash held at the Federal Reserve Bank of Dallas. These amounts are classified as "Cash and Due From Banks" in the Bank's statements of condition.


36


Advances
The following table presents advances outstanding, by type of institution, as of December 31, 2015, 2014 and 2013.
ADVANCES OUTSTANDING BY BORROWER TYPE
(par value, dollars in millions)
 
December 31,
 
2015
 
2014
 
2013
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Commercial banks
$
17,726

 
72
%
 
$
13,608

 
72
%
 
$
11,537

 
73
%
Thrifts
2,590

 
11

 
2,399

 
13

 
2,478

 
16

Credit unions
2,763

 
11

 
1,968

 
11

 
1,362

 
9

Insurance companies
1,546

 
6

 
799

 
4

 
365

 
2

Community Development Financial Institutions
11

 

 
4

 

 
1

 

Total member advances
24,636

 
100

 
18,778

 
100

 
15,743

 
100

Housing associates
2

 

 
2

 

 
29

 

Non-member borrowers
12

 

 
15

 

 
23

 

Total par value of advances
$
24,650

 
100
%
 
$
18,795

 
100
%
 
$
15,795

 
100
%
Total par value of advances outstanding to CFIs (1)
$
6,559

 
27
%
 
$
6,362

 
34
%
 
$
5,541

 
35
%
____________________________________
(1) 
The figures presented above reflect the advances outstanding to Community Financial Institutions (“CFIs”) as of December 31, 2015, 2014 and 2013 based upon the definitions of CFIs that applied as of those dates.

The Bank's advances balances (at par value) increased $5.8 billion during 2015. The Bank's lending activities expanded due to increased demand for loans from some of its larger borrowers, which the Bank attributes to increased loan demand and a decrease in liquidity levels at those institutions. In addition, as discussed further in the section entitled "Capital," the Bank made available a special advances offering during the period from October 21, 2015 through December 31, 2015. Under this offering, the activity-based stock investment requirement was reduced from 4.1 percent to 2 percent for advances with a minimum maturity of one year or greater, provided the advances increased the member institution's outstanding advances balance above its October 20, 2015 balance, less any advances balances that were scheduled to mature during the period from October 21, 2015 through December 31, 2015. Approximately $4.9 billion of advances were funded under this offering. Advances to the Bank's five largest borrowers increased from $4.5 billion at December 31, 2014 to $6.5 billion at December 31, 2015 and the proportion of total advances attributable to the five largest borrowers increased from 24 percent to 26 percent at those same dates. 
The Bank's advances balances (at par value) increased $3.0 billion during 2014, despite the repayment (on May 7, 2014) of $1.0 billion of advances by Comerica Bank, the Bank's largest borrower at December 31, 2013. Comerica Bank had no advances outstanding at December 31, 2015 or 2014. The increase in the Bank's advances was due to increased demand for loans at member institutions, which the Bank attributed to improving economic conditions and more robust activity in the housing markets served by its members. Advances to the Bank's five largest borrowers increased from $4.2 billion at December 31, 2013 to $4.5 billion at December 31, 2014 but the proportion of total advances attributable to the five largest borrowers decreased from 27 percent to 24 percent at those same dates. 


37


At December 31, 2015, advances outstanding to the Bank’s five largest borrowers totaled $6.5 billion, representing 26.2 percent of the Bank’s total outstanding advances as of that date. The following table presents the Bank’s five largest borrowers as of December 31, 2015.
FIVE LARGEST BORROWERS
(par value, dollars in millions)
 
 
As of December 31, 2015
Name
 
Par Value of
Advances
 
Percent of
Total Par Value
of Advances
Texas Capital Bank, N.A.
 
