Attached files

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EX-10.4.1 - 2017 DIRECTORS COMPENSATION POLICY - Federal Home Loan Bank of Pittsburghfhlbpitex104110k2016.htm
EX-99.2 - REPORT OF THE AUDIT COMMITTEE - Federal Home Loan Bank of Pittsburghfhlbpitex99210k2016.htm
EX-99.1 - AUDIT COMMITTEE CHARTER - Federal Home Loan Bank of Pittsburghfhlbpitex99110k2016.htm
EX-32.3 - CAO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32310k2016.htm
EX-32.2 - CFO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32210k2016.htm
EX-32.1 - CEO 906 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex32110k2016.htm
EX-31.3 - CAO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31310k2016.htm
EX-31.2 - CFO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31210k2016.htm
EX-31.1 - CEO 302 CERTIFICATION - Federal Home Loan Bank of Pittsburghfhlbpitex31110k2016.htm
EX-24.0 - POWER OF ATTORNEY - Federal Home Loan Bank of Pittsburghfhlbpitex24010k2016.htm
EX-12.1 - RATIO OF EARNINGS TO FIXED CHARGES - Federal Home Loan Bank of Pittsburghfhlbpitex12110k2016.htm
EX-10.12.3 - 2017 EXECUTIVE INCENTIVE COMPENSATION PLAN - Federal Home Loan Bank of Pittsburghfhlbpitex1012310k2016.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                                    to                                   
 
Commission File Number: 000-51395
FEDERAL HOME LOAN BANK OF PITTSBURGH
 
(Exact name of registrant as specified in its charter) 
Federally Chartered Corporation
 
25-6001324
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer Identification No.)
601 Grant Street
Pittsburgh, PA 15219
 (Address of principal executive offices)
 
15219
 (Zip Code)
 
(412) 288-3400 
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
None
Title of Each Class: None
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
Name of Each Exchange on
Capital Stock, putable, par value $100
 
Which Registered: None
(Title of Class)
 
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[]Yes [x]No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  
[]Yes [x]No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [x]Yes []No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  [x] Yes [] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [x]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
o Large accelerated filer
 
o Accelerated filer
x Non-accelerated filer
 
o Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [] Yes [x] No

Registrant’s stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2016, the aggregate par value of the stock held by current and former members of the registrant was approximately $3,232.1 million. There were 37,286,645 shares of common stock outstanding at February 28, 2017.



FEDERAL HOME LOAN BANK OF PITTSBURGH

TABLE OF CONTENTS

PART I
 
Item 1: Business
 
Item 1A: Risk Factors
 
Item 1B: Unresolved Staff Comments
 
Item 2: Properties
 
Item 3: Legal Proceedings
 
Item 4: Mine Safety Disclosures
 
PART II
 
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Item 6: Selected Financial Data
 
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
  Risk Management
 
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
 
Item 8: Financial Statements and Supplementary Financial Data
 
Financial Statements for the Years 2016, 2015, and 2014
 
Notes to Financial Statements
 
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Item 9A: Controls and Procedures
 
Item 9B: Other Information
 
PART III
 
Item 10: Directors, Executive Officers and Corporate Governance
 
Item 11: Executive Compensation
 
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
Item 13: Certain Relationships and Related Transactions, and Director Independence
 
Item 14: Principal Accountant Fees and Services
 
PART IV
 
Item 15: Exhibits and Financial Statement Schedules
 
Item 16: Form 10-K Summary
 
Glossary
 
Signatures
 






i.


PART I – FINANCIAL INFORMATION

Forward-Looking Information

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

Item 1: Business

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

General
 
History.  The Bank is one of 11 Federal Home Loan Banks (FHLBanks). The FHLBanks operate as separate entities with their own managements, employees and boards of directors. The 11 FHLBanks, along with the Office of Finance (OF - the FHLBanks’ fiscal agent) comprise the FHLBank System. The FHLBanks were organized under the authority of the Federal Home Loan Bank Act of 1932, as amended (the Act). The FHLBanks are commonly referred to as government-sponsored enterprises (GSEs), which generally mean they are a combination of private capital and public sponsorship. The public sponsorship attributes include:

being exempt from federal, state and local taxation, except real estate taxes;
being exempt from registration under the Securities Act of 1933 (the 1933 Act), although the FHLBanks are required by Federal Housing Finance Agency (FHFA or Finance Agency) regulation and the Housing and Economic Recovery Act of 2008 (the Housing Act or HERA) to register a class of their equity securities under the Securities Exchange Act of 1934 (the 1934 Act); and
having a line of credit with the U.S. Treasury. This line represents the U.S. Treasury’s authority to purchase consolidated obligations in an amount up to $4 billion.

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


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Mission.  The Bank’s primary mission is to intermediate between the capital markets and the housing market through member financial institutions. The Bank provides credit for housing and community development through two primary programs. First, it provides members with advances against the security of residential mortgages and other types of high-quality collateral. Second, the Bank purchases residential mortgage loans originated by or through eligible member institutions. The Bank also offers other types of credit and noncredit products and services to member institutions. These include letters of credit, interest rate exchange agreements (interest rate swaps, caps, collars, floors, swaptions and similar transactions), affordable housing grants, securities safekeeping, and deposit products and services. The Bank issues debt to the public (consolidated obligation bonds and discount notes) in the capital markets through the OF and uses these funds to provide its member financial institutions with a reliable source of credit for these programs. The U.S. government does not guarantee the debt securities or other obligations of the Bank or the FHLBank System.

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

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

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

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

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

Nonmember Borrowers.  In addition to member institutions, the Bank is permitted under the Act to make advances to nonmember housing associates that are approved mortgagees under Title II of the National Housing Act. These eligible housing associates must be chartered under law, be subject to inspection and supervision by a governmental agency, and lend their own funds as their principal activity in the mortgage field. The Bank must approve each applicant. Housing associates are not subject to certain provisions of the Act that are applicable to members, such as the capital stock purchase requirements. However, they are generally subject to more restrictive lending and collateral requirements than those applicable to members. Housing associates that are not state housing finance agencies are limited to pledging to the Bank as security for advances their Federal Housing Administration (FHA) mortgage loans and securities backed by FHA mortgage loans. Housing associates that are state housing finance agencies (that is, they are also instrumentalities of state or local governments) may, in addition to pledging FHA mortgages and securities backed by FHA mortgages, also pledge the following as collateral for Bank advances: (1) U.S. Treasury and agency securities; (2) single and multifamily mortgages; (3) AAA-rated securities backed by single and multifamily mortgages; and (4) deposits with the Bank. As of December 31, 2016, the Bank had approved three state housing finance agencies; two are currently eligible to borrow from the Bank but had no outstanding advance balances as of December 31, 2016.


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

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

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


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Advances

Advance Products

The Bank makes advances on the security of pledged mortgage loans and other eligible types of collateral. The following table summarizes the advance products offered by the Bank as of December 31, 2016. This information excludes mortgage loans purchased by the Bank and held for portfolio and loans relating to the Banking on Business (BOB) program, which are discussed separately in this Item 1.
Product
Description
Maturity
Key Features
RepoPlus
Short-term fixed-rate advances(1); principal and interest paid at maturity
1 day to 89 days
The RepoPlus advance products serve member short-term liquidity needs. RepoPlus is typically a short-term, fixed-rate product while the Open RepoPlus is a revolving line of credit which allows members to borrow, repay and re-borrow based on the terms of the line of credit. These balances tend to be extremely volatile as members borrow and repay frequently.
Mid-Term Repo
Mid-term fixed-rate and adjustable-rate advances(1); principal paid at maturity; interest paid monthly or quarterly.
3 months to 3 years
The Mid-Term Repo product assists members with managing intermediate-term interest rate risk. To assist members with managing the basis risk, or the risk of a change in the spread relationship between two indices, the Bank offers adjustable-rate Mid-Term Repo advances. Adjustable-rate, Mid-Term Repo advances can be priced based on 1-month London Interbank Offered Rate (LIBOR) or 3-month LIBOR indices. The Bank also offers Mid-term fixed-rate advances. These balances tend to be somewhat unpredictable as these advances are not always replaced as they mature; members’ liquidity needs drive these fluctuations.
Core (Term)
Long-term fixed-rate and adjustable-rate advances(1)(2); principal paid at maturity; interest paid monthly or quarterly (Note: amortizing loans principal and interest paid monthly)
1 year to 30 years
For managing longer-term interest rate risk and to assist with asset/liability management, the Bank offers long-term fixed-rate and adjustable-rate advances. Amortizing long-term fixed-rate advances can be fully amortized on a monthly basis over the term of the loan or amortized balloon-style, based on an amortization term longer than the maturity of the loan.
Returnable
Short-term and long-term fixed-rate and adjustable-rate advances with returnable options owned by member; principal paid at maturity; interest paid monthly or quarterly
2 months to 30 years
These advances permit the member to prepay an advance on certain pre-determined dates without a fee.
Convertible Select
Long-term fixed-rate and adjustable-rate advances with conversion options sold by member; principal paid at maturity; interest paid quarterly
2 years to 15 years
These advances contain embedded options which the member can sell to the Bank.  If the option is exercised by the Bank (based on a predetermined frequency), the member can choose to either repay the advance or allow the advance to be converted into an adjustable-rate advance with a predetermined spread.
Notes:
(1) May include loans made under the Community Lending Program (CLP).
(2) May also include Affordable Housing Program (AHP) loans.


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The following chart shows the percentage of advances by product type and dollar amount (in billions) as of December 31, 2016.

fhlbpit10k_chart-05228.jpg

Letters of Credit. Standby letters of credit are issued by the Bank for a fee on behalf of its members and housing associates to support certain obligations to third-party beneficiaries and are backed by an irrevocable, independent obligation from the Bank. These are subject to the same collateralization and borrowing limits that apply to advances. Standby letters of credit can be valuable tools to support community lending activities, including arranging financing to support bond issuances for community and economic development as well as affordable housing projects. The letters of credit offer customizable terms available to meet unique and evolving needs. If the Bank is required to make payment for a beneficiary’s draw, these amounts are withdrawn from the member/housing associates’ demand deposit account (DDA). Any remaining amounts not covered by the DDA withdrawal are converted into a collateralized overnight advance.

Collateral

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

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

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

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

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submitted quarterly to the Bank by the member. Origination of new advances or renewal of advances must be secured by eligible collateral categories.

 
Detailed Listing or Specific Pledge Collateral Status. The Bank may require a member to provide a detailed listing of eligible collateral being pledged if the member is under a specific agreement, or if participating in the Bank’s market-value based pricing program, or as determined based on its credit condition. In this case, the member typically retains physical possession of collateral pledged to the Bank but provides a listing of assets pledged. In some cases, the member may benefit by choosing to list collateral, in lieu of non-listed status, since it may result in a higher collateral weighting being applied to the collateral. The Bank benefits from detailed listing collateral status because it provides more loan information to calculate a more precise valuation of the collateral.

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

 
With respect to certain specific collateral pledge agreement borrowers (typically HFAs), the Bank takes control of all collateral pledged at the time the loan is made through the delivery of securities or, where applicable, mortgage loans to the Bank or its custodian. Approximately 76% of TCE outstanding was secured by collateral pledged to the Bank under a blanket lien agreement and in undelivered status at December 31, 2016. The remaining 24% of TCE outstanding was secured by collateral pledged under detailed listing or specific pledge and delivery status.

