Federal Home Loan Bank of Cincinnati - FORM 10-K

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EX-99.2 - EXHIBIT 99.2 - Federal Home Loan Bank of Cincinnati	ex992201610-k.htm
EX-99.1 - EXHIBIT 99.1 - Federal Home Loan Bank of Cincinnati	ex991201610-k.htm
EX-32 - EXHIBIT 32 - Federal Home Loan Bank of Cincinnati	ex32201610-k.htm
EX-31.2 - EXHIBIT 31.2 - Federal Home Loan Bank of Cincinnati	ex312201610-k.htm
EX-31.1 - EXHIBIT 31.1 - Federal Home Loan Bank of Cincinnati	ex311201610-k.htm
EX-24 - EXHIBIT 24 - Federal Home Loan Bank of Cincinnati	ex24201610-k.htm
EX-18 - EXHIBIT 18 - Federal Home Loan Bank of Cincinnati	ex18201610-k.htm
EX-12 - EXHIBIT 12 - Federal Home Loan Bank of Cincinnati	ex12201610-k.htm
EX-10.10 - EXHIBIT 10.10 - Federal Home Loan Bank of Cincinnati	ex10102016-10k.htm
EX-10.3 - EXHIBIT 10.3 - Federal Home Loan Bank of Cincinnati	ex103201610-k.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



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

For the transition period from __________ to __________.

Commission File No. 000-51399

FEDERAL HOME LOAN BANK OF CINCINNATI

(Exact name of registrant as specified in its charter)



Federally chartered corporation		31-6000228
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
600 Atrium Two, P.O. Box 598,
Cincinnati, Ohio		45201-0598
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code

(513) 852-7500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Class B Stock, par value $100 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d).

o Yes x No

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes o No

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

As of February 28, 2017, the registrant had 42,055,343 shares of capital stock outstanding, which included stock classified as mandatorily redeemable. The capital stock of the registrant is not listed on any securities exchange or quoted on any automated quotation system, only may be owned by members and former members and is transferable only at its par value of $100 per share.

Documents Incorporated by Reference: None



Page 1 of	166

Table of Contents



	PART I

Item 1.	Business	4

Item 1A.	Risk Factors	17

Item 1B.	Unresolved Staff Comments	22

Item 2.	Properties	22

Item 3.	Legal Proceedings	22

Item 4.	Mine Safety Disclosures	22

	PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	23

Item 6.	Selected Financial Data	24

Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	76

Item 8.	Financial Statements and Supplementary Data

	Financial Statements for the Years Ended 2016, 2015, and 2014	77

	Notes to Financial Statements	84

	Supplemental Financial Data	137

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	137

Item 9A.	Controls and Procedures	137

Item 9B.	Other Information	137

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance	139

Item 11.	Executive Compensation	144

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	159

Item 13.	Certain Relationships and Related Transactions, and Director Independence	160

Item 14.	Principal Accountant Fees and Services	161

	PART IV

Item 15.	Exhibits and Financial Statement Schedules	162

Item 16.	Form 10-K Summary	162

Signatures		163

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PART I

Special Cautionary Notice Regarding Forward Looking Information

This document contains forward-looking statements that describe the objectives, expectations, estimates, and assessments of the Federal Home Loan Bank of Cincinnati (the FHLB). These statements use words such as “anticipates,” “expects,” “believes,” “could,” “estimates,” “may,” and “should.” By their nature, forward-looking statements relate to matters involving risks or uncertainties, some of which we may not be able to know, control, or completely manage. Actual future results could differ materially from those expressed or implied in forward-looking statements or could affect the extent to which we are able to realize an objective, expectation, estimate, or assessment. Some of the risks and uncertainties that could affect our forward-looking statements include the following:

▪

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

▪

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


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


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


▪	changes in investor demand for Consolidated Obligations;


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


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


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


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


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

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

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Item 1.	Business.

COMPANY INFORMATION

Company Background

The FHLB is a regional wholesale bank that serves the public interest by providing financial products and services to our members to fulfill a public-policy mission of supporting housing finance and community investment. We are part of the FHLBank System. Each of the 11 FHLBanks operates as a separate entity with its own stockholders, employees, Board of Directors, and business model. Our region, known as the Fifth District, is comprised of Kentucky, Ohio and Tennessee.

The U.S. Congress chartered the FHLBank System in the Federal Home Loan Bank Act of 1932 (the FHLBank Act) as a GSE to help provide liquidity and credit to the U.S. housing market and support home ownership. Promoting home ownership is a long-standing central theme of U.S. government policy. The System has a critical public-policy role as important national liquidity providers to mortgage lenders, particularly during stressful conditions when private-sector liquidity often proves unreliable.

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

The FHLBank System also includes the Federal Housing Finance Agency (Finance Agency) and the Office of Finance. The Finance Agency is an independent agency in the executive branch of the U.S. government that regulates the FHLBanks, the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Office of Finance. The Office of Finance is a joint office of the FHLBanks that facilitates the issuance and servicing of the FHLBank System's Consolidated Obligations.

All federally insured depository institutions, certain insurance companies, and community development financial institutions chartered in the Fifth District may voluntarily apply for membership in our FHLB. Applicants must satisfy membership requirements in accordance with statutes and Finance Agency regulations. These requirements deal primarily with home financing activities, satisfactory financial condition such that Advances may be made safely, and matters related to the regulatory, supervisory and management oversight of the applicant. By law, an institution is permitted to be a member of only one FHLBank, although a holding company may have memberships in more than one FHLBank through its subsidiaries.

The combination of public sponsorship and private ownership that drives our business model is reflected in the composition of our 18-member Board of Directors, all of whom members elect. Ten directors are officers and/or directors of our member institutions, while the remaining directors are independent directors who represent the public interest.

At December 31, 2016, we had 687 members, 209 full-time employees, and two part-time employees. Our employees are not represented by a collective bargaining unit.

Mission and Corporate Objectives

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

How We Achieve the Mission

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

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

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

The primary way we obtain funding is through participation in the issuance of the FHLBank System's Consolidated Obligations in the global capital markets. Secondary sources of funding are capital and deposits we accept from our members. A critical component of the success of the FHLBank System is its ability to maintain a comparative advantage in funding, which due to its GSE status, confers an implied guarantee from the U.S. federal government, low risk operations, and joint and several liability across the 11 FHLBanks. We regularly issue Obligations under a wide range of maturities, structures, and amounts, and at relatively favorable spreads to benchmark market interest rates (represented by U.S. Treasury securities and the London InterBank Offered Rate (LIBOR)) compared with many other financial institutions.

Because we are a cooperative organization with some members using our products more heavily than others and members having different percentages of capital stock, we must achieve a balance in generating membership value from product prices and characteristics and paying a competitive dividend rate. We attempt to achieve this balance by pricing Mission Asset Activity at relatively narrow spreads over funding costs, compared with other financial institutions, while still achieving acceptable profitability. Our cooperative ownership structure and deep access to debt markets allow our business to be scalable and self-capitalizing without jeopardizing profitability, taking undue risks, or diminishing capital adequacy.

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

Corporate Objectives

Our corporate objectives, listed below, are to promote housing finance among members and ensure our operations and governance are effective and efficient.


▪	Mission Asset Activity: Implement strategies and tactics to effectively manage ongoing operations that promote members’ usage of Mission Asset Activity.


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


▪	Housing and Community Investment Programs: Maintain effective housing and community investment programs and offer targeted voluntary assistance programs.


▪	Safe and Sound Operations: Optimize our counterparty and deposit ratings, achieve an acceptable rating on annual examinations, and have an adequate amount and composition of capital.


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


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

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Business Activities

Mission Asset Activity

The following are our principal business activities with members:


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


▪	We issue collateralized Letters of Credit.


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

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

Affordable Housing and Community Investment

In addition, through various Housing and Community Investment programs, we assist members in serving very low-, low-, and moderate-income households and community economic development. These programs provide Advances at below-market rates of interest, as well as direct grants.

Investments

To help us achieve our mission and corporate objectives, we invest in highly-rated debt instruments of financial institutions and the U.S. government and in mortgage-related securities. In practice, these investments normally include shorter-term liquidity instruments and longer-term mortgage-backed securities, as permitted by Finance Agency regulation. Investments provide liquidity, help us manage market risk exposure, enhance earnings, and through the purchase of mortgage-related securities, support the housing market.

Sources of Earnings

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

Major items of expense are:


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


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


▪	non-interest expenses.

The largest component of earnings is net interest income, which equals interest income minus interest expense. We derive net interest income from the interest rate spread earned on assets versus funding costs and the use of financial leverage. Each of these can vary over time with changes in market conditions, including most importantly interest rates, business conditions and our risk management activities.

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

Capital

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

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

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

Tax Status

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

Ratings of Nationally Recognized Statistical Rating Organizations

The FHLBank System's comparative advantage in funding is acknowledged in its excellent credit ratings from nationally recognized statistical rating organizations (NRSROs). Moody's Investors Service (Moody's) currently assigns, and historically has assigned, the System's Consolidated Obligations the highest ratings available: long-term debt is rated Aaa and short-term debt is rated P-1. It also assigns a Prime-1 short-term bond rating on each FHLBank. It affirmed these ratings in 2016 and maintained a stable outlook. In 2016, Standard & Poor's affirmed its issuer credit ratings on each FHLBank and its AA+ ratings on the System's senior debt and also maintained a stable outlook.

The ratings closely follow the U.S. sovereign ratings from both agencies. The lower-than AAA debt ratings from Standard & Poor's have had no discernible impact on the System's debt issuance capabilities since the rating change occurred in 2011.

The agencies' rationales for their ratings of the System and our FHLB include the System's status as a GSE; the joint and several liability for Obligations; excellent overall asset quality; extremely strong capacity to meet commitments to pay timely principal and interest on debt; strong liquidity; conservative use of derivatives; adequate capitalization relative to our risk profile; a stable capital structure; and the fact that no FHLBank has ever defaulted on repayment of, or delayed return of principal or interest on, any Obligation.

A credit rating is not a recommendation to buy, sell or hold securities. A rating organization may revise or withdraw its ratings at any time, and each rating should be evaluated independently of any other rating. We cannot predict what future actions, if any, a rating organization may take regarding the System's or our ratings.

Regulatory Oversight

The Finance Agency is headed by a Director who has authority to promulgate regulations and to make other decisions. The Finance Agency is charged with ensuring that each FHLBank carries out its housing and community development finance mission, remains adequately capitalized, operates in a safe and sound manner, and complies with Finance Agency regulations.

To carry out these responsibilities, the Finance Agency conducts on-site examinations at least annually of each FHLBank, as well as periodic on- and off-site reviews, and receives monthly information on each FHLBank's financial condition and operating results. While an individual FHLBank has substantial discretion in governance and operational structure, the Finance Agency maintains broad supervisory and regulatory authority. In addition, the Comptroller General has authority to audit or examine the Finance Agency and the FHLBanks, to decide the extent to which the FHLBanks fairly and effectively fulfill the purposes of the FHLBank Act, and to review any audit, or conduct its own audit, of the financial statements of an FHLBank.

BUSINESS SEGMENTS

We manage the development, resource allocation, product delivery, pricing, credit risk management, and operational administration of our Mission Asset Activity in two business segments: Traditional Member Finance and the MPP. Traditional Member Finance includes Credit Services, Housing and Community Investment, Investments, some correspondent and deposit services, and other financial products of the FHLB. See the “Segment Information” section of “Results of Operations” in Item 7 and Note 18 of the Notes to Financial Statements for more information on our business segments, including their results of operations.

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Traditional Member Finance

Credit Services

Advances. Advances are competitively priced sources of funds available for members to help manage their asset/liability and liquidity needs. Advances can both complement and be alternatives to retail deposits, other wholesale funding sources, and corporate debt issuance. We strive to facilitate efficient, fast, and continual member access to funds. In most cases members can access funds on a same-day basis.

We price a variety of standard Advance programs every business day and several other standard programs on demand. We also offer customized, non-standard Advances. Having diverse programs gives members the flexibility to choose and customize their borrowings according to size, maturity, interest rate, interest rate index (for adjustable-rate coupons), interest rate options, and other features.

Repurchase based (REPO) Advances are short-term, fixed-rate instruments structured similarly to repurchase agreements from investment banks, with one principal difference. Members collateralize their REPO Advances through our normal collateralization process, instead of being required to pledge specific securities as would be required in a repurchase agreement. A majority of REPO Advances outstanding have overnight maturities.

LIBOR Advances have adjustable interest rates typically priced off 1- or 3-month LIBOR indices. LIBOR Advances may be structured at the member's option as either prepayable with a fee or prepayable without a fee if the prepayment is made on a repricing date.

Regular Fixed-Rate Advances have terms of 3 months to 30 years, with interest normally paid monthly and principal repayment normally at maturity. Members may choose to purchase call options on these Advances, although in the last several years, balances with call options have been at or close to zero.

Putable Advances are fixed-rate Advances that provide us an option to terminate the Advance, usually after an initial “lockout” period. Most have long-term original maturities. Selling us these options enables members to secure lower rates on Putable Advances compared to Regular Fixed-Rate Advances with the same final maturity.

Mortgage-Related Advances are fixed-rate, amortizing Advances with final maturities of 5 to 30 years. Some of these Advances, at the choice of the member, provide members with prepayment options without fees.

We also offer various other Advance programs that have smaller outstanding balances.

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

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

In addition, for many, but not all, Advance programs, Finance Agency regulations require us to charge members prepayment fees for early termination of principal when the early termination results in an economic loss to us. We determine prepayment fees using standard present-value calculations that make us economically indifferent to the prepayment. The prepayment fee equals the present value of the estimated profit that we would have earned over the remaining life of the prepaid Advance. If a member prepays principal on an Advance that we have hedged with an interest rate swap, we may also assess the member a fee to compensate us for the cost we incur in terminating the swap before its stated final maturity. Some Advance programs are structured as non-prepayable and may have additional restrictions in order to terminate.

We manage credit risk on Advances by requiring each member to supply us with a security interest in eligible collateral that in the aggregate has estimated value in excess of the total Advances and Letters of Credit. Collateral is comprised mostly of single-family loans, home equity lines, multi-family loans and bond securities. The combination of conservative collateral policies and risk-based credit underwriting activities mitigates virtually all potential credit risk associated with Advances and Letters of Credit. We have never experienced a credit loss on Advances, nor have we ever determined it necessary to establish a

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loan loss reserve for Advances. Item 7's “Quantitative and Qualitative Disclosures About Risk Management” and Notes 8 and 10 of the Notes to Financial Statements have more detail on our credit risk management of member borrowings.

Housing and Community Investment

Our Housing and Community Investment Programs include the Affordable Housing Program and various housing and community economic development-related Advance programs. We fund the Affordable Housing Program with an accrual equal to 10 percent of our previous year's net earnings, mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989. See Note 14 of the Notes to Financial Statements for a complete description of the Affordable Housing Program calculation.

The Affordable Housing Program provides funding for the development of affordable housing. The Program consists of a Competitive Program and a homeownership program called Welcome Home, which assists homebuyers with down payments and closing costs. Under the Competitive Program, we currently distribute funds in the form of grants to members that apply and successfully compete in an annual offering. Under Welcome Home, we make funds available beginning in March until they have been fully committed. For both programs, the income of qualifying individuals or households must be 80 percent or less of the area median income. We set aside up to 35 percent of the Affordable Housing Program accrual for Welcome Home and allocate the remainder to the Competitive Program.

Our Board of Directors also may allocate funds to voluntary housing programs. In 2016, the Board re-authorized an additional $1.5 million to the Carol M. Peterson Housing Fund for use during the year. These funds are primarily used as grants to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners. In March 2017, the Board re-authorized this fund in the same amount for use in 2017. In 2012, the Board of Directors also established the Disaster Reconstruction Program, a $5 million voluntary housing program that provides grants for purchase or rehabilitation of a home to Fifth District residents that have suffered loss or damage to their primary residence as a result of a state or federally declared disaster. Since the program's inception, we have disbursed over $3 million to assist 184 households.

Two other housing programs that fall outside the auspices of the Affordable Housing Program are the Community Investment Program and the Economic Development Program. Advances under the former program have rates equal to our cost of funds, while Advances under the latter program have rates equal to our cost of funds plus three basis points. Members use the Community Investment Program to serve housing needs of low- and moderate-income households and, under certain conditions, community economic development projects. The Economic Development Program is a discounted Advance program used to promote economic development and job creation and retention.

Investments

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

We are also permitted by regulation to purchase the following other investments, which have longer original maturities than liquidity investments:


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


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


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

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

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Per Finance Agency regulations, the total investment in mortgage-backed securities and asset-backed securities may not exceed, on a book value basis, 300 percent of previous month-end regulatory capital on the day we purchase the securities. See the “Capital Resources” section below for the definition of regulatory capital.

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


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


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


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

▪

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


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

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

Market risk associated with short-term investments tends to be minimal because of their short maturities and because we typically fund them with short-term Consolidated Obligations having similar maturities. We mitigate much of the market risk of mortgage-backed securities, which exists primarily from changes in mortgage prepayment speeds, by limiting their balances to 300 percent of regulatory capital, by funding them with a portfolio of long-term fixed-rate callable and noncallable Obligations, and by managing the market risk exposure of the entire balance sheet within prudent policy limits.

Finance Agency regulations and internal policies also provide controls on market risk exposure by restricting the types of mortgage loans, mortgage-backed securities and other investments we can hold. These restrictions prohibit, among others, the purchase of interest only or principal only stripped mortgage-backed securities and mortgage-backed securities whose average life varies more than six years under a 300 basis points interest rate shock.

Our internal policies specify guidelines for, and relatively tight constraints on, the types and amounts of short-term investments we are permitted to hold and the maximum amount of credit risk exposure we are permitted to have with eligible counterparties. We are permitted to invest only in the instruments of counterparties with high credit ratings, and because of our conservative investment policies and practices, we believe all of our investments have high credit quality. We have never had a credit loss or credit-related write down of any investment security.

Deposits

We provide a variety of deposit programs, including demand, overnight, term and Federal funds, which enable depositors to invest funds in short-term liquid assets. We accept deposits from members, other FHLBanks, any institution to which we offer correspondent services, and other government instrumentalities. The rates of interest we pay on deposits are subject to change daily based on comparable money market interest rates. The balances in deposit programs tend to vary positively with the amount of idle funds members have available to invest, as well as, the level of short-term interest rates. Deposits have represented a small component of our funding in recent years, typically less than one percent of our funding sources.

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

Description of the MPP

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

We purchase two types of mortgage loans: qualifying conforming fixed-rate conventional 1-4 family residential mortgages and residential mortgages fully insured by the Federal Housing Administration (FHA). Members approved to sell us these loans are referred to as Participating Financial Institutions (PFIs).

A “conventional” mortgage refers to a non-government-guaranteed mortgage. A “conforming” mortgage refers to the maximum amount permissible to be lent as a regular prime (i.e., non-jumbo, non-subprime) mortgage. For 2017, the Finance Agency established the conforming limit at $424,100 with loans originated in a limited number of high-cost cities and counties receiving higher conforming limits. We do not purchase mortgages subject to these higher amounts.

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

Shortly before delivering the loans that will fill the Mandatory Delivery Contract, the PFI must submit loan level detail including underwriting information. We apply procedures through the automated Loan Acquisition System designed to screen loans that do not comply with our policies. Our underwriting guidelines generally mirror those of Fannie Mae and Freddie Mac for conforming conventional loans, although our guidelines and pool composition requirements are more conservative in a number of ways in order to further limit credit risk exposure. PFIs are required to make certain representations and warranties against our underwriting guidelines on the loans they sell to us. If a PFI sells us a loan in breach of those representations and warranties, we have the contractual right to require the PFI to repurchase the loan.

How We Manage Risks of the MPP

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

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

We manage credit risk exposure for conventional loans through underwriting and pool composition requirements and by applying layered credit enhancements. These enhancements, which apply after a homeowner's equity is exhausted, include (in order of priority) available primary mortgage insurance, the Lender Risk Account (discussed below), and for loans acquired before February 2011, Supplemental Mortgage Insurance that the PFI purchased from one of our approved third-party providers naming us as the beneficiary.

Beginning in February 2011, we discontinued use of Supplemental Mortgage Insurance for new loan purchases and replaced it with expanded use of the Lender Risk Account and aggregation of loan purchases into larger pools to provide diversification in credit risk exposure. These credit enhancements are designed to protect us against credit losses in scenarios of severe downward movements in housing prices and unfavorable changes in other factors that can affect loan delinquencies and defaults.

The Lender Risk Account is a key component of how we manage residual credit risk. It is a holdback of a portion of the initial purchase price. Starting after five years from the loan purchase date, we may return the holdback to PFIs if they manage credit risk to pre-defined acceptable levels of exposure on the loan pools they sell to us. Actual loan losses are deducted from the

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amount of the purchase-price holdback we return to the PFI. The Lender Risk Account provides PFIs with a strong incentive to sell us high quality performing mortgage loans.

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

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

Earnings from the MPP

The MPP enhances long-term profitability on a risk-adjusted basis and augments the return on member stockholders' capital investment. We generate earnings in the MPP from monthly interest payments minus the cost of funding and the cost of hedging the MPP's interest rate risk. Interest income on each loan is computed as the mortgage note rate multiplied by the loan's principal balance:


▪	minus servicing costs (0.25 percent for conventional loans and 0.44 percent for FHA loans);


▪	minus the cost of Supplemental Mortgage Insurance (for applicable loans); and


▪	adjusted for the amortization of purchase premiums or the accretion of purchase discounts and for the amortization or accretion of fair value adjustments on loans initially classified as mortgage loan commitments.

For new loan purchases, we consider the cost of the Lender Risk Account when we set conventional loan prices and evaluate the MPP's potential return on investment. The pricing of each structure depends on a number of factors and is specific to the PFI and to the loan pool. We do not receive fees or income for retaining the risk of losses in excess of any credit enhancements.

FUNDING - CONSOLIDATED OBLIGATIONS

Our primary source of funding and hedging market risk exposure is through participation in the sale of Consolidated Obligation debt securities to global investors. Obligations are the joint and several obligations of all the FHLBanks, backed only by the financial resources of these institutions.

There are two types of Consolidated Obligations: Consolidated Bonds (Bonds) and Consolidated Discount Notes (Discount Notes). We participate in the issuance of Bonds for three purposes:


▪	to finance and hedge intermediate- and long-term fixed-rate Advances and mortgage assets;


▪	to finance and hedge short-term, LIBOR-indexed adjustable-rate Advances, and swapped Advances, typically by synthetically transforming fixed-rate Bonds to adjustable-rate LIBOR funding through the execution of interest rate swaps; and


▪	to acquire liquidity investments.

Bonds may have fixed or adjustable rates of interest. Fixed-rate Bonds are either noncallable or callable. A callable Bond is one that we are able to redeem in whole or in part at our discretion on one or more predetermined call dates according to the Bond's offering notice. The maturity of Bonds typically ranges from one year to 20 years. Our adjustable-rate Bonds use LIBOR for interest rate resets. In the last five years, we have not participated in the issuance of range Bonds, zero coupon Bonds, or indexed principal redemption Bonds.

We use fixed-rate Bonds to fund longer-term fixed-rate Advances and longer-term fixed-rate mortgage assets, and use adjustable-rate Bonds to fund adjustable-rate LIBOR Advances.

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

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

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The mix of Obligations fluctuates in response to relative changes in short-term versus long-term assets, relative changes in fixed-rate versus adjustable-rate assets, decisions on market risk management (particularly the amount of funding of longer-term assets with short-term Obligations), and differences in relative costs of various Obligations.

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

Finance Agency regulations govern the issuance of Obligations. An FHLBank may not issue individual debt securities without Finance Agency approval, and we have never done so. The Office of Finance services Obligations, prepares the FHLBank System's quarterly and annual combined financial statements, and serves as a source of information for the FHLBanks on capital market developments.

We have the primary liability for our portion of Obligations, i.e., those issued on our behalf for which we received the proceeds. However, we also are jointly and severally liable with the other FHLBanks for the payment of principal and interest on all Obligations. If we do not pay the principal or interest in full when due on any Obligation issued on our FHLB's behalf, we are prohibited from paying dividends or redeeming or repurchasing shares of capital stock. If another FHLBank were unable to repay its participation in an Obligation for which it is the primary obligor, the Finance Agency could call on each of the other FHLBanks to repay all or part of the Obligation. The Finance Agency has never invoked this authority.

LIQUIDITY

Our business requires a substantial and continual amount of liquidity to satisfy financial obligations (primarily maturing Consolidated Obligations) in a timely and cost-efficient manner and to provide members access to timely Advance funding and mortgage loan sales in all financial environments. We obtain liquidity by issuing debt, holding short-term assets that mature before their associated funding, and having the ability to sell certain investments without significant accounting or economic consequences. Sources of asset liquidity include cash, maturing Advances, maturing investments, principal paydowns of mortgage assets, the ability to sell certain investments, and interest payments received. Uses of liquidity include repayments of Obligations, issuances of new Advances, purchases of loans under the MPP, purchases of investments, and payments of interest.

Liquidity requirements are significant because Advance balances can be volatile, many have short-term maturities, and we strive to allow members to borrow Advances on the same day they request them. We regularly monitor liquidity risks and the investment and cash resources available to meet liquidity needs, as well as statutory and regulatory liquidity requirements.

Because Obligations have favorable credit ratings and because the FHLBank System is one of the largest sellers of debt in the worldwide capital markets, the System historically has been able to satisfy its liquidity needs through debt issuance across a wide range of structures at relatively favorable spreads to benchmark market interest rates.

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CAPITAL RESOURCES

Capital Plan

Basic Characteristics

Our Capital Plan has the following basic characteristics:


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


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


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


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


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

Under Finance Agency regulations, regulatory capital is composed of all capital stock (including stock classified as mandatorily redeemable), retained earnings, general loss allowances, and other amounts from sources the Finance Agency determines are available to absorb losses. Under the Gramm-Leach-Bliley Act of 1999 (GLB Act), permanent capital equals Class B stock plus retained earnings and is available to absorb financial losses.

GAAP capital excludes mandatorily redeemable capital stock, while regulatory capital includes it. Mandatorily redeemable capital stock, which is stock subject to pending redemption, is accounted for as a liability on our Statements of Condition and related dividend payments are accounted for as interest expense. The classification of some capital stock as a liability has no effect on our safety and soundness, liquidity position, market risk exposure, or ability to meet interest payments on our participation in Obligations. Mandatorily redeemable capital stock is fully available to absorb losses until the stock is redeemed or repurchased. See Note 15 of the Notes to Financial Statements for more discussion of mandatorily redeemable capital stock.

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


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


▪	We must maintain at least a five percent minimum leverage ratio of capital divided by total assets, which includes a 1.5 weighting factor applicable to permanent capital. Because all of our Class B stock is permanent capital, this requirement is met automatically if we satisfy the four percent unweighted capital requirement.


▪	We are subject to a risk-based capital rule in which we must hold an amount of "permanent" capital that exceeds the amount of exposure to market risk, credit risk, and operational risk. How we determine the amount of these risk exposures is stipulated by Finance Agency regulation. Permanent capital includes retained earnings and the regulatory amount of Class B capital stock.

In addition to the minimum capital requirements, the GLB Act and our Capital Plan promote the adequacy of our capital to absorb financial losses in three ways. These combine to give member stockholders a clear incentive to require us to minimize our risk profile:


▪	the five-year redemption period for Class B stock;


▪	the option we have to call on members to purchase additional capital if required to preserve safety and soundness; and

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

Capital Stock Purchases and Operations of the Capital Plan

The Capital Plan ties the amount of each member's required capital stock to the amount of the member's assets and the amount and type of its Mission Asset Activity with us. The former stock is called membership stock; the latter is called activity stock. Membership stock is required to become a member and maintain membership. The amount required for each member currently ranges from a minimum of $1 thousand to a maximum of $25 million for each member, with the amount within that range determined as a percentage of member assets.

In addition to its membership stock, a member is required to purchase and hold activity stock to capitalize its Mission Asset Activity. For purposes of the Capital Plan, Mission Asset Activity includes the principal balance of Advances, guaranteed funds and rate Advance commitments, and the principal balance of loans and commitments in the MPP.

The FHLB must capitalize all Mission Asset Activity with capital stock at a rate of at least four percent. However, each member is permitted to maintain an amount of activity stock within the range of minimum and maximum percentages for each type of Mission Asset Activity. The current percentages are as follows:



Mission Asset Activity	Minimum Activity Percentage	Maximum Activity Percentage
Advances	2%	4%
Advance Commitments	2	4
MPP	0	4

If a member owns more stock than is needed to satisfy both its membership stock requirement and the maximum activity stock percentages for its Mission Asset Activity, we designate the remaining stock as the member's excess capital stock. The member may utilize its excess stock to capitalize additional Mission Asset Activity.

If an individual member's excess stock reaches zero, the Capital Plan normally permits us, with certain limits, to capitalize additional Mission Asset Activity of that member with excess stock owned by other members at the maximum percentage rate. This feature, called “cooperative capital,” enables us to more effectively utilize our capital stock. A member's use of cooperative capital reduces the ratio of its activity stock to its Mission Asset Activity for each type of Mission Asset Activity. There is a limit to how much cooperative capital a member may use, which we currently set at $100 million.

When a member's ratio of activity stock to its Mission Asset Activity reaches the minimum activity stock percentage for all types of Mission Asset Activity, the member must capitalize additional Mission Asset Activity of a given type by purchasing capital stock at that asset type's minimum percentage rate, assuming availability of cooperative capital.

Statutory and Regulatory Restrictions on Capital Stock Redemption and Repurchases

In accordance with the GLB Act, our stock is putable by members. There are statutory and regulatory restrictions on our obligation or right to redeem or repurchase outstanding stock, including, but not limited to, the following:


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


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

If we were to be liquidated, stockholders would be entitled to receive the par value of their capital stock after payment in full to our creditors. In addition, each stockholder would be entitled to any retained earnings in an amount proportional to the stockholder's share of the total shares of capital stock. In the event of a merger or consolidation of the FHLB, the Board of Directors would determine the rights and preferences of the FHLB's stockholders, subject to any terms and conditions imposed by the Finance Agency.

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Retained Earnings

Purposes and Amount of Retained Earnings

Retained earnings are important to protect members' capital stock investment against the risk of impairment and to enhance our ability to pay stable and competitive dividends when earnings may be volatile. Impairment risk is the risk that members would have to write down the par value of their capital stock investment in our FHLB as a result of their analysis of ultimate recoverability. An extreme situation of earnings instability, in which other-than-temporary losses were experienced and expected for a period of time, could result in a determination that the value of our capital stock was impaired.

We have a policy that sets forth a range for the amount of retained earnings we believe is needed to mitigate impairment risk and facilitate dividend stability in light of the risks we face. At December 31, 2016, the minimum retained earnings requirement ranges from $325 million to $550 million, based on mitigating quantifiable risks under very stressed business and market scenarios to a 99 percent confidence level. At the end of 2016, our retained earnings totaled $834 million. We believe the current amount of retained earnings is fully sufficient to protect our capital stock against impairment risk and to provide for dividend stability.

Joint Capital Agreement to Augment Retained Earnings

The FHLBanks entered into a Joint Capital Enhancement Agreement (the “Capital Agreement”) in February 2011. The Capital Agreement provides that each FHLBank will allocate quarterly at least 20 percent of its net income to a restricted retained earnings account (the “Account”). The Account is not available to be distributed as dividends except under certain limited circumstances. The Capital Agreement does not limit our ability to use retained earnings held outside of the Account to pay dividends.

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

USE OF DERIVATIVES

Finance Agency regulations and our policies establish guidelines for the execution and use of derivative transactions. We are prohibited from trading in, or the speculative use of, derivatives and have limits on the amount of credit risk to which we may be exposed. Most of our derivatives activity involves interest rate swaps, some of which may include options. We account for all derivatives at fair value.

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


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


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

The derivatives we transact related to mortgage assets primarily hedge interest rate risk and prepayment risk. Such derivatives include options on interest rates swaps (swaptions) and sales of to-be-announced mortgage-backed securities for forward settlement.

Derivatives transactions related to Bonds help us intermediate between the preference of capital market investors for intermediate- and long-term fixed-rate debt securities and the preference of our members for shorter-term or adjustable-rate Advances. We can satisfy the preferences of both groups by issuing long-term fixed-rate Bonds and entering into an interest rate swap that synthetically converts the Bonds to an adjustable-rate LIBOR funding basis that matches up with the short-term and adjustable-rate Advances, thereby preserving a favorable interest rate spread.

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Use of derivatives can result in a substantial amount of volatility of accounting and economic earnings. We strive to maintain a low amount of earnings volatility from realized gains and losses on derivatives. We accept a moderate amount of earnings volatility from unrealized gains and losses on recording derivatives at fair values, to the extent our use of derivatives effectively hedge market risk exposure.

COMPETITION

Numerous economic and financial factors influence members' use of Mission Asset Activity. One of the most important factors that affect Advance demand is the amount of member deposits, which for most members are their primary source of funds. In addition, both small and, in particular, large members typically have access to wholesale funds besides FHLB Advances. Another important source of competition for Advances is the ongoing fiscal and monetary stimuli initiated by the federal government to combat the continued difficulties in the housing market and broader economy. This is discussed in Item 1A's “Risk Factors” and in Item 7's “Executive Overview."

The holding companies of some of our large asset members have membership(s) in other FHLBanks through their affiliates. Others could initiate memberships in other Districts. The competition among FHLBanks for the business of multiple-membership institutions is similar to the FHLBanks' competition with other wholesale lenders and mortgage investors. We compete with other FHLBanks on the offerings and pricing of Mission Asset Activity, earnings and dividend performance, collateral policies, capital plans, and members' perceptions of our relative safety and soundness. Some members may also evaluate benefits of diversifying business relationships among FHLBank memberships. We regularly monitor these competitive forces among the FHLBanks.

The primary competitors for mortgage loans we purchase in the MPP are Fannie Mae and Freddie Mac, government agencies such as the Government National Mortgage Association (Ginnie Mae), and private issuers. Fannie Mae and Freddie Mac, in particular, have long-established and efficient programs and are the dominant purchasers of fixed-rate conventional mortgages. In addition, a number of private financial institutions have well-established securitization programs, although they may not currently be as active as they were historically. The MPP also competes with the Federal Reserve to the extent it purchases mortgage-backed securities and affects market prices and the availability of supply.

For debt issuance, the FHLBank System competes with issuers in the national and global debt markets, including most importantly the U.S. government and other GSEs.

Item 1A. Risk Factors.

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

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

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


▪	the general state and trends of the economy and financial institutions, especially in our Fifth District;


▪	conditions in the financial, credit, mortgage, and housing markets;


▪	interest rates;


▪	competitive alternatives to our products, such as retail deposits and other sources of wholesale funding;


▪	actions of the Federal Reserve to affect liquidity reserves of financial institutions and the money supply;


▪	the willingness and ability of financial institutions to expand lending; and


▪	regulatory initiatives facing our company, the System and our members.

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

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

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

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

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

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

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

There are significant differences between the FHLBank System and Fannie Mae and Freddie Mac, including the System's focus on lending as opposed to guaranteeing mortgages and its distinctive cooperative business model. GSE legislation could inadequately account for these differences. This could substantially change or imperil the ability of the FHLBank System to continue operating effectively within its current business model, including by adversely changing the perceptions of the capital markets about the risk associated with the debt of housing GSEs. We cannot predict the effects on the System if GSE reform were to be enacted.

FHLB Regulatory Environment. Changes in the regulatory and legislative environment could unfavorably affect our business model, financial condition, and results of operations.

In addition to potential GSE reform, the legislative and regulatory environment in which the System operates continues to undergo rapid change driven principally by reforms emanating from the Housing and Economic Reform Act of 2008 (HERA) and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Recently-promulgated

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and future legislative and regulatory actions, including possible changes in the Dodd-Frank Act, could significantly affect our business model, financial condition, or results of operations.

Further, there has been a trend in the financial industry of migration of mortgage finance away from traditional FHLBank System members. However, the legislative and regulatory environment faced by the FHLBanks has not kept pace in recent years with adapting to this trend. For example, in January 2016, the Finance Agency published a final rule regarding membership requirements, which negatively affected our business and Advance balances by deeming that captive insurance companies (to which some of the housing finance has been migrating) were ineligible for membership in the System.

We believe that, taken as a whole, legislative and regulatory actions have raised our operating costs and imparted added uncertainty regarding the business model and membership base under which the FHLBanks may operate in the future. We are unable at this time to predict the ultimate effects the regulatory environment could have on the FHLBank System's business model or on our financial condition and results of operations.

Liquidity and Market Access. Impaired access to the capital markets for debt issuance could decrease the amount of Mission Asset Activity, lower earnings by raising debt costs and, at the extreme, prevent the System from meeting its financial obligations.

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

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

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

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

The FHLB is an asset-based lender for Advances and Letters of Credit. Advances are over-collateralized and we have a perfected first lien position on collateral. However, we do not have full information on the characteristics of nor do we estimate current market values on a large portion of collateral. This results in a degree of uncertainty as to the precise amount of over-collateralization.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Basel Committee on Banking Supervision (the Basel Committee) developed a proposed new capital regime for internationally active banks. Banks subject to the new regime are required, among other things, to have higher capital ratios. It is uncertain how the new capital regime and other regulatory standards, such as those related to liquidity adequacy, will ultimately be implemented by U.S. regulatory authorities. The new regime could ultimately require some of our members to divest assets to comply with the more stringent capital and liquidity requirements, thereby possibly lowering Advance demand. Additionally, the liquidity requirements being implemented could adversely impact Advance demand and investor demand for Consolidated Obligations because they would limit the ability of members to fully include Advances and Consolidated Obligations in required liquidity calculations. This could raise our debt costs and, in turn, raise the Advance rates we are able to offer members, thereby harming the ability to fulfill our mission.

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

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

Control failures, including failures in our controls over financial reporting as well as business interruptions with members and counterparties, could occur from human error, fraud, breakdowns in information and computer systems, errors or misuse of financial and business models and services we employ (including third-party vendor services), lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse or repair the negative effects of such failures or interruptions.

We rely heavily on internal and third-party information systems and other technology to manage our business. Our operations rely on the secure processing, storage and transmission of confidential and other information in computer systems and networks. Computer systems, software and networks can be vulnerable to failures and interruptions including “cyberattacks,” which are breaches, unauthorized access, misuse, computer viruses or other malicious code and other events against information owned by our company and customers. These failures and interruptions could jeopardize the confidentiality or integrity of information, or otherwise cause interruptions or malfunctions in operations.

We can make no assurance that we will be able to prevent, timely and adequately address, or mitigate failures, interruptions, or "cyberattacks" in information systems and other technology. If we experience a failure, interruption, or "cyberattack" in any of these systems, we may be unable to effectively conduct or manage our business activities, operating processes, and risk management, which could significantly harm customer relations, our reputation, or profitability, potentially resulting in material adverse effects on our financial condition and results of operations.

Personnel Risk. Our financial condition and results of operations could suffer if we are unable to hire and retain skilled key personnel.

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

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our offices are located in approximately 79,000 square feet of leased space in downtown Cincinnati, Ohio. We also maintain a leased, fully functioning, back-up facility in suburban Cincinnati. Additionally, we lease a small office in Nashville, Tennessee for the area marketing representative. We believe that our facilities are in good condition, well maintained, and adequate for our current needs.