$
1,500

 
6.1
%
LegacyTexas Bank
 
1,440

 
5.8

Centennial Bank
 
1,400

 
5.7

Southside Bank
 
1,148

 
4.7

Security Service FCU
 
963

 
3.9

 
 
$
6,451

 
26.2
%
As of December 31, 2014 and 2013, advances outstanding to the Bank’s five largest borrowers comprised $4.5 billion (24 percent) and $4.2 billion (27 percent), respectively, of the total advances portfolio.
The following table presents information regarding the composition of the Bank’s advances by product type as of December 31, 2015 and 2014.
ADVANCES OUTSTANDING BY PRODUCT TYPE
(par value, dollars in millions)
 
December 31, 2015
 
December 31, 2014
 
Balance
 
Percentage
of Total
 
Balance
 
Percentage
of Total
Fixed-rate
$
17,220

 
69.9
%
 
$
16,540

 
88.0
%
Adjustable/variable-rate indexed
5,949

 
24.1

 
527

 
2.8

Amortizing
1,481

 
6.0

 
1,728

 
9.2

Total par value
$
24,650

 
100.0
%
 
$
18,795

 
100.0
%
The Bank is required by statute and regulation to obtain sufficient collateral from members/borrowers to fully secure all advances and other extensions of credit. The Bank’s collateral arrangements with its members/borrowers and the types of collateral it accepts to secure advances are described in Item 1 — Business. To ensure the value of collateral pledged to the Bank is sufficient to secure its advances, the Bank applies various haircuts, or discounts, to determine the value of the collateral against which borrowers may borrow. From time to time, the Bank reevaluates the adequacy of its collateral haircuts under a range of stress scenarios to ensure that its collateral haircuts are sufficient to protect the Bank from credit losses on advances and other extensions of credit.
In addition, as described in Item 1 — Business, the Bank reviews the financial condition of its depository institution borrowers on at least a quarterly basis to identify any borrowers whose financial condition indicates they might pose an increased credit risk and, as needed, takes appropriate action. The Bank has not experienced any credit losses on advances since it was founded in 1932 and, based on its credit extension and collateral policies, management currently does not anticipate any credit losses on advances. Accordingly, the Bank has not provided any allowance for losses on advances.
Short-Term Liquidity Holdings
At December 31, 2015, the Bank’s short-term liquidity holdings were comprised of $2.2 billion of overnight federal funds sold, a $1.0 billion overnight reverse repurchase agreement and $0.8 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas. At December 31, 2014, the Bank’s short-term liquidity holdings were comprised of $5.6 billion of overnight federal funds sold, $1.5 billion of non-interest bearing excess cash balances held at the Federal Reserve Bank of Dallas, $0.4 billion of U.S. Treasury Bills and $0.4 billion of overnight reverse repurchase agreements. All of the Bank's federal funds sold during 2015 and 2014 were transacted with domestic bank counterparties and U.S. branches of foreign financial institutions on an overnight basis. The amount of the Bank’s short-term liquidity holdings fluctuates in response to several factors, including the anticipated demand for advances, the timing and extent of advance prepayments, changes in the Bank’s deposit balances, the Bank’s pre-funding activities, prevailing conditions (or anticipated changes in

38


conditions) in the short-term debt markets, changes in the returns provided by short-term investment alternatives relative to the Bank’s discount note funding costs, the level of liquidity needed to satisfy Finance Agency requirements and, on and after July 14, 2015, the Finance Agency's expectations with regard to the Bank's core mission achievement. For a discussion of the Finance Agency’s liquidity requirements, see the section below entitled “Liquidity and Capital Resources.” For a discussion of the Finance Agency's guidance regarding core mission achievement, see Item 1- Business (specifically, the section entitled Legislative and Regulatory Developments beginning on page 16 of this report).
Finance Agency regulations and Bank policies govern the Bank’s investments in unsecured money market instruments, such as overnight and term federal funds and commercial paper. Those regulations and policies establish limits on the amount of unsecured credit that may be extended to borrowers or to affiliated groups of borrowers, and require the Bank to base its investment limits on the creditworthiness of its counterparties.
As of December 31, 2015, the Bank’s overnight federal funds sold consisted of $0.1 billion sold to counterparties rated double-A, $1.6 billion sold to counterparties rated single-A and $0.5 billion sold to counterparties rated triple-B. The credit ratings presented in the preceding sentence represent the lowest long-term rating assigned to the counterparty by Moody’s, S&P or Fitch Ratings, Ltd. (“Fitch”).