As of December 31, 2016, nine of the Bank’s top ten borrowers (ranked by TCE and outstanding advances) were in undelivered collateral status; the remaining one was in specific pledge status, utilizing detailed loan listings. This was a banking institution member which elected to have residential loan collateral specifically pledged under a detailed listing affiliate pledge lending arrangement.

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

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

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

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additional or substitute collateral while any obligations of a member to the Bank remain outstanding to protect the Bank’s security interest and ensure that it remains fully secured at all times.


See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details of eligible collateral, including amounts and percentages of eligible collateral securing members’ obligations to the Bank as of December 31, 2016.

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

 
Priority.  The Act affords any security interest granted to the Bank by any member, or any affiliate of a member, priority over the claims and rights of any third party, including any receiver, conservator, trustee or similar party having rights of a lien creditor. The only two exceptions are: (1) claims and rights that would be entitled to priority under otherwise applicable law and are held by actual bona fide purchasers for value; and (2) parties that are secured by actual perfected security interests ahead of the Bank’s security interest. The Bank has detailed liquidation plans in place to promptly exercise the Bank’s rights regarding securities, loan collateral, and other collateral upon the failure of a member. At December 31, 2016 and 2015, respectively, on a borrower-by-borrower basis, the Bank had a perfected security interest in eligible collateral with an eligible collateral value (after collateral weightings) in excess of the book value of all members’ and nonmember housing associates’ obligations to the Bank. Management believes that adequate policies and procedures are in place to effectively manage the Bank’s credit risk associated with lending to members and nonmember housing associates.

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

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

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

The Bank also accepts FHLBank deposits and multi-family residential mortgage loans as eligible collateral. In addition, member CFIs may pledge a broader array of collateral to the Bank, including secured small business, small farm, small agri-business and community development loans. The Housing Act defines member CFIs as Federal Deposit Insurance Corporation (FDIC)-insured institutions with no more than $1.1 billion (the limit during 2016) in average assets over the past three years. This limit may be adjusted by the Finance Agency based on changes in the Consumer Price Index. The determination to accept such collateral is at the discretion of the Bank and is made on a case-by-case basis. These advances were also collateralized by sufficient levels of non-CFI collateral. All member advances are fully secured by residential mortgage assets, ORERC, eligible securities and/or CFI collateral. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for the percentage of each type of collateral held by the Bank at December 31, 2016.

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

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Nontraditional residential mortgage loans are defined by the Bank’s Collateral Policy as mortgage loans that allow borrowers to defer payment of principal or interest. These loans may be interest-only loans, payment-option loans, negative-amortization, or have other features, such as, but not limited to, variable interest rates with below-market introductory rates, simultaneous second-lien loans and reduced documentation to support the repayment capacity of the borrower. Nontraditional residential mortgage loans exhibit characteristics that may result in increased risk relative to traditional residential mortgage loan products. They may pose even greater risk when granted to borrowers with undocumented or undemonstrated repayment capacity, for example, low or no documentation loans or credit characteristics that would be characterized as subprime. The potential for increased risk is particularly true if the nontraditional residential mortgage loans are not underwritten to the fully indexed rate.

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

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

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The various types of eligible collateral and related lending values as of December 31, 2016 are summarized below. Collateral includes wholly-owned member assets (or unencumbered assets of an affiliate or subsidiary of the member pledged to the Bank, if applicable and approved by FHLBank). The weightings are analyzed on at least a semi-annual basis and adjusted as necessary. At the discretion of the Bank, on a case-by-case basis, the collateral weighting on loan categories may be increased (up to a maximum of 85 percent) upon completion of specific market valuation of such collateral and authorization from the Bank’s Membership and Credit Committee.
Securities Collateral
Lending Values as a Percentage of Fair Value for All Members
Deposits held by the Bank and pledged to, and under the sole control of, the Bank
100%
U.S. Treasury securities; U.S. Agency securities, including securities of FNMA, FHLMC, FFCB, NCUA, SBA, USDA and FDIC notes; FHLBank consolidated obligations; REFCORP Bonds (1)
97%
MBS, including collateralized mortgage obligations (CMO) issued or guaranteed by GNMA, FHLMC, and FNMA
95%
U.S. Treasury STRIPs
90%
Non-agency residential MBS, including CMOs, representing a whole interest in such mortgages.
AAA 85%
AA 75%
A 70%
Commercial mortgage-backed securities (CMBS)
AAA 85%
AA 75%
A 70%
Securities issued by a state or local government or its agencies, or authorities or instrumentalities in the United States (municipals) with a real estate nexus.
AAA 92%
AA 90%
A 88%

Loan Collateral
Lending Values
% of Unpaid Principal Balance
% of Fair Value
QCR Filer Full Collateral Listing-Undelivered
Full Collateral Credit Reasons
Market Valuation Program
Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and Conventional whole, fully disbursed, first mortgage loans secured by 1-to-4 family residences (Note: Includes first lien HELOCs for listing members only)
80%
70%
85%
Nontraditional mortgage loans and loans with unknown FICO® (2) scores
70%
60%
80%
Conventional and FHA whole, fully-disbursed mortgage loans secured by multifamily properties
75%
65%
85%
Farmland loans
70%
60%
n/a
Commercial real estate loans (owner & non-owner occupied)
70%
60%
80%
Low FICO® score loans with mitigating factors as defined by the Bank
60%
50%
75%
Conventional, fully disbursed, second-mortgage loans secured by 1-to-4 family residences. Both term loans and HELOCs
60%
50%
CFI Collateral
60%
50%
n/a
Notes:
(1) Defined as Federal National Mortgage Association (Fannie Mae or FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac or FHLMC), Federal Farm Credit Bank (FFCB), National Credit Union Administration (NCUA), Small Business Administration (SBA), and U.S. Department of Agriculture (USDA).
(2) Nontraditional mortgage loan portfolios may be required to be independently identified for collateral review and valuation for inclusion in a member’s MBC. This may include a request for loan-level listing on a periodic basis.

During 2016, the Bank implemented some changes to its collateral policies and practices. See the Credit and Counterparty Risk - TCE and Collateral discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for details regarding these changes.


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Investments
 
Overview.  The Bank maintains a portfolio of investments for three main purposes: liquidity; collateral for derivative counterparties; and additional earnings. For liquidity purposes, the Bank invests in shorter-term instruments, including overnight Federal funds and overnight reverse repurchase agreements, to ensure the availability of funds to meet member borrowing requests. In addition, the Bank may invest in other short-term instruments, including term Federal funds, and interest-earning certificates of deposit. The Bank also maintains a secondary liquidity portfolio, which consists primarily of U.S. agency debentures that can be financed under normal market conditions in securities repurchase agreement transactions to raise additional funds. U.S. Treasury securities may be purchased and pledged as collateral for derivative transactions.
 
The Bank further enhances income by acquiring securities issued by GSEs and state and local government agencies as well as Agency MBS. The Bank's private label MBS portfolio continues to run-off; no private label MBS have been purchased since late 2007. Securities currently in the portfolio were required to carry one of the top two ratings from Moody’s Investors Service, Inc. (Moody’s), Standard & Poor’s Ratings Services (S&P) or Fitch Ratings (Fitch) at the time of purchase. All MBS securities in the Bank’s investment portfolio were AAA rated at the time of purchase with the exception of one pre-2004 vintage security which was rated AA at the time of purchase. The long-term investment portfolio is intended to provide the Bank with higher returns than those available in the short-term money markets. Investment income also bolsters the Bank’s capacity to meet its commitment to affordable housing and community investment, and to cover operating expenses. See the Credit and Counterparty Risk – Investments discussion in Risk Management in Item 7. Management’s Discussion and Analysis in this Form 10-K for discussion of the credit risk of the investment portfolio and further information on these securities’ current ratings.
 
Prohibitions.  Under Finance Agency regulations, the Bank is prohibited from purchasing certain types of securities, including:

instruments, such as common stock, that represent an ownership interest in an entity, other than stock in small business investment companies or certain investments targeted to low-income persons or communities;
instruments issued by non-U.S. entities, other than those issued by United States branches and agency offices of foreign commercial banks;
non-investment-grade debt instruments, other than certain investments targeted to low-income persons or communities and instruments that were downgraded after purchase by the Bank;
whole mortgages or other whole loans, other than: (1) those acquired under the Bank’s mortgage purchase program; (2) certain investments targeted to low-income persons or communities; (3) certain marketable direct obligations of state, local or tribal government units or agencies that are of investment quality; (4) MBS or asset-backed securities (ABS) backed by manufactured housing loans or home equity loans (HELOCs); and (5) certain foreign housing loans authorized under Section 12(b) of the Act; and
non-U.S. dollar denominated securities.
 
The provisions of Finance Agency regulation further limit the Bank’s investment in MBS and ABS. These provisions require that the total book value of MBS owned by the Bank not exceed 300% of the Bank’s previous month-end regulatory capital on the day of purchase of additional MBS. In addition, the Bank is prohibited from purchasing:

interest-only or principal-only strips of MBS;
residual-interest or interest-accrual classes of collateralized mortgage obligations and real estate mortgage investment conduits; and
fixed-rate or floating-rate MBS that on the trade date are at rates equal to their contractual cap and that have average lives that vary by more than six years under an assumed instantaneous interest rate change of 300 basis points.
 
The FHLBanks are prohibited from purchasing an FHLBank consolidated obligation as part of the consolidated obligation’s initial issuance. The Bank’s investment policy is even more restrictive, as it prohibits it from investing in another FHLBank consolidated obligation at any time. The Federal Reserve Board (Federal Reserve) requires Federal Reserve Banks (FRBs) to release interest and principal payments on the FHLBank System consolidated obligations only when there are sufficient funds in the FHLBanks’ account to cover these payments. The prohibitions on purchasing FHLBank consolidated obligations noted above will be temporarily waived if the Bank is obligated to accept the direct placement of consolidated obligation discount notes to assist in the management of any daily funding shortfall of another FHLBank.
 
The Bank does not consolidate any off-balance sheet special-purpose entities or other conduits.


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Mortgage Partnership Finance® (MPF®) Program
 
Under the MPF Program, the Bank purchases qualifying 5- to 30-year conventional conforming and government-insured fixed-rate mortgage loans secured by one-to-four family residential properties. The MPF Program provides participating members and eligible housing associates a secondary market alternative that allows for increased balance sheet liquidity and provides a method for removal of assets that carry interest rate and prepayment risks from their balance sheets. In addition, the MPF Program provides a greater degree of competition among mortgage purchasers and allows small and mid-sized community-based financial institutions to participate more effectively in the secondary mortgage market.
 
The Bank currently offers five products under the MPF Program to Participating Financial Institutions (PFIs): MPF Original, MPF 35, MPF Government, MPF Direct and MPF Xtra. Further details regarding the credit risk structure for each of the products, as well as additional information regarding the MPF Program and the products offered by the Bank, is provided in the Financial Condition section and the Credit and Counterparty Risk - Mortgage Loans discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K.
 