Item 3. Legal Proceedings.

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

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II


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

By law our stock is not publicly traded, and only our members (and former members with a withdrawal notice pending) may own our stock. The par value of our capital stock is $100 per share. As of December 31, 2016, we had 687 stockholders and approximately 42 million shares of capital stock outstanding, all of which were Class B Stock.

We paid quarterly dividends in 2016 and 2015 as outlined in the table below.



(Dollars in millions)
	2016						2015
			Annualized						Annualized
Quarter	Amount		Rate		Form	Quarter	Amount		Rate		Form
First	$	44	4.00	%	Cash	First	$	43	4.00	%	Cash
Second	43		4.00		Cash	Second	42		4.00		Cash
Third	42		4.00		Cash	Third	43		4.00		Cash
Fourth	42		4.00		Cash	Fourth	44		4.00		Cash
Total	$	171	4.00			Total	$	172	4.00

Generally, our Board of Directors has discretion to declare or not declare dividends and to determine the rate of any dividend declared. Our policy states that dividends for a quarter are declared and paid from retained earnings after the close of a calendar quarter and are based on average stock balances for the then closed quarter. Our Board of Directors' decision to declare dividends is influenced by the financial condition, overall financial performance and retained earnings of the FHLB, and actual and anticipated developments in the overall economic and financial environment including, most importantly, interest rates and the mortgage and credit markets. The dividend rate is generally referenced as a spread to average short-term interest rates experienced during the quarter to help assess a competitive level for our stockholders.

A Finance Agency Capital Rule prohibits us from issuing new excess capital stock to members, either by paying stock dividends or otherwise, if before or after the issuance the amount of member excess capital stock exceeds or would exceed one percent of the FHLB's assets. Excess capital stock for this regulatory purpose is calculated as the aggregate of capital stock owned that is in excess of all membership and Mission Asset Activity requirements (as defined in our Capital Plan). At December 31, 2016, we had excess capital stock outstanding totaling less than one percent of total assets.

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

RECENT SALES OF UNREGISTERED SECURITIES

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

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Item 6.	Selected Financial Data.

The following table presents selected Statement of Condition data, Statement of Income data and financial ratios for the five years ended December 31, 2016. The FHLB's change to the contractual interest method for amortizing premiums and accreting discounts on mortgage loans held for portfolio has been reported through retroactive application of the change in accounting principle to all periods presented.



	Year Ended December 31,
(Dollars in millions)	2016			2015			2014			2013			2012
STATEMENT OF CONDITION DATA AT PERIOD END:
Total assets	$	104,635		$	118,756		$	106,607		$	103,137		$	81,540
Advances	69,882			73,292			70,406			65,270			53,944
Mortgage loans held for portfolio	9,150			7,954			6,956			6,782			7,526
Allowance for credit losses on mortgage loans	1			2			5			7			18
Investments ⁽¹⁾	25,334			37,356			26,007			22,364			19,950
Consolidated Obligations, net:
Discount Notes	44,690			77,199			41,232			38,210			30,840
Bonds	53,191			35,092			59,217			58,163			44,346
Total Consolidated Obligations, net	97,881			112,291			100,449			96,373			75,186
Mandatorily redeemable capital stock	35			38			63			116			211
Capital:
Capital stock - putable	4,157			4,429			4,267			4,698			4,010
Retained earnings	834			737			656			578			516
Accumulated other comprehensive loss	(13		)	(13		)	(17		)	(9		)	(11		)
Total capital	4,978			5,153			4,906			5,267			4,515
STATEMENT OF INCOME DATA:
Net interest income	$	363		$	327		$	327		$	307		$	288
(Reversal) provision for credit losses	—			—			—			(7		)	1
Non-interest income	46			30			23			20			13
Non-interest expense	111			75			68			64			58
Affordable Housing Program assessments	30			28			28			30			27
Net income	$	268		$	254		$	254		$	240		$	215
FINANCIAL RATIOS:
Dividend payout ratio ⁽²⁾	63.9		%	67.7		%	69.5		%	74.2		%	65.6		%
Weighted average dividend rate ⁽³⁾	4.00			4.00			4.00			4.18			4.44
Return on average equity	5.35			5.04			5.16			4.72			5.69
Return on average assets	0.25			0.24			0.25			0.26			0.32
Net interest margin ⁽⁴⁾	0.35			0.31			0.32			0.33			0.43
Average equity to average assets	4.76			4.78			4.86			5.43			5.67
Regulatory capital ratio ⁽⁵⁾	4.80			4.38			4.68			5.23			5.81
Operating expenses to average assets ⁽⁶⁾	0.064			0.058			0.054			0.055			0.067


(1)	Investments include interest bearing deposits in banks, securities purchased under agreements to resell, Federal funds sold, trading securities, available-for-sale securities, and held-to-maturity securities.


(2)	Dividend payout ratio is dividends declared in the period as a percentage of net income.


(3)	Weighted average dividend rates are dividends paid divided by the average number of shares of capital stock eligible for dividends.


(4)	Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average earning assets.


(5)	Regulatory capital ratio is period-end regulatory capital (capital stock, mandatorily redeemable capital stock and retained earnings) as a percentage of period-end total assets.


(6)	Operating expenses comprise compensation and benefits and other operating expenses, which are included in non-interest expense.

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

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

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

EXECUTIVE OVERVIEW

Financial Condition

Mission Asset Activity

The following table summarizes our financial condition.



	Year Ended December 31,
	Ending Balances				Average Balances
(In millions)	2016		2015		2016		2015
Total Assets	$	104,635	$	118,756	$	105,425	$	105,539
Mission Asset Activity:
Advances (principal)	69,907		73,242		69,214		70,355
Mortgage Purchase Program (MPP):
Mortgage loans held for portfolio (principal)	8,926		7,758		8,323		7,396
Mandatory Delivery Contracts (notional)	441		450		555		471
Total MPP	9,367		8,208		8,878		7,867
Letters of Credit (notional)	17,508		19,555		17,035		17,694
Total Mission Asset Activity	$	96,782	$	101,005	$	95,127	$	95,916

In 2016, the FHLB fulfilled its mission by providing a key source of readily available and competitively priced wholesale funding to its member financial institutions, supporting its commitment to affordable housing and community investment, and paying stockholders a competitive dividend return on their capital investment.

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

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

As of December 31, 2016, members funded on average 3.2 percent of their assets with Advances, and the market penetration rate was relatively stable with over 68 percent of members holding Mission Asset Activity. As in the last several years, most members continued to have modest demand for new Advance borrowings.

The growth in the MPP reflected our strategy to increase this segment as well as continued low mortgage rates, which resulted in a substantial amount of new mortgage loans available for purchase from homeowners' refinancing activity. During 2016, we purchased $2.8 billion of mortgage loans, while principal reductions totaled $1.6 billion. Residual credit risk exposure in the mortgage loan portfolio continued to be minimal.

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Based on earnings in 2016, we accrued $30 million for the Affordable Housing Program (AHP) pool of funds to be available to members in 2017. In addition, we continued our voluntary sponsorship of two other housing programs, which provide resources to pay for accessibility rehabilitation and emergency repairs for special needs and elderly homeowners and to help members aid their communities following natural disasters.

Investments and Other Assets

The balance of investments at December 31, 2016 was $25.3 billion, a decrease of $12.0 billion (32 percent) from year-end 2015. Most of the reduction was driven by a decline in short-term investments used for asset liquidity, for which we carried a substantially larger-than-normal balance at the end of 2015. At December 31, 2016, investments included $14.5 billion of mortgage-backed securities and $10.8 billion of other investments, which were mostly short-term instruments held for liquidity. All of our mortgage-backed securities held at December 31, 2016 were issued and guaranteed by Fannie Mae, Freddie Mac or a U.S. agency.

Investment balances averaged $27.4 billion in 2016, similar to the average balance during 2015. We maintained an adequate amount of asset liquidity throughout 2016 under a variety of liquidity measures as discussed in the "Liquidity Risk" section of "Quantitative and Qualitative Disclosures About Risk Management."

Capital

Capital adequacy remained strong throughout 2016, surpassing all minimum regulatory capital requirements. The GAAP capital-to-assets ratio at December 31, 2016 was 4.76 percent, while the regulatory capital-to-assets ratio was 4.80 percent. Both ratios exceeded the regulatory required minimum of four percent. Regulatory capital includes mandatorily redeemable capital stock accounted for as a liability under GAAP. The amounts of GAAP and regulatory capital decreased $175 million and $178 million, respectively, in 2016, due to excess capital stock redemption requests from a larger member and repurchases of capital stock from captive insurance company members, partially offset by the growth in retained earnings.

Retained earnings totaled $834 million at December 31, 2016, an increase of $97 million (13 percent) from year-end 2015.

Results of Operations

Overall Results

The table below summarizes our results of operations.



	Year Ended December 31,
(Dollars in millions)	2016			2015			2014
Net income	$	268		$	254		$	254
Affordable Housing Program assessments	30			28			28
Return on average equity (ROE)	5.35		%	5.04		%	5.16		%
Return on average assets	0.25			0.24			0.25
Weighted average dividend rate	4.00			4.00			4.00
Average 3-month LIBOR	0.74			0.32			0.23
ROE spread to 3-month LIBOR	4.61			4.72			4.93
Dividend rate spread to 3-month LIBOR	3.26			3.68			3.77

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

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

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ROE in 2016 was significantly above short-term rates, while we maintained risk exposures in line with our tolerance and appetite for a moderate to low-risk profile. The spread between ROE and 3-month LIBOR is a market benchmark we believe member stockholders use to assess the competitiveness of the return on their capital investment in our company. Earnings levels continued to represent competitive returns on stockholders' capital investment.

In December 2016, we paid stockholders a quarterly 4.00 percent annualized dividend rate on their capital investment in our company. This is the same rate we have distributed in each of the last 13 quarters.

Effect of Interest Rate Environment

Trends in market interest rates strongly influence the results of operations and profitability via how they affect members' demand for Mission Asset Activity, spreads on assets, funding costs and decisions in managing the tradeoffs in our market risk/return profile. The following table presents key market interest rates (obtained from Bloomberg L.P.).



	Year 2016				Year 2015				Year 2014
	Ending		Average		Ending		Average		Ending		Average
Federal funds effective	0.55	%	0.39	%	0.20	%	0.13	%	0.06	%	0.09	%
3-month LIBOR	1.00		0.74		0.61		0.32		0.26		0.23
2-year LIBOR	1.45		1.00		1.18		0.88		0.90		0.62
10-year LIBOR	2.34		1.70		2.19		2.18		2.28		2.65
2-year U.S. Treasury	1.19		0.83		1.05		0.67		0.67		0.45
10-year U.S. Treasury	2.45		1.84		2.27		2.13		2.17		2.53
15-year mortgage current coupon ⁽¹⁾	2.49		1.94		2.32		2.13		2.10		2.34
30-year mortgage current coupon ⁽¹⁾	3.14		2.63		3.02		2.88		2.85		3.23



	Year 2016 by Quarter - Average
	Quarter 1		Quarter 2		Quarter 3		Quarter 4
Federal funds effective	0.36	%	0.37	%	0.39	%	0.45	%
3-month LIBOR	0.62		0.64		0.79		0.92
2-year LIBOR	0.91		0.90		0.96		1.24
10-year LIBOR	1.78		1.61		1.43		1.99
2-year U.S. Treasury	0.84		0.77		0.72		1.00
10-year U.S. Treasury	1.92		1.75		1.56		2.13
15-year mortgage current coupon ⁽¹⁾	1.99		1.86		1.72		2.19
30-year mortgage current coupon ⁽¹⁾	2.71		2.56		2.37		2.85


(1)	Simple average of current coupon rates of Fannie Mae and Freddie Mac par mortgage-backed security indications.

The continued low interest rate environment in 2016 moderately benefited our results of operations. Because the low rate environment has persisted for nearly a decade, much of the benefit has diminished over time as many assets and liabilities have fully repriced to the low rates. However, results of operations continued to benefit from a lack of sharp changes in interest rates, especially upward movements.

In December 2016, the Federal Reserve increased its target overnight Federal funds from a 0.25 to 0.50 percent range to a 0.50 to 0.75 percent range. In addition, during 2016 LIBOR increased relative to the cost of funds for our short-term debt, which improved income because we have a substantial amount of assets tied directly or indirectly to LIBOR.

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

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Business Outlook and Risk Management

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

Strategic/Business Risk

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

The relative balance between loan and deposit fluctuations can provide an indication of potential member Advance demand. From September 30, 2015 to September 30, 2016 (the most recent period for which data are available), aggregate loan portfolios of Fifth District depository institutions grew $132 billion (9.7 percent) while their aggregate deposit balances rose $264 billion (12.7 percent). Most of the loan and deposit growth in this period occurred from our largest members, which is consistent with the concentration of nationwide financial activity.

Excluding the five members that have over $50 billion of assets, aggregate loans increased $13.0 billion (6.5 percent) in the 12-month period while aggregate deposits grew by $10.4 billion (4.5 percent). This relative balance of loan and deposit growth contributed to the small fluctuation in Advance balances from most members.

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

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

Regulatory and Legislative Risk

General: The FHLBank System faces legislative and regulatory oversight. Legislative and regulatory actions applicable, directly or indirectly, to the FHLBank System in the last decade have increased uncertainty regarding the business model and membership base under which the FHLBanks may operate in the future. This is due primarily to the uncertainty around potential future GSE reform, which shows no signs of resolution, and the evolution of mortgage financing moving towards financial institutions currently not eligible for FHLBank membership. See Item 1A's "Risk Factors" for more discussion. We cannot predict the ultimate outcome of GSE reform and whether our membership base will be legislatively and regulatorily permitted to evolve in concert with the housing finance market.

Membership Requirements: In January 2016, the Finance Agency issued a rule on membership requirements. The primary changes were:


▪	banning captive insurance companies as being eligible members in an FHLBank, and


▪	clarifying matters related to defining the principal place of business for members for purposes of determining their appropriate FHLBank district.

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

The rule has not materially affected our financial condition or results of operations. However, we are concerned that the rule could constrain the ability of the FHLBanks to fulfill their mission of promoting housing finance with institutions engaged in housing finance activities. We continue to believe that captive insurance companies are important institutions in helping to deepen and diversify the flow of funds in the mortgage markets.

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Market Risk

During 2016, as in 2015, the market risk exposure to changing interest rates was moderate overall and well within policy limits. We believe that profitability would not become uncompetitive unless long-term rates were to permanently increase over the next 12 months by five percentage points or more combined with short-term rates increasing to at least seven percent. We believe such a stress scenario is extremely unlikely to occur in the foreseeable future. Our market risk exposure to lower long-term interest rates, even up to two percentage points, would likely result in ROE remaining well above market interest rates.

Capital Adequacy

We believe members place a high value on their capital investment in our company. Our capital policies and Capital Plan have safeguards to ensure we meet regulatory and prudential capital requirements. Capital ratios at December 31, 2016 and all throughout the year exceeded the regulatory required minimum of four percent. We believe the amount of retained earnings is sufficient to protect against members' impairment risk of their capital stock investment in the FHLB and to provide the opportunity to stabilize or augment future dividends.

Credit Risk

In 2016, we continued to experience a de minimis level of overall residual credit risk exposure from our Credit Services, investments, and derivative transactions. We believe policies and procedures related to credit underwriting, Advance collateral management, and transactions with investment and derivative counterparties continue to fully mitigate these risks. Therefore, we have never experienced any credit losses and we continue to have no loan loss reserves or impairment recorded for these instruments. Residual credit risk exposure in the mortgage loan portfolio was minimal. The allowance for credit losses in the MPP continued to decline and was $1 million at December 31, 2016.

Liquidity Risk

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

ANALYSIS OF FINANCIAL CONDITION

Mission Asset Activity

Mission Assets are the primary means by which we fulfill our mission with direct connections to members. We regularly monitor our balance sheet concentration of Mission Asset Activity. In 2016, our Primary Mission Asset ratio, which measures the sum of average Advances and mortgage loans as a percentage of average Consolidated Obligations, was 78 percent. This ratio exceeded the Finance Agency's preferred ratio of 70 percent. In assessing overall mission achievement, we also consider supplemental sources of Mission Asset Activity, the most significant of which is Letters of Credit issued to members.

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Credit Services

Credit Activity and Advance Composition

The tables below show trends in Advance balances by major programs and in the notional amount of Letters of Credit.



(Dollars in millions)	December 31, 2016				December 31, 2015
	Balance		Percent⁽¹⁾		Balance		Percent⁽¹⁾
Adjustable/Variable Rate-Indexed:
LIBOR	$	44,289	64	%	$	47,312	65	%
Other	918		1		617		1
Total	45,207		65		47,929		66
Fixed-Rate:
REPO	10,786		15		10,568		14
Regular Fixed-Rate	9,618		14		9,248		13
Putable ⁽²⁾	565		1		1,046		1
Amortizing/Mortgage Matched	2,596		4		2,706		4
Other	1,135		1		1,745		2
Total	24,700		35		25,313		34
Total Advances Principal	$	69,907	100	%	$	73,242	100	%

Letters of Credit (notional)	$	17,508			$	19,555



(Dollars in millions)	December 31, 2016				September 30, 2016				June 30, 2016				March 31, 2016
	Balance		Percent⁽¹⁾		Balance		Percent⁽¹⁾		Balance		Percent⁽¹⁾		Balance		Percent⁽¹⁾
Adjustable/Variable-Rate Indexed:
LIBOR	$	44,289	64	%	$	45,308	66	%	$	46,707	63	%	$	47,161	69	%
Other	918		1		588		1		524		1		420		—
Total	45,207		65		45,896		67		47,231		64		47,581		69
Fixed-Rate:
REPO	10,786		15		8,673		12		11,861		16		6,568		10
Regular Fixed-Rate	9,618		14		9,625		14		10,007		13		9,359		14
Putable ⁽²⁾	565		1		821		1		1,019		1		1,034		1
Amortizing/Mortgage Matched	2,596		4		2,659		4		2,728		4		2,684		4
Other	1,135		1		1,133		2		1,615		2		1,401		2
Total	24,700		35		22,911		33		27,230		36		21,046		31
Other Advances	—		—		6		—		—		—		—		—
Total Advances Principal	$	69,907	100	%	$	68,813	100	%	$	74,461	100	%	$	68,627	100	%

Letters of Credit (notional)	$	17,508			$	16,769			$	17,467			$	16,757


(1)	As a percentage of total Advances principal.


(2)	Excludes Putable Advances where the related put options have expired. Such Advances are classified based on their current terms.

The decline in Advance balances comparing the end of 2016 to the end of 2015 was primarily driven by modest reductions in borrowings from a few large-asset members combined with the repayment of captive insurance companies' Advances.

Members reduced their available lines in the Letters of Credit program by $2.0 billion (10 percent) in 2016. Letters of Credit balances averaged $17.0 billion in 2016, a decrease of $0.7 billion (four percent) from the average balance during 2015. We normally earn fees on Letters of Credit based on the actual average amount of the Letters utilized, which generally is less than the notional amount issued.

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Advance Usage

In addition to analyzing Advance balances by dollar trends and the number of members utilizing them, we monitor the degree to which members use Advances to fund their balance sheets. The following table shows the unweighted, average ratio of each member's Advance balance to its most-recently available figures for total assets.



	December 31, 2016		September 30, 2016		June 30, 2016		March 31, 2016		December 31, 2015
Average Advances-to-Assets for Members
Assets less than $1.0 billion (602 members)	3.07	%	3.01	%	3.04	%	2.92	%	3.26	%
Assets over $1.0 billion (85 members)	3.87		3.99		3.78		3.19		4.35
All members	3.17		3.13		3.12		2.95		3.37

Advance usage ratios were lower at year-end 2016 compared to year-end 2015, driven largely by the continued modest demand for Advances and the pay off and non-renewal of $6.6 billion in borrowings from captive insurance company members as required by the Finance Agency's 2016 final rule on membership requirements.

The following table shows Advance usage of members by charter type.



(Dollars in millions)	December 31, 2016				December 31, 2015
	Par Value of Advances		Percent of Total Par Value of Advances		Par Value of Advances		Percent of Total Par Value of Advances
Commercial Banks	$	53,743	77	%	$	53,479	73	%
Savings Associations	6,857		10		5,220		7
Credit Unions	1,191		2		957		1
Insurance Companies	8,043		11		13,428		19
Community Development Financial Institutions	3		—		2		—
Total member Advances	69,837		100		73,086		100
Former member borrowings	70		—		156		—
Total par value of Advances	$	69,907	100	%	$	73,242	100	%

The following tables present principal balances for the five members with the largest Advance borrowings.



(Dollars in millions)
December 31, 2016					December 31, 2015
Name	Par Value of Advances		Percent of Total Par Value of Advances		Name	Par Value of Advances		Percent of Total Par Value of Advances
JPMorgan Chase Bank, N.A.	$	32,300	46	%	JPMorgan Chase Bank, N.A.	$	35,350	48	%
U.S. Bank, N.A.	8,563		12		U.S. Bank, N.A.	10,086		14
Third Federal Savings and Loan Association	3,049		4		Capstead Insurance, LLC ⁽¹⁾	2,875		4
Fifth Third Bank	2,517		4		Nationwide Life Insurance Company	2,279		3
The Huntington National Bank	2,433		3		Third Federal Savings and Loan Association	2,162		3
Total of Top 5	$	48,862	69	%	Total of Top 5	$	52,752	72	%


(1)	Captive insurance company member.

Advance concentration ratios are influenced by, and generally similar to, concentration ratios of financial activity among our Fifth District financial institutions. We believe that having large financial institutions that actively use our Mission Asset Activity augments the value of membership to all members. For example, such activity improves our operating efficiency, increases our earnings and thereby contributions to housing and community investment programs, may enable us over time to obtain more favorable funding costs, and helps us maintain competitively priced Mission Asset Activity.

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

The table below shows principal purchases and reductions of loans in the MPP for each of the last two years.



(In millions)	2016			2015
Balance, beginning of year	$	7,758		$	6,796
Principal purchases	2,830			2,348
Principal reductions	(1,662		)	(1,386		)
Balance, end of year	$	8,926		$	7,758

The increase in principal loan balances in 2016 reflected our strategy to grow this segment of Mission Asset Activity. Most of the higher principal resulted from activity of our two largest sellers who drive program balances. In 2016, 101 members sold us mortgage loans, with the number of monthly sellers averaging 67. All loans acquired in 2016 were conventional loans.

The following tables show the percentage of principal balances from PFIs supplying five percent or more of total principal and the percentage of principal balances from all other PFIs. As shown in the table below, MPP activity is concentrated amongst a few members.



(Dollars in millions)	December 31, 2016					December 31, 2015
	Principal		% of Total			Principal		% of Total
Union Savings Bank	$	2,886	32	%	Union Savings Bank	$	2,242	29	%
Guardian Savings Bank FSB	855		10		PNC Bank, N.A. ⁽¹⁾	839		11
PNC Bank, N.A. ⁽¹⁾	660		7		Guardian Savings Bank FSB	633		8
All others	4,525		51		All others	4,044		52
Total	$	8,926	100	%	Total	$	7,758	100	%

(1)Former member.

We closely track the refinancing incentives of our mortgage assets (including loans in the MPP and mortgage-backed securities) because the option for homeowners to change their principal payments normally represents the largest portion of our market risk exposure and can affect MPP balances. MPP principal paydowns in 2016 equated to a 15 percent annual constant prepayment rate, up nominally from the 14 percent rate for all of 2015.

The MPP's composition of balances by loan type, original final maturity, and weighted-average mortgage note rate did not change materially in 2016. The weighted average mortgage note rate fell from 4.14 percent at the end of 2015 to 3.95 percent at the end of 2016. This decline reflected a continuing trend of prepayments of higher rate mortgages and purchases of lower rate mortgages in the low interest rate environment. MPP yields earned in 2016, after consideration of funding and hedging costs, continued to offer favorable returns relative to their market risk exposure.

Housing and Community Investment

In 2016, we accrued $30 million of earnings for the Affordable Housing Program, which will be awarded to members in 2017. This amount represents an increase of $2 million from 2015 due to the higher earnings in 2016.

Including funds available in 2016 from previous years, we had $28 million available for the competitive Affordable Housing Program in 2016, which we awarded to 63 projects through a single competitive offering. In addition, we disbursed $10 million to 171 members on behalf of 2,089 homebuyers through the Welcome Home Program, which assists homebuyers with down payments and closing costs. In total, just over one-third of members received approval for funding under the two Affordable Housing Programs.

Additionally, in 2016 our Board committed $1.5 million to the Carol M. Peterson Housing Fund (CMP Fund), which helped 224 homeowners, and continued its commitment to the $5 million Disaster Reconstruction Program. Both are voluntary programs beyond the 10 percent of earnings that we are required by law to set aside for the Affordable Housing Program.

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

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

Investments

The table below presents the ending and average balances of the investment portfolio.



(In millions)	2016				2015
	Ending Balance		Average Balance		Ending Balance		Average Balance
Liquidity investments	$	10,818	$	12,177	$	22,110	$	12,590
Mortgage-backed securities	14,516		15,061		15,246		14,664
Other investments ⁽¹⁾	—		144		—		85
Total investments	$	25,334	$	27,382	$	37,356	$	27,339


(1)	The average balance includes the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end.

We continued to maintain an adequate amount of asset liquidity. Liquidity investment levels can vary significantly based on liquidity needs, the availability of acceptable net spreads, the number of eligible counterparties that meet our unsecured credit risk criteria, and changes in the amount of Mission Assets. It is normal for liquidity investments to vary by up to several billion dollars on a daily basis. We conservatively carried a larger amount of liquidity to satisfy any potential member borrowing needs leading up to year-end 2015 during a period in which accessing additional liquidity was thought to present greater challenges. In 2016, we reduced liquidity investments closer to historical levels, ending the year at $10.8 billion.

Our overarching strategy for balances of mortgage-backed securities is to keep holdings as close as possible to the regulatory maximum of three times regulatory capital, subject to the availability of securities that we believe provide acceptable risk/return tradeoffs. The ratio of mortgage-backed securities to regulatory capital was 2.89 at December 31, 2016. The balance of mortgage-backed securities at December 31, 2016 consisted of $11.3 billion of securities issued by Fannie Mae or Freddie Mac (of which $4.1 billion were floating-rate securities), $0.7 billion of floating-rate securities issued by the National Credit Union Administration (NCUA), and $2.5 billion of securities issued by Ginnie Mae (which are primarily fixed rate). We held no private-label mortgage-backed securities.

The table below shows principal purchases, paydowns and sales of our mortgage-backed securities for each of the last two years.



(In millions)	Mortgage-backed Securities Principal
	2016			2015
Balance, beginning of year	$	15,203		$	14,715
Principal purchases	3,016			3,099
Principal paydowns	(2,925		)	(2,611		)
Principal sales	(807		)	—
Balance, end of year	$	14,487		$	15,203

Principal paydowns in 2016 equated to an 18 percent annual constant prepayment rate, compared to the 16 percent rate in 2015. The securities sold were composed of securities that had less than 15 percent of the original acquired principal outstanding at the time of the sale.

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Consolidated Obligations

The table below presents the ending and average balances of our participations in Consolidated Obligations.



(In millions)	2016						2015
	Ending Balance			Average Balance			Ending Balance			Average Balance
Discount Notes:
Par	$	44,711		$	49,853		$	77,225		$	52,714
Discount	(21		)	(18		)	(26		)	(8		)
Total Discount Notes	44,690			49,835			77,199			52,706
Bonds:
Unswapped fixed-rate	25,373			26,495			26,962			26,350
Unswapped adjustable-rate	18,290			14,512			4,065			13,385
Swapped fixed-rate	9,510			7,959			4,010			6,489
Total par Bonds	53,173			48,966			35,037			46,224
Other items ⁽¹⁾	18			68			55			90
Total Bonds	53,191			49,034			35,092			46,314
Total Consolidated Obligations⁽²⁾	$	97,881		$	98,869		$	112,291		$	99,020


(1)	Includes unamortized premiums/discounts, fair value option valuation adjustments, hedging and other basis adjustments.


(2)	The 11 FHLBanks have joint and several liability for the par amount of all of the Consolidated Obligations issued on their behalves. The par amount of the outstanding Consolidated Obligations for all of the FHLBanks was (in millions) $989,311 and $905,202 at December 31, 2016 and 2015, respectively.

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

The composition of unswapped fixed-rate Bonds, which typically have initial maturities greater than one year, was relatively stable in 2016 compared to 2015. The following table shows the allocation on December 31, 2016 of unswapped fixed-rate Bonds according to their final remaining maturity and next call date (for callable Bonds). We believe that the allocations of Bonds among these classifications provide effective mitigation of market risk exposure to both higher and lower interest rates.



(In millions)	Year of Maturity								Year of Next Call
	Callable		Noncallable		Amortizing		Total		Callable
Due in 1 year or less	$	150	$	3,648	$	—	$	3,798	$	5,394
Due after 1 year through 2 years	630		3,467		—		4,097		70
Due after 2 years through 3 years	659		3,602		—		4,261		209
Due after 3 years through 4 years	746		2,805		—		3,551		—
Due after 4 years through 5 years	1,006		2,164		—		3,170		—
Thereafter	2,482		4,014		—		6,496		—
Total	$	5,673	$	19,700	$	—	$	25,373	$	5,673

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Deposits

Total deposits with us are normally a relatively minor source of low-cost funding. Total interest bearing deposits at December 31, 2016 were $0.8 billion, a decrease of five percent from year-end 2015. The average balance of total interest bearing deposits in 2016 was $0.8 billion, similar to the average balance during 2015.

Derivatives Hedging Activity and Liquidity

Our use of and accounting for derivatives is discussed in the "Effect of the Use of Derivatives on Net Interest Income" section in "Results of Operations." Liquidity is discussed in the "Liquidity Risk" section in “Quantitative and Qualitative Disclosures About Risk Management.”

Capital Resources

The following tables present capital amounts and capital-to-assets ratios, on both a GAAP and regulatory basis.



	Year Ended December 31,
(In millions)	2016				2015
	Period End		Average		Period End		Average
GAAP and Regulatory Capital
GAAP Capital Stock	$	4,157	$	4,214	$	4,429	$	4,344
Mandatorily Redeemable Capital Stock	35		88		38		61
Regulatory Capital Stock	4,192		4,302		4,467		4,405
Retained Earnings	834		813		737		715
Regulatory Capital	$	5,026	$	5,115	$	5,204	$	5,120



	2016				2015
	Period End		Average		Period End		Average
GAAP and Regulatory Capital-to-Assets Ratio
GAAP	4.76	%	4.76	%	4.34	%	4.78	%
Regulatory ⁽¹⁾	4.80		4.85		4.38		4.85


(1)	At all times, the FHLBanks must maintain at least a four percent minimum regulatory capital-to-assets ratio.

We consider the regulatory ratio to be a better representation of financial leverage than the GAAP ratio because, although the GAAP ratio treats mandatorily redeemable capital stock as a liability, it protects investors in our debt in the same manner as GAAP capital stock and retained earnings.

The following table presents the sources of change in regulatory capital stock balances in 2016 and 2015.



(In millions)	2016			2015
Regulatory stock balance at beginning of year	$	4,467		$	4,330
Stock purchases:
Membership stock	34			13
Activity stock	58			178
Stock repurchases/redemptions:
Redemption of member excess	(285		)	(1		)
Withdrawals	(82		)	(53		)
Regulatory stock balance at the end of the year	$	4,192		$	4,467

The decrease in our regulatory capital stock balance during 2016 was driven by excess capital stock redemption requests from a larger member and repurchases of captive insurance company members' capital stock.

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The table below shows the amount of excess capital stock.



(In millions)	December 31, 2016		December 31, 2015
Excess capital stock (Capital Plan definition)	$	347	$	461
Cooperative utilization of capital stock	$	525	$	521
Mission Asset Activity capitalized with cooperative capital stock	$	13,133	$	13,034

A portion of capital stock is excess, meaning it is not required as a condition to being a member and not required to capitalize Mission Asset Activity. Excess capital stock provides a base of capital to manage financial leverage at prudent levels, augments loss protections for bondholders, and capitalizes a portion of growth in Mission Assets. The amount of excess capital stock, as defined by our Capital Plan, was $347 million at December 31, 2016, which was within our preferred range of $200 million to $700 million.

Retained earnings increased by $97 million (13 percent) from year-end 2015, while we maintained a competitive 4.00 percent dividend rate in each quarter of 2016.

Membership and Stockholders

In 2016, we added 12 new member stockholders and lost 24 members, ending the year at 687 member stockholders. Sixteen of the members lost merged with other Fifth District members and, therefore, the impact on our earnings and Mission Asset Activity was small.

In 2016, there were no material changes in the allocation of membership by state, charter type, or asset size. At the end of 2016, the composition of membership by state was Ohio with 306, Kentucky with 192, and Tennessee with 189.

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

The following table provides the number of member stockholders by charter type.



	December 31,
	2016	2015
Commercial Banks	402	418
Savings Associations	96	99
Credit Unions	130	124
Insurance Companies	55	54
Community Development Financial Institutions	4	4
Total	687	699

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The following table provides the ownership of capital stock by charter type.



(In millions)	December 31,
	2016		2015
Commercial Banks	$	3,224	$	3,425
Savings Associations	391		378
Credit Unions	141		128
Insurance Companies	400		497
Community Development Financial Institutions	1		1
Total GAAP Capital Stock	4,157		4,429
Mandatorily Redeemable Capital Stock	35		38
Total Regulatory Capital Stock	$	4,192	$	4,467

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

The following table provides a summary of member stockholders by asset size.



	December 31,
Member Asset Size ⁽¹⁾	2016	2015
Up to $100 million	172	177
> $100 up to $500 million	359	370
> $500 million up to $1 billion	71	76
> $1 billion	85	76
Total Member Stockholders	687	699


(1)	The December 31 membership composition reflects members' assets as of the most-recently available figures for total assets.

Most members are smaller community financial institutions, with 77 percent having assets up to $500 million. As noted elsewhere, having larger members is important to help achieve our mission objectives, including providing valuable products and services to all members.

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RESULTS OF OPERATIONS

Components of Earnings and Return on Equity

The following table is a summary income statement for the last three years. Each ROE percentage is computed by dividing income or expense for the category by the average amount of stockholders' equity for the period.



(Dollars in millions)	2016					2015				2014
	Amount			ROE ⁽¹⁾		Amount		ROE ⁽¹⁾		Amount		ROE ⁽¹⁾
Net interest income	$	363		7.24	%	$	327	6.50	%	$	327	6.64	%
Reversal for credit losses	—			—		—		—		—		(0.01	)
Net interest income after reversal for credit losses	363			7.24		327		6.50		327		6.65
Non-interest income:
Net realized gains from sale of held-to-maturity securities	39			0.77		—		—		—		—
Net (losses) gains on derivatives and hedging activities	(47		)	(0.95	)	13		0.26		7		0.14
Net gains on financial instruments held under fair value option	40			0.81		1		0.02		2		0.04
Other non-interest income, net	14			0.29		16		0.31		14		0.28
Total non-interest income	46			0.92		30		0.59		23		0.46
Total revenue	409			8.16		357		7.09		350		7.11
Non-interest expense	111			2.21		75		1.50		68		1.39
Affordable Housing Program assessments	30			0.60		28		0.55		28		0.56
Net income	$	268		5.35	%	$	254	5.04	%	$	254	5.16	%


(1)	The ROE amounts have been computed using dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) in this table may produce nominally different results.

Net Interest Income

The largest component of net income is net interest income. Our principal goal in managing net interest income is to balance trade-offs between maintaining a moderate market risk profile and ensuring profitability remains competitive. Effective risk/return management requires us to focus principally on the relationships among assets and liabilities that affect net interest income, rather than individual balance sheet and income statement accounts in isolation.

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

Components of Net Interest Income

We generate net interest income from the following two components:

▪

Net interest rate spread. This component equals the balance of total earning assets multiplied by the difference between the book yield on interest-earning assets and the book cost of interest-bearing liabilities. It is composed of net (amortization)/accretion, prepayment fees on Advances, and all other earnings from interest-earning assets net of funding costs. The latter is the largest component and represents the coupon yields of interest-earning assets net of the coupon costs of Consolidated Obligations and deposits.

▪

Earnings from funding assets with capital (“earnings from capital”). Because of our relatively low net interest rate spread compared to other financial institutions, we have historically derived a substantial portion of net interest income from deploying interest-free capital in interest-earning assets. We deploy much of the capital in short-term and adjustable-rate assets in order to help ensure that ROE moves in the same direction as short-term interest rates and to help control market risk exposure.

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The following table shows the major components of net interest income. Reasons for the variance in net interest income between the periods are discussed below.



(Dollars in millions)	2016					2015					2014
	Amount			% of Earning Assets		Amount			% of Earning Assets		Amount			% of Earning Assets
Components of net interest rate spread:
Net (amortization)/accretion ^{(1) (2)}	$	(54	)	(0.05	)%	$	(24	)	(0.02	)%	$	(1	)	—	%
Prepayment fees on Advances, net ⁽²⁾	10			0.01		3			—		4			—
Other components of net interest rate spread	360			0.34		314			0.30		291			0.29
Total net interest rate spread	316			0.30		293			0.28		294			0.29
Earnings from funding assets with interest-free capital	47			0.05		34			0.03		33			0.03
Total net interest income/net interest margin ⁽³⁾	$	363		0.35	%	$	327		0.31	%	$	327		0.32	%


(1)	Includes (amortization)/accretion of premiums/discounts on mortgage assets and Consolidated Obligations and deferred transaction costs (concession fees) for Consolidated Obligations.


(2)	These components of net interest rate spread have been segregated to display their relative impact.


(3)	Net interest margin is net interest income before (reversal)/provision for credit losses as a percentage of average total interest earning assets.

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

Amortization increased substantially in 2016 compared to 2015 primarily because of an acceleration in prepayment speeds as long-term interest rates generally declined during the first three quarters of 2016. Amortization was lower than normal in 2014 due to a decline in prepayment speeds in response to higher mortgage rates.

Prepayment Fees on Advances: Fees for members' early repayment of certain Advances are designed to make us economically indifferent to whether members hold Advances to maturity or repay them before maturity. Advance prepayment fees increased in 2016 compared to 2015 primarily due to the prepayment of Advances related to an in-district merger in the third quarter of 2016. Although Advance prepayment fees were moderate in 2016, they were minimal in 2015 and 2014.

Other Components of Net Interest Rate Spread: Excluding net amortization and prepayment fees, the total other components of net interest rate spread increased $46 million in 2016 compared to 2015, compared to an increase of $23 million in 2015 over 2014. The following factors primarily accounted for the net increase.

2016 Versus 2015

▪

Funding of LIBOR-indexed assets-Favorable: Net interest income on LIBOR-indexed assets increased by an estimated $25 million primarily because their yields rose by more than the rates on Discount Notes and adjustable-rate Bonds funding them. These spreads widened in part due to new regulatory requirements for the money market industry, which were effective in October 2016. These new requirements have raised investor demand for short-term government and GSE debt compared to prime institutional funds. This factor was partially offset by a decrease in the average amount of LIBOR-indexed assets funded by lower-cost Discount Notes.