39


Long-Term Investments
The composition of the Bank's long-term investment portfolio at December 31, 2015 and 2014 is set forth in the table below.
COMPOSITION OF LONG-TERM INVESTMENT PORTFOLIO
(in millions)
 
 
 
Balance Sheet Classification
 
Total Long-Term Investments
(at carrying value)
 
 
 
December 31, 2015
 
Held-to-Maturity
 (at carrying value)
 
Available-for-Sale
(at fair value)
 
Trading
(at fair value)
 
 
Held-to-Maturity
(at fair value)
 
 
Debentures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
22

 
$
498

 
$
202

 
$
722

 
$
21

 
GSE obligations
 

 
5,339

 

 
5,339

 

 
State housing agency obligations
 
110

 

 

 
110

 
110

 
Other
 

 
371

 

 
371

 

 
Total debentures
 
132

 
6,208

 
202

 
6,542

 
131

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
 
4

 

 

 
4

 
4

 
GSE residential MBS
 
2,909

 

 

 
2,909

 
2,931

 
GSE commercial MBS
 
62

 
3,505

 

 
3,567

 
61

 
Non-agency residential MBS
 
121

 

 

 
121

 
135

 
Total MBS
 
3,096

 
3,505

 

 
6,601

 
3,131

 
Total long-term investments
 
$
3,228

 
$
9,713

 
$
202

 
$
13,143

 
$
3,262

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Classification
 
Total Long-Term Investments
(at carrying value)
 
 
 
 
 
Held-to-Maturity
 (at carrying value)
 
Available-for-Sale
 (at fair value)
 
Trading
(at fair value)
 
 
Held-to-Maturity
 (at fair value)
 
December 31, 2014
 
 
Debentures
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed obligations
 
$
27

 
$
50

 
$

 
$
77

 
$
27

 
GSE obligations
 

 
4,922

 

 
4,922

 

 
Other
 

 
411

 

 
411

 

 
Total debentures
 
27

 
5,383

 

 
5,410

 
27

 
 
 
 
 
 
 
 
 
 
 
 
 
MBS portfolio
 
 
 
 
 
 
 
 
 
 
 
U.S. government-guaranteed residential MBS
 
7

 

 

 
7

 
7

 
GSE residential MBS
 
4,424

 

 

 
4,424

 
4,471

 
GSE commercial MBS
 
62

 
1,006

 

 
1,068

 
62

 
Non-agency residential MBS
 
142

 

 

 
142

 
160

 
Total MBS
 
4,635

 
1,006

 