PFI. Members and eligible housing associates must specifically apply to become a PFI. The Bank reviews their eligibility including servicing qualifications and ability to supply documents, data and reports required to be delivered under the MPF Program. The Bank added six new PFIs in 2016, and as of December 31, 2016, 134 members were approved participants in the MPF Program. The Bank purchased mortgage loans totaling $790.2 million during 2016 of which $405.3 million was from one PFI.

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

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

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

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

MPF Xtra. MPF Xtra allows PFIs to sell residential, conforming fixed-rate mortgages to FHLBank of Chicago, which concurrently sells them to Fannie Mae on a nonrecourse basis. MPF Xtra does not have the CE structure of the traditional MPF Program. Additionally, because these loans are sold from the PFI to FHLBank of Chicago to Fannie Mae, they are not reported on the Bank’s Statement of Condition. With the MPF Xtra product, there is no credit obligation assumed by the PFI or the Bank and no CE fees are paid. PFIs which have completed all required documentation and training are eligible to offer the product. As of December 31, 2016, 44 PFIs were eligible to offer the product. Of these, 11 PFIs sold $50.4 million of mortgage loans through MPF Xtra for 2016. The Bank receives a nominal fee for facilitating these MPF Xtra transactions.

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

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

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

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

Specialized Programs
 
The Bank helps members meet their Community Reinvestment Act (CRA) responsibilities. Through community investment cash advance programs such as AHP and CLP, members have access to subsidized and other low-cost funding. Members use the funds from these programs to create affordable rental and homeownership opportunities, and for community and economic development activities that benefit low- and moderate-income neighborhoods and help revitalize their communities.
BOB Loans
 
See Note 1 - Summary of Significant Accounting Policies in Item 8. in this Form 10-K for a description of the BOB program. In 2016 and 2015, the Bank made $5.0 million and $3.5 million available, respectively, to assist small businesses through the BOB loan program.


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

Debt Financing — Consolidated Obligations
 
The primary source of funds for the Bank is the sale of debt securities, known as consolidated obligations. These consolidated obligations are issued as both bonds and discount notes, depending on maturity. Consolidated obligations are the joint and several obligations of the 11 FHLBanks. Consolidated obligations are not obligations of the U.S. government, and the U.S. government does not guarantee them. Moody’s has rated consolidated obligations Aaa with stable outlook/P-1, and S&P has rated them AA+ with stable outlook/A-1+. The following table presents the total par value of the consolidated obligations of the Bank and the FHLBank System at December 31, 2016 and 2015.
 
(in millions)
December 31, 2016
December 31, 2015
Consolidated obligation bonds
$
67,195.7

$
48,515.7

Consolidated obligation discount notes
28,529.6

42,318.5

Total Bank consolidated obligations
95,725.3

90,834.2

Total FHLBank System combined consolidated obligations
$
989,311.1

$
905,201.8

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



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

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

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

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

Capital Resources

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

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


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Each member is required to purchase and maintain activity stock equal to the percentage of the book value of the following transactions as shown in the table below:
 
Range of activity stock requirement according to the Capital Plan
 
 
Minimum
Maximum
Current requirement
Outstanding advances
2.0%
6.0%
4.0%
Acquired member assets (AMA)
0.0%
6.0%
4.0%
Letters of credit
0.0%
4.0%
0.75%
Outstanding advance commitments (settling more than 30 days after trade date)
0.0%
6.0%
0.0%

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

Dividends and Retained Earnings.  As prescribed in the Capital Plan, the Bank may pay dividends from current net earnings or previously retained earnings, subject to certain limitations and conditions. The Bank’s Board may declare and pay dividends in either cash or capital stock. The Bank’s practice has been to pay only a cash dividend. The amount of dividends the Board determines to pay out, if any, is affected by, among other factors, the level of retained earnings recommended under the Bank’s retained earnings policy. In addition, as set forth in the Capital Plan, the dividends paid on subclass B2 activity stock will be equal to or higher than the dividends being paid on subclass B1 membership stock at that time. Dividends paid in 2016, 2015 and 2014 are presented in the table below.
 
Dividend - Annual Yield
 
2016
2015
2014
 
Membership
Activity
Membership
Activity
 
February
3.0%
5.0%
(1) 
(1) 
2.5%
April
2.0%
5.0%
3.0%
5.0%
4.0%
July
2.0%
5.0%
3.0%
5.0%
4.0%
October
2.0%
5.0%
3.0%
5.0%
4.0%
Note:
(1) The Bank did not differentiate dividends on activity and membership stock prior to April 2015. In February 2015, the Bank paid a quarterly dividend on all capital stock equal to an annual yield of 4.0%. In addition, the Bank paid a special dividend of 2.5%. This special dividend was based on average member capital stock for the full year of 2014.

In February 2017, the Bank paid a quarterly dividend equal to an annual yield of 5.0% and 2.0% on activity stock and membership stock, respectively. The dividends were based on average member capital stock held for the fourth quarter of 2016.

As of December 31, 2016, the balance in retained earnings was $986.2 million, of which $214.5 million was deemed restricted. Refer to the Capital Resources section and the Risk Governance discussion in Risk Management, both in Item 7. Management’s Discussion and Analysis in this Form 10-K for additional discussion of the Bank’s capital-related metrics, retained earnings, dividend payments, capital levels and regulatory capital requirements.

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

The Finance Agency regulates the Bank’s use of derivatives. The regulations prohibit the trading in or speculative use of these instruments and limit credit risk arising from these instruments. All derivatives are recorded in the Statement of Condition

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at fair value. See Note 11- Derivatives and Hedging Activities to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K for additional information.

Competition
 
Advances.  The Bank competes with other suppliers of wholesale funding, both secured and unsecured, including the FRBs, commercial banks, investment banking divisions of commercial banks, and brokered deposits, largely on the basis of interest rates as well as types and weightings of collateral. Competition is often more significant when originating advances to larger members, which have greater access to the capital markets. Competition within the FHLBank System is somewhat limited; however, there may be some members of the Bank that have affiliates that are members of other FHLBanks. The Bank's ability to compete successfully with other FHLBanks for business depends primarily on pricing, dividends, capital stock requirements, credit and collateral terms, and products offered. Despite these competitive factors, advances rose 3.1% to $76.8 billion at December 31, 2016 compared to $74.5 billion at December 31, 2015. This was primarily driven by increases in fixed- and floating-rate term advance borrowings by several members. Additional details regarding the advance portfolio are available in the Financial Condition discussion in Item 7. Management's Discussion and Analysis in this Form 10-K.

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

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

Major Customers

Chase Bank USA, N.A., PNC Bank, N.A., and Ally Bank each had advance balances in excess of 10% of the Bank’s total portfolio as of December 31, 2016. See further discussion in Item 1A. Risk Factors and the “Credit and Counterparty Risk - TCE and Collateral” discussion in the Risk Management section in Item 7. Management’s Discussion and Analysis, both in this Form 10-K.

Personnel

As of December 31, 2016, the Bank had 212 full-time employee positions and three part-time employee positions, for a total of 213.5 full-time equivalents. The employees are not represented by a collective bargaining unit and the Bank considers its relationship with its employees to be good.

Taxation

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

AHP

The FHLBanks must set aside for the AHP annually, on a combined basis, the greater of an aggregate of $100 million or 10% of current year’s net income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP). If the Bank experienced a full year net loss, as defined in Note 15 - Affordable Housing Program (AHP) to the audited financial statements in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K, the Bank would have no obligation to the AHP for the year except in the following circumstance: if the result of the aggregate 10% calculation described above is less than $100 million for all 11 FHLBanks, then the Act requires that each FHLBank contribute such prorated sums as may be required to assure that the aggregate contributions of the FHLBanks equal

15



$100 million. The proration would be made on the basis of an FHLBank’s net income in relation to the income of all FHLBanks for the previous year. Each FHLBank’s required annual AHP contribution is limited to its annual net income. If an FHLBank finds that its required contributions are negatively impacting the financial stability of that FHLBank, it may apply to the Finance Agency for a temporary suspension of its contributions. As allowed by AHP regulations, an FHLBank can elect to allot fundings based on future periods’ required AHP contributions to be awarded during a year (referred to as Accelerated AHP). Accelerated AHP allows an FHLBank to commit and disburse AHP funds to meet the FHLBank’s mission when it would otherwise be unable to do so, based on its normal funding mechanism.
 
For additional details regarding the AHP assessment, please see the Earnings Performance discussion in Item 7. Management’s Discussion and Analysis and Note 15 - Affordable Housing Program (AHP) in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K.

SEC Reports and Corporate Governance Information

The Bank is subject to the informational requirements of the 1934 Act and, in accordance with the 1934 Act, files annual, quarterly and current reports with the SEC. The Bank’s SEC File Number is 000-51395. Any document filed with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, information statements and other information regarding registrants that file electronically with the SEC, including the Bank’s filings. The Bank’s financial information is also filed in eXtensible Business Reporting Language (XBRL) as required by the SEC and is available on the Bank’s and the SEC’s websites. The SEC’s website address is www.sec.gov. Copies of such materials can also be obtained at prescribed rates from the public reference section of the SEC at 100 F Street NE, Washington, D.C. 20549.
 
The Bank also makes the Annual Report filed on Form 10-K, Quarterly Reports filed on Form 10-Q, certain Current Reports filed on Form 8-K, and amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) or 15(d) of the 1934 Act available free of charge on or through its internet website as soon as reasonably practicable after such material is filed with the SEC. The Bank’s internet website address is www.fhlb-pgh.com. The Bank filed the certifications of the President and Chief Executive Officer, Chief Financial Officer, and the Chief Accounting Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with respect to the Bank’s 2016 Annual Report on Form 10-K as exhibits to this Report.
 
Information about the Bank’s Board and its committees and corporate governance, as well as the Bank’s Code of Conduct, is available in the corporate governance section of the “About Us” link on the Bank’s website at www.fhlb-pgh.com. Printed copies of this information may be requested without charge upon written request to the Legal Department at the Bank.

Item 1A: Risk Factors

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

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

For example, the Bank provides on-line banking transactional capability to enable its members to execute borrowing and other transactions with the Bank. The Bank is under ongoing cyber attack. Although the Bank has security measures in place and devotes significant resources to secure the Bank's computer systems and networks, it might not be able to anticipate or implement effective preventive measures against all security breaches. To date, the Bank has experienced a limited number of successful desktop (e.g., malware) security incidents. However, these incidents were limited and did not involve any breaches of data such as those that trigger notice requirements under applicable law. Each of these incidents was responded to appropriately which prevented material impact on the Bank’s operations. The Bank’s technology control environment, along

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with security policies and standards, incident response procedures, security controls testing and dedicated information security resources, have protected the Bank against material cyber-security attacks. In addition, the Bank completes periodic independent assessments that leverage industry recognized frameworks in order to continually improve the Bank’s control environment against cyber-security attacks. If a successful penetration were to occur, it might result in unauthorized access to digital systems for purposes of misappropriating assets or sensitive information (including confidential information of the Bank, members, counterparties or mortgage loan borrowers), corrupt data or cause operational disruption. This may result in financial loss or a violation of privacy or other laws. The Bank could incur substantial costs and suffer other negative consequences as a result, including but not limited to remediation costs, increased security costs, litigation, penalties, and reputational damage.