▪	Growth in MPP Balances-Favorable: A $1.0 billion higher average balance of MPP loans increased net interest income by an estimated $12 million.


▪	Higher spreads on liquidity investments-Favorable: Higher spreads earned on liquidity investments increased net interest income by an estimated $4 million. The increase in spreads was primarily driven by the larger increase in rates earned on liquidity investments relative to their associated funding.

▪

Higher spreads on MPP loans-Favorable: An increase in the spread earned on mortgage loans improved net interest income by an estimated $3 million. The increase was driven by additional utilization of hedging with derivatives (swaptions) and the decision to call and replace debt at lower rates driven by declines in long-term interest rates. These factors were partially offset by continued paydowns of higher-yielding mortgage assets and low-cost debt.

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▪	Higher spreads on mortgage-backed securities-Favorable: Higher spreads earned on new mortgage-backed securities increased net interest income by an estimated $3 million.

2015 Versus 2014


▪	Growth in Mission Assets-Favorable: Higher balances of Mission Assets increased net interest income by an estimated $19 million. This was comprised of $8 million from a $3.8 billion increase in average Advance balances and $11 million from a $0.8 billion increase in average MPP balances.


▪	LIBOR Asset funding-Favorable: Net interest income increased by an estimated $18 million because we transitioned the funding of LIBOR-indexed assets from adjustable-rate LIBOR Bonds more towards lower-cost Discount Notes in response to a reduction in the cost of Discount Notes compared to the cost of adjustable-rate LIBOR Bonds.


▪	Fixed-rate asset funding-Unfavorable: A reduction in the amount of short-term debt funding longer-term fixed-rate mortgages lowered net interest income by an estimated $7 million.


▪	Lower MPP spread-Unfavorable: The continued paydown of higher-yielding mortgage assets and low-cost debt led to a decline in the spread earned on mortgage loans, decreasing net interest income by an estimated $6 million.


▪	Lower balances on mortgage-backed securities-Unfavorable: The average balance of the mortgage-backed securities portfolio declined $0.9 billion, which decreased net interest income by an estimated $5 million.


▪	Other factors-Favorable: Various other factors, including, but not limited to, a decrease in the amount of mandatorily redeemable capital stock and higher spreads earned on mortgage-backed securities, increased net interest income by an estimated $4 million.

Earnings from Capital: The earnings from funding assets with interest-free capital increased $13 million in 2016 compared to 2015 due to modestly higher interest rates driven in part by the Federal Reserve's decision to raise short-term rates and the increase in LIBOR. The earnings from funding assets with interest-free capital did not change significantly in 2015 compared to 2014 due to the continued low interest rate environment.

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Average Balance Sheet and Rates

The following table provides average balances and rates for major balance sheet accounts, which determine the changes in the net interest rate spread. All data include the impact of interest rate swaps, which we allocate to each asset and liability category according to their designated hedging relationship.



(Dollars in millions)	2016						2015						2014
	Average Balance		Interest		Average Rate ⁽¹⁾		Average Balance		Interest		Average Rate ⁽¹⁾		Average Balance		Interest		Average Rate ⁽¹⁾
Assets
Advances	$	69,282	$	587	0.85	%	$	70,458	$	369	0.52	%	$	66,642	$	318	0.48	%
Mortgage loans held for portfolio ⁽²⁾	8,541		261		3.06		7,581		251		3.32		6,766		247		3.64
Federal funds sold and securities purchased under resale agreements	11,218		44		0.39		11,493		14		0.12		9,673		7		0.07
Interest-bearing deposits in banks ^{(3) (4) (5)}	1,071		6		0.57		1,141		2		0.20		2,244		3		0.15
Mortgage-backed securities	15,061		325		2.16		14,664		326		2.22		15,594		343		2.20
Other investments ⁽⁴⁾	32		—		0.44		41		—		0.11		37		—		0.08
Loans to other FHLBanks	3		—		0.41		—		—		—		—		—		—
Total interest-earning assets	105,208		1,223		1.16		105,378		962		0.92		100,956		918		0.91
Less: allowance for credit losses on mortgage loans	1						2						6
Other assets	218						163						169
Total assets	$	105,425					$	105,539					$	101,119
Liabilities and Capital
Term deposits	$	100	—		0.35		$	132	—		0.20		$	93	—		0.19
Other interest bearing deposits ⁽⁵⁾	734		1		0.13		704		—		0.01		753		—		0.01
Discount Notes	49,835		174		0.35		52,706		65		0.12		35,992		28		0.08
Unswapped fixed-rate Bonds	26,549		532		2.00		26,425		528		2.00		25,605		519		2.03
Unswapped adjustable-rate Bonds	14,512		84		0.58		13,385		21		0.15		29,355		33		0.11
Swapped Bonds	7,973		66		0.83		6,504		19		0.29		3,721		7		0.20
Mandatorily redeemable capital stock	88		3		4.01		61		2		4.00		105		4		4.01
Other borrowings	—		—		0.37		—		—		—		—		—		—
Total interest-bearing liabilities	99,791		860		0.86		99,917		635		0.64		95,624		591		0.62
Non-interest bearing deposits	1						—						4
Other liabilities	618						578						573
Total capital	5,015						5,044						4,918
Total liabilities and capital	$	105,425					$	105,539					$	101,119

Net interest rate spread					0.30	%					0.28	%					0.29	%
Net interest income and net interest margin ⁽⁶⁾			$	363	0.35	%			$	327	0.31	%			$	327	0.32	%
Average interest-earning assets to interest-bearing liabilities					105.43	%					105.47	%					105.57	%


(1)	Amounts used to calculate average rates are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.


(2)	Non-accrual loans are included in average balances used to determine average rate.


(3)	Includes certificates of deposit and bank notes that are classified as available-for-sale securities.


(4)	Includes available-for-sale securities based on their amortized costs. The yield information does not give effect to changes in fair value that are reflected as a component of stockholders' equity for available-for-sale securities.


(5)	The average balance amounts include the rights or obligations to cash collateral, which are included in the fair value of derivative assets or derivative liabilities on the Statements of Condition at period end.


(6)	Net interest margin is net interest income as a percentage of average total interest earning assets.

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

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

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long-term assets. The result was an increase in the net average rate on total interest-earning assets of 0.24 percentage points in 2016 compared to 2015, after only a 0.01 percentage points change in 2015 over 2014.

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

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

2015 Versus 2014: The net interest spread and net interest margin remained stable as the higher recognition of mortgage premium amortization was offset by the net other components of net interest rate spread discussed in the previous section.

Volume/Rate Analysis

Changes in both average balances (volume) and interest rates influence changes in net interest income. The following table summarizes these changes and trends in interest income and interest expense.



(In millions)	2016 over 2015									2015 over 2014
	Volume ⁽¹⁾⁽³⁾			Rate ⁽²⁾⁽³⁾			Total			Volume ⁽¹⁾⁽³⁾			Rate ⁽²⁾⁽³⁾			Total
Increase (decrease) in interest income
Advances	$	(6	)	$	224		$	218		$	19		$	32		$	51
Mortgage loans held for portfolio	31			(21		)	10			27			(23		)	4
Federal funds sold and securities purchased under resale agreements	—			30			30			1			6			7
Interest-bearing deposits in banks	—			4			4			(2		)	1			(1		)
Mortgage-backed securities	8			(9		)	(1		)	(20		)	3			(17		)
Other investments	—			—			—			—			—			—
Loans to other FHLBanks	—			—			—			—			—			—
Total	33			228			261			25			19			44
Increase (decrease) in interest expense
Term deposits	—			—			—			—			—			—
Other interest-bearing deposits	—			1			1			—			—			—
Discount Notes	(3		)	112			109			16			21			37
Unswapped fixed-rate Bonds	2			2			4			17			(8		)	9
Unswapped adjustable-rate Bonds	2			61			63			(22		)	10			(12		)
Swapped Bonds	5			42			47			7			5			12
Mandatorily redeemable capital stock	1			—			1			(2		)	—			(2		)
Other borrowings	—			—			—			—			—			—
Total	7			218			225			16			28			44
Increase (decrease) in net interest income	$	26		$	10		$	36		$	9		$	(9	)	$	—


(1)	Volume changes are calculated as the change in volume multiplied by the prior year rate.


(2)	Rate changes are calculated as the change in rate multiplied by the prior year average balance.


(3)	Changes that are not identifiable as either volume-related or rate-related, but rather are equally attributable to both volume and rate changes, have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes.

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Effect of the Use of Derivatives on Net Interest Income

The following table shows the effect of using derivatives on net interest income. The effect on earnings from other components of derivatives, including market value adjustments, is provided in “Non-Interest Income and Non-Interest Expense.”



(In millions)	2016			2015			2014
Advances:
Amortization of hedging activities in net interest income	$	(3	)	$	(3	)	$	(3	)
Net interest settlements included in net interest income	(60		)	(84		)	(91		)
Mortgage loans:
Amortization of derivative fair value adjustments in net interest income	(7		)	(5		)	(2		)
Consolidated Obligation Bonds:
Net interest settlements included in net interest income	8			20			18
Decrease to net interest income	$	(62	)	$	(72	)	$	(78	)

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

Credit Losses

Delinquency trends in the MPP declined over the last three years as the housing market improved, resulting in no provision for estimated incurred credit losses in 2016 and 2015 and a $0.5 million reversal for estimated incurred credit losses in 2014. Further information is in the "Credit Risk - MPP" section in "Quantitative and Qualitative Disclosures About Risk Management" and Note 10 of the Notes to Financial Statements.

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Non-Interest Income and Non-Interest Expense

The following table presents non-interest income and non-interest expense for each of the last three years.



(Dollars in millions)	2016			2015			2014
Non-interest income
Net realized gains from sale of held-to-maturity securities	$	39		$	—		$	—
Net (losses) gains on derivatives and hedging activities	(47		)	13			7
Net gains on financial instruments held under fair value option	40			1			2
Other non-interest income, net	14			16			14
Total non-interest income	$	46		$	30		$	23
Non-interest expense
Compensation and benefits	$	42		$	40		$	37
Other operating expense	26			22			17
Finance Agency	6			7			7
Office of Finance	4			4			4
Litigation settlement	25			—			—
Other	8			2			3
Total non-interest expense	$	111		$	75		$	68
Average total assets	$	105,425		$	105,539		$	101,119
Average regulatory capital	5,115			5,120			5,030
Total non-interest expense to average total assets ⁽¹⁾	0.11		%	0.07		%	0.07		%
Total non-interest expense to average regulatory capital ⁽¹⁾	2.17			1.48			1.36


(1)	Amounts used to calculate percentages are based on dollars in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

Non-interest income increased in 2016 compared to 2015 primarily due to $39 million in gains from the sale of securities during the fourth quarter of 2016. Each of the securities sold had less than 15 percent of the original acquired principal remaining and were sold under our periodic clean-up process. These gains were partially offset by unrealized losses from changes in market values on derivatives used to hedge certain Consolidated Obligations, net of unrealized market value gains on these Obligations, which are held at fair value. The table below presents further information on the effect of derivatives and hedging activities on non-interest income.

Non-interest expense increased in 2016 primarily due to a settlement in December 2016 of all claims related to the 2008 Lehman bankruptcy of approximately $25 million, and secondarily, higher operating expenses driven primarily by legal fees and other non-interest expense. The latter increase resulted primarily from more recognition of issuance costs (concession fees) on Consolidated Obligations held at fair value.

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

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Effect of Derivatives and Hedging Activities on Non-Interest Income

The following tables present the net effect of derivatives and hedging activities on non-interest income.



(In millions)	2016
	Advances		Mortgage Loans		Consolidated Obligation Bonds			Balance Sheet		Total
Net effect of derivatives and hedging activities
Gains on fair value hedges	$	1	$	—	$	—		$	—	$	1
Gains (losses) on derivatives not receiving hedge accounting	—		3		(57		)	6		(48		)
Total net gains (losses) on derivatives and hedging activities	1		3		(57		)	6		(47		)
Net gains on financial instruments held under fair value option ⁽¹⁾	—		—		40			—		40
Total net effect on non-interest income	$	1	$	3	$	(17	)	$	6	$	(7	)



(In millions)	2015
	Advances		Mortgage Loans		Consolidated Obligation Bonds		Balance Sheet		Total
Net effect of derivatives and hedging activities
Gains on fair value hedges	$	2	$	—	$	1	$	—	$	3
Gains on derivatives not receiving hedge accounting	1		1		8		—		10
Total net gains on derivatives and hedging activities	3		1		9		—		13
Net gains on financial instruments held under fair value option ⁽¹⁾	—		—		1		—		1
Total net effect on non-interest income	$	3	$	1	$	10	$	—	$	14



(In millions)	2014
	Advances		Mortgage Loans		Consolidated Obligation Bonds		Balance Sheet		Total
Net effect of derivatives and hedging activities
Gains on fair value hedges	$	5	$	—	$	—	$	—	$	5
Gains on derivatives not receiving hedge accounting	—		—		2		—		2
Total net gains on derivatives and hedging activities	5		—		2		—		7
Net gains on financial instruments held under fair value option ⁽¹⁾	—		—		2		—		2
Total net effect on non-interest income	$	5	$	—	$	4	$	—	$	9


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

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

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Analysis of Quarterly ROE

The following table summarizes the components of 2016's quarterly ROE and provides quarterly ROE for 2015 and 2014.



	1^st Quarter		2^nd Quarter		3^rd Quarter		4^th Quarter		Total
Components of 2016 ROE:
Net interest income:
Other net interest income	7.65	%	7.77	%	8.18	%	8.90	%	8.12	%
Net amortization	(0.75	)	(1.28	)	(1.20	)	(1.09	)	(1.08	)
Prepayment fees	0.18		0.15		0.41		0.05		0.20
Net interest income after reversal for credit losses	7.08		6.64		7.39		7.86		7.24
Net gains (losses) on derivatives and hedging activities	0.45		1.80		(1.39	)	(4.62	)	(0.95	)
Other non-interest (loss) income	(0.79	)	(1.27	)	1.06		8.46		1.87
Total non-interest (loss) income	(0.34	)	0.53		(0.33	)	3.84		0.92
Total revenue	6.74		7.17		7.06		11.70		8.16
Total non-interest expense	1.73		1.68		1.70		3.75		2.21
Affordable Housing Program assessments	0.51		0.56		0.54		0.80		0.60
2016 ROE	4.50	%	4.93	%	4.82	%	7.15	%	5.35	%

2015 ROE	5.32	%	4.70	%	5.23	%	4.93	%	5.04	%

2014 ROE	4.78	%	5.33	%	4.92	%	5.63	%	5.16	%

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

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Segment Information

Note 18 of the Notes to Financial Statements presents information on our two operating business segments. We manage financial operations and market risk exposure primarily at the macro level, and within the context of the entire balance sheet, rather than exclusively at the level of individual segments. Under this approach, the market risk/return profile of each segment may not match, or possibly even have the same trends as, what would occur if we managed each segment on a stand-alone basis. The tables below summarize each segment's operating results for the periods shown.



(Dollars in millions)	Traditional Member Finance			MPP			Total
2016
Net interest income after reversal for credit losses	$	288		$	75		$	363
Net income	$	205		$	63		$	268
Average assets	$	96,855		$	8,570		$	105,425
Assumed average capital allocation	$	4,607		$	408		$	5,015
Return on average assets⁽¹⁾	0.21		%	0.73		%	0.25		%
Return on average equity⁽¹⁾	4.45		%	15.44		%	5.35		%

2015
Net interest income after reversal for credit losses	$	250		$	77		$	327
Net income	$	192		$	62		$	254
Average assets	$	97,932		$	7,607		$	105,539
Assumed average capital allocation	$	4,680		$	364		$	5,044
Return on average assets⁽¹⁾	0.20		%	0.82		%	0.24		%
Return on average equity⁽¹⁾	4.10		%	17.14		%	5.04		%

2014
Net interest income after reversal for credit losses	$	238		$	89		$	327
Net income	$	181		$	73		$	254
Average assets	$	94,333		$	6,786		$	101,119
Assumed average capital allocation	$	4,588		$	330		$	4,918
Return on average assets⁽¹⁾	0.19		%	1.08		%	0.25		%
Return on average equity⁽¹⁾	3.94		%	22.16		%	5.16		%


(1)	Amounts used to calculate returns are based on numbers in thousands. Accordingly, recalculations based upon the disclosed amounts (millions) may not produce the same results.

Traditional Member Finance Segment

2016 Versus 2015: The increase in net income was due primarily to gains from the sale of securities during the fourth quarter of 2016 and higher spreads earned on LIBOR-indexed assets that were driven by the larger increase in rates earned on these assets relative to their associated funding. These positive factors were partially offset by a settlement during the fourth quarter of 2016 of all claims related to the 2008 Lehman bankruptcy and net unrealized losses on derivatives and hedging activities, as discussed above.

2015 Versus 2014: The increase in net income was due to higher spreads earned on Advances primarily from lower funding costs as a result of using more Discount Notes, growth in average Advance balances, and larger unrealized net gains on derivatives and hedging activities. These items were partially offset by lower average balances on mortgage-backed securities.

MPP Segment

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

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

The MPP continued to earn a substantial level of profitability compared to market interest rates, with a moderate amount of market risk and small amount of credit risk. In 2016, the MPP averaged eight percent of total average assets while accounting for 23 percent of earnings.

2016 Versus 2015: Net income increased slightly in 2016 compared to 2015 due primarily to growth in MPP balances and a higher net spread, resulting from an increase in the use of swaptions to hedge interest rate risk and the decision to call and replace debt at lower rates. These favorable factors were mostly offset by the increased amortization of purchased mortgage premiums as a result of lower long-term interest rates in the first three quarters of 2016. Secondarily, profitability decreased due to the paydown of higher-yielding mortgage loans and low-cost debt.

2015 Versus 2014: Net interest income decreased resulting from higher net amortization expense and the paydown of higher-yielding mortgage assets and low-cost debt, which were partially offset by growth in MPP balances.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK MANAGEMENT

Overview

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

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

We practice this conservative risk philosophy in many ways:


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


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


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


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


▪	We maintain a prudent amount of financial leverage.


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


▪	We hold a significant amount of retained earnings that we believe is consistent with protecting the par value of capital stock and providing for dividend stabilization.


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

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


▪	by anticipating potential business risks and developing appropriate responses;


▪	by defining permissible lines of business;


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


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


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


▪	by specifying capital adequacy minimums; and


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

Market Risk

Overview

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

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

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

We analyze market risk using numerous analytical measures under a variety of interest rate and business scenarios, including stressed scenarios, and perform sensitivity analyses on the many variables that can affect market risk, using several market risk models from third-party software companies. These models employ rigorous valuation techniques for the optionality that exists in mortgage prepayments, call and put options, and caps/floors. We regularly assess the effects of different assumptions, techniques and methodologies on the measurements of market risk exposure, including comparisons to alternative models and information from brokers/dealers.

Policy Limits on Market Risk Exposure

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


▪	Market Value of Equity Sensitivity. The market value of equity for the entire balance sheet in two hypothetical interest rate scenarios (up 200 basis points and down 200 basis points from the current interest rate environment) must be between positive and negative 10 percent of the current balance sheet's market value of equity. The interest rate

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


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


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


▪	Market Capitalization. The market capitalization ratio (defined as the ratio of the market value of equity to the par value of regulatory stock) must be above 95 percent in the current rate environment and must be above 90 percent in each of the two interest rate shock scenarios.


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

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

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

Market Value of Equity and Duration of Equity - Entire Balance Sheet

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

Market Value of Equity



(Dollars in millions)	Down 300			Down 200			Down 100			Flat Rates		Up 100			Up 200			Up 300
Average Results
2016 Full Year
Market Value of Equity	$	4,571		$	4,595		$	4,720		$	4,843	$	4,791		$	4,655		$	4,509
% Change from Flat Case	(5.6		)%	(5.1		)%	(2.5		)%	—		(1.1		)%	(3.9		)%	(6.9		)%
2015 Full Year
Market Value of Equity	$	4,697		$	4,792		$	4,958		$	4,969	$	4,875		$	4,729		$	4,568
% Change from Flat Case	(5.5		)%	(3.6		)%	(0.2		)%	—		(1.9		)%	(4.8		)%	(8.1		)%
Month-End Results
December 31, 2016
Market Value of Equity	$	4,587		$	4,660		$	4,803		$	4,770	$	4,654		$	4,543		$	4,457
% Change from Flat Case	(3.8		)%	(2.3		)%	0.7		%	—		(2.4		)%	(4.8		)%	(6.6		)%
December 31, 2015
Market Value of Equity	$	4,565		$	4,652		$	4,849		$	4,888	$	4,795		$	4,656		$	4,507
% Change from Flat Case	(6.6		)%	(4.8		)%	(0.8		)%	—		(1.9		)%	(4.7		)%	(7.8		)%

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Duration of Equity



(In years)	Down 300		Down 200		Down 100		Flat Rates		Up 100	Up 200	Up 300
Average Results
2016 Full Year	(2.3	)	(2.8	)	(3.4	)	(0.8	)	2.3	3.1	3.3
2015 Full Year	(5.7	)	(4.6	)	(1.7	)	1.0		2.8	3.4	3.5
Month-End Results
December 31, 2016	(2.0	)	(3.7	)	(1.7	)	1.8		2.5	2.0	1.8
December 31, 2015	(6.9	)	(5.7	)	(2.8	)	0.6		2.8	3.3	3.2

During 2016, as in 2015, consistent with our historical practice and risk appetite, we positioned market risk exposure to changing interest rates at a moderate level and well within policy limits. The dollar amount of equity exposure for any individual rate shock can be obtained by multiplying the percentage change of the market value of equity by the amount of total capital. The durations of equity provide an estimate of the change in market value of equity for a 1.00 percentage point further change in interest rates from the rate shock level.

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

Market Risk Exposure of the Mortgage Assets Portfolio

The mortgage assets portfolio normally accounts for almost all market risk exposure because of prepayment volatility that we cannot completely hedge while maintaining sufficient net spreads. Sensitivities of the market value of equity allocated to the mortgage assets portfolio under interest rate shocks (in basis points) are shown below. At December 31, 2016, the mortgage assets portfolio had an assumed capital allocation of $1.1 billion based on the entire balance sheet's regulatory capital-to-assets ratio. Average results are compiled using data for each month-end. The market value sensitivities are one measure we use to analyze the portfolio's estimated market risk exposure.

% Change in Market Value of Equity-Mortgage Assets Portfolio



	Down 300		Down 200		Down 100		Flat Rates	Up 100		Up 200		Up 300
Average Results
2016 Full Year	(31.7	)%	(29.4	)%	(15.5	)%	—	(3.1	)%	(15.3	)%	(29.0	)%
2015 Full Year	(33.1	)%	(22.7	)%	(4.1	)%	—	(8.0	)%	(21.3	)%	(36.3	)%
Month-End Results
December 31, 2016	(28.4	)%	(18.5	)%	0.7	%	—	(10.4	)%	(20.3	)%	(27.7	)%
December 31, 2015	(41.7	)%	(30.8	)%	(6.4	)%	—	(9.6	)%	(24.4	)%	(40.7	)%

The risk exposure of the mortgage assets portfolio to higher interest rates was modestly lower in 2016 compared to 2015 and modestly higher in most lower rate scenarios, driven primarily by the low level of current market rates. We believe the mortgage assets portfolio continued to have an acceptable amount of market risk exposure relative to its actual and expected profitability and is consistent with our risk appetite philosophy.

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Use of Derivatives in Market Risk Management

A key component of hedging market risk exposure is the use of derivatives transactions, as discussed in Item 1 "Business." The following table presents the notional principal amounts of the derivatives classified by how we designate the hedging relationship. The notional amount of derivatives at December 31, 2016 increased by $7.7 billion (81 percent) from the end of 2015, driven primarily by the shift in composition of shorter-term funding away from Discount Notes towards fixed-rate Bonds swapped to adjustable-rate LIBOR and secondarily, higher utilization of interest rates swaptions.



(In millions)		December 31, 2016				December 31, 2015
Hedged Item/Hedging Instrument	Hedging Objective	Fair Value Hedge		Economic Hedge		Fair Value Hedge		Economic Hedge
Advances:
Pay-fixed, receive-float interest rate swap (without options)	Converts the Advance's fixed rate to a variable-rate index.	$	3,605	$	15	$	3,007	$	15
Pay-fixed, receive-float interest rate swap (with options)	Converts the Advance's fixed rate to a variable-rate index and offsets option risk in the Advance.	696		33		1,187		48
Total Advances		4,301		48		4,194		63
Mortgage Loans:
Forward settlement agreement	Protects against changes in market value of fixed-rate Mandatory Delivery Contracts resulting from changes in interest rates.	—		511		—		462
Consolidated Obligations Bonds:
Receive-fixed, pay-float interest rate swap (without options)	Converts the Bond's fixed rate to a variable-rate index.	1,229		6,789		1,184		2,494
Receive-fixed, pay-float interest rate swap (with options)	Converts the Bond's fixed rate to a variable-rate index and offsets option risk in the Bond.	130		1,362		170		162
Total Consolidated Obligations Bonds		1,359		8,151		1,354		2,656
Balance Sheet:
Interest rate swaptions	Provides the option to enter into an interest rate swap to offset interest-rate or prepayment risk.	—		2,346		—		281
Stand-Alone Derivatives:
Mandatory Delivery Contracts	Exposure to fair-value risk associated with fixed rate mortgage purchase commitments.	—		441		—		450
Total		$	5,660	$	11,497	$	5,548	$	3,912

Capital Adequacy

Retained Earnings

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

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

Risk-Based Capital

The following table shows the amount of risk-based capital required based on Finance Agency prescribed measurements. By regulation, we are required to hold permanent capital at least equal to the amount of risk-based capital.



(Dollars in millions)	December 31, 2016			Monthly Average 2016			December 31, 2015
Market risk-based capital	$	184		$	220		$	206
Credit risk-based capital	262			262			280
Operational risk-based capital	134			144			145
Total risk-based capital requirement	580			626			631
Total permanent capital	5,026			5,115			5,204
Excess permanent capital	$	4,446		$	4,489		$	4,573
Risk-based capital as a percent of permanent capital	12		%	12		%	12		%

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

Dodd-Frank Stress Test

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

Market Capitalization Ratios

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

The following table presents the market value of equity to regulatory capital stock (excluding retained earnings) for several interest rate environments.



	December 31, 2016		Monthly Average Year Ended December 31, 2016		December 31, 2015
Market Value of Equity to Par Value of Regulatory Capital Stock - Base Case (Flat Rates) Scenario	114	%	113	%	109	%
Market Value of Equity to Par Value of Regulatory Capital Stock - Down Shock ⁽¹⁾	115		110		109
Market Value of Equity to Par Value of Regulatory Capital Stock - Up Shock ⁽²⁾	108		109		104


(1)	Represents a down shock of 100 basis points.


(2)	Represents an up shock of 200 basis points.

A base case value below 100 percent (par) could indicate that, in the remote event of an immediate liquidation scenario involving redemption of all capital stock, capital stock may be returned to stockholders at a value below par. This could be due to experiencing risks that lower the market value of capital and/or to having an insufficient amount of retained earnings. In 2016, the market capitalization ratios in the scenarios presented continued to be above policy limits. The base case ratio, which

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

The following table presents the market value of equity to the book value of total capital.



	December 31, 2016		Monthly Average Year Ended December 31, 2016		December 31, 2015
Market Value of Equity to Book Value of Capital - Base Case (Flat Rates) Scenario ⁽¹⁾	95	%	96	%	94	%
Market Value of Equity to Book Value of Capital - Down Shock ⁽¹⁾⁽²⁾	96		93		93
Market Value of Equity to Book Value of Capital - Up Shock ⁽¹⁾⁽³⁾	91		92		89


(1)	Capital includes total capital and mandatorily redeemable capital stock.


(2)	Represents a down shock of 100 basis points.


(3)	Represents an up shock of 200 basis points.

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

Credit Risk

Overview

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

Credit Services

Overview: We have policies and practices to manage credit risk exposure from our secured lending activities, which include Advances and Letters of Credit. The objective of our credit risk management is to equalize risk exposure across members and counterparties to a zero level of expected losses, consistent with our conservative risk management principles and desire to have virtually no residual credit risk related to member borrowings.

Collateral: We require each member to provide us a security interest in eligible collateral before it can undertake any secured borrowing. At December 31, 2016, our policy of over-collateralization resulted in total collateral pledged of $318.5 billion to serve members' total borrowing capacity of $273.8 billion of which $186.3 billion was unused. The estimated value of pledged collateral is discounted in order to offset market, credit, and liquidity risks that may affect the collateral's realizable value in the event it must be liquidated. Over-collateralization by one member is not applied to another member.

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The table below shows the total pledged collateral (unadjusted for Collateral Maintenance Requirements).



	December 31, 2016				December 31, 2015
(Dollars in billions)			Percent of Total				Percent of Total
	Collateral Amount		Pledged Collateral		Collateral Amount		Pledged Collateral
Single family loans	$	188.7	59	%	$	174.0	57	%
Multi-family loans	56.7		18		44.9		15
Commercial real estate	33.8		11		31.0		10
Home equity loans/lines of credit	24.9		8		23.1		7
Bond Securities	13.8		4		32.9		11
Farm real estate	0.6		—		0.6		—
Total	$	318.5	100	%	$	306.5	100	%

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

We assign each member one of four levels of collateral status: Blanket, Securities, Listing, and Physical Delivery. Assignment is based in part on an internal credit rating model that reflects our view of the member's current financial condition and performance. Blanket collateral status, which we assign to approximately 90 percent of borrowers, is the least restrictive status and is available to lower-risk bank and credit union members. Approximately 53 percent of pledged collateral is under Blanket status. We monitor the level of eligible collateral pledged under Blanket status using quarterly regulatory financial reports or periodic collateral “Certification” documents submitted by all significant borrowers.

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

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

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

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The table below indicates the range of lendable values remaining after the application of CMRs for each major collateral type pledged at December 31, 2016.



	Lending Values Applied to Collateral
Blanket Status:
Prime 1-4 family loans	67-87%
Multi-family loans	54-77%
Prime home equity loans/lines of credit	56-74%
Commercial real estate loans	59-83%
Farm real estate loans	67-83%
Listing Status/Physical Delivery:
Cash/U.S. Government/U.S. Treasury/U.S. agency securities	81-100%
U.S. agency mortgage-backed securities/collateralized mortgage obligations	82-98%
Private-label residential mortgage-backed securities	44-88%
Private-label commercial mortgage-backed securities	33-88%
Municipal securities	54-93%
Small Business Administration certificates	81-94%
1-4 family loans	61-91%
Multi-family loans	57-88%
Home equity loans/lines of credit	56-89%
Commercial real estate loans	61-89%
Farm real estate loans	63-88%

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

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

Internal Credit Ratings: We perform credit underwriting of our members and nonmember borrowers and assign them an internal credit rating on a scale of one to seven, with a higher number representing a less favorable assessment of the institution's credit and overall financial condition. The credit ratings are based on internal credit analysis and consideration of available credit ratings from independent credit rating organizations. The credit ratings are used in conjunction with other measures of the credit risk and pledged collateral, as described above, in managing credit risk exposure to member and nonmember borrowers.

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

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The following tables show the distribution of internal credit ratings we assigned to member and nonmember borrowers, which we use to help manage credit risk exposure.



(Dollars in billions)
December 31, 2016				December 31, 2015
	Borrowers				Borrowers
		Collateral-Based				Collateral-Based
Credit		Borrowing		Credit		Borrowing
Rating	Number	Capacity		Rating	Number	Capacity
1-3	599	$	265.8	1-3	582	$	251.7
4	67	6.7		4	85	5.2
5	22	1.2		5	29	3.6
6	8	0.1		6	8	0.1
7	3	—		7	7	—
Total	699	$	273.8	Total	711	$	260.6

A “4” rating is our assessment of the lowest level of satisfactory performance. At December 31, 2016, 33 borrowers (five percent of the total) had credit ratings of "5" through "7," a net decrease of 11 from the end of 2015. These members had $1.3 billion of borrowing capacity at December 31, 2016. There was a net decrease of 18 members who had a "4" credit rating and a net increase of 17 members with credit ratings of "1," "2," or "3." These trends indicate a general improvement in the financial condition of our members during the recovery cycle for the overall economy and housing market.

Member Failures, Closures, and Receiverships: There was one member failure in 2016. We had no outstanding exposure to this institution.

MPP

Overview: The residual amount of credit risk exposure to loans in the MPP is minimal, based on the following factors:


▪	various credit enhancements for conventional loans, which are designed to protect us against credit losses;


▪	conservative underwriting and loan characteristics consistent with favorable expected credit performance;


▪	a small overall amount of delinquencies and defaults when compared to national averages;


▪	credit losses totaling $1.2 million in 2016 and $17.9 million over the life of the program, which represent an immaterial percentage of conventional loans' current unpaid principal balances at December 31, 2016 and of total purchases-to-date for the entire MPP; and


▪	in addition to the low program-to-date credit losses, based on financial analysis, we believe that future credit losses will not harm capital adequacy and will not significantly affect profitability except under the most extreme and unlikely credit conditions.

Portfolio Loan Characteristics: The following table shows FICO^® credit scores of homeowners at origination dates for the conventional loan portfolio.



FICO^® Score ⁽¹⁾	December 31, 2016		December 31, 2015
< 620	—	%	—	%
620 to < 660	1		1
660 to < 700	6		7
700 to < 740	16		17
>= 740	77		75

Weighted Average	764		762


(1)	Represents the FICO^® score at origination.

There was little change in the distribution of FICO^®scores at origination in 2016 compared to 2015. The distribution of FICO^® scores at origination is one indication of the portfolio's overall favorable credit quality. At December 31, 2016, 77 percent of the

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portfolio had scores at an excellent level of 740 or above and 93 percent had scores above 700, which is a threshold generally considered indicative of homeowners with good credit quality.

The following tables show loan-to-value ratios for conventional loans based on values estimated at the origination dates and current values estimated at the noted periods. The estimated current ratios are based on original loan values, principal paydowns that have occurred since origination, and a third-party estimate of changes in historical home prices for the zip code in which each loan resides. Both measures are weighted by current unpaid principal.



	Based on Estimated Origination Value					Based On Estimated Current Value
Loan-to-Value	December 31, 2016		December 31, 2015		Loan-to-Value	December 31, 2016		December 31, 2015
<= 60%	15	%	16	%	<= 60%	38	%	33	%
> 60% to 70%	16		16		> 60% to 70%	26		22
> 70% to 80%	55		55		> 70% to 80%	28		28
> 80% to 90%	9		8		> 80% to 90%	7		13
> 90%	5		5		> 90% to 100%	1		4
					> 100%	—		—
Weighted Average	73	%	72	%	Weighted Average	63	%	65	%

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

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

The geographical allocation of conventional loans in the MPP is concentrated in Ohio, as shown in the following table based on unpaid principal balance.



	December 31, 2016			December 31, 2015
Ohio	65	%	Ohio	63	%
Kentucky	14		Kentucky	14
Indiana	11		Indiana	10
Tennessee	2		Tennessee	3
Michigan	1		Michigan	1
All others	7		All others	9
Total	100	%	Total	100	%

Credit Enhancements: Conventional mortgage loans are supported against credit losses by various combinations of primary mortgage insurance (PMI), supplemental mortgage insurance (SMI) (for loans purchased before February 2011), and the Lender Risk Account (LRA). The LRA is a hold back of a portion of the initial purchase price to cover expected credit losses for a specific pool of loans. Starting after five years from the loan purchase date, we may return the hold back to PFIs if they manage credit risk to predefined acceptable levels of exposure on the loan pools they sell to us. As a result, some pools of loans may have sufficient credit enhancements to recapture all losses while other pools of loans may not. The LRA had balances of $188 million and $158 million at December 31, 2016 and 2015, respectively. For more information, see Note 10 of the Notes to Financial Statements.

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Credit Performance: The table below provides an analysis of conventional loans delinquent or in the process of foreclosure, along with the national average serious delinquency rate.



	Conventional Loan Delinquencies
(Dollars in millions)	December 31, 2016			December 31, 2015
Early stage delinquencies - unpaid principal balance ⁽¹⁾	$	47		$	51
Serious delinquencies - unpaid principal balance ⁽²⁾	$	23		$	32
Early stage delinquency rate ⁽³⁾	0.5		%	0.7		%
Serious delinquency rate⁽⁴⁾	0.3		%	0.4		%
National average serious delinquency rate ⁽⁵⁾	1.5		%	1.8		%


(1)	Includes conventional loans 30 to 89 days delinquent and not in foreclosure.


(2)	Includes conventional loans that are 90 days or more past due or where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported.


(3)	Early stage delinquencies expressed as a percentage of the total conventional loan portfolio.


(4)	Serious delinquencies expressed as a percentage of the total conventional loan portfolio.


(5)	National average number of fixed-rate prime conventional loans that are 90 days or more past due or in the process of foreclosure is based on the most recent national delinquency data available. The December 31, 2016 rate is based on September 30, 2016 data.

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

We consider a high risk loan as having a current loan-to-value ratio above 100 percent. At December 31, 2016, high risk loans had experienced a minimal amount of serious delinquencies (i.e., delinquencies that are 90 days or more past due or in the process of foreclosure). For example, of the $15 million of conventional principal balances with current estimated loan-to-values above 100 percent, $0.3 million (two percent) were seriously delinquent. We believe these data further support our view that the overall portfolio is comprised of high-quality, well-performing loans.

Credit Losses: The following table shows the effects of credit enhancements on the estimation of credit losses at the noted periods. Estimated incurred credit losses, after credit enhancements, are accounted for in the allowance for credit loss or as a charge off (i.e., a reduction to the principal of mortgage loans held for portfolio).



(In millions)	December 31, 2016			December 31, 2015
Estimated incurred credit losses, before credit enhancements	$	(9	)	$	(14	)
Estimated amounts deemed recoverable by:
Primary mortgage insurance	1			1
Supplemental mortgage insurance	5			8
Lender Risk Account	2			2
Estimated incurred credit losses, after credit enhancements	$	(1	)	$	(3	)

The small amount of incurred credit losses provides further support on the aggregate health of the portfolio. Credit risk exposure depends on the actual and potential credit performance of the loans in each pool compared to the pool's equity (on individual loans) and credit enhancements, including PMI, the LRA, and SMI.

In addition to the allowance for credit losses recorded, we regularly analyze potential ranges of additional lifetime credit risk exposure for the loans in the MPP. Even under adverse scenarios for either home prices or unemployment rates, we expect that further credit losses would not significantly decrease profitability.

Credit Risk Exposure to Insurance Providers:

PMI

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

SMI

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

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loan purchases; instead, we now augment credit enhancements with a greater amount of the purchase proceeds added to the LRA. At December 31, 2016, we had $1.1 billion of conventional loans purchased prior to February 2011 with outstanding SMI coverage through Genworth and MGIC that are paying down over time. Although there is a possibility that MGIC and Genworth may not pay all of the future insurance claims we make, our estimation of credit exposure to them has declined over the last several years, and was not considered material at December 31, 2016.

Investments

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

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

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

The following table presents the carrying value of liquidity investments outstanding in relation to the counterparties' lowest long-term credit ratings provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services. For resale agreements, the ratings shown are based on ratings of the associated collateral.