 
5,641

 
4,700

 
Total long-term investments
 
$
4,662

 
$
6,389

 
$

 
$
11,051

 
$
4,727



40


The Bank is precluded by regulation from purchasing additional MBS if such purchase would cause the aggregate amortized cost of its MBS holdings to exceed 300 percent of the Bank’s total regulatory capital (the sum of its capital stock, mandatorily redeemable capital stock and retained earnings). As of December 31, 2015, the Bank held $6.7 billion of MBS (at amortized cost), which represented 291 percent of its total regulatory capital at that date. As of December 31, 2014, the Bank held $5.7 billion of MBS (at amortized cost), which represented 295 percent of its total regulatory capital at that date. The Bank intends to continue to purchase additional GSE MBS if securities with adequate returns are available when the Bank has the regulatory capacity to increase its MBS portfolio.
During the years ended December 31, 2014 and 2013, the Bank acquired $0.4 billion, and $1.7 billion, respectively, of LIBOR-indexed floating rate collateralized mortgage obligations ("CMOs") issued by either Fannie Mae or Freddie Mac that the Bank designated as held-to-maturity. As further described below, the floating rate coupons of these residential MBS ("RMBS") are subject to interest rate caps. In addition, during 2015 and 2014, the Bank acquired $2.5 billion and $1.0 billion of GSE commercial MBS ("CMBS"), all of which are backed by multifamily loans. Substantially all of the GSE CMBS purchases were classified as available-for-sale and hedged with fixed-for-floating interest rate swaps.
In addition to MBS, the Bank is also permitted under applicable policies and regulations to purchase certain other types of highly rated, long-term, non-MBS investments subject to certain limitations. These investments include but are not limited to the non-MBS debt obligations of other GSEs, provided such investments in any single GSE do not exceed the lesser of the Bank’s total regulatory capital or that GSE's total capital, taking into account the financial support provided by the U.S. Department of the Treasury, if applicable, at the time new investments are made.
During the year ended December 31, 2015, the Bank purchased $1.5 billion of GSE debentures, all of which were non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System. Substantially all of these securities were hedged with fixed-for-floating interest rate swaps. Because ASC 815 does not allow hedge accounting treatment for fair value hedges of investment securities designated as held-to-maturity, all of these securities were classified as available-for-sale. The Bank did not purchase any GSE debentures during the years ended December 31, 2014 or 2013. The Bank's investments in the non-MBS debt obligations of Fannie Mae, Freddie Mac and the Farm Credit System are each currently limited to an amount equal to 100 percent of the Bank's total regulatory capital at the time of purchase. In addition, in 2015, the Bank also acquired $0.5 billion of U.S. government-guaranteed debentures (classified as available-for-sale), $0.2 billion of U.S. Treasury Notes (classified as trading) and $0.1 billion of state housing agency obligations (classified as held-to-maturity); the Bank did not acquire any of these types of investments in 2014 or 2013. Subject to applicable regulatory limits and the constraints imposed by the Finance Agency's recent guidance regarding core mission achievement, the Bank may continue to add these types of securities to its long-term investment portfolio if attractive opportunities to do so are available.
During the years ended December 31, 2015, 2014 and 2013, proceeds from maturities and paydowns of held-to-maturity securities totaled approximately $0.7 billion, $1.0 billion and $1.7 billion, respectively. Proceeds from maturities of available-for-sale securities totaled $40 million and $26 million during the years ended December 31, 2015 and 2014, respectively. There were no maturities or paydowns of available-for-sale securities during the year ended December 31, 2013. During the year ended December 31, 2015, the Bank sold approximately $816 million (par value) of GSE RMBS (CMO LIBOR floaters with embedded caps) classified as held-to-maturity securities. The aggregate gains recognized on these sales totaled $14.5 million. For each of these securities, the Bank had previously collected at least 85 percent of the principal outstanding at the time of acquisition. As such, the sales were considered maturities for purposes of security classification. The proceeds from these sales were reinvested in GSE CMBS. During 2015, the Bank also sold approximately $871 million (par value) of GSE debentures classified as available-for-sale. The aggregate gains recognized on these sales totaled $3.9 million. The GSE debentures that were sold were replaced with longer-dated GSE debentures. The Bank did not sell any long-term investments during the years ended December 31, 2014 or 2013.
As of December 31, 2015, the U.S. government and the issuers of the Bank's holdings of GSE debentures and GSE MBS were rated triple-A by Moody's and Fitch and AA+ by S&P. At that same date, the Bank's holdings of other debentures, which were comprised of securities issued by the Private Export Funding Corporation, were rated triple-A by Moody's and Fitch and A by S&P. Further, the Bank's holdings of state housing agency debentures were rated triple-A by Moody's, S&P and Fitch. The credit ratings associated with the Bank's holdings of non-agency RMBS are presented in the table below.
The Bank evaluates outstanding held-to-maturity and available-for-sale investment securities in an unrealized loss position as of the end of each calendar quarter for other-than-temporary impairment (“OTTI”). An investment security is impaired if the fair value of the investment is less than its amortized cost. At December 31, 2015, the gross unrealized losses on the Bank’s held-to-maturity and available-for-sale investment securities were $10.4 million and $97.0 million, respectively. As of that date, $9.1 million (or 87 percent) of the unrealized losses associated with its held-to-maturity securities portfolio were related to the Bank's holdings of non-agency (i.e., private-label) RMBS. For a summary of the Bank's OTTI evaluation, see the audited financial statements included in this report (specifically, Notes 4 and 5 beginning on pages F-18 and F-21, respectively).