The Bank's business is dependent upon its ability to effectively exchange and process information using its computer information systems. The Bank's products and services require a complex and sophisticated computing environment, which includes purchased and custom-developed software. Maintaining the effectiveness and efficiency of the Bank's operations is dependent upon the continued timely implementation of technology solutions and systems, which may require ongoing capital expenditures, as well as the ability to sustain ongoing operations during technology solution implementations or upgrades. If the Bank were unable to sustain its technological capabilities, it may not be able to remain competitive, and its business, financial condition and profitability may be significantly compromised.

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

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

The Bank clears certain derivative transactions through a third party central clearinghouse. These swaps are subject to mandatory reporting, record-keeping and documentation requirements established by applicable regulators, an initial and a variation margin requirement established by the clearinghouse and its clearing members. Guidance from the Commodity Futures Trading Commission (CFTC) also addressed treatment of customer collateral for cleared swaps and additional protections for such collateral.

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

On June 15, 2016, the SEC approved the Financial Industry Regulatory Authority, Inc.’s (FINRA) proposed amendment to FINRA Rule 4210, which will require U.S. registered broker-dealers to receive a minimum amount of margin from their counterparties with respect to “Covered Agency Transactions” which include the following:

TBA transactions for which the difference between the trade date and contractual settlement date is greater than one business day;

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specified pool transactions for which the difference between the trade date and contractual settlement date is greater than one business day; and
U.S. agency collateralized mortgage obligations for which the difference between the trade date and contractual settlement date is greater than three business days.

Since the FHLBanks qualify as “exempt accounts”, the Bank will not be subject to the maintenance margin requirement and will only be required to exchange daily mark-to-market margin with respect to Covered Agency Transactions.

In October 2016, the Finance Agency informed the FHLBanks that it was reviewing the current regulatory liquidity requirements and may propose new requirements in 2017. The FHLBanks are working with the Finance Agency to gain a better understanding and potential impact of any such changes.

The Housing Act was intended to, among other things, address the 2007-2008 housing finance crisis, expand the Finance Agency's authority and address GSE reform issues. Several GSE reform bills have been crafted in the prior Congress and prior Administration. With a new Administration and changes in Congress, additional GSE reform efforts are expected. Depending on the terms, such legislation could have a material effect on the Bank. In addition, any future legislative changes to the Housing Act may significantly affect the Bank's business, results of operations and financial condition.

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

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

Continued regulatory changes drive ongoing updates to the Bank's current computer information systems to support these requirements. Recent legislative and regulatory proposals regarding enhanced cybersecurity standards and requirements may result in increased costs to the Bank as well as additional work-arounds until the Bank fully implements technology necessary to meet these additional requirements.

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

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

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

In connection with the MPF Program, the Bank is subject to competition regarding the purchase of conventional, conforming fixed-rate mortgage loans. In this regard, the Bank faces competition in the areas of customer service, purchase prices for the MPF loans and ancillary services such as automated underwriting. The Bank's strongest competitors are large

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

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

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

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

At December 31, 2016, the Bank's five largest customers, PNC Bank, N.A., Chase Bank USA, N.A., Santander Bank, N.A., TD Bank, N.A., and Ally Bank, accounted for 75% of its TCE and owned 72% of its outstanding capital stock. Of these members, PNC Bank, N.A., Ally Bank and Chase Bank USA, N.A. each had outstanding advance balances in excess of 10% of the total portfolio. If any of the Bank’s five largest customers paid off their outstanding advances, reduced their letter of credit activity with the Bank or withdrew from membership, the Bank could experience a material adverse effect on its outstanding advance levels and TCE, which would impact the Bank's financial condition and results of operations.

The Bank relies on both internally and externally developed models to manage market and other risks, to make business decisions and for financial accounting and reporting purposes. The Bank's business could be adversely affected if these models fail to produce reliable results or if the results are not used appropriately.

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

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


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If the models are not reliable or the Bank does not use them appropriately, the Bank could make poor business decisions, including asset and liability management decisions, or other decisions, which could result in an adverse financial impact. Further, any strategies that the Bank employs to attempt to manage the risks associated with the use of models may not be effective.

Failures of critical vendors and other third parties could disrupt the Bank’s ability to conduct business.

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

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

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

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

Regulations related to capital and liquidity have impacted how dealers are managing their balance sheets. The capacity for FHLBank debt is lower, as dealers have directed their focus on those assets that provide a higher return on equity. The FHLBanks are engaged in discussions with dealers to identify issues and provide strategies that could provide benefits to the business needs of those entities and maintain the level of FHLBank debt on the dealers’ balance sheets.

Money market reform has benefited the Bank’s ability to raise short-term liquidity at attractive costs. This market shift started in the second half of 2016 as money funds shifted from prime to government investments. This shift may be short-term in nature as money market investor risk and return preferences or money market regulatory requirements could change over time.

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

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

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

The Bank's business and earnings are affected by international, domestic and district-specific business and economic conditions. These economic conditions, which may also affect counterparty and members' business, include real estate values, residential mortgage originations, short-term and long-term interest rates, inflation and inflation expectations, unemployment levels, money supply, fluctuations in both debt and equity markets, and the strength of the foreign, domestic and local economies in which the Bank operates.

The Bank is affected by the global economy through member ownership and investor appetite. Changes in perception regarding the stability of the U.S. economy, the creditworthiness of the U.S. government, the degree of government support of financial institutions or the depletion of funds available for investment by overseas investors could lead to changes in foreign interest in investing in, or supporting, U.S. financial institutions or holding FHLBank debt.

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

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

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

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

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

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

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

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pledged collateral may not be sufficient to fully satisfy the amount of the failed institution's obligations and the operational cost of liquidating the collateral.

The Bank has expanded its number of insurance company members. There are several unique risks the Bank may be exposed to regarding members in the insurance industry. To the extent the Bank determines that the risk it faces in regard to an insurance company or insurance company members in a specific state requires additional mitigation, the Bank takes steps to mitigate this risk. These steps may include limits on eligible collateral and establishing over-collateralization levels to address risk of collateral volatility.

The Bank currently has two Community Development Financial Institution (CDFI) members, which are not generally subject to banking or insurance regulators. The Bank takes steps to mitigate this risk, which may include requiring specific over-collateralization levels or limits on eligible collateral. For all CDFI members, the Bank requires delivery of collateral pledged to secure the Bank’s advances and other credit products provided to such members.

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

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

If the number of high quality counterparties available for uncleared hedging transactions decreases, the Bank's ability to enter into hedging transactions may be constrained. As a result, the Bank may not be able to effectively manage interest rate risk, which could negatively affect its results of operations and financial condition. In addition, the Bank may be limited in the number of counterparties available with which it can conduct business with respect to money market investments, liquidity positions and other business transactions. It may also affect the Bank's credit risk position and the advance products the Bank can offer to members.

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

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

Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of all of the FHLBanks, backed only by the financial resources of the FHLBanks. Accordingly, the Bank is jointly and severally liable with the other FHLBanks for all consolidated obligations issued, regardless of whether the Bank receives all or any portion of the proceeds from any particular issuance of consolidated obligations. As of December 31, 2016, out of a total of $989.3 billion in par value of consolidated obligations outstanding, the Bank was the primary obligor on $95.7 billion, or approximately 9.7% of the total.

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

FHLBank System consolidated obligation bonds have been assigned Aaa/stable outlook and AA+/stable outlook ratings by Moody's and S&P, respectively. Consolidated obligation discount notes have been assigned a P-1 and A-1+ rating by Moody's

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and S&P, respectively. In addition, all FHLBanks have been assigned a long-term rating of Aaa/stable outlook and AA+/stable outlook by Moody’s and S&P, respectively. All FHLBanks have been assigned a short-term rating of P-1 and A-1+ by Moody’s and S&P, respectively. These ratings indicate that the FHLBanks have a strong capacity to meet their commitments to pay principal of and interest on consolidated obligations and that the consolidated obligations are judged to be of high quality with minimal credit risk. The ratings also reflect the FHLBanks' status as GSEs.

It is possible that the credit rating of an FHLBank, another GSE or the U.S. government could be lowered further by at least one NRSRO. It is expected that a debt ceiling resolution will be necessary by mid-March 2017. Depending on the nature and outcome of that process, the credit rating of the U.S. government could be lowered as was the case in August 2011. This could adversely affect the Bank's costs of doing business as described above. In addition, further downgrades could negatively impact the Bank's reputation and may result in heightened scrutiny by the regulator.

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

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

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

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

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

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

Decreases in interest rates may cause an increase in mortgage prepayments and may result in increased premium amortization expense and substandard performance in the Bank's mortgage portfolio as the Bank experiences a return of

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principal that it must re-invest in a lower rate environment, adversely affecting net interest income over time, if associated debt remains outstanding (i.e., debt overhang).

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

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

The Bank currently invests in Agency and other U.S. obligation MBS, which support the Bank’s mission. Prior to 2008, the Bank also had invested in private label MBS, which exposed the Bank to a higher level of credit risk relative to the other investments within the Bank’s portfolio, and resulted in credit-related OTTI losses. However, this portion of the Bank’s portfolio has continued to run off, with no new investments purchased since 2007; minimal credit-related OTTI losses were recognized in 2016. Given the profile of the current portfolio, the Bank is subject to less credit risk.

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

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

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

The Bank participates in the MPF Program with the FHLBank of Chicago as MPF provider. Net mortgage loans held for portfolio accounted for 3.3% of the Bank's total assets as of December 31, 2016 and approximately 11.9% of the Bank's total interest income in 2016. In contrast to the Bank's traditional member advance business, the MPF Program is highly subject to competitive pressures, more susceptible to loan losses, and also carries more interest rate risk, prepayment risk and operational complexity. The residential mortgage loan origination business historically has been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. General changes in market conditions could have a negative effect on the mortgage loan market. These would include, but are not limited to: rising interest rates slowing mortgage loan originations; an economic downturn creating increased defaults and lowered housing prices; innovative products that do not currently meet the criteria of the MPF Program; and new government programs or mandates. Any of these changes could have a negative impact on the profitability of the MPF Program. The Finance Agency made a series of changes to the Home Affordable Refinance Program (HARP) in an effort to assist more eligible borrowers who can benefit from refinancing of their home mortgage and extended the program through December 31, 2016. Other agencies have also implemented programs over the last few years aimed at preventing foreclosure. While many governmental loan modification programs are ending due to regulatory, business and customer expectations, servicers are expected to continue to offer other loan modification programs. The Bank offers a loan modification program for its MPF Program loans as well. To date, the Bank has not experienced any significant impact on its portfolio levels from the HARP program, the Bank's MPF loan modification program or other foreclosure prevention programs. However, program execution and related changes, as well as any new programs in the market may change that experience.

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

24


economic conditions or a natural disaster, the Bank could experience an increase in the required allowance for loan losses on this portfolio.

The Bank has established an allowance for loan losses in accordance with accounting standards to reflect incurred losses on its portfolio. If delinquency and loss rates on MPF loans increase, or there are additional declines in residential real estate values, the Bank will likely experience increases in the allowance for loan losses on its MPF loan portfolio.