(In millions)	December 31, 2016
	Long-Term Rating
	AA		A		Total
Unsecured Liquidity Investments
Federal funds sold	$	1,280	$	2,977	$	4,257
Certificates of deposit	1,300		—		1,300
Total unsecured liquidity investments	2,580		2,977		5,557
Guaranteed/Secured Liquidity Investments
Securities purchased under agreements to resell	5,230		—		5,230
Government-sponsored enterprises ⁽¹⁾	31		—		31
Total guaranteed/secured liquidity investments	5,261		—		5,261
Total liquidity investments	$	7,841	$	2,977	$	10,818



	December 31, 2015
	Long-Term Rating
	AA		A		Total
Unsecured Liquidity Investments
Federal funds sold	$	4,305	$	6,540	$	10,845
Certificates of deposit	600		100		700
Total unsecured liquidity investments	4,905		6,640		11,545
Guaranteed/Secured Liquidity Investments
Securities purchased under agreements to resell	10,532		—		10,532
Government-sponsored enterprises ⁽¹⁾	33		—		33
Total guaranteed/secured liquidity investments	10,565		—		10,565
Total liquidity investments	$	15,470	$	6,640	$	22,110


(1)	Consists of securities that are issued and effectively guaranteed by Fannie Mae and/or Freddie Mac, which have the support of the U.S. government, although they are not obligations of the U.S. government.

During 2016, we purchased a portion of our total liquidity investments from counterparties for which the investments are secured with collateral (secured resale agreements). We believe these investments present little or no credit risk exposure to us.

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The following table presents credit ratings of our unsecured investment credit exposures by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.



(In millions)	December 31, 2016
	Counterparty Rating ⁽¹⁾
Domicile of Counterparty	AA		A		Total
Domestic	$	680	$	925	$	1,605
U.S. branches and agency offices of foreign commercial banks:
Canada	700		905		1,605
Australia	800		—		800
Netherlands	—		647		647
France	—		500		500
Sweden	300		—		300
Finland	100		—		100
Total U.S. branches and agency offices of foreign commercial banks	1,900		2,052		3,952
Total unsecured investment credit exposure	$	2,580	$	2,977	$	5,557


(1)	Represents the lowest long-term credit rating provided by Standard & Poor's, Moody's, and/or Fitch Advisory Services.

The following table presents the remaining contractual maturity of our unsecured investment credit exposure by the domicile of the counterparty or the domicile of the counterparty's parent for U.S. branches and agency offices of foreign commercial banks.



(In millions)	December 31, 2016
Domicile of Counterparty	Overnight		Due 2 days through 30 days		Due 31 days through 90 days		Total
Domestic	$	1,305	$	—	$	300	$	1,605
U.S. branches and agency offices of foreign commercial banks:
Canada	1,305		100		200		1,605
Australia	500		—		300		800
Netherlands	647		—		—		647
France	500		—		—		500
Sweden	—		—		300		300
Finland	—		100		—		100
Total U.S. branches and agency offices of foreign commercial banks	2,952		200		800		3,952
Total unsecured investment credit exposure	$	4,257	$	200	$	1,100	$	5,557

At December 31, 2016, all of the $5.6 billion of unsecured investment exposure was to counterparties with holding companies domiciled in countries receiving either AAA or AA long-term sovereign ratings. Furthermore, we restrict a significant portion of unsecured lending to overnight maturities, which further limits risk exposure to these counterparties. By Finance Agency regulation, all counterparties exposed to non-U.S. countries are required to be domestic U.S. branches of foreign counterparties. We also limit exposure to counterparties and countries that could have significant direct or indirect exposure to European sovereign debt.

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Mortgage-Backed Securities:

GSE Mortgage-Backed Securities

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

Mortgage-Backed Securities Issued by Other Government Agencies

We also invest in mortgage-backed securities issued and guaranteed by Ginnie Mae and the NCUA. These investments totaled $3.2 billion at December 31, 2016. We believe that the strength of the issuers' guarantees and backing by the full faith and credit of the U.S. government is sufficient to protect us against credit losses on these securities.

Derivatives

Credit Risk Exposure: We mitigate most of the credit risk exposure resulting from derivative transactions through collateralization. The table below presents the derivative positions to which we had credit risk exposure at December 31, 2016.



(In millions)
Credit Rating ⁽¹⁾	Total Notional		Net Derivatives Fair Value Before Collateral			Cash Collateral Pledged To (From) Counterparty			Net Credit Exposure to Counterparties ⁽²⁾
Non-member counterparties
Asset positions with credit exposure
Uncleared derivatives:
AA	$	10	$	—		$	—		$	—
A	2,664		10			(8		)	2
Total uncleared derivatives	2,674		10			(8		)	2
Cleared derivatives ⁽³⁾	4,470		35			5			40
Liability positions with credit exposure
Uncleared derivatives:
Aa/AA	2,608		(9		)	9			—
Total uncleared derivatives	2,608		(9		)	9			—
Cleared derivatives ⁽³⁾	6,353		(67		)	130			63
Total derivative positions with credit exposure to non-member counterparties	16,105		(31		)	136			105
Member institutions ⁽⁴⁾	49		—			—			—
Total	$	16,154	$	(31	)	$	136		$	105


(1)	Each category includes the related plus (+) and minus (-) ratings (i.e., “A” includes “A+” and “A-” ratings).


(2)	Amounts shown as $0 have net credit exposure of less than $1 million.


(3)	Represents derivative transactions cleared with LCH.Clearnet LLC and CME Clearing, the FHLB's clearinghouses, which are not rated. LCH.Clearnet LLC's parent, LCH.Clearnet Group Ltd, is rated A+ by Standard & Poor's and CME Clearing's parent, CME Group Inc. is rated Aa3 by Moody's and AA- by Standard & Poor's.


(4)	Represents Mandatory Delivery Contracts.

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

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Although we cannot predict if we will realize credit risk losses from any of our derivatives counterparties, we believe that all of them will be able to continue making timely interest payments and, more generally, to continue to satisfy the terms and conditions of their derivative contracts with us. As of December 31, 2016, we had $0.1 billion of notional principal of interest rate swaps outstanding to one member, JPMorgan Chase Bank, N.A., which also had outstanding credit services with us. Due to the amount of market value collateralization, we had no outstanding credit exposure to this counterparty related to interest rate swaps outstanding.

Liquidity Risk

Liquidity Overview

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

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

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

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

Contingency Liquidity Requirement

Contingency liquidity risk is the potential inability to meet liquidity needs because our access to the capital markets to issue Consolidated Obligations is restricted or suspended for a period of time due to a market disruption, operational failure, or real or perceived credit quality problems. We continued to hold an ample amount of liquidity reserves to protect against contingency liquidity risk.



(In millions)	December 31, 2016			December 31, 2015
Contingency Liquidity Requirement
Total Contingency Liquidity Reserves ⁽¹⁾	$	32,127		$	41,932
Total Requirement ⁽²⁾	(24,224		)	(28,420		)
Excess Contingency Liquidity Available	$	7,903		$	13,512


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


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

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Deposit Reserve Requirement

To support our member deposits, we also must meet a statutory deposit reserve requirement. The sum of our investments in obligations of the United States, deposits in eligible banks or trust companies, and Advances with a final maturity not exceeding five years must equal or exceed the current amount of member deposits. The following table presents the components of this liquidity requirement.



(In millions)	December 31, 2016			December 31, 2015
Deposit Reserve Requirement
Total Eligible Deposit Reserves	$	72,114		$	82,036
Total Member Deposits	(765		)	(804		)
Excess Deposit Reserves	$	71,349		$	81,232

Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2016. We believe that, as in the past, we will continue to have sufficient liquidity, including from access to the debt markets to issue Consolidated Obligations, to satisfy these obligations on a timely basis.



(In millions)	< 1 year		1 < 3 years		3 < 5 years		> 5 years		Total
Contractual Obligations
Long-term debt (Bonds) - par ⁽¹⁾	$	20,971	$	17,170	$	8,536	$	6,496	$	53,173
Operating leases (include premises and equipment)	1		2		2		4		9
Mandatorily redeemable capital stock	25		2		7		1		35
Commitments to fund mortgage loans	441		—		—		—		441
Pension and other postretirement benefit obligations	2		5		4		28		39
Total Contractual Obligations	$	21,440	$	17,179	$	8,549	$	6,529	$	53,697


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

Off-Balance Sheet Arrangements

The following table summarizes our off-balance sheet items at December 31, 2016. For more information, see Note 20 of the Notes to Financial Statements.



(In millions)	< 1 year		1 < 3 years		3 < 5 years		> 5 years		Total
Off-balance sheet items ⁽¹⁾
Standby Letters of Credit	$	17,029	$	366	$	66	$	47	$	17,508
Standby bond purchase agreements	29		68		9		—		106
Consolidated Obligations traded, not yet settled	6		—		—		—		6
Total off-balance sheet items	$	17,064	$	434	$	75	$	47	$	17,620


(1)	Represents notional amount of off-balance sheet obligations.

Member Concentration Risk

We regularly assess concentration risks from business activity. We believe that the current concentration of Advance activity is consistent with our risk management philosophy, and the impact of borrower concentration on market risk, credit risk, and operational risk, after considering mitigating controls, is small.

Our business is designed to support significant changes in asset levels without having to undergo material changes in staffing, operations, risk practices, or general resource needs. A key reason for this scalability is that the Capital Plan provides for additional capital when Mission Assets grow and the opportunity for us to retire capital when Mission Assets decline, thereby acting, along with our efficient operating expenses, to preserve competitive profitability.

We believe the effect on credit risk exposure from borrower concentration is minimal because of our application of normal credit risk mitigations, the most important of which is over-collateralization of borrowings. In the remote possibility of failure of a member to whom we lent a large amount of Advances, combined with the Federal Deposit Insurance Corporation's decision not to repay Advances, we would implement our member failure plan. Our member failure plan, which we test periodically, would liquidate collateral to recover losses from losing principal and interest on the Advance balances.

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

Operational Risks

Operational risk is defined as the risk of an unexpected loss resulting from human error, fraud, inability to enforce legal contracts, or deficiencies in internal controls or information systems. We mitigate operational risks through adherence to internal policies, conformance with entity level controls, and through an emphasis on the importance of risk management, as further discussed below. In addition, the Internal Audit Department, which reports directly to the Audit Committee of the Board of Directors, regularly monitors and tests compliance with our policies, procedures, applicable regulatory requirements and best practices.

Internal Department Procedures and Controls

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

Information Systems

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

We mitigate the risk associated with cyberattacks through the implementation of multiple layers of security controls. Administrative, physical, and logical controls are in place for establishing, administering and actively monitoring system access, sensitive data, and system change. Additionally, separate groups within our organization and/or third parties validate the strength of our security and confirm that established policies and procedures are adequately followed.

Disaster Recovery Provisions

We have a Business Resumption Contingency Plan that provides us with the ability to maintain operations in various scenarios of business disruption. We review and update this plan periodically to ensure that it serves our changing operational needs and those of our members. We have an off-site facility in a suburb of Cincinnati, Ohio, which is tested at least annually. We also have a back-up agreement in place with another FHLBank in the event that both of our Cincinnati-based facilities are inoperable.

Insurance Coverage

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

Human Resources Policies and Procedures

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

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

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Introduction

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

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

Accounting for Derivatives and Hedging Activity

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

Fair Value Hedges

As indicated in the "Use of Derivatives in Market Risk Management" section of "Quantitative and Qualitative Disclosures About Risk Management," we designate a portion of our derivatives as fair value hedges. Fair value hedge accounting permits the changes in fair values of the hedged risk in the hedged instruments to be recorded in the current period, thus offsetting, partially or fully, the change in fair value of the derivatives. For derivatives accounted as fair value hedges, the hedged risk is designated to be changes in LIBOR benchmark interest rates. The result is that there has been a relatively small amount of unrealized earnings volatility from hedging market risk with derivatives.

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

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

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

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Fair Value Option--Economic Hedge

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

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

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

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

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

We have historically purchased most MPP loans at premium prices. Mortgage-backed securities outstanding at the end of 2016 were purchased at net premium prices close to par. At the end of 2016, the MPP had a net premium balance of $224 million and mortgage-backed securities had a net premium balance of $29 million, resulting in a total mortgage net premium balance of $253 million.

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

Contractual Method

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

Retrospective Method

For mortgage-backed securities, we apply the retrospective method. The retrospective method requires that we estimate principal cash flows over the estimated life of the securities and make a retrospective adjustment of the effective yield each time the estimated life changes as if the new estimate had been known since the original acquisition date of the asset. Projecting principal cash flows requires us to estimate mortgage prepayment speeds, which are driven primarily by changes in interest rates. Projected prepayment speeds are derived using a market-tested third-party prepayment model. We regularly test the reasonableness and accuracy of the prepayment model by comparing its projections to actual prepayment results experienced over time and to dealer prepayment indications.

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

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

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

Provision for Credit Losses

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

Advances

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

Based on the nature and quality of the collateral held as security for Advances, including overcollateralization, our credit analyses of members and collateral, and members' prior repayment history (i.e., we have never recorded a loss from an Advance), we believe that no allowance for losses was necessary at December 31, 2016. See Notes 1 and 10 of the Notes to Financial Statements for additional information.

Mortgage Loans Acquired Under the MPP

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

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


▪	having the related real estate as collateral, which effectively includes the borrower's equity; and


▪	by credit enhancements including 1) primary mortgage insurance, if applicable, 2) the member's available funds remaining in the Lender Risk Account, and 3) if applicable, Supplemental Mortgage Insurance coverage up to the policy limit, applied on a loan-by-loan basis.

We assume any credit exposure if losses exceed the related real estate residual value and credit enhancements.

The key estimates and assumptions that affect our allowance for credit losses generally include:


▪	the characteristics of specific conventional loans outstanding under the MPP;


▪	evaluations of the overall delinquent loan portfolio through the use of migration analysis;


▪	loss severity estimates;


▪	historical claims and default experience;


▪	expected proceeds from credit enhancements;


▪	evaluation of exposure to Supplemental Mortgage Insurance providers and their ability to pay claims;

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▪	comparisons to industry reported data; and


▪	current economic trends and conditions.

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

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

Other-Than-Temporary Impairment Analysis for Investment Securities

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

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

If we were to determine that an other-than-temporary impairment existed, the security would initially be written down to current market value, with the loss recognized in non-interest income if we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of the amortized cost basis. If we do not intend to sell the security and it is not more likely than not we will be required to sell the security before recovery, the security would be written down to current market value with a separate display of losses related to credit deterioration and losses related to all other factors on the income statement. Any non-credit loss related amounts would then be reclassified and recorded in other comprehensive income, resulting in only net credit-related losses recorded on the income statement. As of December 31, 2016 we did not consider any of our investment securities to be other-than-temporarily impaired.

Fair Values

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

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

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

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

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liability as of the measurement date. Observable inputs reflect market data obtained from independent sources (Levels 1 and 2), while unobservable inputs reflect our assumptions of market variables (Level 3). Management utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Because items classified as Level 3 are valued using significant unobservable inputs, the process for determining the fair value of these items is generally more subjective and involves a high degree of management judgment and use of assumptions. As of December 31, 2016 and 2015, all of our assets and liabilities measured at fair value on a recurring basis were classified as Level 2 within the fair value hierarchy.

RECENTLY ISSUED ACCOUNTING STANDARDS AND INTERPRETATIONS

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

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OTHER FINANCIAL INFORMATION

Income Statements (Quarter amounts are unaudited)

Summary income statements for each quarter within the two years ended December 31, 2016 are provided in the tables below. The FHLB's change to the contractual interest method for amortizing premiums and accreting discounts on mortgage loans held for portfolio has been reported through retroactive application of the change in accounting principle to all periods presented. See Note 1 of the Notes to Financial Statements for more information.



	2016
(In millions)	1^st Quarter			2^nd Quarter		3^rd Quarter			4^th Quarter		Total
Interest income	$	303		$	298	$	308		$	314	$	1,223
Interest expense	214			215		215			216		860
Net interest income	89			83		93			98		363
Non-interest (loss) income	(4		)	6		(4		)	48		46
Non-interest expense	28			28		28			57		141
Net income	$	57		$	61	$	61		$	89	$	268



	2015
(In millions)	1^st Quarter		2^nd Quarter		3^rd Quarter		4^th Quarter		Total
Interest income	$	229	$	228	$	244	$	261	$	962
Interest expense	148		149		161		177		635
Net interest income	81		79		83		84		327
Non-interest income	8		5		10		7		30
Non-interest expense	24		26		26		27		103
Net income	$	65	$	58	$	67	$	64	$	254

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

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Investment Securities

Data on investments for the years ended December 31, 2016, 2015 and 2014 are provided in the tables below.



(In millions)	Carrying Value at December 31,
	2016		2015		2014
Trading securities:
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities	$	1	$	1	$	2
Total trading securities	1		1		2
Available-for-sale securities:
Certificates of deposit	1,300		700		1,350
Total available-for-sale securities	1,300		700		1,350
Held-to-maturity securities:
Government-sponsored enterprises	31		33		26
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities	3,183		3,894		2,039
Government-sponsored enterprise single-family mortgage-backed securities	8,186		10,891		12,647
Government-sponsored enterprise multi-family mortgage-backed securities	3,146		460		—
Total held-to-maturity securities	14,546		15,278		14,712
Total securities	15,847		15,979		16,064
Securities purchased under agreements to resell	5,230		10,532		3,343
Federal funds sold	4,257		10,845		6,600
Total investments	$	25,334	$	37,356	$	26,007

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As of December 31, 2016, investments had the following maturity and yield characteristics.



(Dollars in millions)	Due in one year or less			Due after one year through five years			Due after five through 10 years			Due after 10 years			Carrying Value
Trading securities:
Mortgage-backed securities⁽¹⁾:
Other U.S. obligation single-family mortgage-backed securities	$	—		$	—		$	1		$	—		$	1
Total trading securities	—			—			1			—			1
Yield on trading securities	—		%	—		%	2.56		%	—		%
Available-for-sale securities:
Certificates of deposit	$	1,300		$	—		$	—		$	—		$	1,300
Total available-for-sale securities	1,300			—			—			—			1,300
Yield on available-for sale securities	0.87		%	—		%	—		%	—		%
Held-to-maturity securities:
Government-sponsored enterprises	$	31		$	—		$	—		$	—		$	31
Mortgage-backed securities⁽¹⁾:
Other U.S. obligation single-family mortgage-backed securities	128			594			—			2,461			3,183
Government-sponsored enterprise single-family mortgage-backed securities	—			—			65			8,121			8,186
Government-sponsored enterprise multi-family mortgage-backed securities	—			—			2,659			487			3,146
Total held-to-maturity securities	159			594			2,724			11,069			14,546
Yield on held-to-maturity securities	0.90		%	1.10		%	1.34		%	2.21		%
Total securities	$	1,459		$	594		$	2,725		$	11,069		$	15,847
Securities purchased under agreements to resell	5,230			—			—			—			5,230
Federal funds sold	4,257			—			—			—			4,257
Total investments	$	10,946		$	594		$	2,725		$	11,069		$	25,334


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

As of December 31, 2016, the FHLB held securities of the following issuers with a book value greater than 10 percent of FHLB capital. The table includes government-sponsored enterprises, securities of the U.S. government, and government agencies and corporations.



(In millions)	Total		Total
Name of Issuer	Carrying Value		Fair Value
Freddie Mac	$	3,741	$	3,702
Fannie Mae	7,622		7,547
National Credit Union Administration Trust	722		723
Government National Mortgage Association	2,462		2,442
Certificates of deposit (5 issuers)	1,300		1,300
Total investment securities	$	15,847	$	15,714

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Loan Portfolio Analysis

The FHLB's outstanding loans, loans 90 days or more past due and accruing interest, and allowance for credit loss information for the five years ended December 31 are shown below. The FHLB's interest and related shortfall on non-accrual loans and loans modified in troubled debt restructurings was not material during the years presented below.



(Dollars in millions)	2016			2015			2014			2013			2012
Domestic:
Advances	$	69,882		$	73,292		$	70,406		$	65,270		$	53,944
Real estate mortgages	$	9,150		$	7,954		$	6,956		$	6,782		$	7,526
Real estate mortgages past due 90 days or more (including those in process of foreclosure) and still accruing interest, unpaid principal balance	$	33		$	42		$	66		$	89		$	113
Non-accrual loans, unpaid principal balance ⁽¹⁾	$	4		$	7		$	4		$	3		$	3
Troubled debt restructurings, unpaid principal balance (not included above)	$	8		$	8		$	5		$	4		$	3
Allowance for credit losses on mortgage loans, beginning of year	$	2		$	5		$	7		$	18		$	21
Net charge-offs	(1		)	(3		)	(2		)	(4		)	(4		)
(Reversal) provision for credit losses	—			—			—			(7		)	1
Allowance for credit losses on mortgage loans, end of year	$	1		$	2		$	5		$	7		$	18
Ratio of net charge-offs during the period to average loans outstanding during the period	0.01		%	0.04		%	0.03		%	0.05		%	0.06		%


(1)	See Note 1 of the Notes to Financial Statements for an explanation of the FHLB's non-accrual policy.

Other Borrowings

Borrowings with original maturities of one year or less are classified as short-term. The following is a summary of short-term borrowings exceeding 30 percent of total capital for the years ended December 31:



(Dollars in millions)	2016			2015			2014
Discount Notes
Outstanding at year-end (book value)	$	44,690		$	77,199		$	41,232
Weighted average rate at year-end ^{(1) (2)}	0.46		%	0.24		%	0.09		%
Daily average outstanding for the year (book value)	$	49,835		$	52,706		$	35,992
Weighted average rate for the year ⁽²⁾	0.35		%	0.12		%	0.08		%
Highest outstanding at any month-end (book value)	$	63,137		$	77,199		$	41,232
Bonds (short-term)
Outstanding at year-end (par value)	$	11,332		$	4,415		$	17,810
Weighted average rate at year-end ^{(2) (3)}	0.66		%	0.23		%	0.10		%
Daily average outstanding for the year (par value)	$	11,996		$	6,974		$	18,810
Weighted average rate for the year ^{(2) (3)}	0.51		%	0.13		%	0.10		%
Highest outstanding at any month-end (par value)	$	14,591		$	13,825		$	22,235


(1)	Represents an implied rate without consideration of concessions.


(2)	Amounts used to calculate weighted average rates for the year are based on dollars in thousands. Accordingly, recalculations based upon amounts in millions may not produce the same results.


(3)	Represents the effective coupon rate.

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Term Deposits

At December 31, 2016, term deposits in denominations of $100,000 or more totaled $149,300,000. The table below presents the maturities for term deposits in denominations of $100,000 or more:



(In millions) By remaining maturity at December 31, 2016	3 months or less		Over 3 months but within 6 months		Over 6 months but within 12 months		Over 12 months but within 24 months		Total
Time certificates of deposit	$	78	$	43	$	16	$	12	$	149

Ratios



	2016		2015		2014
Return on average assets	0.25	%	0.24	%	0.25	%
Return on average equity	5.35		5.04		5.16
Average equity to average assets	4.76		4.78		4.86
Dividend payout ratio	63.92	%	67.68	%	69.45	%

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

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

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Item 8.	Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

of the Federal Home Loan Bank of Cincinnati:

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

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

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

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

Cincinnati, Ohio

March 16, 2017

FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CONDITION

(In thousands, except par value)



	December 31,
	2016			2015
ASSETS
Cash and due from banks (Note 3)	$	8,737		$	10,136
Interest-bearing deposits	129			99
Securities purchased under agreements to resell	5,229,487			10,531,979
Federal funds sold	4,257,000			10,845,000
Investment securities:
Trading securities (Note 4)	970			1,159
Available-for-sale securities (Note 5)	1,300,023			700,081
Held-to-maturity securities (includes $0 and $0 pledged as collateral in 2016 and 2015, respectively, that may be repledged) ^(a)(Note 6)	14,546,979			15,278,206
Total investment securities	15,847,972			15,979,446
Advances (includes $15,093 and $15,057 at fair value under fair value option in 2016 and 2015, respectively) (Note 8)	69,882,074			73,292,172
Mortgage loans held for portfolio:
Mortgage loans held for portfolio (Note 9)	9,149,860			7,953,362
Less: allowance for credit losses on mortgage loans (Note 10)	1,142			1,686
Mortgage loans held for portfolio, net	9,148,718			7,951,676
Accrued interest receivable	109,886			94,855
Premises, software, and equipment, net	9,187			10,436
Derivative assets (Note 11)	104,753			26,996
Other assets	37,338			13,013
TOTAL ASSETS	$	104,635,281		$	118,755,808
LIABILITIES
Deposits (Note 12)	$	765,879		$	804,342
Consolidated Obligations: (Note 13)
Discount Notes	44,689,662			77,199,208
Bonds (includes $7,895,510 and $2,214,590 at fair value under fair value option in 2016 and 2015, respectively)	53,190,866			35,091,722
Total Consolidated Obligations	97,880,528			112,290,930
Mandatorily redeemable capital stock (Note 15)	34,782			37,895
Accrued interest payable	119,322			118,823
Affordable Housing Program payable (Note 14)	104,883			107,352
Derivative liabilities (Note 11)	17,874			31,087
Other liabilities	733,918			212,254
Total liabilities	99,657,186			113,602,683
Commitments and contingencies (Note 20)
CAPITAL (Note 15)
Capital stock Class B putable ($100 par value); issued and outstanding shares: 41,569 shares in 2016 and 44,288 shares in 2015	4,156,944			4,428,756
Retained earnings:
Unrestricted	574,122			530,998
Restricted	260,285			206,648
Total retained earnings	834,407			737,646
Accumulated other comprehensive loss (Note 16)	(13,256		)	(13,277		)
Total capital	4,978,095			5,153,125
TOTAL LIABILITIES AND CAPITAL	$	104,635,281		$	118,755,808


(a)	Fair values: $14,413,231 and $15,229,965 at December 31, 2016 and 2015, respectively.

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

FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF INCOME

(In thousands)



	For the Years Ended December 31,
	2016			2015			2014
INTEREST INCOME:
Advances	$	576,970		$	366,651		$	314,800
Prepayment fees on Advances, net	9,874			2,723			3,624
Interest-bearing deposits	320			88			85
Securities purchased under agreements to resell	9,491			2,147			1,261
Federal funds sold	34,313			12,106			5,426
Investment securities:
Trading securities	20			22			25
Available-for-sale securities	5,822			2,198			3,204
Held-to-maturity securities	325,500			325,449			343,042
Total investment securities	331,342			327,669			346,271
Mortgage loans held for portfolio	261,071			251,594			246,560
Loans to other FHLBanks	13			—			—
Total interest income	1,223,394			962,978			918,027
INTEREST EXPENSE:
Consolidated Obligations:
Discount Notes	173,595			65,217			27,439
Bonds	681,757			566,970			559,480
Total Consolidated Obligations	855,352			632,187			586,919
Deposits	1,320			360			264
Loans from other FHLBanks	1			—			—
Mandatorily redeemable capital stock	3,517			2,432			4,190
Total interest expense	860,190			634,979			591,373
NET INTEREST INCOME	363,204			327,999			326,654
Reversal for credit losses	—			—			(500		)
NET INTEREST INCOME AFTER REVERSAL FOR CREDIT LOSSES	363,204			327,999			327,154
NON-INTEREST INCOME:
Net losses on trading securities	(5		)	(18		)	(9		)
Net realized gains from sale of held-to-maturity securities	38,763			—			—
Net gains on financial instruments held under fair value option	40,503			1,057			2,174
Net (losses) gains on derivatives and hedging activities	(47,431		)	13,037			6,627
Standby Letters of Credit fees	12,195			13,098			10,767
Other, net	2,206			2,720			3,071
Total non-interest income	46,231			29,894			22,630
NON-INTEREST EXPENSE:
Compensation and benefits	41,932			39,766			36,777
Other operating expenses	25,935			21,728			17,454
Finance Agency	6,325			6,793			7,084
Office of Finance	4,284			4,698			4,374
Litigation settlement	25,250			—			—
Other	7,337			2,566			2,559
Total non-interest expense	111,063			75,551			68,248
INCOME BEFORE ASSESSMENTS	298,372			282,342			281,536
Affordable Housing Program assessments	30,189			27,906			27,605
NET INCOME	$	268,183		$	254,436		$	253,931

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)



	For the Years Ended December 31,
	2016			2015		2014
Net income	$	268,183		$	254,436	$	253,931
Other comprehensive income adjustments:
Net unrealized (losses) gains on available-for-sale securities	(58		)	105		97
Pension and postretirement benefits	79			3,214		(7,651		)
Total other comprehensive income adjustments	21			3,319		(7,554		)
Comprehensive income	$	268,204		$	257,755	$	246,377

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CAPITAL

(In thousands)



	Capital Stock Class B - Putable					Retained Earnings									Accumulated Other Comprehensive			Total
	Shares		Par Value			Unrestricted			Restricted			Total			Loss			Capital
BALANCE, DECEMBER 31, 2013	46,980		$	4,697,985		$	510,321		$	110,843		$	621,164		$	(9,042	)	$	5,310,107
Adjustment for cumulative effect of accounting change - change in amortization methodology						(37,459		)	(5,868		)	(43,327		)				(43,327		)
Proceeds from sale of capital stock	835		83,543															83,543
Repurchase of capital stock	(4,979	)	(497,875		)													(497,875		)
Net shares reclassified to mandatorily redeemable capital stock	(171	)	(17,110		)													(17,110		)
Comprehensive income						203,145			50,786			253,931			(7,554		)	246,377
Cash dividends on capital stock						(176,356		)				(176,356		)				(176,356		)
BALANCE, DECEMBER 31, 2014	42,665		4,266,543			499,651			155,761			655,412			(16,596		)	4,905,359
Proceeds from sale of capital stock	1,912		191,132															191,132
Net shares reclassified to mandatorily redeemable capital stock	(289	)	(28,919		)													(28,919		)
Comprehensive income						203,549			50,887			254,436			3,319			257,755
Cash dividends on capital stock						(172,202		)				(172,202		)				(172,202		)
BALANCE, DECEMBER 31, 2015	44,288		4,428,756			530,998			206,648			737,646			(13,277		)	5,153,125
Proceeds from sale of capital stock	920		92,027															92,027
Net shares reclassified to mandatorily redeemable capital stock	(3,639	)	(363,839		)													(363,839		)
Comprehensive income						214,546			53,637			268,183			21			268,204
Cash dividends on capital stock						(171,422		)				(171,422		)				(171,422		)
BALANCE, DECEMBER 31, 2016	41,569		$	4,156,944		$	574,122		$	260,285		$	834,407		$	(13,256	)	$	4,978,095

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

STATEMENTS OF CASH FLOWS

(In thousands)



	For the Years Ended December 31,
	2016			2015			2014
OPERATING ACTIVITIES:
Net income	$	268,183		$	254,436		$	253,931
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	55,296			35,793			(1,490		)
Net change in derivative and hedging activities	63,806			12,651			16,224
Net change in fair value adjustments on trading securities	5			18			9
Net change in fair value adjustments on financial instruments held under fair value option	(40,503		)	(1,057		)	(2,174		)
Other adjustments	(38,774		)	(11		)	(393		)
Net change in:
Accrued interest receivable	(15,028		)	(13,473		)	3,746
Other assets	(24,325		)	(1,120		)	(739		)
Accrued interest payable	21,273			4,694			(3,177		)
Other liabilities	32,560			41,036			19,252
Total adjustments	54,310			78,531			31,258
Net cash provided by operating activities	322,493			332,967			285,189

INVESTING ACTIVITIES:
Net change in:
Interest-bearing deposits	(113,516		)	12,092			30,579
Securities purchased under agreements to resell	5,302,492			(7,188,979		)	(993,000		)
Federal funds sold	6,588,000			(4,245,000		)	(4,860,000		)
Premises, software, and equipment	(1,623		)	(1,834		)	(686		)
Trading securities:
Proceeds from maturities of long-term	184			164			228
Available-for-sale securities:
Net (increase) decrease in short-term	(600,000		)	650,000			835,000
Held-to-maturity securities:
Net decrease (increase) in short-term	1,404			(6,585		)	1,386
Proceeds from maturities of long-term	2,924,469			2,611,029			2,093,933
Proceeds from sale of long-term	852,199			—			—
Purchases of long-term	(2,529,144		)	(3,172,521		)	(719,833		)
Advances:
Proceeds	1,364,290,711			930,146,812			1,120,239,271
Made	(1,360,955,355		)	(933,090,216		)	(1,125,441,755		)
Mortgage loans held for portfolio:
Principal collected	1,661,697			1,383,198			1,070,820
Purchases	(2,899,907		)	(2,414,064		)	(1,260,888		)
Net cash provided by (used in) investing activities	14,521,611			(15,315,904		)	(9,004,945		)




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

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(continued from previous page)
FEDERAL HOME LOAN BANK OF CINCINNATI
STATEMENTS OF CASH FLOWS
(In thousands)

	For the Years Ended December 31,
	2016			2015			2014
FINANCING ACTIVITIES:
Net increase (decrease) in deposits and pass-through reserves	$	3,567		$	74,725		$	(200,660	)
Net payments on derivative contracts with financing elements	(23,185		)	(28,458		)	(31,195		)
Net proceeds from issuance of Consolidated Obligations:
Discount Notes	325,535,819			305,975,240			270,415,559
Bonds	50,922,924			19,042,816			41,461,146
Payments for maturing and retiring Consolidated Obligations:
Discount Notes	(358,051,273		)	(270,027,809		)	(267,394,419		)
Bonds	(32,787,008		)	(43,118,354		)	(40,358,950		)
Proceeds from issuance of capital stock	92,027			191,132			83,543
Payments for repurchase/redemption of mandatorily redeemable capital stock	(366,952		)	(53,987		)	(70,000		)
Payments for repurchase of capital stock	—			—			(497,875		)
Cash dividends paid	(171,422		)	(172,202		)	(176,356		)
Net cash (used in) provided by financing activities	(14,845,503		)	11,883,103			3,230,793
Net decrease in cash and cash equivalents	(1,399		)	(3,099,834		)	(5,488,963		)
Cash and cash equivalents at beginning of the period	10,136			3,109,970			8,598,933
Cash and cash equivalents at end of the period	$	8,737		$	10,136		$	3,109,970
Supplemental Disclosures:
Interest paid	$	858,401		$	642,179		$	621,865
Affordable Housing Program payments, net	$	32,658		$	18,657		$	23,291

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

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FEDERAL HOME LOAN BANK OF CINCINNATI

NOTES TO FINANCIAL STATEMENTS

Background Information

The Federal Home Loan Bank of Cincinnati (the FHLB), a federally chartered corporation, is one of 11 District Federal Home Loan Banks (FHLBanks). The FHLBanks serve the public by enhancing the availability of credit for residential mortgages and targeted community development. The FHLB provides a readily available, competitively-priced source of funds to its member institutions. The FHLB is a cooperative whose member institutions own nearly all of the capital stock of the FHLB and may receive dividends on their investment to the extent declared by the FHLB's Board of Directors. Former members own the remaining capital stock to support business transactions still carried on the FHLB's Statements of Condition. Regulated financial depositories and insurance companies engaged in residential housing finance may apply for membership. Housing associates, including state and local housing authorities, may also borrow from the FHLB; while eligible to borrow, housing authorities are not members of the FHLB and, therefore, are not allowed to hold capital stock. A housing authority is eligible to utilize the Advance programs of the FHLB if it meets applicable statutory requirements. It must be a U.S. Department of Housing and Urban Development approved mortgagee and must also meet applicable mortgage lending, financial condition, as well as charter, inspection and supervision requirements.

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

The Federal Housing Finance Agency (Finance Agency) is the independent Federal regulator of the FHLBanks, Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae). The Finance Agency's stated mission is to ensure that the housing government-sponsored enterprises (GSEs) operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.

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

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

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Note 1 - Summary of Significant Accounting Policies

Basis of Presentation

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

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

Change in Accounting Principle. Effective October 1, 2016, the FHLB changed its method of accounting for the amortization and accretion of premiums and discounts and hedging basis adjustments on mortgage loans held for portfolio to the contractual interest method (contractual method). Historically, the FHLB deferred and amortized premiums and accreted discounts into interest income using the retrospective interest method (retrospective method), which used both actual prepayment experience and estimates of future principal repayments in calculating the estimated lives of the loans. While both the retrospective and contractual methods are acceptable under GAAP, the contractual method has become preferable for recognizing net unamortized premiums on mortgage loans held for portfolio because (i) it reduces the FHLB's reliance on subjective assumptions and estimates that affected the reported amounts of assets, capital and income in the financial statements and (ii) it represents the base accounting model articulated in GAAP applicable to accounting for the amortization of premiums and the accretion of discounts, whereas the retrospective method is only permitted by the guidance in narrowly defined circumstances.

The change to the contractual method for amortizing premiums and accreting discounts and hedging basis adjustments on mortgage loans has been reported through retroactive application of the change in accounting principle to all periods presented. For the quarters ended March 31, 2016, June 30, 2016, September 30, 2016 and December 31, 2016, the effect of this change was an increase (decrease) to net income (in thousands) of $8,162, $5,017, $3,486, and $(22,522), respectively. The effect for the year ended December 31, 2016 was a decrease to net income (in thousands) of $(5,857).

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The following tables illustrate the effect of the change in amortization and accretion method on the FHLB's financial statements as of and for the years ended December 31, 2016, 2015, and 2014.