41


The deterioration in the U.S. housing markets that occurred primarily during the period from 2007 through 2011, as reflected during that period by declines in the values of residential real estate and higher levels of delinquencies, defaults and losses on residential mortgages, including the mortgages underlying the Bank’s non-agency RMBS, generally increased the risk that the Bank may not ultimately recover the entire cost bases of some of its non-agency RMBS. Based on its analysis of the securities in this portfolio, the Bank believes that the unrealized losses as of December 31, 2015 were principally the result of liquidity risk related discounts in the non-agency RMBS market and do not accurately reflect the currently likely future credit performance of the securities.
All of the Bank’s non-agency RMBS are rated by one or more of the following NRSROs: Moody’s, S&P and/or Fitch. The following table presents the credit ratings assigned to the Bank’s non-agency RMBS holdings as of December 31, 2015. The credit ratings presented in the table represent the lowest rating assigned to the security by Moody’s, S&P or Fitch.
NON-AGENCY RMBS BY CREDIT RATING
(dollars in thousands)
Credit
Rating
 
Number of
Securities
 
Unpaid
Principal
Balance
 
Amortized
Cost
 
Carrying
Value
 
Estimated
Fair Value
 
Unrealized
Losses
Single-A
 
1
 
$
1,226

 
$
1,226

 
$
1,226

 
$
1,204

 
$
22

Triple-B
 
5
 
24,744

 
24,744

 
24,744

 
23,341

 
1,403

Double-B
 
4
 
4,268

 
4,269

 
4,269

 
4,022

 
247

Single-B
 
4
 
20,920

 
20,814

 
18,649

 
18,805

 
2,009

Triple-C
 
12
 
90,373

 
82,592

 
65,487

 
77,849

 
5,379

Single-D
 
1
 
11,763

 
9,275

 
7,169

 
9,478

 

Total
 
27
 
$
153,294

 
$
142,920

 
$
121,544

 
$
134,699

 
$
9,060

At December 31, 2015, the Bank’s portfolio of non-agency RMBS was comprised of 8 securities with an aggregate unpaid principal balance of $25 million that are backed by first lien fixed-rate loans and 19 securities with an aggregate unpaid principal balance of $128 million that are backed by first lien option adjustable-rate mortgage (“option ARM”) loans. In comparison, as of December 31, 2014, the Bank’s non-agency RMBS portfolio was comprised of 8 securities backed by fixed-rate loans that had an aggregate unpaid principal balance of $33 million and 19 securities backed by option ARM loans that had an aggregate unpaid principal balance of $148 million. None of the Bank's non-agency RMBS were paid in full during the year ended December 31, 2015.

42


The following table provides a summary of the Bank’s non-agency RMBS as of December 31, 2015 by classification by the originator at the time of issuance and collateral type; the Bank does not hold any RMBS that were labeled as subprime by the originator at the time of issuance.
NON-AGENCY RMBS BY UNDERLYING COLLATERAL TYPE
(dollars in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average
Collateral Delinquency (1)(2)
 
Credit Enhancement Statistics
Classification
 
Number of
Securities
 
Unpaid
Principal
Balance
 
Amortized
Cost
 
Estimated
Fair Value
 
Unrealized
Losses
 
 
Current
Weighted
Average (1)(3)
 
Original
Weighted
Average (1)
 
Minimum
Current (4)
Prime collateral(5)
 
23

 
$
121

 
$
115

 
$
108

 
$
7

 
17.58
%
 
32.79
%
 
37.55
%
 
%
Alt-A collateral(5)
 
4

 
32

 
28

 
27

 
2

 
23.20
%
 
21.24
%
 
30.38
%
 
1.31
%
Total non-agency RMBS
 
27

 
$
153

 
$
143

 
$
135

 
$
9

 
18.76
%
 
30.38
%
 
36.05
%
 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate collateral
 
8

 
$
25

 
$
22

 
$
21

 
$
1

 
12.45
%
 
2.07
%
 
7.21
%
 
%
Option ARM collateral
 
19

 
128

 
121

 
114

 
8

 
19.99
%
 
35.89
%