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

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

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

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

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

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

Under Finance Agency regulation, the Bank may pay dividends on its capital stock only out of unrestricted retained earnings or current net income. The payment of dividends is subject to certain statutory and regulatory restrictions (including

25


that the Bank shall be in compliance with all minimum capital requirements and shall not have been designated undercapitalized by the Finance Agency) and is highly dependent on the Bank's ability to continue to generate future net income and maintain adequate retained earnings and capital levels.

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

The Bank's controls and procedures may fail or be circumvented, risk management policies and procedures may be inadequate and circumstances beyond the Bank's control could cause unexpected operating losses. In addition, the loss of key employees may have an adverse effect on the Bank's business and operations.

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

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

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

The Bank may be adversely affected by litigation.

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

Item 1B: Unresolved Staff Comments

None

Item 2: Properties

The Bank leases 96,240 square feet of office space at 601 Grant Street, Pittsburgh, Pennsylvania, 15219 and additional office space at the following locations: (1) 1325 G Street, Washington, DC 20005; (2) 2300 Computer Avenue, Willow Grove, Pennsylvania, 19090; (3) 435 N. DuPont Highway, Dover, Delaware 19904; (4) 1286 Suncrest Town Center, Morgantown, WV 26505; and (5) 580 and 768 Vista Park Drive, Pittsburgh, Pennsylvania 15205. The Washington, DC office space is shared with the FHLBanks of Atlanta and Des Moines. Essentially all of the Bank’s operations are housed at the Bank’s headquarters at the Grant Street location.


26



Item 3: Legal Proceedings

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

Item 4: Mine Safety Disclosures

Not applicable.

PART II – OTHER INFORMATION

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

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

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

The members’ minimum stock purchase requirement is subject to change from time to time at the discretion of the Board of Directors of the Bank in accordance with the Capital Plan. Par value of each share of capital stock is $100. As of December 31, 2016, the total mandatorily redeemable capital stock reflected the balance for three institutions, two of which were merged out of district and considered to be nonmembers. One other institution has notified the Bank of its intention to voluntarily redeem its capital stock and withdraw from membership. This institution will continue to be a member of the Bank until the withdrawal period is completed.

The total number of shares of capital stock outstanding as of December 31, 2016 was 37,606,262 of which members held 37,554,320 shares and nonmembers held 51,942 shares.

The Bank’s cash dividends declared in each quarter are reflected in the table below.
(in millions)
2016
2015
First quarter
$40.0
$99.7
Second quarter
39.7
34.7
Third quarter
37.6
38.1
Fourth quarter
37.7
40.3

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


27



Item 6: Selected Financial Data

The following should be read in conjunction with the financial statements and Item 7. Management’s Discussion and Analysis, each included in this Form 10-K. The Condensed Statements of Income data for 2016, 2015 and 2014, and the Condensed Statements of Condition data as of December 31, 2016 and 2015 are derived from the financial statements included in Item 8. Financial Statements and Supplementary Financial Data in this Form 10-K. The Statements of Income data for 2013 and 2012 and the Condensed Statements of Condition data as of December 31, 2014 and 2013 are derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2014 Form 10-K. The Condensed Statements of Condition data as of December 31, 2012 is derived from the financial statements in Item 8. Financial Statements and Supplementary Financial Data included in the Bank’s 2013 Form 10-K.

Condensed Statements of Income
 
Year Ended December 31,
(in millions)
2016
2015
2014
2013
2012
Net interest income
$
348.9

$
317.8

$
283.1

$
195.1

$
209.8

Provision (benefit) for credit losses
1.2

(0.2
)
(4.1
)
(1.8
)
0.4

Other noninterest income
25.0

44.5

75.6

47.5

7.1

Other expense
83.8

77.5

78.6

80.0

72.3

Income before assessments
288.9

285.0

284.2

164.4

144.2

AHP assessment
28.9

28.5

28.4

16.6

14.5

Net income
$
260.0

$
256.5

$
255.8

$
147.8

$
129.7

Dividends
$
155.0

$
212.8

$
103.9

$
21.4

$
5.8

Dividend payout ratio(1)
59.64
%
82.96
%
40.64
%
14.49
%
4.30
%
Return on average equity
5.96
%
6.16
%
6.83
%
4.32
%
3.75
%
Return on average assets
0.28
%
0.29
%
0.36
%
0.24
%
0.23
%
Net interest margin (2)
0.38
%
0.36
%
0.40
%
0.32
%
0.37
%
Regulatory capital ratio (3)
4.69
%
4.60
%
4.53
%
5.16
%
5.89
%
GAAP capital ratio(4)
4.73
%
4.67
%
4.67
%
5.22
%
5.31
%
Total average equity to average assets
4.72
%
4.66
%
5.22
%
5.60
%
6.02
%
Notes:
(1) Represents dividends paid as a percentage of net income for the respective periods presented.
(2) Net interest margin is net interest income before provision for credit losses as a percentage of average interest-earning assets.
(3) Regulatory capital ratio is the sum of period-end capital stock, mandatorily redeemable capital stock, and retained earnings as a percentage of total assets at period-end.
(4) GAAP capital ratio is sum of capital stock, retained earnings and accumulated other comprehensive income (AOCI) as a percentage of total assets at period-end.


28



Condensed Statements of Condition
 
December 31,
(in millions)
2016
2015
2014
2013
2012
Cash and due from banks
$
3,587.6

$
2,377.0

$
2,451.1

$
3,121.3

$
1,350.6

Investments(1)
17,227.3

16,144.0

16,528.4

13,875.2

19,057.2

Advances
76,808.7

74,504.8

63,408.4

50,247.5

40,497.8

Mortgage loans held for portfolio, net(2)
3,390.7

3,086.9

3,123.3

3,224.1

3,532.5

Total assets
101,260.0

96,329.8

85,670.5

70,664.5

64,610.2

Consolidated obligations, net:
 
 
 
 
 
  Discount notes
28,500.3

42,275.5

37,057.8

28,236.0

24,148.2

  Bonds
67,156.0

48,600.8

43,708.2

37,692.2

35,129.7

Total Consolidated obligations, net(3)
95,656.3

90,876.3

80,766.0

65,928.2

59,277.9

Deposits
558.9

686.0

641.2

694.4

999.9

Mandatorily redeemable capital stock
5.2

6.0

0.6


431.6

AHP payable
76.7

70.9

56.0

36.3

24.5

Total liabilities
96,466.1

91,828.2

81,667.5

66,972.3

61,181.2

Capital stock - putable
3,755.4

3,539.7

3,041.0

2,962.2

2,816.0

Unrestricted retained earnings
771.7

718.7

726.3

625.6

528.8

Restricted retained earnings
214.5

162.5

111.2

60.1

30.5

AOCI
52.3

80.7

124.5

44.3

53.7

Total capital
4,793.9

4,501.6

4,003.0

3,692.2

3,429.0

Notes:
(1) Includes trading, available-for-sale (AFS) and held-to-maturity (HTM) investment securities, securities purchased under agreements to resell, Federal funds sold, and interest-bearing deposits.
(2) Net of allowance for loan losses of $6.2 million, $5.7 million, $7.3 million, $11.4 million and $14.2 million at December 31, 2016 through 2012, respectively.
(3) Aggregate FHLBank System-wide consolidated obligations (at par) were $989.3 billion, $905.2 billion, $847.2 billion, $766.8 billion and $687.9 billion at December 31, 2016 through 2012, respectively.


29


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

Forward-Looking Information

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

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

Executive Summary

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

The interest rate environment significantly impacts the Bank's profitability. Net interest income is affected by several external factors, including market interest rate levels and volatility, credit spreads and the general state of the economy. To manage interest rate risk, a portion of the Bank's advances and debt have been hedged with interest-rate exchange agreements in which 1-month or 3-month LIBOR is received (advances) or paid (debt). Short-term interest rates also directly affect the Bank's earnings on invested capital. Finally, the Bank's mortgage-related assets make it sensitive to changes in mortgage rates. The Bank earns relatively narrow spreads between yields on assets (particularly advances, its largest asset) and the rates paid on corresponding liabilities. During 2016, funding spreads (i.e., the cost of FHLBank debt relative to LIBOR) particularly short-term funding spreads, improved considerably. This development was driven by new regulations applicable to institutional money market funds. These reform measures, which took effect in October 2016, resulted in increased demand for FHLB debt, which, when combined with a corresponding increase in LIBOR, resulted in more attractive funding spreads during the fourth quarter of 2016.

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

30


loan portfolio and investments and a possible decrease in the net interest margin. However, the Bank has accretion of interest income on certain private label residential MBS as a result of significant projected increases in cash flows. During 2016, this accretion resulted in additional interest income of $25.3 million compared to $27.4 million in 2015.

Results of Operations. The Bank’s net income for 2016 was $260.0 million compared to $256.5 million in 2015. This $3.5 million increase was driven by higher net interest income partially offset by lower noninterest income and higher other expense. Net interest income was $348.9 million for 2016 compared to $317.8 million in 2015. Higher net interest income was primarily due to higher interest income on advances, prepayment fees on advances and Federal funds sold, partially offset by higher interest expense on consolidated obligations.

For the fourth quarter of 2016, net income was $81.7 million, compared to $54.4 million in the fourth quarter of 2015. This $27.3 million increase was primarily driven by higher net interest income and higher noninterest income. Net interest income was $94.7 million for the fourth quarter of 2016, compared to $78.1 million in the fourth quarter of 2015, an increase of $16.6 million, primarily due to higher interest income on advances, investment income on AFS securities and Federal funds sold, partially offset by higher interest expense on consolidated obligations. Noninterest income in the fourth quarter of 2016 was $21.2 million, compared to $8.0 million in the fourth quarter of 2015, an increase of $13.2 million, primarily due to higher net gains on derivatives and hedging activities, partially offset by higher net losses on trading securities.

The net interest margin was 38 basis points and 36 basis points for 2016 and 2015, respectively.

Financial Condition. Advances. Total advances were $76.8 billion at December 31, 2016, an increase of $2.3 billion compared to $74.5 billion at December 31, 2015. Increased advance levels from the large member classification more than offset decreases in other member classifications which were primarily driven by certain prepayments and merger activities. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs. As the advance portfolio increased in size during 2016 compared to 2015, the term of advances decreased modestly. At December 31, 2016, approximately 50% of the par value of advances in the portfolio had a remaining maturity of more than one year, compared to 55% at December 31, 2015.

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

Investments. At December 31, 2016, the Bank held $17.2 billion of total investments including trading, AFS and HTM investment securities as well as securities purchased under agreements to resell, interest-bearing deposits and Federal funds sold. By comparison, at December 31, 2015, these investments totaled $16.1 billion. The increase of $1.1 billion was primarily driven by an increase in MBS investments.

Consolidated Obligations. The Bank's consolidated obligations totaled $95.7 billion at December 31, 2016, an increase of $4.8 billion from December 31, 2015. At December 31, 2016, bonds represented 70% of the Bank's consolidated obligations, compared with 53% at December 31, 2015. Discount notes represented 30% of the Bank's consolidated obligations at December 31, 2016 compared with 47% at year-end 2015. In 2016, there was increased demand for floating-rate, short-term bonds which were used to fund the increased member demand for floating-rate advances. In addition, the Bank reduced its refunding risk exposure by issuing longer term bonds.