	As of and for the Year Ended December 31, 2016
(In thousands)	Previous Method		New Method		Effect of Change
Statements of Condition:
Mortgage loans held for portfolio, net	$	9,183,157	$	9,148,718	$	(34,439	)
Total assets	104,669,720		104,635,281		(34,439		)
Affordable Housing Program payable	105,534		104,883		(651		)
Total liabilities	99,657,837		99,657,186		(651		)
Retained earnings:
Unrestricted	603,950		574,122		(29,828		)
Restricted	264,245		260,285		(3,960		)
Total retained earnings	868,195		834,407		(33,788		)
Total capital	5,011,883		4,978,095		(33,788		)
Total liabilities and capital	104,669,720		104,635,281		(34,439		)
Statements of Income:
Interest income - mortgage loans held for portfolio	$	267,579	$	261,071	$	(6,508	)
Net interest income after reversal for credit losses	369,712		363,204		(6,508		)
Income before assessments	304,880		298,372		(6,508		)
Affordable Housing Program assessments	30,840		30,189		(651		)
Net income	274,040		268,183		(5,857		)
Statements of Comprehensive Income:
Net income	$	274,040	$	268,183	$	(5,857	)
Comprehensive income	274,061		268,204		(5,857		)
Statements of Capital:
Total retained earnings, beginning of year	$	765,577	$	737,646	$	(27,931	)
Total comprehensive income	274,061		268,204		(5,857		)
Total retained earnings, end of year	868,195		834,407		(33,788		)
Total capital	5,011,883		4,978,095		(33,788		)
Statements of Cash Flows:
Operating activities:
Net income	$	274,040	$	268,183	$	(5,857	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	48,788		55,296		6,508
Changes in:
Other liabilities	33,211		32,560		(651		)
Total adjustments	48,453		54,310		5,857
Net cash provided by operating activities	322,493		322,493		—

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	As of and for the Year Ended December 31, 2015
(In thousands)	Previous Method		New Method		Effect of Change
Statements of Condition:
Mortgage loans held for portfolio, net	$	7,979,607	$	7,951,676	$	(27,931	)
Total assets	118,783,739		118,755,808		(27,931		)
Retained earnings:
Unrestricted	556,139		530,998		(25,141		)
Restricted	209,438		206,648		(2,790		)
Total retained earnings	765,577		737,646		(27,931		)
Total capital	5,181,056		5,153,125		(27,931		)
Total liabilities and capital	118,783,739		118,755,808		(27,931		)
Statements of Income:
Interest income - mortgage loans held for portfolio	$	245,876	$	251,594	$	5,718
Net interest income after reversal for credit losses	322,281		327,999		5,718
Income before assessments	276,624		282,342		5,718
Net income	248,718		254,436		5,718
Statements of Comprehensive Income:
Net income	$	248,718	$	254,436	$	5,718
Comprehensive income	252,037		257,755		5,718
Statements of Capital:
Total retained earnings, beginning of year	$	689,061	$	655,412	$	(33,649	)
Total comprehensive income	252,037		257,755		5,718
Total retained earnings, end of year	765,577		737,646		(27,931		)
Total capital	5,181,056		5,153,125		(27,931		)
Statements of Cash Flows:
Operating activities:
Net income	$	248,718	$	254,436	$	5,718
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	41,511		35,793		(5,718		)
Total adjustments	84,249		78,531		(5,718		)
Net cash provided by operating activities	332,967		332,967		—

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	As of and for the Year Ended December 31, 2014
(In thousands)	Previous Method		New Method			Effect of Change
Statements of Income:
Interest income - mortgage loans held for portfolio	$	236,882	$	246,560		$	9,678
Net interest income after reversal for credit losses	317,476		327,154			9,678
Income before assessments	271,858		281,536			9,678
Net income	244,253		253,931			9,678
Statements of Comprehensive Income:
Net income	$	244,253	$	253,931		$	9,678
Comprehensive income	236,699		246,377			9,678
Statements of Capital:
Cumulative effect of change in accounting principle, January 1, 2014	$	—	$	(43,327	)	$	(43,327	)
Retained earnings after cumulative effect of change in accounting principle, beginning of year	621,164		577,837			(43,327		)
Comprehensive income	236,699		246,377			9,678
Total retained earnings, end of year	689,061		655,412			(33,649		)
Total capital	4,939,008		4,905,359			(33,649		)
Statements of Cash Flows:
Operating activities:
Net income	$	244,253	$	253,931		$	9,678
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,188		(1,490		)	(9,678		)
Total adjustments	40,936		31,258			(9,678		)
Net cash provided by operating activities	285,189		285,189			—

Significant Accounting Policies

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

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

Use of Estimates. The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates. These assumptions and estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expenses. Actual results could differ from these estimates.

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

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

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

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

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

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

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

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

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

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

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

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


▪	if the FHLB has an intent to sell the impaired debt security;


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

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

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

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

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

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

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

For prepaid Advances that are hedged and meet the hedge accounting requirements, the FHLB terminates the hedging relationship upon prepayment and records the associated fair value gains and losses, adjusted for the prepayment fees, in interest income. If the new Advance qualifies as a modification of the original hedged Advance, the fair value gains or losses of the Advance and the prepayment fees are included in the basis of the modified Advance, and gains or losses and prepayment fees are amortized in interest income over the life of the modified Advance using a level-yield methodology. If the modified Advance also is hedged and the hedge meets the hedging criteria, the modified Advance is marked to fair value after the modification, and subsequent fair value changes are recorded in other income.

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

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

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

Premiums and Discounts. The FHLB defers and amortizes premiums and accretes discounts paid to and received by the FHLB's participating members (Participating Financial Institutions, or PFIs) and hedging basis adjustments, as interest income using the contractual method.

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

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

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

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

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

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

Non-accrual Loans. The FHLB places a conventional mortgage loan on non-accrual status if it is determined that either (1) the collection of interest or principal is doubtful (e.g., when a related allowance for credit losses is recorded on a loan considered to be a troubled debt restructuring as a result of the individual evaluation for impairment), or (2) interest or principal is past due for 90 days or more, except when the loan is well-secured and in the process of collection (e.g., through credit enhancements and with monthly settlements on a schedule/scheduled basis). Loans with settlements on a schedule/scheduled basis means the FHLB receives monthly principal and interest payments from the servicer regardless of whether the mortgagee is making payments to the servicer. Loans with monthly settlement on an actual/actual basis are considered well-secured; however, servicers of actual/actual loan types contractually do not advance principal and interest regardless of borrower creditworthiness. As a result, these loans are placed on non-accrual status once they become 90 days delinquent.

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

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

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

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

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

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

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


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


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

Accounting for Fair Value Hedges. If hedging relationships meet certain criteria including, but not limited to, formal documentation of the hedging relationship and an expectation to be highly effective, they are eligible for fair value hedge accounting and the offsetting changes in fair value of the hedged items attributable to the hedged risk may be recorded in earnings. The application of hedge accounting generally requires the FHLB to evaluate the effectiveness of the hedging relationships at inception and on an ongoing basis and to calculate the changes in fair value of the derivatives and related hedged items independently. This is known as the “long-haul” method of accounting. Transactions that meet more stringent criteria qualify for the “shortcut” method of hedge accounting in which an assumption can be made that the change in fair value of a hedged item exactly offsets the change in value of the related derivative. The FHLB discontinued use of the shortcut method effective July 1, 2009 for all new hedging relationships.

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

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

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

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

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

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

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

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

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

Concessions. Dealers receive concessions in connection with the issuance of certain Consolidated Obligations. The Office of Finance prorates the amount of the concession to the FHLB based upon the percentage of the debt issued that is assumed by the FHLB. Concessions paid on Consolidated Obligations designated under the fair value option are expensed as incurred in other non-interest expense. The FHLB records concessions paid on Consolidated Obligation Bonds not designated under the fair value option as a direct deduction from their carrying amounts, consistent with the presentation of discounts on Consolidated Obligations. The concessions are amortized, using a level-yield methodology, over the terms to maturity or the expected lives of the Consolidated Obligation Bonds. The amortization of those concessions is included in Consolidated Obligation Bond interest expense.

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

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

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

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

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

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

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

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

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

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

Affordable Housing Program (AHP). The FHLBank Act requires each FHLBank to establish and fund an AHP. The FHLB charges the required funding for AHP to earnings and establishes a liability. The AHP funds provide subsidies to members to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. The FHLB issues AHP Advances at interest rates below the customary interest rate for non-subsidized Advances. When the FHLB makes an AHP Advance, the present value of the variation in the cash flow caused by the difference in the interest rate between the AHP Advance rate and the FHLB's related cost of funds for comparable maturity funding is charged against the AHP liability and recorded as a discount on the AHP Advance. As an alternative, the FHLB also has the authority to make the AHP subsidy available to members as a grant. The discount on AHP Advances is accreted to interest income on Advances using a level-yield methodology over the life of the Advance.

Note 2 - Recently Issued Accounting Standards and Interpretations

Classification of Certain Cash Receipts and Cash Payments. On August 26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the Statement of Cash Flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified on the Statement of Cash Flows. This guidance is effective for the FHLB for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. The FHLB does not intend to adopt the new guidance early. At this time, the FHLB does not expect the new guidance to have a material impact on the FHLB’s cash flows.

Measurement of Credit Losses on Financial Instruments. On June 16, 2016, the FASB issued amended guidance for the accounting of credit losses on financial instruments. The amendments require entities to immediately record the full amount of expected credit losses in their loan portfolios. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance also requires, among other things, credit losses relating to available-for-sale debt securities to be recorded through an allowance for credit losses and expanded disclosure requirements. The guidance is effective for the FHLB for interim and annual periods beginning after December 15, 2019. Early application is permitted as of

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the interim and annual reporting periods beginning after December 15, 2018. The guidance should be applied using a modified-retrospective approach, through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In addition, entities are required to use a prospective transition approach for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The FHLB does not intend to adopt the new guidance early. While the FHLB is still in the process of evaluating this guidance, the FHLB expects the guidance will result in an increase in the allowance for credit losses given the requirement to estimate losses for the entire estimated life of the financial asset. The extent of the impact on the FHLB’s financial condition, results of operations, and cash flows will depend upon the composition of the FHLB’s financial assets at the adoption date and the economic conditions and forecasts at that time.

Contingent Put and Call Options in Debt Instruments. On March 14, 2016, the FASB issued amendments to clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. The guidance requires entities to apply only the four-step decision sequence when assessing whether the economic characteristics and risks of call (put) options are clearly and closely related to the economic characteristics and risks of their debt hosts. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. This guidance became effective for the FHLB for the interim and annual periods beginning on January 1, 2017. The adoption of this guidance had no effect on the FHLB's financial condition, results of operations, and cash flows.

Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. On March 10, 2016, the FASB issued amendments to clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under GAAP does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments provide entities with the option to apply the guidance using either a prospective approach or a modified retrospective approach, retrospectively applied to all derivative instruments that meet the specific conditions. As permitted, the FHLB elected early adoption of the guidance prospectively on January 1, 2016. The adoption of this guidance had no effect on the FHLB's financial condition, results of operations, and cash flows.

Leases. On February 25, 2016, the FASB issued guidance which requires recognition of lease assets and lease liabilities on the Statement of Condition and disclosure of key information about leasing arrangements. In particular, this guidance requires a lessee, of operating or finance leases, to recognize on the Statement of Condition a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2018, and early application is permitted. The guidance requires lessors and lessees to recognize and measure leases at the beginning of the earliest period presented in the financial statements using a modified retrospective approach. The FHLB does not intend to adopt the new guidance early. Upon adoption, the FHLB expects to report higher assets and liabilities as a result of including right-of-use assets and lease liabilities on its Statement of Condition. While the FHLB is still in the process of evaluating this guidance, the FHLB does not expect the new guidance to have a material impact on its financial condition, results of operations, and cash flows.

Recognition and Measurement of Financial Assets and Financial Liabilities. On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:


▪	Requires equity investments (with certain exceptions) to be measured at fair value with changes in fair value recognized in net income.


▪	Requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected the fair value option.


▪	Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the Statement of Condition or the accompanying notes to the financial statements.


▪	Eliminates the requirement for public entities to disclose the method(s) and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the Statement of Condition.

The guidance becomes effective for the FHLB for the interim and annual periods beginning after December 15, 2017, and early adoption is only permitted for certain provisions. The amendments, in general, should be applied by means of a cumulative-effect adjustment to the Statement of Condition as of the beginning of the period of adoption. The FHLB does not intend to

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adopt the new guidance early. At this time, the FHLB does not expect the new guidance to have a material impact on the FHLB's financial condition, results of operations, and cash flows.

Note 3 - Cash and Due from Banks

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

Compensating Balances. The FHLB maintains collected cash balances with commercial banks in return for certain services. These agreements contain no legal restrictions on the withdrawal of funds. The average collected cash balances for the years ended December 31, 2016 and 2015 were approximately $50,000 and $63,000.

Pass-through Deposit Reserves. The FHLB acts as a pass-through correspondent for member institutions required to deposit reserves with the Federal Reserve Banks. The amount shown as “Cash and due from banks” includes pass-through reserves deposited with Federal Reserve Banks of approximately $576,000 and $238,000 as of December 31, 2016 and 2015.

Note 4 - Trading Securities

Table 4.1 - Trading Securities by Major Security Types (in thousands)



Fair Value	December 31, 2016		December 31, 2015
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities	$	970	$	1,159
Total	$	970	$	1,159

Table 4.2 - Net Losses on Trading Securities (in thousands)



	For the Years Ended December 31,
	2016			2015			2014
Net losses on trading securities held at period end	$	(5	)	$	(18	)	$	(9	)
Net losses on trading securities	$	(5	)	$	(18	)	$	(9	)

Note 5 - Available-for-Sale Securities

Table 5.1 - Available-for-Sale Securities by Major Security Types (in thousands)



	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	1,300,000	$	38	$	(15	)	$	1,300,023
Total	$	1,300,000	$	38	$	(15	)	$	1,300,023

	December 31, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Certificates of deposit	$	700,000	$	81	$	—		$	700,081
Total	$	700,000	$	81	$	—		$	700,081

All securities outstanding with gross unrealized losses at December 31, 2016 were in a continuous unrealized loss position for less than 12 months.

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Table 5.2 - Available-for-Sale Securities by Contractual Maturity (in thousands)



	December 31, 2016				December 31, 2015
Year of Maturity	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	1,300,000	$	1,300,023	$	700,000	$	700,081

Table 5.3 - Interest Rate Payment Terms of Available-for-Sale Securities (in thousands)



	December 31, 2016		December 31, 2015
Amortized cost of available-for-sale securities:
Fixed-rate	$	1,300,000	$	700,000

Realized Gains and Losses. The FHLB had no sales of securities out of its available-for-sale portfolio for the years ended December 31, 2016, 2015, or 2014.

Note 6 - Held-to-Maturity Securities

Table 6.1 - Held-to-Maturity Securities by Major Security Types (in thousands)



	December 31, 2016
	Amortized Cost ⁽¹⁾		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
Non-mortgage-backed securities:
Government-sponsored enterprises (GSE)	$	31,279	$	1	$	—		$	31,280
Total non-mortgage-backed securities	31,279		1		—			31,280
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities	3,183,219		3,653		(23,151		)	3,163,721
GSE single-family mortgage-backed securities	8,186,733		36,161		(147,494		)	8,075,400
GSE multi-family mortgage-backed securities	3,145,748		988		(3,906		)	3,142,830
Total mortgage-backed securities	14,515,700		40,802		(174,551		)	14,381,951
Total	$	14,546,979	$	40,803	$	(174,551	)	$	14,413,231

	December 31, 2015
	Amortized Cost ⁽¹⁾		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value
Non-mortgage-backed securities:
GSE	$	32,683	$	—	$	—		$	32,683
Total non-mortgage-backed securities	32,683		—		—			32,683
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities	3,894,432		3,629		(25,292		)	3,872,769
GSE single-family mortgage-backed securities	10,891,089		122,044		(148,589		)	10,864,544
GSE multi-family mortgage-backed securities	460,002		—		(33		)	459,969
Total mortgage-backed securities	15,245,523		125,673		(173,914		)	15,197,282
Total	$	15,278,206	$	125,673	$	(173,914	)	$	15,229,965


(1)	Carrying value equals amortized cost.

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Table 6.2 - Net Purchased Premiums Included in the Amortized Cost of Mortgage-backed Securities Classified as Held-to-Maturity (in thousands)



	December 31, 2016			December 31, 2015
Premiums	$	60,519		$	84,450
Discounts	(31,474		)	(40,667		)
Net purchased premiums	$	29,045		$	43,783

Table 6.3 summarizes the held-to-maturity securities with unrealized losses, which are aggregated by major security type and length of time that individual securities have been in a continuous unrealized loss position.

Table 6.3 - Held-to-Maturity Securities in a Continuous Unrealized Loss Position (in thousands)



	December 31, 2016
	Less than 12 Months					12 Months or more					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities	$	2,151,584	$	(23,151	)	$	—	$	—		$	2,151,584	$	(23,151	)
GSE single-family mortgage-backed securities	4,548,897		(90,119		)	1,193,241		(57,375		)	5,742,138		(147,494		)
GSE multi-family mortgage-backed securities	1,897,043		(3,906		)	—		—			1,897,043		(3,906		)
Total	$	8,597,524	$	(117,176	)	$	1,193,241	$	(57,375	)	$	9,790,765	$	(174,551	)

	December 31, 2015
	Less than 12 Months					12 Months or more					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Mortgage-backed securities:
Other U.S. obligation single-family mortgage-backed securities	$	2,574,649	$	(25,292	)	$	—	$	—		$	2,574,649	$	(25,292	)
GSE single-family mortgage-backed securities	4,332,237		(74,068		)	2,065,926		(74,521		)	6,398,163		(148,589		)
GSE multi-family mortgage-backed securities	459,969		(33		)	—		—			459,969		(33		)
Total	$	7,366,855	$	(99,393	)	$	2,065,926	$	(74,521	)	$	9,432,781	$	(173,914	)

Table 6.4 - Held-to-Maturity Securities by Contractual Maturity (in thousands)



	December 31, 2016				December 31, 2015
Year of Maturity	Amortized Cost ⁽¹⁾		Fair Value		Amortized Cost ⁽¹⁾		Fair Value
Non-mortgage-backed securities:
Due in 1 year or less	$	31,279	$	31,280	$	32,683	$	32,683
Due after 1 year through 5 years	—		—		—		—
Due after 5 years through 10 years	—		—		—		—
Due after 10 years	—		—		—		—
Total non-mortgage-backed securities	31,279		31,280		32,683		32,683
Mortgage-backed securities ⁽²⁾	14,515,700		14,381,951		15,245,523		15,197,282
Total	$	14,546,979	$	14,413,231	$	15,278,206	$	15,229,965


(1)	Carrying value equals amortized cost.


(2)	Mortgage-backed securities are not presented by contractual maturity because their expected maturities will likely differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment fees.

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Table 6.5 - Interest Rate Payment Terms of Held-to-Maturity Securities (in thousands)



	December 31, 2016		December 31, 2015
Amortized cost of non-mortgage-backed securities:
Fixed-rate	$	31,279	$	32,683
Total amortized cost of non-mortgage-backed securities	31,279		32,683
Amortized cost of mortgage-backed securities:
Fixed-rate	9,706,072		12,664,603
Variable-rate	4,809,628		2,580,920
Total amortized cost of mortgage-backed securities	14,515,700		15,245,523
Total	$	14,546,979	$	15,278,206

Realized Gains and Losses. The FHLB sold securities out of its held-to-maturity portfolio during the periods noted below in Table 6.6, each of which had less than 15 percent of the acquired principal outstanding at the time of the sale. These sales are considered maturities for the purposes of security classification.

Table 6.6 - Proceeds from Sale and Gains on Held-to-Maturity Securities (in thousands)



	For the Years Ended December 31,
	2016		2015		2014
Proceeds from sale of held-to-maturity securities	$	852,199	$	—	$	—
Gross gains from sale of held-to-maturity securities	38,763		—		—

Note 7 - Other-Than-Temporary Impairment Analysis

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

For its Other U.S. obligations and GSE investments (mortgage-backed securities and non-mortgage-backed securities), the FHLB has determined that the strength of the issuers' guarantees through direct obligations or support from the U.S. government is sufficient to protect the FHLB from losses based on current expectations. As a result, the FHLB determined that, as of December 31, 2016, all of the gross unrealized losses on these investments were temporary as the declines in market value of these securities were not attributable to credit quality. Furthermore, the FHLB does not intend to sell the investments, and it is not more likely than not that the FHLB will be required to sell the investments before recovery of their amortized cost bases. As a result, the FHLB did not consider any of these investments to be other-than-temporarily impaired at December 31, 2016.

The FHLB also reviewed its available-for-sale securities that have experienced unrealized losses at December 31, 2016 and determined that the unrealized losses were temporary, based on the creditworthiness of the issuers and the related collateral characteristics, and that the FHLB will recover its entire amortized cost basis. Additionally, because the FHLB does not intend to sell these securities, nor is it more likely than not that the FHLB will be required to sell the securities before recovery, it did not consider the investments to be other-than-temporarily impaired at December 31, 2016.

The FHLB did not consider any of its investments to be other-than-temporarily impaired at December 31, 2015.

Note 8 - Advances

The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics and optionality. Fixed-rate Advances generally have maturities ranging from one day to 30 years. Variable-rate advances generally have maturities ranging from less than 30 days to 10 years, where the interest rates reset periodically at a fixed spread to the London Interbank Offered Rate (LIBOR) or other specified index. The following table presents Advance redemptions by contractual maturity, including index-amortizing Advances, which are presented according to their predetermined amortization schedules.

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Table 8.1 - Advance Redemption Terms (dollars in thousands)



	December 31, 2016					December 31, 2015
Redemption Term	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in 1 year or less	$	23,129,060		0.85	%	$	27,177,311		0.57	%
Due after 1 year through 2 years	21,503,138			1.06		12,360,345			0.79
Due after 2 years through 3 years	14,292,353			1.12		15,839,007			0.77
Due after 3 years through 4 years	5,322,050			1.26		11,107,509			0.78
Due after 4 years through 5 years	963,105			1.78		3,391,892			1.06
Thereafter	4,697,315			1.75		3,366,205			1.69
Total par value	69,907,021			1.07		73,242,269			0.75
Commitment fees	(534		)			(629		)
Discount on AHP Advances	(7,435		)			(9,396		)
Premiums	2,061					2,744
Discounts	(5,994		)			(8,386		)
Hedging adjustments	(13,138		)			65,513
Fair value option valuation adjustments and accrued interest	93					57
Total	$	69,882,074				$	73,292,172

The FHLB offers certain fixed and variable-rate Advances to members that may be prepaid on specified dates (call dates) without incurring prepayment or termination fees (callable Advances). If the call option is exercised, replacement funding may be available to members. Other Advances may only be prepaid subject to a prepayment fee paid to the FHLB that makes the FHLB financially indifferent to the prepayment of the Advance.

Table 8.2 - Advances by Year of Contractual Maturity or Next Call Date (in thousands)



Year of Contractual Maturity or Next Call Date	December 31, 2016		December 31, 2015
Due in 1 year or less	$	33,831,156	$	33,384,838
Due after 1 year through 2 years	15,901,805		11,289,035
Due after 2 years through 3 years	13,608,214		13,959,002
Due after 3 years through 4 years	2,982,425		10,356,770
Due after 4 years through 5 years	2,243,105		2,747,419
Thereafter	1,340,316		1,505,205
Total par value	$	69,907,021	$	73,242,269

The FHLB also offers putable Advances. With a putable Advance, the FHLB effectively purchases put options from the member that allows the FHLB to terminate the Advance at predetermined dates. The FHLB normally would exercise its put option when interest rates increase relative to contractual rates.

Table 8.3 - Advances by Year of Contractual Maturity or Next Put Date for Putable Advances (in thousands)



Year of Contractual Maturity or Next Put Date	December 31, 2016		December 31, 2015
Due in 1 year or less	$	23,499,560	$	28,111,211
Due after 1 year through 2 years	21,248,138		11,895,945
Due after 2 years through 3 years	14,286,853		15,549,007
Due after 3 years through 4 years	5,322,050		11,098,009
Due after 4 years through 5 years	963,105		3,391,892
Thereafter	4,587,315		3,196,205
Total par value	$	69,907,021	$	73,242,269

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Table 8.4 - Advances by Interest Rate Payment Terms (in thousands)



	December 31, 2016		December 31, 2015
Fixed-rate ⁽¹⁾
Due in one year or less	$	16,330,685	$	15,599,101
Due after one year	8,369,765		9,713,857
Total fixed-rate ⁽¹⁾	24,700,450		25,312,958
Variable-rate ⁽¹⁾
Due in one year or less	6,798,375		11,578,210
Due after one year	38,408,196		36,351,101
Total variable-rate ⁽¹⁾	45,206,571		47,929,311
Total par value	$	69,907,021	$	73,242,269


(1)	Payment terms based on current interest rate terms, which reflect any option exercises or rate conversions that have occurred subsequent to the related Advance issuance.

Credit Risk Exposure. The FHLB's potential credit risk from Advances is concentrated in commercial banks and insurance companies. The FHLB's Advances outstanding that were greater than or equal to $1.0 billion per borrower were $55.5 billion (79.4 percent) and $57.4 billion (78.4 percent) at December 31, 2016 and 2015, respectively. These Advances were made to 9 and 8 borrowers (members and former members) at December 31, 2016 and 2015. See Note 10 for information related to the FHLB's credit risk on Advances and allowance methodology for credit losses.

Table 8.5 - Borrowers Holding Five Percent or more of Total Advances, Including Any Known Affiliates that are Members of the FHLB (dollars in millions)



December 31, 2016					December 31, 2015
	Principal		% of Total Par Value of Advances			Principal		% of Total Par Value of Advances
JPMorgan Chase Bank, N.A.	$	32,300	46	%	JPMorgan Chase Bank, N.A.	$	35,350	48	%
U.S. Bank, N.A.	8,563		12		U.S. Bank, N.A.	10,086		14
Total	$	40,863	58	%	Total	$	45,436	62	%

Note 9 - Mortgage Loans Held for Portfolio

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

Table 9.1 - Mortgage Loans Held for Portfolio (in thousands)



	December 31, 2016			December 31, 2015
Unpaid principal balance:
Fixed rate medium-term single-family mortgage loans ⁽¹⁾	$	1,320,585		$	1,478,780
Fixed rate long-term single-family mortgage loans	7,605,088			6,278,904
Total unpaid principal balance	8,925,673			7,757,684
Premiums	211,058			184,975
Discounts	(3,740		)	(4,572		)
Hedging basis adjustments ⁽²⁾	16,869			15,275
Total mortgage loans held for portfolio	$	9,149,860		$	7,953,362


(1)	Medium-term is defined as a term of 15 years or less.


(2)	Represents the unamortized balance of the mortgage purchase commitments' market values at the time of settlement. The market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.

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Table 9.2 - Mortgage Loans Held for Portfolio by Collateral/Guarantee Type (in thousands)



	December 31, 2016		December 31, 2015
Unpaid principal balance:
Conventional mortgage loans	$	8,534,542	$	7,277,584
FHA mortgage loans	391,131		480,100
Total unpaid principal balance	$	8,925,673	$	7,757,684

For information related to the FHLB's credit risk on mortgage loans and allowance for credit losses, see Note 10.

Table 9.3 - Members, Including Any Known Affiliates that are Members of the FHLB, and Former Members Selling Five Percent or more of Total Unpaid Principal (dollars in millions)



	December 31, 2016					December 31, 2015
	Principal		% of Total			Principal		% of Total
Union Savings Bank	$	2,886	32	%	Union Savings Bank	$	2,242	29	%
Guardian Savings Bank FSB	855		10		PNC Bank, N.A. ⁽¹⁾	839		11
PNC Bank, N.A. ⁽¹⁾	660		7		Guardian Savings Bank FSB	633		8


(1)	Former member.

Note 10 - Allowance for Credit Losses

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

Credit products

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

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

Using a risk-based approach, the FHLB considers the payment status, collateralization levels, and borrower's financial condition to be indicators of credit quality for its credit products. At December 31, 2016 and 2015, the FHLB had rights to collateral on a member-by-member basis with an estimated value in excess of its outstanding extensions of credit.

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The FHLB evaluates and makes changes to its collateral guidelines, as necessary, based on current market conditions. At December 31, 2016 and 2015, the FHLB did not have any Advances that were past due, in non-accrual status or impaired. In addition, there were no troubled debt restructurings related to credit products of the FHLB during 2016 or 2015.

The FHLB has not experienced any credit losses on Advances since it was founded in 1932. Based upon the collateral held as security, its credit extension and collateral policies and the repayment history on credit products, the FHLB did not record any credit losses on credit products as of December 31, 2016 or 2015. Accordingly, the FHLB did not record any allowance for credit losses on Advances.

At December 31, 2016 and 2015, the FHLB did not record any liability to reflect an allowance for credit losses for off-balance sheet credit exposures. See Note 20 for additional information on the FHLB's off-balance sheet credit exposure.

Mortgage Loans Held for Portfolio - FHA

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

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

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

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

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

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

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

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

Table 10.1 - Rollforward of Allowance for Credit Losses on Conventional Mortgage Loans (in thousands)



	For the Years Ended December 31,
	2016			2015			2014
Balance, beginning of period	$	1,686		$	4,919		$	7,233
Net charge offs	(544		)	(3,233		)	(1,814		)
Reversal for credit losses	—			—			(500		)
Balance, end of period	$	1,142		$	1,686		$	4,919

Table 10.2 - Allowance for Credit Losses and Recorded Investment on Conventional Mortgage Loans by Impairment Methodology (in thousands)



	December 31, 2016		December 31, 2015
Allowance for credit losses:
Collectively evaluated for impairment	$	1,142	$	1,686
Individually evaluated for impairment	—		—
Total allowance for credit losses	$	1,142	$	1,686
Recorded investment:
Collectively evaluated for impairment	$	8,772,681	$	7,483,523
Individually evaluated for impairment	9,889		9,385
Total recorded investment	$	8,782,570	$	7,492,908

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

Table 10.3 - Changes in the LRA (in thousands)



	For the Years Ended December 31,
	2016			2015			2014
LRA at beginning of year	$	158,010		$	129,213		$	115,236
Additions	34,338			33,100			18,947
Claims	(885		)	(1,747		)	(2,075		)
Scheduled distributions	(3,779		)	(2,556		)	(2,895		)
LRA at end of period	$	187,684		$	158,010		$	129,213

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

Table 10.4 - Recorded Investment in Delinquent Mortgage Loans (dollars in thousands)



	December 31, 2016
	Conventional MPP Loans			FHA Loans			Total
Past due 30-59 days delinquent	$	39,409		$	23,206		$	62,615
Past due 60-89 days delinquent	9,350			8,275			17,625
Past due 90 days or more delinquent	21,773			14,054			35,827
Total past due	70,532			45,535			116,067
Total current mortgage loans	8,712,038			351,299			9,063,337
Total mortgage loans	$	8,782,570		$	396,834		$	9,179,404
Other delinquency statistics:
In process of foreclosure, included above ⁽¹⁾	$	15,412		$	5,841		$	21,253
Serious delinquency rate ⁽²⁾	0.26		%	3.59		%	0.40		%
Past due 90 days or more still accruing interest ⁽³⁾	$	19,408		$	14,054		$	33,462
Loans on non-accrual status, included above	$	3,908		$	—		$	3,908

	December 31, 2015
	Conventional MPP Loans			FHA Loans			Total
Past due 30-59 days delinquent	$	42,606		$	31,846		$	74,452
Past due 60-89 days delinquent	10,125			9,887			20,012
Past due 90 days or more delinquent	30,575			17,426			48,001
Total past due	83,306			59,159			142,465
Total current mortgage loans	7,409,602			428,186			7,837,788
Total mortgage loans	$	7,492,908		$	487,345		$	7,980,253
Other delinquency statistics:
In process of foreclosure, included above ⁽¹⁾	$	23,171		$	7,043		$	30,214
Serious delinquency rate ⁽²⁾	0.42		%	3.64		%	0.62		%
Past due 90 days or more still accruing interest ⁽³⁾	$	25,016		$	17,426		$	42,442
Loans on non-accrual status, included above	$	6,753		$	—		$	6,753


(1)	Includes loans where the decision of foreclosure or a similar alternative such as pursuit of deed-in-lieu has been reported. Loans in process of foreclosure are included in past due or current loans dependent on their delinquency status.


(2)	Loans that are 90 days or more past due or in the process of foreclosure (including past due or current loans in the process of foreclosure) expressed as a percentage of the total loan portfolio class recorded investment amount.


(3)	Each conventional loan past due 90 days or more still accruing interest is on a schedule/scheduled monthly settlement basis and contains one or more credit enhancements. Loans that are well secured and in the process of collection as a result of remaining credit enhancements and schedule/scheduled settlement are not placed on non-accrual status.

The FHLB did not have any real estate owned at December 31, 2016 or 2015.

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Individually Evaluated Impaired Loans. Table 10.5 presents the recorded investment, unpaid principal balance, and related allowance associated with loans individually evaluated for investment.

Table 10.5 - Individually Evaluated Impaired Loan Statistics by Product Class Level (in thousands)



	December 31, 2016						December 31, 2015
Conventional MPP loans	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance	$	9,889	$	9,708	$	—	$	9,385	$	9,187	$	—
With an allowance	—		—		—		—		—		—
Total	$	9,889	$	9,708	$	—	$	9,385	$	9,187	$	—

Table 10.6 - Average Recorded Investment of Individually Evaluated Impaired Loans and Related Interest Income Recognized (in thousands)



	For the Years Ended December 31,
	2016				2015				2014
Individually impaired loans	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Conventional MPP Loans	$	9,440	$	466	$	8,433	$	438	$	8,029	$	417

Troubled Debt Restructurings. A troubled debt restructuring is considered to have occurred when a concession is granted to a borrower for economic or legal reasons related to the borrower's financial difficulties and that concession would not have been considered otherwise. The FHLB's troubled debt restructurings primarily involve loans where an agreement permits the recapitalization of past due amounts up to the original loan amount and certain loans discharged in Chapter 7 bankruptcy. A loan considered a troubled debt restructuring is individually evaluated for impairment when determining its related allowance for credit losses. Credit loss is measured by factoring in expected cash shortfalls as of the reporting date.

The FHLB's recorded investment in modified loans considered troubled debt restructurings was (in thousands) $9,889 and $9,385 at December 31, 2016 and 2015, respectively. The amount of troubled debt restructurings is not considered material to the FHLB's financial condition, results of operations, or cash flows.

Note 11 - Derivatives and Hedging Activities

Nature of Business Activity

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

The FHLB transacts its derivatives with large banks and major broker-dealers. Some of these banks and broker-dealers or their affiliates buy, sell, and distribute Consolidated Obligations. Derivative transactions may be either executed with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent) with a Derivative Clearing Organization (cleared derivatives). Once a derivative transaction has been accepted for clearing by a Derivative Clearing Organization (Clearinghouse), the derivative transaction is novated and the executing counterparty is replaced with the Clearinghouse. The FHLB is not a derivative dealer and does not trade derivatives for short-term profit.

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

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

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


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


▪	preserve a favorable interest rate spread between the yield of an asset (e.g., an Advance) and the cost of the related liability (e.g., the Consolidated Obligation Bond used to fund the Advance);


▪	manage embedded options in assets and liabilities;


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


▪	protect the value of existing asset or liability positions.

Types of Derivatives

The FHLB primarily uses the following derivative instruments:

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

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

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

Application of Derivatives

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

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

Types of Hedged Items

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

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

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

Advances - The FHLB offers a wide range of fixed- and variable-rate Advance products with different maturities, interest rates, payment characteristics, and optionality. The FHLB may use derivatives to manage the repricing and/or option characteristics of Advances in order to more closely match the characteristics of the FHLB's funding liabilities. In general, whenever a member executes a fixed-rate Advance or a variable-rate Advance with embedded options, the FHLB may simultaneously execute a derivative with terms that offset the terms and embedded options in the Advance. For example, the FHLB may hedge a fixed-rate Advance with an interest rate swap where the FHLB pays a fixed-rate and receives a variable-rate, effectively converting the fixed-rate Advance to a variable-rate Advance. These types of hedges are typically treated as fair value hedges.

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

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

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

For example, fixed-rate Consolidated Obligations are issued and the FHLB may simultaneously enter into a matching interest rate swap in which the counterparty pays fixed cash flows to the FHLB designed to mirror in timing and amount the cash outflows the FHLB pays on the Consolidated Obligation. The FHLB pays a variable cash flow that closely matches the interest payments it receives on short-term or variable-rate Advances, typically 3-month LIBOR. These transactions are treated as fair value hedges.

This strategy of issuing Consolidated Obligations while simultaneously entering into derivatives enables the FHLB to offer a wider range of attractively priced Advances to its members and may allow the FHLB to reduce its funding costs. The continued attractiveness of such debt depends on yield relationships between the FHLB's Consolidated Obligations and the derivative markets. If conditions in these markets change, the FHLB may alter the types or terms of the Consolidated Obligations.

Firm Commitments - Certain mortgage loan purchase commitments, such as mortgage delivery commitments, are considered derivatives. The FHLB may hedge these commitments by selling TBA mortgage-backed securities for forward settlement. The mortgage loan purchase commitment and the TBA used in the firm commitment hedging strategy are treated as an economic hedge and are marked-to-market through earnings. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included in the basis of the mortgage loan and amortized accordingly.

Financial Statement Effect and Additional Financial Information

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

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

Table 11.1 - Fair Value of Derivative Instruments (in thousands)



	December 31, 2016
	Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities
Derivatives designated as fair value hedging instruments:
Interest rate swaps	$	5,660,420	$	37,379	$	26,610
Derivatives not designated as hedging instruments:
Interest rate swaps	8,199,000		2,135		64,661
Interest rate swaptions	2,346,000		13,335		—
Forward rate agreements	511,000		681		166
Mortgage delivery commitments	440,849		319		10,628
Total derivatives not designated as hedging instruments	11,496,849		16,470		75,455
Total derivatives before netting and collateral adjustments	$	17,157,269	53,849		102,065
Netting adjustments and cash collateral ⁽¹⁾			50,904		(84,191		)
Total derivative assets and total derivative liabilities			$	104,753	$	17,874

	December 31, 2015
	Notional Amount of Derivatives		Derivative Assets		Derivative Liabilities
Derivatives designated as fair value hedging instruments:
Interest rate swaps	$	5,548,351	$	12,205	$	77,950
Derivatives not designated as hedging instruments:
Interest rate swaps	2,719,000		1,051		4,029
Interest rate swaptions	281,000		683		—
Forward rate agreements	462,000		1,680		69
Mortgage delivery commitments	449,856		342		1,650
Total derivatives not designated as hedging instruments	3,911,856		3,756		5,748
Total derivatives before netting and collateral adjustments	$	9,460,207	15,961		83,698
Netting adjustments and cash collateral ⁽¹⁾			11,035		(52,611		)
Total derivative assets and total derivative liabilities			$	26,996	$	31,087

(1)

Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same clearing agent and/or counterparty. Cash collateral posted and related accrued interest was (in thousands) $180,169 and $66,685 at December 31, 2016 and 2015. Cash collateral received and related accrued interest was (in thousands) $45,074 and $3,039 at December 31, 2016 and 2015.

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

Table 11.2 - Net (Losses) Gains on Derivatives and Hedging Activities (in thousands)



	For the Years Ended December 31,
	2016			2015			2014
Derivatives and hedged items in fair value hedging relationships:
Interest rate swaps	$	697		$	2,762		$	5,127
Derivatives not designated as hedging instruments:
Economic hedges:
Interest rate swaps	(69,266		)	2,515			628
Interest rate swaptions	6,229			(274		)	—
Forward rate agreements	2,794			(1,090		)	(15,465		)
Net interest settlements	12,009			6,623			706
Mortgage delivery commitments	106			2,501			15,631
Total net (losses) gains related to derivatives not designated as hedging instruments	(48,128		)	10,275			1,500
Net (losses) gains on derivatives and hedging activities	$	(47,431	)	$	13,037		$	6,627

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

Table 11.3 - Effect of Fair Value Hedge-Related Derivative Instruments (in thousands)



	For the Years Ended December 31,
2016	Gain/(Loss) on Derivative			Gain/(Loss) on Hedged Item			Net Fair Value Hedge Ineffectiveness		Effect of Derivatives on Net Interest Income⁽¹⁾
Hedged Item Type:
Advances	$	76,401		$	(75,744	)	$	657	$	(59,560	)
Consolidated Bonds	(6,641		)	6,681			40		7,624
Total	$	69,760		$	(69,063	)	$	697	$	(51,936	)
2015
Hedged Item Type:
Advances	$	62,657		$	(60,453	)	$	2,204	$	(83,571	)
Consolidated Bonds	(10,930		)	11,488			558		19,787
Total	$	51,727		$	(48,965	)	$	2,762	$	(63,784	)
2014
Hedged Item Type:
Advances	$	76,295		$	(71,315	)	$	4,980	$	(91,232	)
Consolidated Bonds	(15,633		)	15,780			147		18,298
Total	$	60,662		$	(55,535	)	$	5,127	$	(72,934	)

(1)

The net effect of derivatives, in fair value hedge relationships, on net interest income is included in the interest income or interest expense line item of the respective hedged item type. These amounts include the effect of net interest settlements attributable to designated fair value hedges but do not include (in thousands) $(2,908), $(3,424), and $(3,310) of (amortization)/accretion related to fair value hedging activities for the years ended December 31, 2016, 2015, and 2014.