In April 2016, Moody's affirmed the Aaa senior debt and P-1 ratings of the FHLBank System and affirmed the Aaa bank deposit and P-1 ratings of all 11 FHLBanks. The outlook on the FHLBank System's and FHLBanks' ratings is stable.

Capital Position and Regulatory Requirements. Total capital at December 31, 2016 was $4.8 billion, compared to $4.5 billion at December 31, 2015. Total retained earnings at December 31, 2016 were $986.2 million, up $105.0 million from $881.2 million at year-end 2015 reflecting the Bank's net income for 2016 which was partially offset by dividends paid. AOCI was $52.3 million at December 31, 2016, a decrease of $28.4 million from December 31, 2015. This decrease was primarily due to changes in the fair values of securities within the AFS portfolio and realized gains on the sale of AFS securities.


31


The table below presents the annual dividend yield on membership and activity stock in 2016.
 
Dividend - Annual Yield
 
Membership stock
Activity stock
February
3.0%
5.0%
April
2.0%
5.0%
July
2.0%
5.0%
October
2.0%
5.0%

In February 2017, the Bank paid quarterly dividends of 5.0% annualized on activity stock and 2.0% annualized on membership stock. The dividends were based on average member capital stock held for the fourth quarter of 2016.

The Bank met all of its capital requirements as of December 31, 2016, and in the Finance Agency’s most recent determination, as of September 30, 2016, the Bank was deemed "adequately capitalized."

2017 Outlook

The Bank anticipates that its members will continue to utilize advances to meet liquidity needs in 2017. If the economy continues to improve, loan growth opportunities and strong competition for retail deposits may also increase advance demand at regional banks and CFIs. Future opportunities and challenges will arise with potential changes in the Bank's operating landscape including various legislative actions, GSE and housing finance reform, and changes in regulatory compliance requirements. However, the Bank has been, and will continue to be, mission driven. Advances are central to the Bank’s mission and, along with other key activities, are crucial to the Bank continuing to meet the needs of its membership and communities.
Earnings Performance

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

Summary of Financial Results

Net Income and Return on Average Equity. The Bank’s net income for 2016 was $260.0 million, compared to $256.5 million in 2015. This $3.5 million increase was driven primarily by higher net interest income partially offset by lower noninterest income and higher other expense. Net interest income for 2016 was $348.9 million, a $31.1 million increase compared to $317.8 million in 2015. Higher net interest income was primarily due to higher interest income on advances, prepayment fees on advances and Federal funds sold, partially offset by higher interest expense on consolidated obligations. Noninterest income in 2016 was $25.0 million, a $19.5 million decrease compared to $44.5 million in 2015. Lower noninterest income was primarily due to net losses on derivatives and hedging activities and lower gains on litigation settlements (net of legal fees and expenses), partially offset by net realized gains on sales of AFS securities. Total other expense in 2016 was $83.8 million, a $6.3 million increase compared to $77.5 million in 2015, primarily due to higher compensation and benefits expenses and technology-related costs. The Bank’s return on average equity for 2016 was 5.96% compared to 6.16% for 2015.

2015 vs. 2014. The Bank recorded net income of $256.5 million in 2015 compared to $255.8 million in 2014, an increase of $0.7 million. The increase was primarily due to higher net gains on derivatives and hedging activities and higher net interest income, partially offset by lower gains on litigation settlements (net of legal fees and expenses) and lower net gains on trading securities. The Bank’s return on average equity for 2015 was 6.16%, compared to 6.83% for 2014.

32


Net Interest Income

The following table summarizes the yields and rates paid on interest-earning assets and interest-bearing liabilities, respectively, the average balance for each of the primary balance sheet classifications and the net interest margin for 2016, 2015 and 2014.
Average Balances and Interest Yields/Rates Paid
 
2016
2015
2014


(dollars in millions)

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

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

Average
Balance
Interest
Income/
Expense
Avg.
Yield/
Rate
(%)
Assets:
 
 
 
 
 
 
 
 
 
Federal funds sold and securities purchased under agreements to resell(1)
$
7,109.4

$
27.3

0.38
$
7,486.3

$
8.2

0.11
$
5,734.2

$
3.9

0.07
Interest-bearing deposits(2)
367.9

1.2

0.35
308.8

0.4

0.11
443.3

0.4

0.08
Investment securities(3)
11,826.2

227.6

1.93
11,056.8

217.0

1.96
11,208.7

219.5

1.96
Advances(4) 
68,362.7

612.1

0.90
65,739.9

349.5

0.53
50,376.8

272.9

0.54
Mortgage loans held for portfolio(5)
3,186.3

117.4

3.68
3,079.3

120.5

3.91
3,160.1

129.4

4.09
Total interest-earning assets
90,852.5

985.6

1.08
87,671.1

695.6

0.79
70,923.1

626.1

0.88
Allowance for credit losses
(8.0
)
 
 
(8.2
)
 
 
(10.4
)
 
 
Other assets(6)
1,536.2

 
 
1,569.4

 
 
850.7

 
 
Total assets
$
92,380.7

 
 
$
89,232.3

 
 
$
71,763.4

 
 
Liabilities and capital:
 
 
 
 
 
 
 
 
 
Deposits (2)
$
636.8

$
1.7

0.27
$
675.9

$
0.3

0.04
$
700.5

$
0.2

0.03
Consolidated obligation discount notes
25,016.4

110.2

0.44
35,181.0

54.1

0.15
27,793.8

24.2

0.09
Consolidated obligation bonds(7)
61,523.3

524.5

0.85
48,376.4

323.2

0.67
38,618.7

318.4

0.82
Other borrowings
6.4

0.3

4.88
3.5

0.2

4.76
2.9

0.2

6.73
Total interest-bearing liabilities
87,182.9

636.7

0.73
84,236.8

377.8

0.45
67,115.9

343.0

0.51
Other liabilities
833.2

 
 
834.2

 
 
902.2

 
 
Total capital
4,364.6

 
 
4,161.3

 
 
3,745.3

 
 
Total liabilities and capital
$
92,380.7

 
 
$
89,232.3

 
 
$
71,763.4


 
Net interest spread
 
 
0.35
 
 
0.34
 
 
0.37
Impact of noninterest-bearing funds
 
 
0.03
 
 
0.02
 
 
0.03
Net interest income/net interest margin
 
$
348.9

0.38
 
$
317.8

0.36
 
$
283.1

0.40
Average interest-bearing assets to interest-bearing liabilities
104.2
%
 
 
104.1
%
 
 
105.7
%
 
 
Notes:
(1) The average balance of Federal funds sold and securities purchased under agreements to resell and the related interest income and average yield calculations may include loans to other FHLBanks.
(2) Average balances of deposits (assets and liabilities) include cash collateral received from/paid to counterparties which is reflected in the Statements of Condition as derivative assets/liabilities.
(3) Investment securities include trading, AFS and HTM securities. The average balances of AFS and HTM are reflected at amortized cost; therefore, the resulting yields do not give effect to changes in fair value or the noncredit component of a previously recognized OTTI reflected in AOCI.
(4) Average balances reflect noninterest-earning hedge accounting adjustments of $0.2 billion, $0.3 billion and $0.5 billion in 2016, 2015 and 2014, respectively.
(5) Nonaccrual mortgage loans are included in average balances in determining the average rate.
(6) The noncredit portion of OTTI losses on investment securities is reflected in other assets for purposes of the average balance sheet presentation.
(7) Average balances reflect noninterest-bearing hedge accounting adjustments of $17.8 million, $13.6 million and $(28.2) million in 2016, 2015 and 2014, respectively.

Net interest income increased $31.1 million in 2016 compared to 2015 due to an increase in interest income, partially offset by an increase in interest expense. Interest-earning assets increased 3.6% with higher demand for advances and increased purchases of investments and mortgage loans, partially offset by a lower amount of Federal funds sold and securities purchased under agreement to resell. Higher interest income on advances, investments, Federal funds sold and securities purchased under agreements to resell were partially offset by lower interest income on mortgage loans held for portfolio. Interest income on advances increased due to prepayment fees, higher volume, and an increase in yield. Interest income on

33


investments increased due to higher volume. Interest income on Federal funds sold and securities purchased under agreements to resell increased due to an increase in yield which more than offset a decrease in volume. Interest income on mortgage loans declined due to a decrease in yield as the run-off of higher-yielding assets has been replaced with lower-yielding assets. The rate paid on interest-bearing liabilities increased 28 basis points due to higher funding costs on consolidated obligations bonds and discount notes.

Rate/Volume Analysis. Changes in both volume and interest rates influence changes in net interest income and net interest margin. The following table summarizes changes in interest income and interest expense between 2016, 2015 and 2014.
 
Increase (Decrease) in Interest Income/Expense Due to Changes in
Rate/Volume
 
2016 Compared to 2015
2015 Compared to 2014
(in millions)
Volume
Rate
Total
Volume
Rate
Total
Federal funds sold
$
(0.4
)
$
19.5

$
19.1

$
1.5

$
2.8

$
4.3

Interest-bearing deposits

0.8

0.8

(0.1
)
0.1


Investment securities
14.9

(4.3
)
10.6

(3.0
)
0.5

(2.5
)
Advances
14.5

248.1

262.6

81.7

(5.1
)
76.6

Mortgage loans held for portfolio
4.1

(7.2
)
(3.1
)
(3.2
)
(5.7
)
(8.9
)
 Total interest-earning assets
$
33.1

$
256.9

$
290.0

$
76.9

$
(7.4
)
$
69.5

 
 
 
 
 
 
 
Interest-bearing deposits
$

$
1.4

$
1.4

$

$
0.1

$
0.1

Consolidated obligation discount notes
(19.6
)
75.7

56.1

7.7

22.2

29.9

Consolidated obligation bonds
99.9

101.4

201.3

71.7

(66.9
)
4.8

Other borrowings
0.1


0.1




 Total interest-bearing liabilities
$
80.4

$
178.5

$
258.9

$
79.4

$
(44.6
)
$
34.8

Total increase (decrease) in net interest income
$
(47.3
)
$
78.4

$
31.1

$
(2.5
)
$
37.2

$
34.7


Interest income and interest expense both increased in 2016 compared to 2015. Higher rates drove the interest income increase. Interest expense reflected higher rates on consolidated obligations along with a volume increase in consolidated obligation bonds.

The following table presents the average par balances of the Bank's advance portfolio for 2016, 2015 and 2014. These balances do not reflect any hedge accounting adjustments.
(in millions)
 
Change 2016 vs. 2015
Change 2015 vs. 2014
Product
2016
2015
2014
%
%
RepoPlus /Mid-Term Repo
$
18,723.5

$
20,466.2

$
17,903.4

(8.5)
14.3
Core (Term)
48,988.8

43,547.7

30,091.4

12.5
44.7
Convertible Select
484.5

1,462.0

1,929.0

(66.9)
(24.2)
Total par value
$
68,196.8

$
65,475.9

$
49,923.8

4.2
31.2
Advance volume fluctuations in the comparisons were driven primarily by demand from larger members. The rate increase was primarily due to an increase in market interest rates as the Federal funds target rate increased in mid-December 2016. Additional prepayment fees also contributed to the year-over-year increase.

Interest expense on the average consolidated obligations portfolio increased in 2016 compared to 2015. Rates paid on both discount notes and bonds rose as the Federal funds target rate increased in mid-December 2016. An increase in average bond balances partially offset by a decrease in average discount note balances contributed to the volume increase. A portion of the bond portfolio is currently swapped to 3-month LIBOR; therefore, as the LIBOR rate (decreases) increases, interest expense on swapped bonds, including the impact of swaps, (decreases) increases. See details regarding the impact of swaps on the rates paid in the “Interest Income Derivatives Effects” discussion below.

34


2015 vs. 2014. Interest income increased in 2015 compared to 2014 due to a volume increase partially offset by a rate decrease. Higher advance volume drove the interest income increase. Interest expense increased in 2015 from 2014 due to higher volumes partially offset by lower rates. The increase reflected higher consolidated obligation volumes partially offset by a rate decrease. Advance volume was driven by demand from larger members; however volumes increased in all member classifications. The rate decrease on bonds was primarily due to longer term debt that was called or matured and replaced with lower cost debt.
 
Interest Income Derivative Effects. The following tables quantify the effects of the Bank’s derivative activities on interest income and interest expense for 2016, 2015 and 2014. Derivative and hedging activities are discussed below.
2016

(dollars in millions)

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

Impact of
Derivatives(1)
Incr./
(Decr.) (%)
Assets:
 
 
 
 
 
 
 
Advances
$
68,362.7

$
612.1

0.90
$
714.4

1.04
$
(102.3
)
(0.14
)
Mortgage loans held for
 portfolio
3,186.3

117.4

3.68
122.8

3.85
(5.4
)
(0.17
)
All other interest-earning
 assets
19,303.5

256.1

1.33
279.3

1.45
(23.2
)
(0.12
)
Total interest-earning
 assets
$
90,852.5

$
985.6

1.08
$
1,116.5

1.23
$
(130.9
)
(0.15
)
Liabilities:
 
 
 
 
 
 
 
Consolidated obligation
 bonds
$
61,523.3

$
524.5

0.85
$
595.2

0.97
$
(70.7
)
(0.12
)
All other interest-bearing
 liabilities
25,659.6

112.2

0.44
112.2

0.44


Total interest-bearing
 liabilities
$
87,182.9

$
636.7

0.73
$
707.4

0.81
$
(70.7
)
(0.08
)
Net interest income/net
 interest spread
 
$
348.9

0.35
$
409.1

0.42
$
(60.2
)
(0.07
)

2015

(dollars in millions)

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

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

$
349.5

0.53
$
553.0

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

120.5

3.91
124.6

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

225.6

1.20
244.6

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

$
695.6

0.79
$
922.2

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

$
323.2

0.67
$
551.3

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

54.6

0.15
54.6

0.15


Total interest-bearing
 liabilities
$
84,236.8

$
377.8

0.45
$
605.9

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

0.34
$
316.3

0.33
$
1.5

0.01


35


2014

(dollars in millions)

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

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

$
272.9

0.54
$
507.5

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

129.4

4.09
132.5

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

223.8

1.29
235.3

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

$
626.1

0.88
$
875.3

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

$
318.4

0.82
$
577.9

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

24.6

0.09
24.6

0.09


Total interest-bearing
 liabilities
$
67,115.9

$
343.0

0.51
$
602.5

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

0.37
$
272.8

0.33
$
10.3

0.04

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

In 2016, the use of derivatives negatively impacted both net interest income and net interest spread. The use of derivatives had little impact on net interest income and net interest spread in 2015. By comparison, in 2014, the use of derivatives resulted in increases to both net interest income and net interest spread. The variances in the advances and consolidated obligation derivative impacts from period to period are driven by the change in the average LIBOR-based variable rate, the timing of interest rate resets and the average hedged portfolio balances outstanding during any given period.

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

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

Provision (Benefit) for Credit Losses. The provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans for 2016 was $1.2 million compared to $(0.2) million in 2015.

2015 vs. 2014. The provision (benefit) for credit losses on mortgage loans held for portfolio and BOB loans was $(0.2) million in 2015 compared to $(4.1) million in 2014. The benefit in 2014 was primarily due to the adoption of certain provisions of AB 2012-02.


36


Other Noninterest Income
(in millions)
2016
2015
2014
Net OTTI losses, credit portion
$
(0.2
)
$
(1.8
)
$

Net gains (losses) on trading securities
(0.6
)
1.6

22.4

Net realized gains from sale of AFS securities
12.6



Net gains (losses) on derivatives and hedging activities
(13.8
)
3.4

(37.5
)
Gains on litigation settlements, net
0.6

15.3

70.9

Standby letters of credit fees
24.7

23.6

17.4

Other, net
1.7

2.4

2.4

Total other noninterest income
$
25.0

$
44.5

$
75.6


The Bank's lower total other noninterest income for 2016 compared to 2015 was due primarily to losses on derivatives and hedging activities and lower gains on litigation settlements, net of legal fees and expenses, partially offset by net realized gains from sale of AFS securities. The activity related to derivatives and hedging activities is discussed in more detail below. The litigation settlements relate to investments the Bank made in private label MBS. During the first and third quarters of 2016, the Bank sold Agency, private label MBS and HELOC securities from its AFS portfolio.

2015 vs. 2014. The Bank’s lower total other noninterest income for 2015 compared to 2014 was due primarily to lower gains on litigation settlements, net of legal fees and expenses, and lower net gains on trading securities partially offset by higher net gains on derivatives and hedging activities and higher standby letters of credit fees. The net gains on trading securities reflects the impact of fair market value changes on Agency investments held in the Bank’s trading portfolio. The increase in standby letter of credit fees was due to higher volume and an increase in the fee on letters of credit.

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

The Bank's hedging strategies consist of fair value accounting hedges and economic hedges. Fair value hedges are discussed in more detail below. Economic hedges address specific risks inherent in the Bank's balance sheet, but either they do not qualify for hedge accounting or the Bank does not elect to apply hedge accounting. As a result, income recognition on the derivatives in economic hedges may vary considerably compared to the timing of income recognition on the underlying asset or liability. The Bank does not enter into derivatives for speculative purposes nor does it have any cash flow hedges.

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

The following tables detail the net effect of derivatives and hedging activities for 2016, 2015 and 2014.

37


 
2016
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(2.2
)
$

$
(5.4
)
$
2.5

$

$
(5.1
)
Net interest settlements included in net interest income (2)
(100.1
)
(23.2
)

68.2


(55.1
)
Total effect on net interest income (loss)
$
(102.3
)
$
(23.2
)
$
(5.4
)
$
70.7

$

$
(60.2
)
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
Gains on fair value hedges
$
2.5

$
0.3

$

$
0.5

$

$
3.3

Gains (losses) on derivatives not receiving hedge accounting
(3.9
)
(11.7
)
(1.5
)
0.1

(0.1
)
(17.1
)
Total net gains (losses) on derivatives and hedging activities
$
(1.4
)
$
(11.4
)
$
(1.5
)
$
0.6

$
(0.1
)
$
(13.8
)
Total net effect of derivatives and hedging activities
$
(103.7
)
$
(34.6
)
$
(6.9
)
$
71.3

$
(0.1
)
$
(74.0
)
 
2015
(in millions)
Advances
Investments
Mortgage Loans
Bonds
Discount Notes
Total
Net interest income:
 
 
 
 
 
 
Amortization/accretion of hedging activities in net interest income (1)
$
(5.0
)
$

$
(4.1
)
$
9.9

$

$
0.8

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

218.2


0.7

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

$

$
1.5

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

$
1.0

$

$
2.9

$

$
4.8

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

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

$
(1.1
)
$
3.4

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

$
(1.1
)
$
4.9

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

$
(3.1
)
$
25.7

$

$
13.7

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

233.8


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

$

$
10.3

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

$
(1.6
)
$

$
2.0

$

$
4.3

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

0.4

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

$
0.4

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

$
0.4

$
(27.2
)

38


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

Fair value hedges. The Bank uses interest rate swaps to hedge a large portion of its fixed-rate advances and consolidated obligations and a small portion of its fixed rate investment securities. The interest rate swaps convert these fixed-rate instruments to a variable-rate (i.e., LIBOR). Most of these hedge relationships are subject to fair value hedge accounting treatment. Fair value hedge ineffectiveness represents the difference between the change in the fair value of the derivative compared to the change in the fair value of the underlying asset/liability hedged. Fair value hedge ineffectiveness is generated by movement in the benchmark interest rate being hedged and by other structural characteristics of the transaction involved. For example, the presence of an upfront fee associated with a structured debt hedge will introduce valuation differences between the hedge and hedged item that will fluctuate over time. During 2016, the Bank recorded net gains of $3.3 million compared to net gains of $4.8 million during 2015. The total notional amount decreased to $29.1 billion at December 31, 2016 from $30.4 billion at December 31, 2015.

Derivatives not receiving hedge accounting. For derivatives not receiving hedge accounting, also referred to as economic hedges, the Bank includes the net interest settlements and the fair value changes in the “Net gains (losses) on derivatives and hedging activities” financial statement line item. For economic hedges, the Bank recorded net losses of $(17.1) million in 2016 compared to $(1.4) million in 2015. For 2016, the losses were concentrated in longer term economic hedges. Changes in the composition of the economic hedge portfolio as well as increases in mid- and long-term interest rates during 2016 compared to decreases in mid- and long-term interest rates in 2015 resulted in larger losses in 2016 compared to 2015. During 2016, the losses were generated by longer term economic swaps hedging consolidated obligations, whereas in 2015 losses were generated by economic asset swaps. The total notional amount of economic hedges, which includes mortgage delivery commitments, was $10.6 billion at December 31, 2016 and $14.2 billion at December 31, 2015.

2015 vs. 2014. Fair value hedges. In 2015 and 2014, total ineffectiveness related to fair value hedges resulted in net gains of $4.8 million and $4.3 million, respectively. The total notional amount decreased to $30.4 billion in 2015 from $32.2 billion in 2014.

2015 vs. 2014. Derivatives not receiving hedge accounting. For economic hedges, the Bank recorded net losses of $(1.4) million in 2015 compared to $(41.8) million in 2014. The total notional amount of economic hedges was $14.2 billion and $12.7 billion at December 31, 2015 and 2014, respectively.

Other Expense
(in millions)
2016
2015
2014
Compensation and benefits
$
46.6

$
43.2

$
43.1

Occupancy
2.8

2.7

2.6

Other
24.3

21.5

24.6

Finance Agency
5.9

5.4

4.5

Office of Finance
4.2

4.7

3.8

Total other expenses
$
83.8

$
77.5

$
78.6


The Bank's total other expenses increased $6.3 million to $83.8 million for 2016 compared to $77.5 million for 2015. The increase was primarily due to higher compensation and benefits expenses, including a $2.7 million increase in voluntary contributions to the Bank's pension plan, along with technology related costs.

2015 vs 2014. The Bank's total other expenses for 2015 decreased slightly compared to 2014. The decline was primarily due to lower legal expenses related to the Bank’s private label MBS litigation and lower voluntary contributions to the Bank’s pension plan, partially offset by higher total compensation expense, including incentive payments. The voluntary contribution to the Bank’s pension plan in 2015 was $4.3 million compared with $6.9 million in 2014.