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Credit Risk on Derivatives

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

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

Offsetting of Derivative Assets and Derivative Liabilities

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

Table 11.4 presents separately the fair value of derivative instruments meeting or not meeting netting requirements, including the related collateral received from or pledged to counterparties. At December 31, 2016 and 2015, the FHLB did not receive or pledge any non-cash collateral. Any overcollateralization under an individual clearing agent and/or counterparty level is not included in the determination of the net unsecured amount.

Table 11.4 - Offsetting of Derivative Assets and Derivative Liabilities (in thousands)



	December 31, 2016						December 31, 2015
	Derivative Assets			Derivative Liabilities			Derivative Assets			Derivative Liabilities
Derivative instruments meeting netting requirements:
Gross recognized amount:
Uncleared derivatives	$	15,506		$	21,378		$	8,046		$	70,178
Cleared derivatives	37,343			69,893			5,893			11,801
Total gross recognized amount	52,849			91,271			13,939			81,979
Gross amounts of netting adjustments and cash collateral:
Uncleared derivatives	(14,737		)	(14,298		)	(7,844		)	(40,810		)
Cleared derivatives	65,641			(69,893		)	18,879			(11,801		)
Total gross amounts of netting adjustments and cash collateral	50,904			(84,191		)	11,035			(52,611		)
Net amounts after netting adjustments and cash collateral:
Uncleared derivatives	769			7,080			202			29,368
Cleared derivatives	102,984			—			24,772			—
Total net amounts after netting adjustments and cash collateral	103,753			7,080			24,974			29,368
Derivative instruments not meeting netting requirements ⁽¹⁾:
Uncleared derivatives	1,000			10,794			2,022			1,719
Total derivative instruments not meeting netting requirements ⁽¹⁾	1,000			10,794			2,022			1,719
Total derivative assets and total derivative liabilities:
Uncleared derivatives	1,769			17,874			2,224			31,087
Cleared derivatives	102,984			—			24,772			—
Total derivative assets and total derivative liabilities	$	104,753		$	17,874		$	26,996		$	31,087


(1)	Represents mortgage delivery commitments and forward rate agreements that are not subject to an enforceable netting agreement.

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Note 12 - Deposits

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

Certain financial institutions have agreed to maintain compensating balances in consideration for correspondent and other non-credit services. These balances are included in interest bearing deposits on the accompanying financial statements. The compensating balances required to be held by the FHLB averaged (in thousands) $108,008 and $3,171,708 during 2016 and 2015.

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

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

Table 12.1- Deposits (in thousands)



	December 31, 2016		December 31, 2015
Interest bearing:
Demand and overnight	$	611,432	$	646,902
Term	149,350		151,825
Other	4,521		5,377
Total interest bearing	765,303		804,104

Non-interest bearing:
Other	576		238
Total non-interest bearing	576		238
Total deposits	$	765,879	$	804,342

The aggregate amount of time deposits with a denomination of $250 thousand or more was (in thousands) $149,300 and $151,775 as of December 31, 2016 and 2015, respectively.

Note 13 - Consolidated Obligations

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

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

Although the FHLB is primarily liable for its portion of Consolidated Obligations, the FHLB is also jointly and severally liable with the other 10 FHLBanks for the payment of principal and interest on all Consolidated Obligations of each of the other FHLBanks. The Finance Agency, at its discretion, may require any FHLBank to make principal or interest payments due on any Consolidated Obligation whether or not the Consolidated Obligation represents a primary liability of such FHLBank. Although an FHLBank has never paid the principal or interest payments due on a Consolidated Obligation on behalf of another FHLBank, if that event should occur, Finance Agency regulations provide that the paying FHLBank is entitled to reimbursement from the non-complying FHLBank for those payments and other associated costs, including interest to be

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

The par values of the 11 FHLBanks' outstanding Consolidated Obligations were approximately $989.3 billion and $905.2 billion at December 31, 2016 and 2015. Finance Agency regulations require the FHLB to maintain unpledged qualifying assets equal to its participation in the Consolidated Obligations outstanding. Qualifying assets are defined as cash; secured Advances; obligations of or fully guaranteed by the United States; obligations, participations, or other instruments of or issued by Fannie Mae or Ginnie Mae; mortgages, obligations, or other securities which are or ever have been sold by Freddie Mac under the FHLBank Act; and such securities as fiduciary and trust funds may invest in under the laws of the state in which the FHLB is located. Any assets subject to a lien or pledge for the benefit of holders of any issue of Consolidated Obligations are treated as if they were free from lien or pledge for purposes of compliance with these regulations.

Table 13.1 - Consolidated Discount Notes Outstanding (dollars in thousands)



	Book Value		Par Value		Weighted Average Interest Rate ⁽¹⁾
December 31, 2016	$	44,689,662	$	44,710,521	0.46	%
December 31, 2015	$	77,199,208	$	77,225,334	0.24	%


(1)	Represents an implied rate without consideration of concessions.

Table 13.2 - Consolidated Bonds Outstanding by Contractual Maturity (dollars in thousands)



	December 31, 2016					December 31, 2015
Year of Contractual Maturity	Amount			Weighted Average Interest Rate		Amount			Weighted Average Interest Rate
Due in 1 year or less	$	20,970,750		0.87	%	$	9,808,000		0.91	%
Due after 1 year through 2 years	12,811,000			1.12		5,143,750			1.42
Due after 2 years through 3 years	4,359,000			1.81		4,814,000			1.64
Due after 3 years through 4 years	3,566,000			1.95		4,090,000			1.89
Due after 4 years through 5 years	4,970,000			1.87		3,041,000			2.09
Thereafter	6,496,000			2.65		8,139,000			2.80
Index amortizing notes	—			—		943			5.25
Total par value	53,172,750			1.39		35,036,693			1.74
Premiums	84,275					90,189
Discounts	(32,804		)			(37,567		)
Hedging adjustments	(2,865		)			3,817
Fair value option valuation adjustment and accrued interest	(30,490		)			(1,410		)
Total	$	53,190,866				$	35,091,722

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

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Table 13.3 - Consolidated Bonds Outstanding by Call Features (in thousands)



	December 31, 2016		December 31, 2015
Par value of Consolidated Bonds:
Non-callable	$	46,007,750	$	28,235,693
Callable	7,165,000		6,801,000
Total par value	$	53,172,750	$	35,036,693

Table 13.4 - Consolidated Bonds Outstanding by Contractual Maturity or Next Call Date (in thousands)



Year of Contractual Maturity or Next Call Date	December 31, 2016		December 31, 2015
Due in 1 year or less	$	26,489,750	$	16,339,000
Due after 1 year through 2 years	12,006,000		4,881,750
Due after 2 years through 3 years	3,894,000		3,499,000
Due after 3 years through 4 years	2,805,000		3,020,000
Due after 4 years through 5 years	3,964,000		2,383,000
Thereafter	4,014,000		4,913,000
Index amortizing notes	—		943
Total par value	$	53,172,750	$	35,036,693

Consolidated Bonds, beyond having fixed-rate or variable-rate interest-rate payment terms, may also have a step-up interest-rate payment type. Step-up bonds pay interest at increasing fixed rates for specified intervals over the life of the Consolidated Bond. These Consolidated Bonds generally contain provisions enabling the FHLB to call the Consolidated Bonds at its option on the step-up dates.

Table 13.5 - Consolidated Bonds by Interest-rate Payment Type (in thousands)



	December 31, 2016		December 31, 2015
Par value of Consolidated Bonds:
Fixed-rate	$	34,682,750	$	30,806,693
Variable-rate	18,290,000		4,065,000
Step-up	200,000		165,000
Total par value	$	53,172,750	$	35,036,693

Note 14 - Affordable Housing Program (AHP)

The FHLBank Act requires each FHLBank to establish an AHP. Each FHLBank provides subsidies in the form of direct grants and below-market interest rate Advances to members who use the funds to assist in the purchase, construction, or rehabilitation of housing for very low-, low-, and moderate-income households. Annually, the FHLBanks must set aside for the AHP the greater of $100 million or 10 percent of net earnings. For purposes of the AHP calculation, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The FHLB accrues AHP expense monthly based on its net earnings. The FHLB reduces the AHP liability as members use subsidies.

If the FHLB experienced a net loss during a quarter, but still had net earnings for the year, the FHLB's obligation to the AHP would be calculated based on the FHLB's year-to-date net earnings. If the FHLB had net earnings in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the FHLB experienced a net loss for a full year, the FHLB would have no obligation to the AHP for the year, because each FHLBank's required annual AHP contribution is limited to its annual net earnings. If the aggregate 10 percent calculation described above was less than $100 million for the FHLBanks, each FHLBank would be required to contribute a pro rata amount sufficient to assure that the aggregate contributions of the FHLBanks equaled $100 million. The pro ration would be made on the basis of an FHLBank's income in relation to the income of all FHLBanks for the previous year.

There was no shortfall, as described above, in 2016, 2015, or 2014. If an FHLBank finds that its required AHP obligations are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its contributions. The

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FHLB has never made such an application. The FHLB had outstanding principal in AHP-related Advances (in thousands) of $69,569 and $85,145 at December 31, 2016 and 2015.

Table 14.1 - Analysis of AHP Liability (in thousands)



	2016			2015
Balance at beginning of year	$	107,352		$	98,103
Assessments (current year additions)	30,189			27,906
Subsidy uses, net	(32,658		)	(18,657		)
Balance at end of year	$	104,883		$	107,352

Note 15 - Capital

The FHLB is subject to three capital requirements under its Capital Plan and the Finance Agency rules and regulations. Regulatory capital does not include accumulated other comprehensive income, but does include mandatorily redeemable capital stock.


1.	Risk-based capital. The FHLB must maintain at all times permanent capital, defined as Class B stock and retained earnings, in an amount at least equal to the sum of its credit risk, market risk, and operations risk capital requirements, all of which are calculated in accordance with the rules and regulations of the Finance Agency.

Total regulatory capital. The FHLB is required to maintain at all times a total regulatory capital-to-assets ratio of at least four percent. Total regulatory capital is the sum of permanent capital, Class A stock, any general loss allowance, if consistent with GAAP and not established for specific assets, and other amounts from sources determined by the Finance Agency as available to absorb losses.


3.	Leverage capital. The FHLB is required to maintain at all times a leverage capital-to-assets ratio of at least five percent. Leverage capital is defined as the sum of permanent capital weighted 1.5 times and all other capital without a weighting factor.

The Finance Agency may require the FHLB to maintain greater permanent capital than is required based on Finance Agency rules and regulations.

At December 31, 2016 and 2015, the FHLB was in compliance with each of these capital requirements.

Table 15.1 - Capital Requirements (dollars in thousands)



	December 31, 2016						December 31, 2015
	Minimum Requirement			Actual			Minimum Requirement			Actual
Risk-based capital	$	579,629		$	5,026,133		$	630,604		$	5,204,297
Capital-to-assets ratio (regulatory)	4.00		%	4.80		%	4.00		%	4.38		%
Regulatory capital	$	4,185,411		$	5,026,133		$	4,750,232		$	5,204,297
Leverage capital-to-assets ratio (regulatory)	5.00		%	7.21		%	5.00		%	6.57		%
Leverage capital	$	5,231,764		$	7,539,200		$	5,937,790		$	7,806,446

The FHLB currently offers only Class B stock, which is issued and redeemed at a par value of $100 per share. Class B stock may be issued to meet membership and activity stock purchase requirements, to pay dividends, and to pay interest on mandatorily redeemable capital stock. Membership stock is required to become a member of and maintain membership in the FHLB. The membership stock requirement is based upon a percentage of the member's total assets, currently determined within a declining range from 0.12 percent to 0.03 percent of each member's total assets, with a current minimum of $1 thousand and a current maximum of $25 million for each member. In addition to membership stock, a member may be required to hold activity stock to capitalize its Mission Asset Activity with the FHLB.

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Mission Asset Activity includes Advances, certain funds and rate Advance commitments, and MPP activity that occurred after implementation of the Capital Plan on December 30, 2002. Members must maintain an activity stock balance at least equal to the minimum activity allocation percentage, which currently is zero percent for the MPP and two percent for all other Mission Asset Activity. If a member owns more than the maximum activity allocation percentage, which currently is four percent of all Mission Asset Activity, the additional stock is that member's excess stock. The FHLB's unrestricted excess stock is defined as total Class B stock minus membership stock, activity stock calculated at the maximum allocation percentage, shares reserved for exclusive use after a stock dividend, and shares subject to redemption and withdrawal notices. The FHLB's excess stock may normally be used by members to support a portion of their activity stock requirement as long as those members maintain at least their minimum activity stock allocation percentage.

A member may request redemption of all or part of its Class B stock or may withdraw from membership by giving five years' advance written notice. When the FHLB repurchases capital stock, it must first repurchase shares for which a redemption or withdrawal notice's five-year redemption period or withdrawal period has expired. Since its Capital Plan was implemented, the FHLB has repurchased, at its discretion, all member shares subject to outstanding redemption notices prior to the expiration of the five-year redemption period.

Any member that has withdrawn from membership may not be readmitted to membership in any FHLBank until five years from the divestiture date for all capital stock that was held as a condition of membership, unless the institution has canceled its notice of withdrawal prior to the divestiture date. This restriction does not apply if the member is transferring its membership from one FHLBank to another on an uninterrupted basis.

In accordance with the FHLBank Act, each class of FHLB stock is considered putable by the member and the FHLB may repurchase, in its sole discretion, any member's stock investments that exceed the required minimum amount. However, there are significant statutory and regulatory restrictions on the obligation to redeem, or right to repurchase, the outstanding stock. As a result, whether or not a member may have its capital stock in the FHLB repurchased (at the FHLB's discretion at any time before the end of the redemption period) or redeemed (at a member's request, completed at the end of a redemption period) will depend on whether the FHLB is in compliance with those restrictions.

The FHLB's retained earnings are owned proportionately by the current holders of Class B stock. The holders' interest in the retained earnings is realized at the time the FHLB periodically declares dividends or at such time as the FHLB is liquidated. The FHLB's Board of Directors may declare and pay dividends in either cash or capital stock, assuming the FHLB is in compliance with Finance Agency rules and regulations.

Restricted Retained Earnings. The Joint Capital Enhancement Agreement (Capital Agreement) is intended to enhance the capital position of each FHLBank. The Capital Agreement provides that each FHLBank contributes 20 percent of its net income each quarter to a separate restricted retained earnings account until the balance of that account equals at least one percent of that FHLBank's average balance of outstanding Consolidated Obligations for the previous quarter. These restricted retained earnings are not available to pay dividends but are available to absorb unexpected losses, if any, that the FHLBank may experience. At December 31, 2016 and 2015 the FHLB had (in thousands) $260,285 and $206,648 in restricted retained earnings.

Mandatorily Redeemable Capital Stock. The FHLB is a cooperative whose members and former members own all of the FHLB's capital stock. Member shares cannot be purchased or sold except between the FHLB and its members at its $100 per share par value, as mandated by the FHLB's Capital Plan. The FHLB reclassifies stock subject to redemption from equity to liability upon expiration of the “grace period” after a member submits a written redemption request or withdrawal notice, or when the member attains nonmember status by merger or acquisition, relocation, charter termination, or involuntary termination of membership. A member may cancel or revoke its written redemption request or its withdrawal notice prior to the end of the five-year redemption period. Under the FHLB's Capital Plan, there is a five calendar day “grace period” for revocation of a redemption request and a 30 calendar day “grace period” for revocation of a withdrawal notice during which the member may cancel the redemption request or withdrawal notice without a penalty or fee. The cancellation fee after the “grace period” is currently two percent of the requested amount in the first year and increases one percent a year until it reaches a maximum of six percent in the fifth year. The cancellation fee can be waived by the FHLB's Board of Directors for a bona fide business purpose.

Stock subject to a redemption or withdrawal notice that is within the “grace period” continues to be considered equity because there is no penalty or fee to retract these notices. Expiration of the “grace period” triggers the reclassification from equity to a liability (mandatorily redeemable capital stock) at fair value because after the “grace period” the penalty to retract these notices is considered substantive. If a member cancels its written notice of redemption or notice of withdrawal, the FHLB will reclassify mandatorily redeemable capital stock from a liability to equity. Dividends related to capital stock classified as a

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liability are accrued at the expected dividend rate and reported as interest expense in the Statements of Income. For the years ended December 31, 2016, 2015, and 2014 dividends on mandatorily redeemable capital stock in the amount (in thousands) of $3,517, $2,432 and $4,190 were recorded as interest expense.

Table 15.2 - Mandatorily Redeemable Capital Stock Roll Forward (in thousands)



	2016			2015			2014
Balance, beginning of year	$	37,895		$	62,963		$	115,853
Capital stock subject to mandatory redemption reclassified from equity	363,839			28,919			17,110
Redemption (or other reduction) of mandatorily redeemable capital stock	(366,952		)	(53,987		)	(70,000		)
Balance, end of year	$	34,782		$	37,895		$	62,963

The number of stockholders holding the mandatorily redeemable capital stock was 28, 15 and 11 at December 31, 2016, 2015, and 2014.

As of December 31, 2016 there were no members or former members that had requested redemptions of capital stock whose stock had not been reclassified as mandatorily redeemable capital stock because the “grace periods” had not yet expired on these requests.

Table 15.3 shows the amount of mandatorily redeemable capital stock by contractual year of redemption. The year of redemption in the table is the end of the five-year redemption period. Consistent with the Capital Plan currently in effect, the FHLB is not required to redeem membership stock until five years after either (i) the membership is terminated or (ii) the FHLB receives notice of withdrawal. The FHLB is not required to redeem activity-based stock until the later of the expiration of the notice of redemption or until the activity to which the capital stock relates no longer remains outstanding. If activity-based stock becomes excess stock as a result of an activity no longer remaining outstanding, the FHLB may repurchase such shares, in its sole discretion, subject to the statutory and regulatory restrictions on capital stock redemption.

Table 15.3 - Mandatorily Redeemable Capital Stock by Contractual Year of Redemption (in thousands)



Contractual Year of Redemption	December 31, 2016		December 31, 2015
Year 1	$	—	$	—
Year 2	29		—
Year 3	2,264		41
Year 4	865		2,265
Year 5	6,307		2,876
Thereafter ⁽¹⁾	623		—
Past contractual redemption date due to remaining activity ⁽²⁾	24,694		32,713
Total	$	34,782	$	37,895


(1)	Represents mandatorily redeemable capital stock resulting from a Finance Agency rule effective February 2016, that makes captive insurance companies ineligible for FHLB membership and thereby terminates their membership no later than February 2017.


(2)	Represents mandatorily redeemable capital stock that is past the end of the contractual redemption period because there is activity outstanding to which the mandatorily redeemable capital stock relates.

Excess Capital Stock. Finance Agency regulations limit the ability of an FHLBank to create member excess stock under certain circumstances. The FHLB may not pay dividends in the form of capital stock or issue new excess stock to members if its excess stock exceeds one percent of its total assets or if the issuance of excess stock would cause the FHLB's excess stock to exceed one percent of its total assets. At December 31, 2016, the FHLB had excess capital stock outstanding totaling less than one percent of its total assets. At December 31, 2016, the FHLB was in compliance with the Finance Agency's excess stock rules.

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Note 16 - Accumulated Other Comprehensive (Loss) Income

The following tables summarize the changes in accumulated other comprehensive (loss) income for the years ended December 31, 2016, 2015, and 2014.

Table 16.1 - Accumulated Other Comprehensive (Loss) Income (in thousands)



	Net unrealized (losses) gains on available-for-sale securities			Pension and postretirement benefits			Total accumulated other comprehensive (loss) income
BALANCE, DECEMBER 31, 2013	$	(121	)	$	(8,921	)	$	(9,042	)
Other comprehensive income before reclassification:
Net unrealized gains	97			—			97
Net actuarial losses	—			(9,496		)	(9,496		)
Reclassifications from other comprehensive income to net income:
Amortization - pension and postretirement benefits	—			1,845			1,845
Net current period other comprehensive income (loss)	97			(7,651		)	(7,554		)
BALANCE, DECEMBER 31, 2014	(24		)	(16,572		)	(16,596		)
Other comprehensive income before reclassification:
Net unrealized gains	105			—			105
Net actuarial gains	—			598			598
Reclassifications from other comprehensive income to net income:
Amortization - pension and postretirement benefits	—			2,616			2,616
Net current period other comprehensive income	105			3,214			3,319
BALANCE, DECEMBER 31, 2015	81			(13,358		)	(13,277		)
Other comprehensive income before reclassification:
Net unrealized losses	(58		)	—			(58		)
Net actuarial losses	—			(2,283		)	(2,283		)
Reclassifications from other comprehensive income to net income:
Amortization - pension and postretirement benefits	—			2,362			2,362
Net current period other comprehensive (loss) income	(58		)	79			21
BALANCE, DECEMBER 31, 2016	$	23		$	(13,279	)	$	(13,256	)

Note 17 - Pension and Postretirement Benefit Plans

Qualified Defined Benefit Multi-employer Plan. The FHLB participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra Defined Benefit Plan), a tax-qualified defined benefit pension plan. The Pentegra Defined Benefit Plan is treated as a multi-employer plan for accounting purposes, but operates as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code. As a result, certain multi-employer plan disclosures, including the certified zone status, are not applicable to the Pentegra Defined Benefit Plan. Under the Pentegra Defined Benefit Plan, contributions made by one participating employer may be used to provide benefits to employees of other participating employers because assets contributed by an employer are not segregated in a separate account or restricted to provide benefits only to employees of that employer. Also, in the event a participating employer is unable to meet its contribution requirements, the required contributions for the other participating employers could increase proportionately. The Pentegra Defined Benefit Plan covers substantially all officers and employees of the FHLB who meet certain eligibility requirements.

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The Pentegra Defined Benefit Plan operates on a plan year from July 1 through June 30. The Pentegra Defined Benefit Plan files one Form 5500 on behalf of all employers who participate in the plan. The Employer Identification Number is 13-5645888 and the three-digit plan number is 333. There are no collective bargaining agreements in place at the FHLB.

The Pentegra Defined Benefit Plan's annual valuation process includes calculating the plan's funded status and separately calculating the funded status of each participating employer. The funded status is defined as the market value of assets divided by the funding target (100 percent of the present value of all benefit liabilities accrued at that date). As permitted by ERISA, the Pentegra Defined Benefit Plan accepts contributions for the prior plan year up to eight and a half months after the end of the prior plan year. As a result, the market value of assets at the valuation date (July 1) will increase by any subsequent contributions designated for the immediately preceding plan year ended June 30.

The most recent Form 5500 available for the Pentegra Defined Benefit Plan is for the year ended June 30, 2015. The FHLB did not contribute more than five percent of the total contributions to the Pentegra Defined Benefit Plan for the plan year ended June 30, 2015, 2014 and 2013.

Table 17.1 - Pentegra Defined Benefit Plan Net Pension Cost and Funded Status (dollars in thousands)



	2016				2015				2014
Net pension cost charged to compensation and benefit expense for the year ended December 31	$	6,659			$	6,348			$	6,041
Pentegra Defined Benefit Plan funded status as of July 1	104.12		%	^(a)	107.01		%	^(b)	111.44		%
FHLB's funded status as of July 1	118.53		%		124.97		%		128.27		%

(a)

The Pentegra Defined Benefit Plan's funded status as of July 1, 2016 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2016 through March 15, 2017. Contributions made on or before March 15, 2017, and designated for the plan year ended June 30, 2016, will be included in the final valuation as of July 1, 2016. The final funded status as of July 1, 2016 will not be available until the Form 5500 for the plan year July 1, 2016 through June 30, 2017 is filed (this Form 5500 is due to be filed no later than April 2018).

(b)

The Pentegra Defined Benefit Plan's funded status as of July 1, 2015 is preliminary and may increase because the plan's participants were permitted to make contributions for the plan year ended June 30, 2015 through March 15, 2016. Contributions made on or before March 15, 2016, and designated for the plan year ended June 30, 2015, will be included in the final valuation as of July 1, 2015. The final funded status as of July 1, 2015 will not be available until the Form 5500 for the plan year July 1, 2015 through June 30, 2016 is filed (this Form 5500 is due to be filed no later than April 2017).

Qualified Defined Contribution Plan. The FHLB also participates in the Pentegra Defined Contribution Plan for Financial Institutions, a tax-qualified, defined contribution pension plan. The FHLB contributes a percentage of the participants' compensation by making a matching contribution equal to a percentage of voluntary employee contributions, subject to certain limitations. The FHLB contributed $1,026,000, $992,000, and $943,000 in the years ended December 31, 2016, 2015, and 2014, respectively.

Nonqualified Supplemental Defined Benefit Retirement Plan (Defined Benefit Retirement Plan). The FHLB maintains a nonqualified, unfunded defined benefit plan. The plan ensures that participants receive the full amount of benefits to which they would have been entitled under the qualified defined benefit plan in the absence of limits on benefit levels imposed by the IRS. There are no funded plan assets. The FHLB has established a grantor trust, which is included in held-to-maturity securities on the Statements of Condition, to meet future benefit obligations and current payments to beneficiaries.

Postretirement Benefits Plan. The FHLB also sponsors a postretirement benefits plan that includes health care and life insurance benefits for eligible retirees. Future retirees are eligible for the postretirement benefits plan if they were hired prior to August 1, 1990, are age 55 or older, and their age plus years of continuous service at retirement are greater than or equal to 80. Spouses are covered subject to required contributions. There are no funded plan assets that have been designated to provide postretirement benefits.

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Table 17.2 presents the obligations and funding status of the FHLB's defined benefit retirement plan and postretirement benefits plan. The benefit obligation represents projected benefit obligation for the nonqualified supplemental defined benefit retirement plan and accumulated postretirement benefit obligation for the postretirement benefits plan.

Table 17.2 - Benefit Obligation, Fair Value of Plan Assets and Funded Status (in thousands)



	Defined Benefit Retirement Plan						Postretirement Benefits Plan
Change in benefit obligation:	2016			2015			2016			2015
Benefit obligation at beginning of year	$	32,540		$	33,860		$	5,116		$	5,197
Service cost	730			668			50			74
Interest cost	1,317			1,222			219			203
Actuarial loss (gain)	2,617			(413		)	(334		)	(185		)
Benefits paid	(2,901		)	(2,797		)	(184		)	(173		)
Benefit obligation at end of year	34,303			32,540			4,867			5,116
Change in plan assets:
Fair value of plan assets at beginning of year	—			—			—			—
Employer contribution	2,901			2,797			184			173
Benefits paid	(2,901		)	(2,797		)	(184		)	(173		)
Fair value of plan assets at end of year	—			—			—			—
Funded status at end of year	$	(34,303	)	$	(32,540	)	$	(4,867	)	$	(5,116	)

Amounts recognized in “Other liabilities” on the Statements of Condition for the FHLB's nonqualified supplemental defined benefit plan and postretirement benefits plan as of December 31, 2016 and 2015 were (in thousands) $39,170 and $37,656.

Table 17.3 - Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)



	Defined Benefit Retirement Plan				Postretirement Benefits Plan
	2016		2015		2016		2015
Net actuarial loss	$	12,748	$	12,447	$	531	$	911

Table 17.4 - Net Periodic Benefit Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income (in thousands)



	For the Years Ended December 31,
	Defined Benefit Retirement Plan									Postretirement Benefits Plan
	2016			2015			2014			2016			2015			2014
Net Periodic Benefit Cost
Service cost	$	730		$	668		$	524		$	50		$	74		$	53
Interest cost	1,317			1,222			1,234			219			203			190
Amortization of net loss	2,316			2,549			1,845			46			67			—
Net periodic benefit cost	$	4,363		$	4,439		$	3,603		$	315		$	344		$	243
Other Changes in Benefit Obligations Recognized in Other Comprehensive Income
Net loss (gain)	$	2,617		$	(413	)	$	8,335		$	(334	)	$	(185	)	$	1,161
Amortization of net loss	(2,316		)	(2,549		)	(1,845		)	(46		)	(67		)	—
Total recognized in other comprehensive income	301			(2,962		)	6,490			(380		)	(252		)	1,161
Total recognized in net periodic benefit cost and other comprehensive income	$	4,664		$	1,477		$	10,093		$	(65	)	$	92		$	1,404

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Table 17.5 presents the estimated net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year.

Table 17.5 - Amortization for Next Fiscal Year (in thousands)



	Defined Benefit Retirement Plan		Postretirement Benefits Plan
Net actuarial loss	$	1,368	$	6

Table 17.6 presents the key assumptions used for the actuarial calculations to determine benefit obligations for the nonqualified supplemental defined benefit retirement plan and postretirement benefits plan.

Table 17.6 - Benefit Obligation Key Assumptions



	Defined Benefit Retirement Plan				Postretirement Benefits Plan
	2016		2015		2016		2015
Discount rate	3.91	%	4.02	%	4.10	%	4.33	%
Salary increases	4.50	%	4.50	%	N/A		N/A

Table 17.7 presents the key assumptions used for the actuarial calculations to determine net periodic benefit cost for the FHLB's defined benefit retirement plans and postretirement benefit plans.

Table 17.7 - Net Periodic Benefit Cost Key Assumptions



	Defined Benefit Retirement Plan						Postretirement Benefits Plan
	2016		2015		2014		2016		2015		2014
Discount rate	4.02	%	3.67	%	4.32	%	4.33	%	3.96	%	4.88	%
Salary increases	4.50	%	4.50	%	4.50	%	N/A		N/A		N/A

Table 17.8 - Postretirement Benefits Plan Assumed Health Care Cost Trend Rates



	2016		2015
Assumed for next year	7.50	%	8.00	%
Ultimate rate	5.50	%	5.50	%
Year that ultimate rate is reached	2020		2020

The effect of a percentage point increase in the assumed health care trend rates would be an increase in net periodic postretirement benefit expense of $58,000 and in accumulated postretirement benefit obligation (APBO) of $898,000. The effect of a percentage point decrease in the assumed health care trend rates would be a decrease in net periodic postretirement benefit expense of $46,000 and in APBO of $717,000.

The discount rates for the disclosures as of December 31, 2016 were determined by using a discounted cash flow approach, which incorporates the timing of each expected future benefit payment. Estimated future benefit payments are based on each plan's census data, benefit formulas and provisions, and valuation assumptions reflecting the probability of decrement and survival. The present value of the future benefit payments is determined by using weighted average duration based interest rate yields from a variety of highly rated relevant corporate bond indices as of December 31, 2016, and solving for the single discount rate that produces the same present value.

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Table 17.9 presents the estimated future benefits payments reflecting expected future services for the years ended after December 31, 2016.

Table 17.9 - Estimated Future Benefit Payments (in thousands)



Years	Defined Benefit Retirement Plan		Postretirement Benefit Plan
2017	$	2,242	$	173
2018	2,194		186
2019	2,298		181
2020	1,940		188
2021	2,054		209
2022 - 2026	8,981		1,237

Note 18 - Segment Information

The FHLB has identified two primary operating segments based on its method of internal reporting: Traditional Member Finance and the MPP. These segments reflect the FHLB's two primary Mission Asset Activities and the manner in which they are managed from the perspective of development, resource allocation, product delivery, pricing, credit risk and operational administration. The segments identify the principal ways the FHLB provides services to member stockholders. The FHLB, as an interest rate spread manager, considers a segment's net interest income, net interest rate spread and, ultimately, net income as the key factors in allocating resources. Resource allocation decisions are made by considering these profitability measures in the context of the historical, current and expected risk profile of each segment and the entire balance sheet, as well as current incremental profitability measures relative to the incremental market risk profile.

Overall financial performance and risk management are dynamically managed primarily at the level of, and within the context of, the entire balance sheet rather than at the level of individual business segments or product lines. Also, the FHLB hedges specific asset purchases and specific subportfolios in the context of the entire mortgage asset portfolio and the entire balance sheet. Under this holistic approach, the market risk/return profile of each business segment does not correspond, in general, to the performance that each segment would generate if it were completely managed on a separate basis, and it is not possible to accurately determine what the performance would be if the two business segments were managed on a stand-alone basis. Further, because financial and risk management is a dynamic process, the performance of a segment over a single identified period may not reflect the long-term expected or actual future trends for the segment.

The Traditional Member Finance segment includes products such as Advances and investments and the borrowing costs related to those assets. The FHLB assigns its investments to this segment primarily because they historically have been used to provide liquidity for Advances and to support the level and volatility of earnings from Advances. All interest rate swaps and a portion of swaptions, including their market value adjustments, are allocated to the Traditional Member Finance segment. The FHLB executed all of its interest rate swaps in its management of market risk for the Traditional Member Finance segment. The FHLB enters into swaptions to minimize the prepayment risk in its overall mortgage asset portfolio.

Income from the MPP is derived primarily from the difference, or spread, between the yield on mortgage loans and the borrowing cost of Consolidated Obligations outstanding allocated to this segment at the time debt is issued. MPP income also includes the gains (losses) on derivatives associated with the MPP segment, comprising all mortgage delivery commitments and forward rate agreements and a portion of swaptions.

Both segments also earn income from investment of interest-free capital. Capital is allocated proportionate to each segment's average assets based on the total balance sheet's average capital-to-assets ratio. Expenses are allocated based on cost accounting techniques that include direct usage, time allocations and square footage of space used. AHP assessments are calculated using the current assessment rates based on the income before assessments for each segment.

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The following tables set forth the FHLB's financial performance by operating segment for the years ended December 31.

Table 18.1 - Financial Performance by Operating Segment (in thousands)



	For the Years Ended December 31,
	Traditional Member Finance		MPP			Total
2016
Net interest income after reversal for credit losses	$	287,721	$	75,483		$	363,204
Non-interest income	40,423		5,808			46,231
Non-interest expense	99,758		11,305			111,063
Income before assessments	228,386		69,986			298,372
Affordable Housing Program assessments	23,190		6,999			30,189
Net income	$	205,196	$	62,987		$	268,183
2015
Net interest income after reversal for credit losses	$	250,076	$	77,923		$	327,999
Non-interest income	28,586		1,308			29,894
Non-interest expense	64,925		10,626			75,551
Income before assessments	213,737		68,605			282,342
Affordable Housing Program assessments	21,618		6,288			27,906
Net income	$	192,119	$	62,317		$	254,436
2014
Net interest income	$	237,828	$	88,826		$	326,654
Reversal for credit losses	—		(500		)	(500		)
Net interest income after reversal for credit losses	237,828		89,326			327,154
Non-interest income	22,460		170			22,630
Non-interest expense	58,876		9,372			68,248
Income before assessments	201,412		80,124			281,536
Affordable Housing Program assessments	20,560		7,045			27,605
Net income	$	180,852	$	73,079		$	253,931

Table 18.2 - Asset Balances by Operating Segment (in thousands)



	Assets
	Traditional Member Finance		MPP		Total
December 31, 2016	$	95,456,372	$	9,178,909	$	104,635,281
December 31, 2015	110,776,396		7,979,412		118,755,808

Note 19 - Fair Value Disclosures

The fair value amounts recorded on the Statements of Condition and presented in the related note disclosures have been determined by the FHLB using available market information and the FHLB's best judgment of appropriate valuation methods. The fair values reflect the FHLB's judgment of how a market participant would estimate the fair values.

Fair Value Hierarchy. The FHLB records trading securities, available-for-sale securities, derivative assets, derivative liabilities, certain Advances and certain Consolidated Obligation Bonds at fair value on a recurring basis, and on occasion, certain mortgage loans held for portfolio on a nonrecurring basis. GAAP establishes a fair value hierarchy and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the measurement is determined. This overall level is an indication of how market observable

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the fair value measurement is. An entity must disclose the level within the fair value hierarchy in which the measurements are classified.

The fair value hierarchy prioritizes the inputs used to measure fair value into three broad levels:

Level 1 Inputs - Quoted prices (unadjusted) for identical assets or liabilities in an active market that the reporting entity can access on the measurement date.

Level 2 Inputs - Inputs other than quoted prices within Level 1 that are observable inputs for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include the following: (1) quoted prices for similar assets or liabilities in active markets; (2) quoted prices for identical or similar assets or liabilities in markets that are not active; (3) inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates and yield curves that are observable at commonly quoted intervals, and implied volatilities); and (4) inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for the asset or liability.

The FHLB reviews the fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in/out at fair value as of the beginning of the quarter in which the changes occur. The FHLB did not have any transfers of assets or liabilities recorded at fair value on a recurring basis during the years ended December 31, 2016 or 2015.

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Table 19.1 presents the carrying value, fair value, and fair value hierarchy of financial assets and liabilities of the FHLB. These values do not represent an estimate of the overall market value of the FHLB as a going concern, which would take into account future business opportunities and the net profitability of assets versus liabilities.

Table 19.1 - Fair Value Summary (in thousands)



	December 31, 2016
			Fair Value
Financial Instruments	Carrying Value		Total		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral ⁽¹⁾
Assets:
Cash and due from banks	$	8,737	$	8,737	$	8,737	$	—	$	—	$	—
Interest-bearing deposits	129		129		—		129		—		—
Securities purchased under agreements to resell	5,229,487		5,229,487		—		5,229,487		—		—
Federal funds sold	4,257,000		4,257,000		—		4,257,000		—		—
Trading securities	970		970		—		970		—		—
Available-for-sale securities	1,300,023		1,300,023		—		1,300,023		—		—
Held-to-maturity securities	14,546,979		14,413,231		—		14,413,231		—		—
Advances ⁽²⁾	69,882,074		69,842,730		—		69,842,730		—		—
Mortgage loans held for portfolio, net	9,148,718		9,174,790		—		9,152,186		22,604		—
Accrued interest receivable	109,886		109,886		—		109,886		—		—
Derivative assets	104,753		104,753		—		53,849		—		50,904
Liabilities:
Deposits	765,879		765,628		—		765,628		—		—
Consolidated Obligations:
Discount Notes	44,689,662		44,689,594		—		44,689,594		—		—
Bonds ⁽³⁾	53,190,866		53,278,571		—		53,278,571		—		—
Mandatorily redeemable capital stock	34,782		34,782		34,782		—		—		—
Accrued interest payable	119,322		119,322		—		119,322		—		—
Derivative liabilities	17,874		17,874		—		102,065		—		(84,191		)
Other:
Standby bond purchase agreements	—		708		—		708		—		—


(1)	Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.


(2)	Includes (in thousands) $15,093 of Advances recorded under the fair value option at December 31, 2016.


(3)	Includes (in thousands) $7,895,510 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2016.

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	December 31, 2015
			Fair Value
Financial Instruments	Carrying Value		Total		Level 1		Level 2		Level 3		Netting Adjustments and Cash Collateral ⁽¹⁾
Assets:
Cash and due from banks	$	10,136	$	10,136	$	10,136	$	—	$	—	$	—
Interest-bearing deposits	99		99		—		99		—		—
Securities purchased under agreements to resell	10,531,979		10,531,979		—		10,531,979		—		—
Federal funds sold	10,845,000		10,845,000		—		10,845,000		—		—
Trading securities	1,159		1,159		—		1,159		—		—
Available-for-sale securities	700,081		700,081		—		700,081		—		—
Held-to-maturity securities	15,278,206		15,229,965		—		15,229,965		—		—
Advances⁽²⁾	73,292,172		73,089,912		—		73,089,912		—		—
Mortgage loans held for portfolio, net	7,951,676		8,106,224		—		8,075,390		30,834		—
Accrued interest receivable	94,855		94,855		—		94,855		—		—
Derivative assets	26,996		26,996		—		15,961		—		11,035
Liabilities:
Deposits	804,342		804,140		—		804,140		—		—
Consolidated Obligations:
Discount Notes	77,199,208		77,183,854		—		77,183,854		—		—
Bonds ⁽³⁾	35,091,722		35,317,688		—		35,317,688		—		—
Mandatorily redeemable capital stock	37,895		37,895		37,895		—		—		—
Accrued interest payable	118,823		118,823		—		118,823		—		—
Derivative liabilities	31,087		31,087		—		83,698		—		(52,611		)
Other:
Standby bond purchase agreements	—		698		—		698		—		—


(1)	Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.


(2)	Includes (in thousands) $15,057 of Advances recorded under the fair value option at December 31, 2015.


(3)	Includes (in thousands) $2,214,590 of Consolidated Obligation Bonds recorded under the fair value option at December 31, 2015.

Summary of Valuation Methodologies and Primary Inputs.

Cash and due from banks: The fair value equals the carrying value.

Interest-bearing deposits: The fair value is determined based on each security's quoted prices, excluding accrued interest, as of the last business day of the period.

Securities purchased under agreements to resell: The fair value of overnight securities purchased under agreements to resell approximates the carrying value. The fair value of term securities purchased under agreements to resell is determined by calculating the present value of the future cash flows and reducing the amount for accrued interest receivable. The discount rates used in these calculations are the rates for securities with similar terms. Based on the fair value of the related collateral held, the securities purchased under agreements to resell were fully collateralized for the periods presented.

Federal funds sold: The fair value of overnight Federal funds sold approximates the carrying value. The fair value of term Federal funds sold is determined by calculating the present value of the expected future cash flows. The discount rates used in these calculations are the rates for Federal funds with similar terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve for Federal funds with similar terms. The fair value excludes accrued interest.

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Trading securities: The FHLB's trading portfolio generally consists of mortgage-backed securities issued by Ginnie Mae. Quoted market prices in active markets are not available for these securities.

To value mortgage-backed security holdings, the FHLB obtains prices from four designated third-party pricing vendors, when available. The pricing vendors use various proprietary models to price mortgage-backed securities. The inputs to those models are derived from various sources including, but not limited to: benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers and other market-related data. Because many mortgage-backed securities do not trade on a daily basis, the pricing vendors use available information such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual securities. Each pricing vendor has an established challenge process in place for all mortgage-backed security valuations, which facilitates resolution of potentially erroneous prices identified by the FHLB.

The FHLB has conducted reviews of the pricing methods employed by the third-party vendors, to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for specific instruments.

The FHLB's valuation technique first requires the establishment of a “median” price for each security. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.

All prices that are outside the threshold (“outliers”) are subject to further analysis (including, but not limited to, comparison to prices provided by an additional third-party valuation service, prices for similar securities, non-binding dealer estimates, and/or use of an internal model that is deemed most appropriate) to determine if an outlier is a better estimate of fair value. If an outlier (or some other price identified in the analysis) is determined to be a better estimate of fair value, then the outlier (or the other price as appropriate) is used as the final price rather than the default price. Alternatively, if the analysis confirms that an outlier is in fact not representative of fair value and the default price is the best estimate, then the default price is used as the final price. In all cases, the final price is used to determine the fair value of the security.

If all prices received for a security are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

Four vendor prices were received for most of the FHLB's mortgage-backed security holdings and the final prices for those securities were computed by averaging the prices received. Based on the FHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLB believes its final prices result in reasonable estimates of fair value and further that the fair value measurements are classified appropriately in the fair value hierarchy.

Available-for-sale securities: The FHLB's available-for-sale portfolio generally consists of certificates of deposit. Quoted market prices in active markets are not available for these securities. Therefore, the fair value is determined based on each security's indicative fair value obtained from a third-party vendor. The FHLB performs several validation steps in order to verify the accuracy and reasonableness of these fair values. These steps may include, but are not limited to, a detailed review of instruments with significant periodic price changes and a derived fair value from an option-adjusted discounted cash flow methodology using market-observed inputs for the interest rate environment and similar instruments.

Held-to-maturity securities: The FHLB's held-to-maturity portfolio generally consists of discount notes issued by Freddie Mac and/or Fannie Mae (non-mortgage-backed securities), and mortgage-backed securities. Quoted market prices are not available for these securities. The fair value for each individual mortgage-backed security is determined by using the third-party vendor approach described above. In general, in order to determine the fair value of its non-mortgage backed securities, the FHLB can use either (a) an income approach based on a market-observable interest rate curve that may be adjusted for a spread, or (b) prices received from third-party pricing vendors. The income approach uses indicative fair values derived from a discounted cash flow methodology. The FHLB believes that both methodologies result in fair values that are reasonable and similar in all material respects based on the nature of the financial instruments being measured.

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For its discount notes issued by Freddie Mac, and/or Fannie Mae, the FHLB determines the fair value using the income approach. The market-observable interest rate curve used by the FHLB includes the U.S. Government Agency Fair Value Curve.

Advances: The FHLB determines the fair values of Advances by calculating the present value of expected future cash flows from the Advances excluding accrued interest. The discount rates used in these calculations are the replacement rates for Advances with similar terms, as approximated either by adding an estimated current spread to the LIBOR Swap Curve or by using current indicative market yields, as indicated by the FHLB's pricing methodologies for Advances with similar current terms. Advance pricing is determined based on the FHLB's rates on Consolidated Obligations. In accordance with Finance Agency regulations, Advances with a maturity and repricing period greater than six months require a prepayment fee sufficient to make the FHLB financially indifferent to the borrower's decision to prepay the Advances. Therefore, the fair value of Advances does not assume prepayment risk.

For swapped option-based Advances, the fair value is determined (independently of the related derivative) by the discounted cash flow methodology based on the LIBOR Swap Curve and forward rates at period end adjusted for the estimated current spread on new swapped Advances to the swap curve. For swapped Advances with a conversion option, the conversion option is valued by taking into account the LIBOR Swap Curve and forward rates at period end and the market's expectations of future interest rate volatility implied from current market prices of similar options.

Mortgage loans held for portfolio, net: The fair values of performing mortgage loans are determined based on quoted market prices offered to approved members as indicated by the FHLB's MPP pricing methodologies for mortgage loans with similar current terms excluding accrued interest. The quoted prices offered to members are based on Fannie Mae price indications on to-be-announced (TBA) mortgage-backed securities and FHA price indications on government-guaranteed loans. The FHLB then adjusts these indicative prices to account for particular features of the FHLB's MPP that differ from the Fannie Mae and FHA securities. These features include, but may not be limited to, the MPP's credit enhancements, and marketing adjustments that reflect the FHLB's cooperative business model and preferences for particular kinds of loans and mortgage note rates. These quoted prices, however, can change rapidly based upon market conditions and are highly dependent upon the underlying prepayment assumptions. In order to determine the fair values, the loan amounts are also reduced for the FHLB's estimate of expected net credit losses. The fair value of conventional mortgage loans 90 days or more delinquent are based on the estimated values of the underlying collateral or the present value of future cash flows and as such are classified as Level 3 in the fair value hierarchy.

Impaired mortgage loans held for portfolio: The estimated fair values of impaired mortgage loans held for portfolio on a non-recurring basis are based on property values obtained from a third-party pricing vendor.

Accrued interest receivable and payable: The fair value approximates the carrying value.

Derivative assets/liabilities: The FHLB's derivative assets/liabilities generally consist of interest rate swaps, interest rate swaptions, TBA mortgage-backed securities (forward rate agreements), and mortgage delivery commitments. The FHLB's interest rate related derivatives (swaps and swaptions) are traded in the over-the-counter market. Therefore, the FHLB determines the fair value of each individual instrument using market value models that use readily observable market inputs as their basis (inputs that are actively quoted and can be validated to external sources). The FHLB uses a mid-market pricing convention as a practical expedient for fair value measurements within a bid-ask spread. These models reflect the contractual terms, including the period to maturity, as well as the significant inputs noted below. The fair value determination uses the standard valuation technique of discounted cash flow analysis.

The FHLB performs several validation steps to verify the reasonableness of the fair value output generated by the primary market value model. In addition to an annual model validation, the FHLB prepares a monthly reconciliation of the model's fair values to estimates of fair values provided by the derivative counterparties. The FHLB believes these processes provide a reasonable basis for it to place continued reliance on the derivative fair values generated by the model.

The fair value of TBA mortgage-backed securities is based on independent indicative and/or quoted prices generated by market transactions involving comparable instruments. The FHLB determines the fair value of mortgage delivery commitments using market prices from the TBA/mortgage-backed security market or TBA/Ginnie Mae market and adjustments noted below.

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The FHLB's discounted cash flow analysis uses market-observable inputs. Inputs, by class of derivative, are as follows:

Interest rate swaps and interest rate swaptions:


▪	Discount rate assumption. Overnight Index Swap Curve;


▪	Forward interest rate assumption. LIBOR Swap Curve; and


▪	Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

TBA mortgage-backed securities:


▪	Market-based prices by coupon class and expected term until settlement.

Mortgage delivery commitments:


▪	TBA securities prices. Market-based prices by coupon class and expected term until settlement, adjusted to reflect the contractual terms of the mortgage delivery commitments, similar to the mortgage loans held for portfolio process. The adjustments to the market prices are market observable, or can be corroborated with observable market data.

The FHLB is subject to credit risk due to the risk of nonperformance by counterparties to its derivative transactions. For uncleared derivatives, the degree of credit risk depends on the extent to which master netting arrangements are included in these contracts to mitigate the risk. In addition, the FHLB requires collateral agreements with collateral delivery thresholds on its uncleared derivatives. The FHLB has evaluated the potential for the fair value of the instruments to be impacted by counterparty credit risk and has determined that no adjustments were significant or necessary to the overall fair value measurements.

The fair values of the FHLB's derivatives include accrued interest receivable/payable and related cash collateral remitted to/received from counterparties. The estimated fair values of the accrued interest receivable/payable and cash collateral approximate their carrying values due to their short-term nature. Derivatives are presented on a net basis by counterparty when it has met the netting requirements. If these netted amounts are positive, they are classified as an asset and if negative, they are classified as a liability.

Deposits: The FHLB determines the fair values of FHLB deposits with fixed rates by calculating the present value of expected future cash flows from the deposits and reducing this amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.

Consolidated Obligations: The FHLB determines the fair values of Discount Notes by calculating the present value of expected future cash flows from the Discount Notes excluding accrued interest. The discount rates used in these calculations are current replacement rates for Discount Notes with similar current terms, as approximated by adding an estimated current spread to the LIBOR Swap Curve. Each month's cash flow is discounted at that month's replacement rate.

The FHLB determines the fair values of non-option-based Consolidated Obligation Bonds by calculating the present value of scheduled future cash flows from the bonds excluding accrued interest. Inputs used to determine fair value of these Consolidated Obligation Bonds are the discount rates, which are estimated current market yields, as indicated by the Office of Finance, for bonds with similar current terms.

The FHLB determines the fair values of option-based Consolidated Obligation Bonds based on pricing received from designated third-party pricing vendors. The pricing vendors used apply various proprietary models to price Consolidated Obligation Bonds. The inputs to those models are derived from various sources including, but not limited to, benchmark yields, reported trades, dealer estimates, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many Consolidated Obligation Bonds do not trade on a daily basis, the pricing vendors use available information, as applicable, such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to determine the prices for individual Consolidated Obligation Bonds. Each pricing vendor has an established challenge process in place for all valuations, which facilitates resolution of potentially erroneous prices identified by the FHLB.

When pricing vendors are used, the FHLB's valuation technique first requires the establishment of a “median” price for each Consolidated Obligation Bond. If four prices are received, the average of the middle two prices is the median price; if three prices are received, the middle price is the median price; if two prices are received, the average of the two prices is the median price; and if one price is received, it is the median price (and also the final price) subject to validation of outliers. All prices that

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are within a specified tolerance threshold of the median price are included in the “cluster” of prices that are averaged to compute a “default” price.

If all prices received for a Consolidated Obligation Bond are outside the tolerance threshold level of the median price, then there is no default price, and the final price is determined by an evaluation of all outlier prices as described above.

Four vendor prices were received for the FHLB's Consolidated Obligation Bonds and the final prices for those bonds were computed by averaging the prices received. Based on the FHLB's review of the pricing methods and controls employed by the third-party pricing vendors and the relative lack of dispersion among the vendor prices, the FHLB believes its final prices result in reasonable estimates of fair value and that the fair value measurements are classified appropriately in the fair value hierarchy.

The FHLB has conducted reviews of its pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies and control procedures for Consolidated Obligation Bonds.

Adjustments may be necessary to reflect the 11 FHLBanks' credit quality when valuing Consolidated Obligation Bonds measured at fair value. Due to the joint and several liability for Consolidated Obligations, the FHLB monitors its own creditworthiness and the creditworthiness of the other FHLBanks to determine whether any credit adjustments are necessary in its fair value measurement of Consolidated Obligation Bonds. No adjustments were considered necessary at December 31, 2016 or 2015.

Mandatorily redeemable capital stock: The fair value of capital stock subject to mandatory redemption is par value for the dates presented, as indicated by member contemporaneous purchases and sales at par value. FHLB stock can only be acquired by members at par value and redeemed at par value. FHLB stock is not traded and no market mechanism exists for the exchange of stock outside the cooperative structure.

Commitments: The fair values of standby bond purchase agreements are based on the present value of the estimated fees taking into account the remaining terms of the agreements.

Subjectivity of estimates. Estimates of the fair values of financial assets and liabilities using the methods described above and other methods are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows, prepayment speeds, interest rate volatility, distributions of future interest rates used to value options, and discount rates that appropriately reflect market and credit risks. The judgments also include the parameters, methods, and assumptions used in models to value the options. The use of different assumptions could have a material effect on the fair value estimates. Since these estimates are made as of a specific point in time, they are susceptible to material near term changes.

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Fair Value Measurements.

Table 19.2 presents the fair value of financial assets and liabilities that are recorded on a recurring or nonrecurring basis at December 31, 2016 or 2015, by level within the fair value hierarchy. The FHLB records nonrecurring fair value adjustments to reflect partial write-downs on certain mortgage loans.

Table 19.2 - Fair Value Measurements (in thousands)



	Fair Value Measurements at December 31, 2016
	Total		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral ⁽¹⁾
Recurring fair value measurements - Assets
Trading securities:
Other U.S. obligation single-family mortgage-backed securities	$	970	$	—	$	970	$	—	$	—
Available-for-sale securities:
Certificates of deposit	1,300,023		—		1,300,023		—		—
Advances	15,093		—		15,093		—		—
Derivative assets:
Interest rate related	103,753		—		52,849		—		50,904
Forward rate agreements	681		—		681		—		—
Mortgage delivery commitments	319		—		319		—		—
Total derivative assets	104,753		—		53,849		—		50,904
Total assets at fair value	$	1,420,839	$	—	$	1,369,935	$	—	$	50,904

Recurring fair value measurements - Liabilities
Consolidated Obligation Bonds	$	7,895,510	$	—	$	7,895,510	$	—	$	—
Derivative liabilities:
Interest rate related	7,080		—		91,271		—		(84,191		)
Forward rate agreement	166		—		166		—		—
Mortgage delivery commitments	10,628		—		10,628		—		—
Total derivative liabilities	17,874		—		102,065		—		(84,191		)
Total liabilities at fair value	$	7,913,384	$	—	$	7,997,575	$	—	$	(84,191	)

Nonrecurring fair value measurements - Assets ⁽²⁾
Mortgage loans held for portfolio	$	1,388	$	—	$	—	$	1,388


(1)	Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.


(2)	The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2016.

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	Fair Value Measurements at December 31, 2015
	Total		Level 1		Level 2		Level 3		Netting Adjustment and Cash Collateral ⁽¹⁾
Recurring fair value measurements - Assets
Trading securities:
Other U.S. obligation single-family mortgage-backed securities	$	1,159	$	—	$	1,159	$	—	$	—
Available-for-sale securities:
Certificates of deposit	700,081		—		700,081		—		—
Advances	15,057		—		15,057		—		—
Derivative assets:
Interest rate related	24,974		—		13,939		—		11,035
Forward rate agreements	1,680		—		1,680		—		—
Mortgage delivery commitments	342		—		342		—		—
Total derivative assets	26,996		—		15,961		—		11,035
Total assets at fair value	$	743,293	$	—	$	732,258	$	—	$	11,035

Recurring fair value measurements - Liabilities
Consolidated Obligation Bonds	$	2,214,590	$	—	$	2,214,590	$	—	$	—
Derivative liabilities:
Interest rate related	29,368		—		81,979		—		(52,611		)
Forward rate agreements	69		—		69		—		—
Mortgage delivery commitments	1,650		—		1,650		—		—
Total derivative liabilities	31,087		—		83,698		—		(52,611		)
Total liabilities at fair value	$	2,245,677	$	—	$	2,298,288	$	—	$	(52,611	)

Nonrecurring fair value measurements - Assets ⁽²⁾
Mortgage loans held for portfolio	$	6,270	$	—	$	—	$	6,270


(1)	Amounts represent the application of the netting requirements that allow the FHLB to settle positive and negative positions and also cash collateral and related accrued interest held or placed by the FHLB with the same counterparty.


(2)	The fair value information presented is as of the date the fair value adjustment was recorded during the year ended December 31, 2015.

Fair Value Option. The fair value option provides an irrevocable option to elect fair value as an alternative measurement for selected financial assets, financial liabilities, unrecognized firm commitments, and written loan commitments not previously carried at fair value. It requires a company to display the fair value of those assets and liabilities for which it has chosen to use fair value on the face of the Statements of Condition. Fair value is used for both the initial and subsequent measurement of the designated assets, liabilities and commitments, with the changes in fair value recognized in net income. If elected, interest income and interest expense on Advances and Consolidated Bonds carried at fair value are recognized based solely on the contractual amount of interest due or unpaid. Any transaction fees or costs are immediately recognized into other non-interest income or other non-interest expense.

The FHLB has elected the fair value option for certain financial instruments that either do not qualify for hedge accounting or may be at risk for not meeting hedge effectiveness requirements. These fair value elections were made primarily in an effort to mitigate the potential income statement volatility that can arise from economic hedging relationships in which the carrying value of the hedged item is not adjusted for changes in fair value.

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For instruments recorded under the fair value option, the related contractual interest income and contractual interest expense are recorded as part of net interest income on the Statements of Income. The remaining changes in fair value for instruments in which the fair value option has been elected are recorded as “Net gains on financial instruments held under fair value option” in the Statements of Income. The net gains on financial instruments held under the fair value option were (in thousands) $40,503, $1,057 and $2,174 for the years ended December 31, 2016, 2015, and 2014. The FHLB has determined that no adjustments to the fair values of its instruments recorded under the fair value option for instrument-specific credit risk were necessary as of December 31, 2016 or 2015.

The following table reflects the difference between the aggregate unpaid principal balance outstanding and the aggregate fair value for Advances and Consolidated Bonds for which the fair value option has been elected.

Table 19.3 – Aggregate Unpaid Balance and Aggregate Fair Value (in thousands)



	December 31, 2016							December 31, 2015
	Aggregate Unpaid Principal Balance		Aggregate Fair Value		Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance			Aggregate Unpaid Principal Balance		Aggregate Fair Value		Aggregate Fair Value Over/(Under) Aggregate Unpaid Principal Balance
Advances ⁽¹⁾	$	15,000	$	15,093	$	93		$	15,000	$	15,057	$	57
Consolidated Bonds	7,926,000		7,895,510		(30,490		)	2,216,000		2,214,590		(1,410		)


(1)	At December 31, 2016 and 2015, none of the Advances were 90 days or more past due or had been placed on non-accrual status.

Note 20 - Commitments and Contingencies

As previously described, Consolidated Obligations are backed only by the financial resources of the FHLBanks. The joint and several liability Finance Agency regulation authorizes the Finance Agency to require any FHLBank to repay all or a portion of the principal and interest on Consolidated Obligations for which another FHLBank is the primary obligor. No FHLBank has ever been asked or required to repay the principal or interest on any Consolidated Obligation on behalf of another FHLBank, and as of December 31, 2016, and through the filing date of this report, the FHLB does not believe that it is probable that it will be asked to do so.

The FHLB determined that it was not necessary to recognize a liability for the fair values of its joint and several obligation related to other FHLBanks' Consolidated Obligations at December 31, 2016 or 2015. The joint and several obligations are mandated by Finance Agency regulations and are not the result of arms-length transactions among the FHLBanks. The FHLBanks have no control over the amount of the guaranty or the determination of how each FHLBank would perform under the joint and several obligation.

Table 20.1 - Off-Balance Sheet Commitments (in thousands)



	December 31, 2016						December 31, 2015
Notional Amount	Expire within one year		Expire after one year		Total		Expire within one year		Expire after one year		Total
Standby Letters of Credit outstanding	$	17,029,024	$	479,119	$	17,508,143	$	19,417,093	$	137,995	$	19,555,088
Commitments for standby bond purchases	28,810		77,240		106,050		85,865		36,510		122,375
Commitments to purchase mortgage loans	440,849		—		440,849		449,856		—		449,856
Unsettled Consolidated Bonds, at par ⁽¹⁾	—		—		—		60,000		—		60,000
Unsettled Consolidated Discount Notes, at par ⁽¹⁾	5,500		—		5,500		—		—		—


(1)	Expiration is based on settlement period rather than underlying contractual maturity of Consolidated Obligations.

Standby Letters of Credit. A Standby Letter of Credit is a financing arrangement between the FHLB and its member. Standby Letters of Credit are executed for members for a fee. If the FHLB is required to make payment for a beneficiary's draw, the payment amount is converted into a collateralized Advance to the member. These Standby Letters of Credit have original expiration periods of up to 19 years, currently expiring no later than 2024. Unearned fees and the value of guarantees related to

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Standby Letters of Credit are recorded in other liabilities and amounted to (in thousands) $5,057 and $4,666 at December 31, 2016 and 2015.

The FHLB monitors the creditworthiness of its members that have Standby Letters of Credit. In addition, Standby Letters of Credit are fully collateralized at the time of issuance. As a result, the FHLB has deemed it unnecessary to record any additional liability on these commitments.

Standby Bond Purchase Agreements. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bonds according to a schedule established by the standby agreement. Each standby agreement dictates the specific terms that would require the FHLB to purchase the bonds. The bond purchase commitments entered into by the FHLB have original expiration periods up to 5 years, currently no later than 2020, although some are renewable at the option of the FHLB. During 2016 and 2015, the FHLB was not required to purchase any bonds under these agreements.

Commitments to Purchase Mortgage Loans. The FHLB enters into commitments that unconditionally obligate the FHLB to purchase mortgage loans. Commitments are generally for periods not to exceed 90 days. The delivery commitments are recorded as derivatives at their fair values.

Pledged Collateral. The FHLB may pledge securities, as collateral, related to derivatives. See Note 11 - Derivatives and Hedging Activities for additional information about the FHLB's pledged collateral and other credit-risk-related contingent features.

Lease Commitments. The FHLB charged to operating expenses net rental and related costs of approximately $1,899,000, $1,966,000, and $1,816,000 for the years ending December 31, 2016, 2015, and 2014. Total future minimum operating lease payments were $8,825,000 at December 31, 2016. Lease agreements for FHLB premises generally provide for increases in the basic rentals resulting from increases in property taxes and maintenance expenses. Such increases are not expected to have a material effect on the FHLB's financial condition or results of operations.

Lehman Bankruptcy. In March 2010, the FHLB was advised by representatives of the Lehman Brothers Holdings, Inc. bankruptcy estate that they believed that the FHLB had been unjustly enriched in connection with the close out of its interest rate swap transactions with Lehman at the time of the Lehman bankruptcy in 2008 and that the bankruptcy estate was entitled to the $43 million difference between the settlement amount the FHLB paid Lehman in connection with the close-out transactions and the market value payment the FHLB received when replacing the swaps with other counterparties. In May 2010, the FHLB received a Derivatives Alternative Dispute Resolution notice from the Lehman bankruptcy estate with a settlement demand of $65.8 million, plus interest accruing primarily at LIBOR plus 14.5 percent since the bankruptcy filing. In accordance with the Alternative Dispute Resolution Order of the Bankruptcy Court administering the Lehman estate, senior management of the FHLB participated in a non-binding mediation in New York in August 2010. The mediation concluded in October 2010 without a settlement. In April 2013, Lehman Brothers Special Financing Inc., through Lehman Brothers Holdings Inc. and the Plan Administrator, filed an adversary complaint in the United States Bankruptcy Court for the Southern District of New York against the FHLB seeking (a) a declaratory judgment on the interpretation of certain provisions and the calculation of amounts due under the agreement governing the 2008 swap transactions described above, and (b) additional amounts alleged as due as part of the termination of such transactions. In December 2016, the FHLB and the Lehman estate entered into a settlement agreement and mutual release, whereby the FHLB paid $25.25 million in complete settlement of all claims. The Adversary Proceeding has been dismissed with prejudice.

Other Legal Proceedings. From time to time, the FHLB is subject to other legal proceedings arising in the normal course of business. The FHLB would record an accrual for a loss contingency when it is probable that a loss has been incurred and the amount can be reasonably estimated. After consultation with legal counsel, management does not anticipate that ultimate liability, if any, arising out of these matters will have a material effect on the FHLB's financial condition or results of operations.

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Note 21 - Transactions with Other FHLBanks

The FHLB notes all transactions with other FHLBanks on the face of its financial statements. Occasionally, the FHLB loans short-term funds to and borrows short-term funds from other FHLBanks. These loans and borrowings are transacted at then current market rates when traded. There were no such loans or borrowings outstanding at December 31, 2016, 2015, or 2014. The following table details the average daily balance of lending and borrowing between the FHLB and other FHLBanks for the years ended December 31.

Table 21.1 - Lending and Borrowing Between the FHLB and Other FHLBanks (in thousands)



	Average Daily Balances for the Years Ended December 31,
	2016		2015		2014
Loans to other FHLBanks	$	3,142	$	—	$	438
Borrowings from other FHLBanks	273		68		68

In addition, the FHLB may, from time to time, assume the outstanding primary liability for Consolidated Obligations of another FHLBank (at then current market rates on the day when the transfer is traded) rather than issuing new debt for which the FHLB is the primary obligor. The FHLB then becomes the primary obligor on the transferred debt. There are no formal arrangements governing the transfer of Consolidated Obligations between the FHLBanks, and these transfers are not investments of one FHLBank in another FHLBank. Transferring debt at current market rates enables the FHLBank System to satisfy the debt issuance needs of individual FHLBanks without incurring the additional selling expenses (concession fees) associated with new debt. It also provides the transferring FHLBanks with outlets for extinguishing debt structures no longer required for their balance sheet management strategies.

There were no Consolidated Obligations transferred to the FHLB during the years ended December 31, 2016, 2015, or 2014. The FHLB had no Consolidated Obligations transferred to other FHLBanks during these periods.

Note 22 - Transactions with Stockholders

As a cooperative, the FHLB's capital stock is owned by its members, by former members that retain the stock as provided in the FHLB's Capital Plan and by nonmember institutions that have acquired members and must retain the stock to support Advances or other activities with the FHLB. All Advances are issued to members and all mortgage loans held for portfolio are purchased from members. The FHLB also maintains demand deposit accounts for members, primarily to facilitate settlement activities that are directly related to Advances and mortgage loan purchases. Additionally, the FHLB may enter into interest rate swaps with its stockholders. The FHLB may not invest in any equity securities issued by its stockholders and it has not purchased any mortgage-backed securities securitized by, or other direct long-term investments in, its stockholders.

For financial statement purposes, the FHLB defines related parties as those members with more than 10 percent of the voting interests of the FHLB capital stock outstanding. Federal legislation prescribes the voting rights of members in the election of both member and independent directors. For member directorships, the Finance Agency designates the number of member directorships in a given year and an eligible voting member may vote only for candidates seeking election in its respective state. For independent directorships, the FHLB's Board of Directors nominates candidates to be placed on the ballot in an at-large election. For both member and independent directorship elections, a member is entitled to vote one share of required capital stock, subject to a statutory limitation, for each applicable directorship. Under this limitation, the total number of votes that a member may cast is limited to the average number of shares of the FHLB's capital stock that were required to be held by all members in that state as of the record date for voting. Nonmember stockholders are not eligible to vote in director elections. Due to the abovementioned statutory limitation, no member owned more than 10 percent of the voting interests of the FHLB at December 31, 2016 or 2015.

All transactions with stockholders are entered into in the ordinary course of business. Finance Agency regulations require the FHLB to offer the same pricing for Advances and other services to all members regardless of asset or transaction size, charter type, or geographic location. However, the FHLB may, in pricing its Advances, distinguish among members based upon its assessment of the credit and other risks to the FHLB of lending to any particular member or upon other reasonable criteria that may be applied equally to all members. The FHLB's policies and procedures require that such standards and criteria be applied consistently and without discrimination to all members applying for Advances.

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Transactions with Directors' Financial Institutions. In the ordinary course of its business, the FHLB may provide products and services to members whose officers or directors serve as directors of the FHLB (Directors' Financial Institutions). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms as those with any other member. The following table reflects balances with Directors' Financial Institutions for the items indicated below. The FHLB had no mortgage-backed securities or derivatives transactions with Directors' Financial Institutions at December 31, 2016 or 2015.

Table 22.1 - Transactions with Directors' Financial Institutions (dollars in millions)



	December 31, 2016				December 31, 2015
	Balance		% of Total⁽¹⁾		Balance		% of Total ⁽¹⁾
Advances	$	3,947	5.6	%	$	3,867	5.3	%
MPP	234		2.6		186		2.4
Regulatory capital stock	166		4.0		236		5.3


(1)	Percentage of total principal (Advances), unpaid principal balance (MPP), and regulatory capital stock.

Concentrations. The following table shows regulatory capital stock balances, outstanding Advance principal balances, and unpaid principal balances of mortgage loans held for portfolio of stockholders holding five percent or more of regulatory capital stock and includes any known affiliates that are members of the FHLB.

Table 22.2 - Stockholders Holding Five Percent or more of Regulatory Capital Stock (dollars in millions)



	Regulatory Capital Stock				Advance		MPP Unpaid
December 31, 2016	Balance		% of Total		Principal		Principal Balance
JPMorgan Chase Bank, N.A.	$	1,317	31	%	$	32,300	$	—
U.S. Bank, N.A.	475		11		8,563		27
Fifth Third Bank	248		6		2,517		2
The Huntington National Bank	244		6		2,433		388



	Regulatory Capital Stock				Advance		MPP Unpaid
December 31, 2015	Balance		% of Total		Principal		Principal Balance
JPMorgan Chase Bank, N.A.	$	1,533	34	%	$	35,350	$	—
U.S. Bank, N.A.	475		11		10,086		33
Fifth Third Bank	248		6		20		3

Nonmember Affiliates. The FHLB has relationships with three nonmember affiliates, the Kentucky Housing Corporation, the Ohio Housing Finance Agency and the Tennessee Housing Development Agency. The FHLB had no investments in or borrowings to any of these nonmember affiliates at December 31, 2016 or 2015. The FHLB has executed standby bond purchase agreements with one state housing authority whereby the FHLB, for a fee, agrees as a liquidity provider if required, to purchase and hold the authority's bonds until the designated marketing agent can find a suitable investor or the housing authority repurchases the bond according to a schedule established by the standby agreement. For the years ended December 31, 2016 and 2015, the FHLB was not required to purchase any bonds under these agreements.

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SUPPLEMENTAL FINANCIAL DATA

Supplemental financial data required is set forth in the “Other Financial Information” caption at Part II, Item 7 of this report.


Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

There were no changes in or disagreements with our accountants on accounting and financial disclosure during the two most recent fiscal years.


Item 9A.	Controls and Procedures.

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2016, the FHLB's management, including its principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, these two officers each concluded that, as of December 31, 2016, the FHLB maintained effective disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files under the Exchange Act is (1) accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the FHLB is responsible for establishing and maintaining adequate internal control over financial reporting. The FHLB's internal control over financial reporting is designed by, or under the supervision of, the FHLB's management, including its principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

The FHLB's management assessed the effectiveness of the FHLB's internal control over financial reporting as of December 31, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on its assessment, management of the FHLB determined that, as of December 31, 2016, the FHLB's internal control over financial reporting was effective based on those criteria.

The effectiveness of the FHLB's internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, as stated in their report which is included in “Item 8. Financial Statements and Supplementary Data."

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the FHLB's internal control over financial reporting that occurred during the fourth quarter ended December 31, 2016 that materially affected, or are reasonably likely to materially affect, the FHLB's internal control over financial reporting.


Item 9B.	Other Information.

PwC serves as the independent registered public accounting firm for the FHLB. Rule 201(c)(1)(ii)(A) of SEC Regulation S-X (the Loan Rule) prohibits an accounting firm, such as PwC, from having certain financial relationships with its audit clients and affiliated entities. Specifically, the Loan Rule provides, in relevant part, that an accounting firm generally would not be independent if it or a covered person in the firm receives a loan from a lender that is a “record or beneficial owner of more than ten percent of the audit client’s equity securities.” A covered person in the firm includes personnel on the audit engagement

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team, personnel in the chain of command, partners and managers who provide ten or more hours of non-audit services to the audit client, and partners in the office where the lead engagement partner practices in connection with the client.

PwC has advised the FHLB that as of December 31, 2016 PwC and certain covered persons had borrowing relationships with two FHLB members (referred below as the “lenders”) who own more than ten percent of the FHLB’s capital stock, which under the Loan Rule, may reasonably be thought to bear on PwC’s independence with respect to the FHLB. The FHLB is providing this disclosure to explain the facts and circumstances, as well as PwC’s and the Audit Committee’s conclusions, concerning PwC’s objectivity and impartiality with respect to the audit of the FHLB.

PwC advised the Audit Committee of the Board that it believes that, in light of the facts of these borrowing relationships, its ability to exercise objective and impartial judgment on all matters encompassed within PwC’s audit engagement has not been impaired and that a reasonable investor with knowledge of all relevant facts and circumstances would reach the same conclusion. PwC has advised the Audit Committee that this conclusion is based in part on the following considerations:


▪	the firm's borrowings are in good standing and neither lender has the right to take action against PwC, as borrower, in connection with the financings;


▪	the debt balances outstanding are immaterial to PwC and to each lender;


▪	PwC has borrowing relationships with a diverse group of lenders, therefore PwC is not dependent on any single lender or group of lenders; and


▪	the PwC audit engagement team has no involvement in PwC’s treasury function and PwC’s treasury function has no oversight or ability to influence the PwC audit engagement team.

Additionally, the Audit Committee assessed PwC’s ability to perform an objective and impartial audit, including consideration of the ownership structure of the FHLB, the limited voting rights of members and the composition of the Board of Directors. In addition to the above listed considerations, the Audit Committee considered the following:


▪	although the lenders owned more than ten percent of the FHLB’s capital stock, the lenders' voting rights are each less than ten percent;


▪	no individual officer or director that serves on the Board of Directors has the ability to significantly influence the FHLB based on the composition of the Board of Directors; and


▪	as of December 31, 2016, and as of the date of the filing of this Form 10-K, no officer or director of either lender served on the Board of Directors of the FHLB.

Based on this evaluation, the Audit Committee has concluded that PwC’s ability to exercise objective and impartial judgment on all issues encompassed within PwC’s audit engagement has not been impaired.

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PART III


Item 10.	Directors, Executive Officers and Corporate Governance.

NOMINATION AND ELECTION OF DIRECTORS

The Finance Agency has authorized us to have a total of 18 directors: 10 member directors and eight independent directors. Two of our independent directors are designated as public interest directors and all 18 directors are elected by our members.

For both member and independent directorship elections, a member institution may cast one vote per seat or directorship up for election for each share of stock that the member was required to hold as of December 31 of the calendar year immediately preceding the election year. However, the number of votes that any member may cast for any one directorship cannot exceed the average number of shares of FHLB stock that were required to be held by all members located in its state. The election process is conducted by mail. Our Board of Directors does not solicit proxies nor is any member institution permitted to solicit proxies in an election.

Finance Agency regulations also provide for two separate selection processes for member and independent director candidates.

Member director candidates are nominated by any officer or director of a member institution eligible to vote in the respective statewide election, including the candidate's own institution. After the FHLB determines that the candidate meets all member director eligibility requirements per Finance Agency regulations, the candidate may run for election and the candidate's name is placed on the ballot.

Independent director candidates are self-nominated. Any individual may submit an independent director application form to the FHLB and request to be considered for election. The FHLB reviews all application forms to determine that the individual satisfies the appropriate public interest or non-public interest independent director eligibility requirements per Finance Agency regulations before forwarding the application form to the Board for review of the candidate's qualifications and skills. The Board then nominates an individual whose name will appear on the ballot after consultation with the Affordable Housing Advisory Council and after the nominee information has been submitted to the Finance Agency for review. As part of the nomination process, the Board may consider several factors including the individual's contributions and service on the Board, if a former or incumbent director, and the specific experience and qualifications of the candidate. The Board also considers diversity in nominating independent directors and how the attributes of the candidate may add to the overall strength and skill set of the Board. These same factors are considered when the Board fills a member or independent director vacancy.

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DIRECTORS

The following table sets forth certain information (ages as of March 1, 2017) regarding each of our current directors.



Name	Age	Director Since	Expiration of Term as a Director	Independent or Member (State)
J. Lynn Anderson	53	2017 ⁽¹⁾	12/31/20	Independent (OH)
Grady P. Appleton	69	2007	12/31/17	Independent (OH)
Brady T. Burt	44	2017	12/31/20	Member (OH)
Greg W. Caudill	58	2014	12/31/17	Member (KY)
James R. DeRoberts	60	2008	12/31/18	Member (OH)
Leslie D. Dunn	71	2007	12/31/20	Independent (OH)
James A. England	65	2011	12/31/18	Member (TN)
Charles J. Koch	70	2008 ⁽²⁾	12/31/18	Independent (OH)
Robert T. Lameier	64	2016	12/31/19	Member (OH)
Michael R. Melvin	72	(1995-2001) 2006	12/31/19	Member (OH)
Donald J. Mullineaux, Chair	71	2010	12/31/19	Independent (KY)
Alvin J. Nance	59	2009	12/31/20	Independent (TN)
Charles J. Ruma	75	(2002-2004) 2007	12/31/19	Independent (OH)
David E. Sartore	56	2014	12/31/17	Member (KY)
William J. Small, Vice Chair	66	2007	12/31/17	Member (OH)
William S. Stuard, Jr.	62	2011	12/31/18	Member (TN)
Nancy E. Uridil	65	2015	12/31/18	Independent (OH)
James J. Vance	55	2017	12/31/20	Member (OH)


(1)	Ms. Anderson, an independent director beginning in 2017, also served as a member director from 2011-2016.