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


39


AHP Assessment

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

The AHP, mandated by the Act, is the largest and primary public policy program of the Bank. The AHP funds, which are offered on a competitive basis, provide grants and below-market loans for both rental and owner-occupied housing for households at 80% or less of the area median income. The Bank is required to contribute approximately 10% of its income (GAAP net income before interest expense related to mandatorily redeemable capital stock and the assessment for AHP) to AHP and makes these funds available for use in the subsequent year. Each year, the Bank’s Board adopts an implementation plan that defines the structure of the program pursuant to the AHP regulations. The Bank’s contribution was $28.9 million, $28.5 million and $28.4 million for 2016, 2015 and 2014, respectively. The following table details the funding rounds the Bank conducted and the distribution of AHP funds for 2016, 2015, and 2014.
 
2016
2015
2014
Funding rounds
1
1
1
Eligible applications
164
163
116
Grants
$23.1 million
$23.8 million
$15.0 million
Projects
50
63
38
Project development costs
$202.1 million
$351.7 million
$280.9 million
Units of affordable housing
1,476
2,390
1,954

The CLP offers advances at low-cost (i.e., the Bank’s cost of funds), providing the full advantage of a low-cost funding source. CLP loans help member institutions finance housing construction and rehabilitation, infrastructure improvement, and economic and community development projects that benefit targeted neighborhoods and households. At December 31, 2016, the CLP loan balance totaled $785.6 million compared to $726.0 million at December 31, 2015, reflecting an increase of $59.6 million, or 8.2%.

The First Front Door Program (FFD) offers grants to first time homebuyers up to $5,000 to assist with the purchase of a home. FFD grants are available to households earning 80% or less of the area median income. During 2016, $6.5 million in FFD grants were disbursed.

The Disaster Relief Program (DRP) is a $1 million program available to members to assist households affected by historic flooding in 12 West Virginia counties during June 2016. The funds are a set-aside from the overall 2016 AHP subsidy pool and can be used for owner-occupied rehabilitation up to $15,000 per household or for home purchase assistance of up to $7,500 per household. During 2016, $7,500 for one DRP grant was disbursed.


40


Financial Condition

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

Assets

Total assets were $101.3 billion at December 31, 2016, compared with $96.3 billion at December 31, 2015, an increase of $5.0 billion primarily due to increased advances, short-term liquidity balances and AFS securities. Advances totaled $76.8 billion at December 31, 2016 compared to $74.5 billion at December 31, 2015.

The Bank's core mission activities primarily include the issuance of advances. In addition, the Bank acquires member assets through the MPF® program. The Bank's average par amounts in 2016 for advances and MPF loans totaled $71.3 billion, resulting in a core mission asset ratio of 82.5%.

Advances. Advances (par) totaled $76.8 billion at December 31, 2016 compared to $74.3 billion at December 31, 2015. At December 31, 2016, the Bank had advances to 184 borrowing members, compared to 199 borrowing members at December 31, 2015. The percentage of borrowing members to total members was 60.5% and 64.8% at December 31, 2016 and December 31, 2015, respectively. A significant amount of the advances continued to be generated from the Bank’s five largest borrowers, reflecting the asset concentration mix of the Bank’s membership base. Total advances outstanding to the Bank’s five largest members increased to 79.7% of total advances as of December 31, 2016, from 74.1% at December 31, 2015.


41


The following table provides information on advances at par by contractual maturity at December 31, 2016 and December 31, 2015.
 
December 31,
(in millions)
2016
2015
Fixed-rate
 
 
Due in 1 year or less
$
20,563.9

$
17,373.2

Due after 1 year through 3 years
5,817.9

8,526.0

Due after 3 years through 5 years
2,793.5

2,824.4

Thereafter
664.7

858.1

Total par value
$
29,840.0

$
29,581.7

 
 
 
Fixed-rate, callable or prepayable(1)
 
 
Due in 1 year or less
$

$
650.0

Total par value
$

$
650.0

 
 
 
Variable-rate
 
 
Due in 1 year or less
$
12,998.1

$
6,777.5

Due after 1 year through 3 years
12,292.5

19,072.5

Due after 3 years through 5 years
8,552.0

4,544.3

Thereafter
3.1

3.1

Total par value
$
33,845.7

$
30,397.4

 
 
 
Variable-rate, callable or prepayable(1)
 
 
Due in 1 year or less
$
4,700.0

$
7,500.0

Due after 1 year through 3 years
3,375.0

3,810.0

Due after 3 years through 5 years
4,225.0

590.0

Thereafter


Total par value
$
12,300.0

$
11,900.0

 
 
 
Other(2)
 
 
Due in 1 year or less
$
309.9

$
891.6

Due after 1 year through 3 years
302.3

652.1

Due after 3 years through 5 years
79.7

103.2

Thereafter
157.7

157.3

Total par value
$
849.6

$
1,804.2

Total par balance
$
76,835.3

$
74,333.3

Notes:
(1) Prepayable advances are those advances that may be contractually prepaid by the borrower on specified dates without incurring prepayment or termination fees.
(2) Includes fixed-rate amortizing/mortgage matched, convertible, and other advances.

The Bank had no putable advances at December 31, 2016 or 2015.


42


The following table provides a distribution of the number of members, categorized by individual member asset size that had an outstanding advance balance during 2016 and 2015. Commercial Bank, Thrift, and Credit Union members are classified by asset size as follows: Large (over $25 billion), Regional ($4 to $25 billion), Mid-size ($1.1 to $4 billion) and CFI (under $1.1 billion).
 
December 31,
December 31,
Member Asset Size
2016
2015
Large
6

6

Regional
14

13

Mid-size
24

23

CFI (1)
196

206

Insurance
9

8

Total borrowing members during the period
249

256

Total membership
304

307

Percentage of members borrowing during the period
81.9
%
83.4
%
Note:
(1) For purposes of this member classification reporting, the Bank groups smaller credit unions with CFIs. CFIs are FDIC-insured depository institutions whose assets do not exceed the applicable regulatory limit.

The total number of members as of December 31, 2016 decreased to 304, compared to 307 as of December 31, 2015. The Bank added 11 new members and lost 14 members. One member was placed into receivership with its charter being dissolved. With no credit exposure outstanding to the Bank, the institution was closed by the Pennsylvania Department of Banking and Securities on May 6, 2016. The FDIC was appointed receiver, and it entered into a purchase and assumption agreement with an out-of-district institution to assume substantially all of the assets and deposits of the failed institution. Two members merged with other institutions outside of the Bank's district, and 11 members merged with other institutions within the Bank's district.

The following table provides information at par on advances by member classification at December 31, 2016 and December 31, 2015.
(in thousands)
December 31, 2016
December 31, 2015
Increase/(Decrease)
Member Classification
Large
$
61,230.0

$
55,075.1

11.2
 %
Regional
6,579.0

9,090.3

(27.6
)
Mid-size
3,681.9

3,443.7

6.9

CFI
3,613.1

4,262.2

(15.2
)
Insurance
1,729.3

2,459.8

(29.7
)
Non-member
2.0

2.2

(9.1
)
Total
$
76,835.3

$
74,333.3

3.4
 %

As of December 31, 2016, total advances increased 3.4% compared with balances at December 31, 2015. Decreases in certain member classifications, primarily driven by certain prepayments and merger activities, were more than offset by increased advance levels from the large member classification. It is not uncommon for the Bank to experience variances in the overall advance portfolio driven primarily by changes in member needs.

See the Credit and Counterparty Risk -TCE and Collateral discussion in the Risk Management section of this Item 7. Management’s Discussion and Analysis in this Form 10-K for further information on collateral policies and practices and details regarding eligible collateral, including amounts and percentages of eligible collateral securing member advances as of December 31, 2016.

Mortgage Loans Held for Portfolio. Mortgage loans held for portfolio, net of allowance for credit losses was $3.4 billion at December 31, 2016 and $3.1 billion at December 31, 2015. The Bank’s focus is on purchasing MPF loans originated by the member institutions located in its district.


43


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

Foregone interest represents income the Bank would have recorded if the loan was paying according to its contractual terms. Foregone interest for the Bank’s mortgage loans was $0.1 million, $0.6 million, $1.3 million, $2.5 million and $2.9 million, for years 2016 through 2012, respectively. Foregone interest for the Bank’s BOB loans was immaterial. Balances regarding the Bank’s loan products are summarized below.
 
December 31,
(in millions)
2016
2015
2014
2013
2012
Advances(1)
$
76,808.7

$
74,504.8

$
63,408.4

$
50,247.5

$
40,497.8

Mortgage loans held for portfolio, net(2)
3,390.7

3,086.9

3,123.3

3,224.1

3,532.5

Nonaccrual mortgage loans(3)
26.6

32.5

44.6

57.8

72.5

Mortgage loans 90 days or more delinquent and still accruing interest(4)
4.0

4.2

6.8

8.3

7.2

BOB loans, net
12.3

11.3

11.6

11.4

12.8

Notes:
(1) There are no advances which are past due or on nonaccrual status.
(2) All mortgage loans are fixed-rate. Balances are reflected net of the allowance for credit losses.
(3) Nonaccrual mortgage loans are reported net of interest applied to principal and does not include performing TDRs of $11.5 million, $14.8 million, $12.8 million, $12.0 million and $10.2 million at December 31, 2016, 2015, 2014, 2013 and 2012 respectively.
(4) Only government-insured or -guaranteed loans continue to accrue interest after becoming 90 days or more delinquent.

The performance of the mortgage loans in the Bank’s MPF Program has been relatively stable since year-end 2015, and the MPF Original portfolio continues to outperform the market based on national delinquency statistics. As of December 31, 2016, the Bank’s seriously delinquent mortgage loans (90 days or more delinquent or in the process of foreclosure) represented 0.6% of the MPF Original portfolio and 2.9% of the MPF Plus portfolio compared with 0.5% and 3.3%, respectively, at December 31, 2015.

Allowance for Credit Losses (ACL).  The Bank has not incurred any losses on advances since its inception in 1932. Due to the collateral held as security and the repayment history for advances, management believes that an ACL for advances is not appropriate under GAAP. This assessment also includes letters of credit, which have the same collateral requirements as advances. For additional information, see discussion regarding collateral policies and standards on the advances portfolio in the Advance Products discussion in Item 1. Business in this Form 10-K.

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

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

The remainder of the portfolio's incurred loss is estimated using a collective assessment, which is based on probability of default and loss given default. Probability of default and loss given default are based on the prior 12 month historical performance of the Bank's mortgage loans. Probability of default is based on a migration analysis, and loss given default is

44


based on realized losses incurred on the sale of mortgage loan collateral including a factor that reduces estimated proceeds from PMI given the credit deterioration experienced by those companies.
 

The following table presents the rollforward of ACL on the mortgage loans held for portfolio for the years 2012 through 2016.
(in millions)
2016
2015
2014
2013
2012
Balance, beginning of year
$
5.7

$
7.3

$
11.4

$
14.2

$
14.3

(Charge-offs) Recoveries, net
(0.2
)
(0.8
)
0.3

(1.0
)
(0.5
)
Provision (benefit) for credit losses
0.7

(0.8
)
(4.4
)
(1.8
)
0.4

Balance, end of year
$
6.2

$
5.7

$
7.3

$
11.4

$
14.2

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