(2)	Mr. Koch, an independent director beginning in 2008, also served as a member director from 1990-1995 and 1998-2006.

Member Directors

Finance Agency regulations govern the eligibility requirements for our member directors. Each member director, and each nominee to a member directorship, must be a U.S. citizen and an officer or director of a member that: is located in the voting state to be represented by the member directorship, was a member of the FHLB as of the record date, and meets all minimum capital requirements established by its appropriate Federal banking agency or state regulator.

Each member director is nominated and elected by our members through an annual voting process administered by us. Any member that is entitled to vote in the election may nominate an eligible individual to fill each available member directorship for its voting state, and all eligible nominees must be presented to the membership in the voting state. In accordance with Finance Agency regulations, except when acting in a personal capacity, no director, officer, attorney, employee or agent of the FHLB may communicate in any manner that he or she directly or indirectly, supports or opposes the nomination or election of a particular individual for a member directorship or take any other action to influence the voting with respect to a particular individual. As a result, the FHLB is not in a position to know which factors its member institutions considered in nominating candidates for member directorships or in voting to elect member directors.

Mr. Burt has been the Senior Vice President and Chief Financial Officer of The Park National Bank, Newark, Ohio, a subsidiary of Park National Corporation, since December 2012. He also serves as the Secretary, Treasurer, and Chief Financial Officer of Park National Corporation. Prior to that, he served as the Vice President and Chief Accounting Officer of The Park National Bank as well as the Chief Accounting Officer of Park National Corporation from April 2007 to December 2012.

Mr. Caudill has been Chief Executive Officer of Farmers National Bank, Danville, Kentucky since December 2002. He also served as President of Farmers National Bank from December 2002 until April 2016.

Mr. DeRoberts has been Chairman of The Arlington Bank, Upper Arlington, Ohio since 1999 and a partner at Gardiner Allen DeRoberts Insurance LLC, Columbus, Ohio since 2006. He also serves as a director of Park National Corporation and its subsidiary, The Park National Bank, Newark, Ohio since February 2015.

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Mr. England has been Chairman of Decatur County Bank, Decaturville, Tennessee since 1990. He also served as Chief Executive Officer of Decatur County Bank from 1990 to 2013.

Mr. Lameier has been President, Chief Executive Officer, and a director of Miami Savings Bank, Miamitown, Ohio since 1993.

Mr. Melvin has been President and a director of Perpetual Federal Savings Bank, Urbana, Ohio since 1980.

Mr. Sartore became Executive Vice President and Chief Financial Officer of Field & Main Bank, Henderson, Kentucky in January 2015 when Ohio Valley Financial Group and BankTrust Financial merged to form Field & Main Bank. Previously, Mr. Sartore was Senior Vice President and Chief Financial Officer of Ohio Valley Financial Group since 1992.

Mr. Small has been Chairman of First Defiance Financial Corp. and its subsidiary bank, First Federal Bank of the Midwest, of Defiance, Ohio, since 1999. He also served as Chief Executive Officer of First Defiance Financial Corp. from 1999 to December 2013. In addition, he served as Chief Executive Officer of First Federal Bank of the Midwest from 1999 until 2008.

Mr. Stuard has been Chairman of F&M Bank, Clarksville, Tennessee, since January 2016 and President and Chief Executive Officer of F&M Bank since January 1991.

Mr. Vance has been Senior Vice President and Treasurer of Western-Southern Life Assurance Company, Cincinnati, Ohio since March 2016. Previously, he served as Vice President and Treasurer of Western-Southern Life Assurance Company from 1999 to March 2016.

Independent Directors

Finance Agency regulations also govern the eligibility requirements of our independent directors. Each independent director, and each nominee to an independent directorship, must be a U.S. citizen and bona fide resident of our District. At least two of our independent directors must be designated by our Board as public interest directors. Public interest independent directors must have more than four years experience representing consumer or community interest in banking services, credit needs, housing, or consumer financial protections. All other independent directors must have knowledge of or experience in one or more of the following areas: auditing and accounting; derivatives; financial management; organizational management; project development; risk management practices; and the law. Our Board of Directors nominates candidates for independent directorships. Directors, officers, employees, attorneys, or agents of the FHLB are permitted to support directly or indirectly the nomination or election of a particular individual for an independent directorship.

Ms. Anderson was the Senior Vice President-Member Solutions Integration for Nationwide Mutual Insurance Company, Columbus, Ohio from March 2016 to December 2016. She also served as President of Nationwide Bank from November 2009 to March 2016. Ms. Anderson is a certified public accountant and has six years of experience serving on the board of a non-profit entity which focuses on providing low- to moderate-income housing. Ms. Anderson's prior leadership positions within the banking and insurance industries contribute skills to the Board in the areas of auditing and accounting, operations and corporate governance.

Mr. Appleton has served as President and Chief Executive Officer of East Akron Neighborhood Development Corporation (EANDC), Akron, Ohio, since January 2014. He previously served as Executive Director of EANDC for more than 30 years. EANDC improves communities by providing quality and affordable housing, comprehensive homeownership services and economic development opportunities. Mr. Appleton's years of experience with EANDC bring insight to the Board that contributes to the FHLB's corporate objective of maximizing the effectiveness of contributions to Housing and Community Investment programs. Mr. Appleton also served as a member of the FHLB's Advisory Council from 1997 until 2006.

Ms. Dunn was Senior Vice President of Business Development, General Counsel and Secretary of Cole National Corporation, a New York Stock Exchange listed retailer now owned by Luxottica Group S.p.A., from September 1997 until October 2004. Prior to joining Cole, she had been a partner since 1985 in the Business Practice of the Jones Day law firm. She currently is engaged in various public and private company board activities and serves in leadership positions with a number of civic and philanthropic organizations. Ms. Dunn has served as a director of New York Community Bancorp, Inc. and on its Audit, Risk Assessment, Cyber, and Nominating and Corporate Governance Committees since September 2015. Ms. Dunn's experience as a director and senior officer of publicly held companies and as a law firm partner representing numerous publicly held companies brings perspective to the Board regarding the FHLB's status as an SEC registrant, corporate governance matters, and the Board's responsibility to oversee the FHLB's operations.

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Mr. Koch is the retired Chairman of the Board and Chief Executive Officer of Charter One Bank, N.A., Cleveland, Ohio. He served as Charter One's Chief Executive Officer from 1987 to 2004, and as its Chairman of the Board from 1995 to 2004, when the bank was sold to Royal Bank of Scotland. Mr. Koch was a director of the Royal Bank of Scotland from 2004 until February 2009. He is currently a director of Assurant Inc. and Citizens Financial Group. In addition, he is the Chair of the Risk and Compliance Committees of Citizens Financial Group. Mr. Koch's substantial experience in risk management and his prior leadership positions within the banking industry and various board positions held contribute skills important to the Board's responsibility for approving a strategic business plan that supports the FHLB's mission and corporate objectives.

Dr. Mullineaux is the Emeritus duPont Endowed Chair in Banking and Financial Services in the Gatton College of Business and Economics at the University of Kentucky. He held the duPont Endowed Chair from 1984 until 2014. Previously, he was on the staff of the Federal Reserve Bank of Philadelphia, where he served as Senior Vice President and Director of Research from 1979 until 1984. He also served as a director of Farmers Capital Bank Corporation from 2005 until 2009. He has published numerous articles and lectured on a variety of banking topics, including risk management, financial markets and economics. He served as the Curriculum Director for the ABA's Stonier Graduate School of Banking from 2001 to 2016. Dr. Mullineaux brings knowledge and experience to the Board in areas vital to the operation of financial institutions in today's economy.

Mr. Nance has been Chief Executive Officer of the Development and Property Management operating divisions of LHP Capital, Knoxville, Tennessee, since April 2015. Previously, he was Executive Director and the Chief Executive Officer of Knoxville's Community Development Corporation (KCDC) Knoxville, Tennessee from 2000 to 2015. The KCDC is the public housing and redevelopment authority for the City of Knoxville and Knox County, which strives to improve Knoxville's neighborhoods and communities, including through providing quality affordable housing. Mr. Nance also served an eight-year term where he held the office of Vice Chairman on the Tennessee Housing Development Agency, the state's housing finance agency, which promotes the production of affordable housing for very low, low, and moderate, income individuals and families in the state. Mr. Nance also serves on the Board of Knoxville Habitat for Humanity. Mr. Nance's depth of experience with these organizations brings insight to the Board that contributes to the FHLB's corporate objective of maximizing the effectiveness of its contributions to Housing and Community Investment programs.

Mr. Ruma has been President and Chief Executive Officer of Virginia Homes Ltd., a Columbus, Ohio area homebuilder, since 1975. He served on the board of the Ohio Housing Finance Agency (OHFA), the state's housing agency, from 2004 to 2009. OHFA helps Ohio's first-time homebuyers, renters, senior citizens, and others find quality, affordable housing that meets their needs. OHFA's programs also support developers and property managers of affordable housing throughout the state. Mr. Ruma's years of experience in the home building industry and with the OHFA bring insight to the Board that contributes to the FHLB's mission and corporate objectives.

Ms. Uridil was the Senior Vice President of Global Operation for Moen Incorporated, North Olmsted, Ohio, from September 2005 until March 2014. Ms. Uridil is currently on the Board of Directors of Flexsteel Industries, Inc., where she serves on the Compensation Committee and chairs the Nominations and Governance Committee. Previously, Ms. Uridil served as a Senior Vice President of Estée Lauder Companies, from 2000 to 2005. Ms. Uridil also served as a Senior Vice President of Mary Kay, Incorporated, from 1996 to 2000. Serving on executive teams for global businesses for more than 18 years, Ms. Uridil has extensive experience in strategy, expense and capital management, merger and acquisition integration and sourcing. Ms. Uridil's qualifications and insight provide valuable skills to the Board in the important areas of personnel, compensation, information technology and operations.

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EXECUTIVE OFFICERS

The following table sets forth certain information (ages as of March 1, 2017) regarding our executive officers.



Name	Age	Position	Employee of the FHLB Since
Andrew S. Howell	55	President and Chief Executive Officer	1989
Donald R. Able	56	Executive Vice President-Chief Operating Officer and Chief Financial Officer	1981
R. Kyle Lawler	59	Executive Vice President-Chief Business Officer	2000
Stephen J. Sponaugle	54	Executive Vice President-Chief Risk and Compliance Officer	1992
Damon v. Allen	46	Senior Vice President-Community Investment Officer	1999
J. Christopher Bates	41	Senior Vice President-Chief Accounting Officer	2005
Roger B. Batsel	45	Senior Vice President-Chief Information Officer	2014
James G. Dooley, Sr.	63	Senior Vice President-Internal Audit	2006
David C. Eastland	59	Senior Vice President-Chief Credit Officer	1999
Tami L. Hendrickson	56	Senior Vice President-Treasurer	2006

Mr. Howell became President and Chief Executive Officer in June 2012. Previously, he served as the Executive Vice President-Chief Operating Officer since January 2008.

Mr. Able became the Executive Vice President-Chief Operating Officer and Chief Financial Officer in January 2015. Mr. Able served as the Executive Vice President-Chief Operating Officer and Interim Chief Financial Officer since March 2014. He became Executive Vice President-Chief Operating Officer in August 2012 and has served as the Principal Financial Officer since January 2007. Prior to that, he had served as the Senior Vice President-Chief Accounting and Technology Officer since January 2011.

Mr. Lawler became Executive Vice President-Chief Business Officer in August 2012. Previously, he served as the Senior Vice President-Chief Credit Officer since May 2007.

Mr. Sponaugle became Executive Vice President-Chief Risk and Compliance Officer in January 2017. Previously, he served as the FHLB's Senior Vice President-Chief Risk and Compliance Officer since November 2015, and as Senior Vice President-Chief Risk Officer from January 2007 to October 2015.

Mr. Allen became Senior Vice President-Community Investment Officer in January 2012. Previously, he served as the FHLB's Vice President and Community Investment Officer since July 2011, and as Vice President-Housing and Community Investment from January 2009 to June 2011.

Mr. Bates became Senior Vice President-Chief Accounting Officer in January 2015. Previously, he served as the FHLB's Vice President-Controller since January 2013 and as Vice President-Assistant Controller from January 2011 to December 2012.

Mr. Batsel became Senior Vice President-Chief Information Officer in January 2014. Previously, he was the Senior Vice President, Chief Information Officer at MidCountry Financial Corp. from September 2011 to January 2014. Prior to that, he was the Senior Vice President and Managing Director of Information Systems at Republic Bank from April 2006 to September 2011.

Mr. Dooley became Senior Vice President-Internal Audit in January 2013. Previously, he served as Vice President-Internal Audit since 2006.

Mr. Eastland became the Senior Vice President-Chief Credit Officer in January 2015. Prior to that, he had served as the FHLB's Vice President-Credit Risk Management since January 2002.

Ms. Hendrickson became Senior Vice President-Treasurer in January 2015. Previously, she served as the FHLB's Vice President-Treasurer since January 2010.

All officers are appointed annually by our Board of Directors.

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AUDIT COMMITTEE FINANCIAL EXPERT

The Board of Directors has determined (1) that Ms. J. Lynn Anderson, Chair of the Audit Committee, and Committee member Mr. David E. Sartore, have the relevant accounting and related financial management expertise, and therefore are qualified, to serve as the Audit Committee financial experts within the meaning of the regulations of the SEC and (2) that each is independent under SEC Rule 10A-3(b)(1). Ms. Anderson's experience has principally been in the internal audit disciplines within the financial industry and is a Certified Public Accountant. Mr. Sartore's experience has principally been in the accounting and finance disciplines within the financial industry and is a Certified Public Accountant. For additional information regarding the independence of the directors of the FHLB, see “Item 13. Certain Relationships and Related Transactions, and Director Independence.”

CODES OF ETHICS

The Board of Directors has adopted a “Code of Ethics for Senior Financial Officers” that applies to the principal executive officer and the principal financial officer, as well as all other executive officers. This policy serves to promote honest and ethical conduct, full, fair and accurate disclosure in the FHLB's reports to regulatory authorities and other public communications, and compliance with applicable laws, rules and regulations. The Code is posted on the FHLB's Web site (www.fhlbcin.com). If a waiver of any provision of the Code is granted to a covered officer, information concerning the waiver will be posted on our Web site.

The Board of Directors has also adopted a “Standards of Conduct” policy that applies to all employees. The purpose of this policy is to promote a strong ethical climate that protects the FHLB against fraudulent activities and fosters an environment in which open communication is expected and protected.


Item 11.	Executive Compensation.

2016 COMPENSATION DISCUSSION AND ANALYSIS

The following provides discussion and analysis regarding our compensation program for executive officers for 2016, and in particular our Named Executive Officers. Our Named Executive Officers for 2016 were: Andrew S. Howell, President and Chief Executive Officer; Donald R. Able, Executive Vice President- Chief Operating Officer and Chief Financial Officer; R. Kyle Lawler, Executive Vice President- Chief Business Officer; Stephen J. Sponaugle, Executive Vice President- Chief Risk and Compliance Officer and James G. Dooley, Sr., Senior Vice President- Internal Audit.

Compensation Program Overview (Philosophy and Objectives)

Our Board of Directors (the Board) is responsible for determining the philosophy and objectives of the compensation program. The philosophy of the program is to provide a flexible and market-based approach to compensation that attracts, retains and motivates high performing, accomplished financial services executives who, by their individual and collective performance, achieve strategic business initiatives and thereby enhance member stockholder value. The program is primarily designed to focus executives on achieving the FHLB's mission through increased business with member institutions within established profitability and risk tolerance levels, while also encouraging teamwork.

To achieve this, we compensate executive officers using a combination of base salary, short and long-term variable (incentive-based) cash compensation, retirement benefits and modest fringe benefits. We believe the compensation program communicates short and long-term goals and standards of performance for the FHLB's mission and key business objectives and appropriately motivates and rewards executives commensurate with their contributions and achievements. The combination of base salary, which rewards individual performance, and short and long-term incentives, which reward teamwork, creates a total compensation opportunity for executives who contribute to and influence strategic plans and who are primarily responsible for the FHLB's performance.

Oversight of the compensation program is the responsibility of the Personnel and Compensation Committee of the Board (the Committee). The Committee annually reviews the components of the compensation program to ensure that it is consistent with and supports the FHLB's mission, strategic business objectives and annual goals. In carrying out its responsibilities, the

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Committee may engage executive compensation consultants to assist in evaluating the effectiveness of the compensation program and in determining the appropriate mix of compensation provided to executive officers. Because individuals are not permitted to own the FHLB's capital stock, all compensation is paid in cash and we have no equity compensation plans or arrangements.

The Committee recommends the President's annual compensation package to the Board, which is responsible for approving all compensation provided to the President. Additionally, the Committee is responsible for reviewing and approving the compensation programs for all officers, including the other Named Executive Officers, and submitting its recommendations to the Board for final approval. The compensation of the Senior Vice President- Internal Audit is reviewed and approved by the Audit Committee. Unless otherwise stated, references to the Committee with regard to Mr. Dooley refer to the Audit Committee.

Management Involvement - Executive Compensation

While the Board is ultimately responsible for determining the compensation of the President and all other executive officers, the President and the Human Resources department periodically advise the Committee regarding competitive and administrative issues affecting our compensation program. The President and the Human Resources department also present recommendations to the Committee regarding the compensation of all other executive officers, and administer programs approved by the Committee and the Board.

Finance Agency Oversight - Executive Compensation

The Director of the Finance Agency is required by regulation to prohibit an FHLBank from paying compensation to its executive officers that is not reasonable and comparable to that paid for employment in similar businesses involving similar duties and responsibilities. Finance Agency rules direct the FHLBanks to provide all compensation actions affecting their Named Executive Officers to the Finance Agency for review. Accordingly, following our Board's November 2016 and January 2017 meetings, we submitted the 2017 base salaries as well as incentive payments earned for 2016 for our Named Executive Officers to the Finance Agency. At this time, we do not expect the regulatory requirements to have a material impact on our executive compensation programs.

Use of Comparative Compensation Data

The compensation program is designed to provide a market competitive compensation package when recruiting and retaining highly talented executives seeking stable, long-term employment. To this end, we gather compensation data from a wide variety of sources, including broad-based national and regional surveys, presentations at FHLBank System meetings, and formal and informal interactions with our compensation consultant. Our consultant, McLagan, is a nationally recognized compensation consulting firm specializing in the financial services industry. When determining compensation for our executive officers, the Committee and the President use this information to inform themselves regarding trends in compensation practices and as a comparison check against general market data (market check) to evaluate the reasonableness and effectiveness of our total compensation program and its components.

We also participate in multiple surveys including the annual McLagan Federal Home Loan Bank Custom Survey and the annual Federal Home Loan Bank System Key Position Compensation Survey. Both surveys contain executive and non-executive compensation information for various key positions across all FHLBanks.

In setting 2017 compensation, we primarily relied upon information from the McLagan Federal Home Loan Bank Custom Survey as it encompassed information relating to 2016 compensation from mortgage banks, commercial financial institutions, and other FHLBanks. While McLagan's compensation analysis included those financial institutions that typically had assets of less than $20 billion, we believe the positions at other FHLBanks generally are more directly comparable to ours given the unique nature of the FHLBank System. The FHLBanks share the same public policy mission, interact routinely with each other, and share a common regulator and regulatory constraints, including the need for Finance Agency review of all compensation actions affecting our executive officers. However, there are significant differences across the FHLBank System, including the sizes of the various FHLBanks, the complexity of their operations, their organizational and cost structures and the types of compensation packages offered. Thus, we do not and, as a practical matter could not, calculate compensation packages for our Named Executive Officers based solely on comparisons to the other FHLBanks.

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Compensation Program Approach

The Committee utilizes a balanced approach for delivering base salary and short and long-term incentive pay with our compensation program. While the annual (short-term) incentive compensation component rewards all officers and staff for the achievement of FHLB annual strategic business goals, the deferred (long-term) incentive compensation component is provided to executive and senior officers for achievement of specific, strategic and mission-related goals for which FHLB performance is measured over a three-year period. The Committee has not established or assigned specific percentages to each element of the FHLB's executive compensation program. Instead, the Committee strives to create a program that generally delivers a total compensation opportunity, i.e., base salary, annual and deferred incentive compensation and other benefits (including retirement plan), to each executive officer that, when the FHLB meets its target performance goals, is at or near the median of the other FHLBanks and is generally consistent with our market check. However, individual elements of compensation as well as total compensation for individual executives may vary from the median due to an executive's tenure, experience and responsibilities.

While the competitiveness of the compensation program is considered an important factor for attracting and retaining executives, the Committee also reviews all elements of compensation to ensure the program is well designed and fiscally responsible from both a regulatory and corporate governance perspective.

Impact of Risk-Taking on Compensation Program

The Committee reviews the overall program to ensure the compensation of executive officers does not encourage unnecessary or excessive risk-taking that could threaten the long-term value of the FHLB. Risk management is an integral part of our culture. The Committee believes that base salary is a sufficient percentage of total compensation to discourage such risk-taking by our executive officers. The Committee also believes the mix of incentive goals, which include risk-related metrics, does not encourage unnecessary or excessive risk-taking and achieves an appropriate balance of incentive for performance between the short and long-term organizational goals. Moreover, the Committee and the Board retain the discretion to reduce or withhold incentive compensation payments if a determination is made that an executive has caused the FHLB to incur such a risk that could threaten the long-term value of the FHLB.

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Elements of Total Compensation Program

The following table summarizes all compensation to the FHLB's Named Executive Officers for the years ended December 31, 2016, 2015 and 2014. Discussion of each component follows the table.

Summary Compensation Table



Name and Principal Position	Year	Salary⁽¹⁾		Bonus ⁽²⁾		Non-Equity Incentive Plan Compensation⁽³⁾		Change in Pension Value & Non-Qualified Deferred Compensation Earnings⁽⁴⁾		All Other Compensation⁽⁵⁾		Total
Andrew S. Howell	2016	$	800,625	$	—	$	648,357	$	1,426,000	$	27,215	$	2,902,197
President and Chief Executive Officer	2015	728,482		—		544,843		889,000		29,536		2,191,861
	2014	692,016		—		479,622		2,431,000		15,600		3,618,238

Donald R. Able	2016	418,952		50,000		278,474		943,000		15,900		1,706,326
Executive Vice President-	2015	383,125		—		242,198		465,000		15,900		1,106,223
Chief Operating Officer and Chief Financial Officer	2014	358,788		—		207,972		1,498,000		15,600		2,080,360

R. Kyle Lawler	2016	379,385		—		261,931		438,000		15,900		1,095,216
Executive Vice President-	2015	357,885		—		229,316		244,000		15,900		847,101
Chief Business Officer	2014	331,154		—		199,572		646,000		15,600		1,192,326

Stephen J. Sponaugle	2016	337,692		—		191,269		494,000		15,900		1,038,861
Executive Vice President-	2015	306,752		—		176,417		181,000		15,900		680,069
Chief Risk and Compliance Officer	2014	281,292		—		138,781		694,000		15,600		1,129,673

James G. Dooley, Sr. ⁽⁶⁾	2016	251,333		—		162,790		68,000		15,900		498,023
Senior Vice President-	2015	233,627		—		118,814		39,000		15,900		407,341
Internal Audit


(1)	Includes excess accrued vacation benefits automatically paid in accordance with established policy (applicable to all employees), which for 2016 were as follows: Mr. Howell, $50,625; Mr. Able, $18,952; Mr. Lawler, $14,385; Mr. Sponaugle $12,692; and Mr. Dooley $1,333.


(2)	As permitted under the non-equity incentive compensation plan, the Board awarded Mr. Able a discretionary bonus in recognition of additional responsibilities assigned to him by the President and Board during 2016. This bonus was paid in 2017.


(3)	Amounts shown for 2016 reflect total payments pursuant to the current portion of the 2016 Incentive Plan and the deferred portion of the 2013 Incentive Plan (2014 - 2016 performance period), as follows:



Name	2016 Incentive Plan (current incentive)		2013 Incentive Plan (three-year deferred incentive)		Total
Andrew S. Howell	$	362,111	$	286,246	$	648,357
Donald R. Able	154,500		123,974		278,474
R. Kyle Lawler	140,981		120,950		261,931
Stephen J. Sponaugle	106,337		84,932		191,269
James G. Dooley, Sr.	87,500		75,290		162,790


(4)	Represents change in the actuarial present value of accumulated pension benefits only, which is primarily dependent on changes in interest rates, years of benefit service and salary.

(5)

Amounts represent matching contributions to the qualified defined contribution pension plan in 2016. For Mr. Howell, 2016 also includes perquisites totaling $11,315, which consisted of personal use of an FHLB-owned vehicle, premiums for an Executive long-term disability plan, spousal travel expenses and an airline program membership. The value of perquisites are based on the actual cash cost to the FHLB.


(6)	Mr. Dooley's 2014 compensation amount is not included as he was not a Named Executive Officer in that year.

Salary

Base salary is both a key component of the total compensation program and a key factor when attracting and retaining executive talent. While base salaries for the Named Executive Officers are influenced by a number of factors, the Board generally targets the median of the competitive market. Other factors affecting an executive's base salary include length of time in position, relevant experience, individual achievement, and the size and scope of assigned responsibilities as compared to the

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responsibilities of other executives. Base salary increases traditionally take effect at the beginning of each calendar year and are granted after a review of the individual's performance and leadership contributions to the achievement of our annual business plan goals and strategic objectives.

Each of the Named Executive Officers received a base salary increase at the beginning of 2016. Total salary increases, including merit and market adjustments, ranged from 7.35 percent to 11.11 percent. For the Named Executive Officers other than the President, the Committee's actions were based on the President's recommendation for each executive, which took into consideration market data, and an evaluation of each executive's annual performance. Individually, directors provided feedback to the Chair, and the Committee recommended, and the Board subsequently approved a salary increase of 11.11 percent for Mr. Howell. In recommending and approving the 2016 increase, the Committee and Board took into consideration competitive market analysis and the directors' appraisals of Mr. Howell's performance during the year.

In October 2016, the Committee recommended and the Board approved a 4.50 percent salary increase pool for 2017 for all employees, comprised of 3.00 percent for merit increases and 1.50 percent for market and promotional adjustments. Using the same process as described above, the Committee recommended, and the Board approved, the following 2017 base salaries and percent increases for the Named Executive Officers: Mr. Howell, $800,000 (6.67 percent); Mr. Able, $420,000 (5.00 percent); Mr. Lawler, $385,000 (5.48 percent); Mr. Sponaugle, $360,000 (10.77 percent); and Mr. Dooley, $260,625 (4.25 percent). On December 14, 2016, we were informed that the Finance Agency had completed its review of the Board-approved compensation actions affecting the Named Executive Officers in 2017.

Non-Equity Incentive Compensation Plan (Incentive Plan)

The Incentive Plan is a cash-based total incentive award that is divided into two equal parts: (1) a current incentive award, and (2) a three-year deferred incentive award. The current component of the Incentive Plan is awarded annually and designed to promote and reward higher levels of performance for accomplishing Board-approved shorter-term goals. The long-term component of the Incentive Plan is a three-year deferred incentive award that is designed to promote higher levels of long-term performance and serve as an employment retention tool for selected executive and senior officers, including the Named Executive Officers.

The Incentive Plan goals generally reflect desired financial, operational, risk and public mission objectives for the current and future fiscal years. Each goal is weighted reflecting its relative importance and potential impact on our strategic initiatives and annual business plan, and each is assigned a quantitative threshold, target and maximum level of performance. Each Named Executive Officer's award opportunity is based entirely on bank-wide performance. However, the Chief Risk Officer's (CRO) award opportunity is weighted 75 percent on bank-wide goals and 25 percent on Enterprise Risk Management (ERM) specific goals, which are developed with the Risk Committee in order to provide incentive and maintain a certain level of independence for risk management initiatives. Additionally, the Senior Vice President- Internal Audit's award opportunity is based entirely on Internal Audit specific goals, which are developed with the Audit Committee, to maintain independence for the internal audit function.

When establishing the Incentive Plan goals and corresponding performance levels, the Board anticipates that we will successfully achieve a threshold level of performance nearly every year. The target level is aligned with expected performance and is anticipated to be reasonably achievable in a majority of plan years. The maximum level of performance reflects a graduated level of difficulty from the target performance level and requires superior performance to achieve.

Each executive officer, including the Named Executive Officers, is assigned a total incentive award opportunity, stated as a percentage of base salary, which corresponds to the individual's level of organizational responsibility and ability to contribute to and influence overall performance. The total incentive award opportunity established for executives is designed to be comparable to incentive opportunities for executives with similar duties and responsibilities at other financial institutions, primarily other FHLBanks, and generally consistent with our market check. The Board believes the total incentive opportunity and plan design provide an appropriate, competitive reward to all officers, including the Named Executive Officers, commensurate with the achievement levels expected for the incentive goals.

The total incentive award earned is determined based on the actual achievement level for each goal in comparison with the performance levels established for that goal.

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The total incentive award opportunities for the 2016 plan year stated as a percentage of base salary were as follows:



	Incentive Opportunity
Name	Threshold		Target		Maximum
Andrew S. Howell	50.0	%	75.0	%	100.0	%
Donald R. Able	40.0		60.0		80.0
R. Kyle Lawler	40.0		60.0		80.0
Stephen J. Sponaugle	30.0		50.0		70.0
James G. Dooley, Sr.	30.0		50.0		70.0

If actual performance falls below the threshold level of performance, no payment is made for that goal. If actual performance exceeds the maximum level, only the value assigned as the performance maximum is paid. When actual performance falls between the assigned threshold, target and maximum performance levels, an interpolated achievement is calculated for that goal. The achievement for each goal is then multiplied by the corresponding incentive weight assigned to that goal and the results for each goal are summed to arrive at the final incentive award payable to the executive. No final awards (or payments) will be made to executives under the Incentive Plan if we receive the lowest "Composite Rating" during the most recent examination by the Finance Agency. Such a rating would indicate that we have been found to be operating in an unacceptable manner, that we exhibit serious deficiencies in corporate governance, risk management or financial condition and performance, or that we are in substantial noncompliance with laws, Finance Agency regulations or supervisory guidance.

Fifty percent of the total opportunity for the Incentive Plan is awarded in cash following the plan year (current incentive award) and 50 percent is mandatorily deferred for three years after the end of the Plan year (deferred incentive award). Deferred incentive awards are calculated based on the actual performance or achievement level for each deferred plan goal at the end of each three-year performance period, with interpolations made for results between achievement levels. The achievement level for each goal then is multiplied by the corresponding incentive weight assigned to that goal. The final value of the deferred award can be increased, decreased or remain the same based on the goal achievement level determined using separate performance measures over the three-year deferral period. For all Named Executive Officers, the final value of the deferred award is 75 percent for a Threshold level of achievement, 100 percent for a Target level of achievement, or 125 percent for a Maximum level of achievement. If a goal achievement level over the three-year deferral period is below the threshold, no payment is made for that deferred goal.

Except as noted above with respect to exam ratings, the Board has ultimate authority over the Incentive Plan and may modify or terminate the Plan at any time or for any reason. The Board also has sole discretion to increase or decrease any Incentive Plan awards. In addition, payments under the Plan are subject to certain claw back provisions which allow the FHLB to recover any incentive paid to a participant based on achievement of financial or operational goals that subsequently are deemed to be inaccurate, misstated or misleading. Our Board believes these claw back requirements serve as deterrents to any manipulation of financial statements or performance metrics in a manner that would assure and/or increase an incentive payment.

2016 Incentive Award. For calendar year 2016, the Board approved a total of six performance measures in the functional areas of Franchise Value Promotion, Mission Asset Activity and Stockholder Risk/Return. The mix of financial and non-financial goals measures performance across our mission and corporate objectives and is intended to discourage unnecessary or excessive risk-taking. Because we consider risk management to be an essential component in the achievement of our mission and corporate objectives, the goals below include a separate risk-related metric.

At its January 2017 meeting, following certification of the 2016 performance results and in accordance with those results, the Board authorized the distribution to the Named Executive Officers of the current awards shown in Note 3 to the Summary Compensation Table. For the 2016 plan year, we cumulatively achieved approximately 97 percent of the available maximum incentive opportunity for FHLB goals. This was similar to the 96 percent overall FHLB performance achieved for 2015.

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The following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for the 2016 Incentive Plan performance measures for all Named Executive Officers other than the Senior Vice President- Internal Audit.

2016 Incentive Plan Performance Levels and Results



(Dollars in thousands)
	Incentive Weight		Threshold Performance			Target Performance			Maximum Performance			Results Achieved
Franchise Value Promotion
1) Mission Outreach	10.0	%	82			95			110			100
2) Mission Asset Participation	10.0		65		%	72		%	80		%	77		%
Mission Asset Activity
3) Average Advance Balances for Members with Assets of $50 billion or less	15.0		$	17,000,000		$	18,000,000		$	19,000,000		$	19,517,367
4) Mortgage Purchase Program New Mandatory Delivery Commitments	15.0		1,980,000			2,150,000			2,700,000			2,879,126
Stockholder Risk/Return
5) Decline in Market Value of Equity	25.0		< 9%			< 7%			4% or less			4.4		%
6) Profitability-Available Earnings vs. Average 3-month LIBOR rate	25.0		350 bps			390 bps			450 bps			473 bps

During 2016, the Board, the Committee and the President periodically reviewed the Incentive Plan goals presented above to determine progress toward the goals. Although the Board and the President discussed various external factors that were affecting achievement of the performance measures, the Board did not take any actions to revise or change the Incentive Plan goals.

The incentive program for the CRO is weighted 75 percent on bank-wide goals, shown above, and 25 percent on the ERM department goal, as follows:

Implement specific initiatives of the FHLB's ERM program within the ERM Department.


Weight of Goal:	100 percent


Threshold:	4 initiatives satisfactorily completed*


Target:	6 initiatives satisfactorily completed*


Maximum:	7 initiatives satisfactorily completed*


2016 Results Achieved:	6.5 initiatives satisfactorily completed*

Specific initiatives include efforts in: 1) risk management integration; 2) development of more extensive risk dashboards; 3) improved communication to management about operational risk and compliance; 4) enhancing model risk, end user computing, records management and vendor management programs; 5) evaluation of market risk/return positioning; 6) analyzing earnings volatility; and 7) development of additional asset/liability decision-making analytics.

The 2016 Incentive Plan measures for the Senior Vice President - Internal Audit were based entirely on achievement of specific internal audit function goals, including issuance of a certain number of audit reports, complete testing of identified internal controls, compliance with regulatory standards, and general effectiveness and leadership of the internal auditor. Based on these goals, 100 percent of the maximum performance was achieved during 2016.

2017 Incentive Award. At its November 2016 meeting, the Board established the 2017 Incentive Plan goals, the incentive weights and the performance measures corresponding to each Incentive Plan goal and award opportunity for the 2017 Incentive Plan. In December 2016, the 2017 Incentive Plan was sent to the Finance Agency and we received notification of the completion of their review in January 2017. The 2017 Incentive Plan goals for our executives are set forth below.

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2017 Incentive Plan Goals



Franchise Value Promotion
Mission Outreach	Weight: 10.0%
Mission Asset Participation	Weight: 10.0%
Mission Asset Activity
Average Advances Balances for Members with Assets of $50 billion or less	Weight: 15.0%
Mortgage Purchase Program New Mandatory Delivery Commitments	Weight: 15.0%
Stockholder Risk/Return
Decline in Market Value of Equity	Weight: 25.0%
Profitability-Available Earnings vs. Average 3-month LIBOR rate	Weight: 25.0%

As reflected above, the Board decided to keep all of the 2017 goals the same as those in 2016 although the performance metrics have been adjusted and the Mission Outreach goal was expanded upon to include initiatives related to minority and women inclusion. In setting the performance measures for the 2017 Incentive Plan, the Board reviewed the results against target for 2016 and considered relevant aspects of our financial outlook for 2017 including the continued uncertainty of the economy and the government's liquidity programs that continue to affect Mission Asset Activity and profitability. The Board also considered opportunities to increase mission asset participation by members.

The Board also approved a separate ERM department goal for the CRO, whose annual incentive is weighted 75 percent on bank-wide goals and 25 percent on the ERM goal.

2017 CRO's Goal

Implement specific initiatives of the FHLB's ERM program within the ERM Department.


Weight of Goal:	100 percent


Threshold:	3 initiatives satisfactorily completed*


Target:	4 initiatives satisfactorily completed*


Maximum:	6 initiatives satisfactorily completed*


*	Specific initiatives include efforts in: 1) the comprehensive review of the FHLB's risk management programs; 2) risk management integration; 3) enhancing key risk metrics; 4) improving the modeling of collateral maintenance requirements; 5) the company-wide implementation of new operational risk initiatives; and 6) enhancing market risk analytics.

Finally, upon recommendation of the Audit Committee, the Board approved the separate 2017 Internal Audit department goals for the Senior Vice President - Internal Audit. The Board decided to keep all of the 2016 goals for 2017, although some of the performance metrics and weightings have been adjusted. Additionally, the Board added two new goals for 2017 related to compliance with the Finance Agency's Internal Audit Governance guidance and results of the External Quality Assurance Review.

Three-Year Deferred Incentive Award. During 2016, the Board, the Committee and the President periodically reviewed progress toward the deferred plan goals for each ongoing performance period. At its January 2017 meeting, following certification of the performance results for the deferred portion of the 2013 Incentive Plan (2014 - 2016 performance period) and in accordance with those results, the Board authorized the distribution of payments to eligible officers including the Named Executive Officers. Cumulatively, we achieved approximately 88 percent of the available maximum incentive opportunity for FHLB goals. The deferred payments for the 2014 - 2016 performance period are shown in Note 3 to the Summary Compensation Table.

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The following table presents, for all Named Executive Officers, except the Senior Vice President - Internal Audit, the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the goals in the deferred portion of the 2013 Incentive Plan (2014 - 2016 performance period):



	Incentive Weight	Threshold Performance	Target Performance	Maximum Performance	Results Achieved
OPERATING EFFICIENCY:
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks	20%	6^th	4^th	1^st	1^st
RISK ADJUSTED PROFITABILITY:
Ranking of Risk Adjusted Profitability in comparison to other FHLBanks	20%	8^th	4^th	1^st	4^th
MARKET CAPITALIZATION RATIO:
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock	20%	95%	100%	110%	107%
ADVANCE UTILIZATION RATIO:
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks	20%	8^th	4^th	1^st	5^th
STRATEGIC BUSINESS PLAN ACHIEVEMENT:
Percentage of Strategic Business Plan strategies achieved	20%	70%	80%	100%	90%

For the Senior Vice President - Internal Audit, the following table presents the incentive weights, threshold, target and maximum performance levels, and the actual results achieved for each of the Internal Audit goals in the deferred portion of the 2013 Incentive Plan (2014 - 2016 performance period):



	Incentive Weight	Threshold Performance	Target Performance	Maximum Performance	Results Achieved
AUDIT COMMITTEE CHARTER FULFILLMENT:
Average of the Audit Committee's annual performance review ratings	50%	3	4	5	4.77
FINDINGS TRACKING:
Results of Audit Committee's evaluation of monitoring, tracking and reporting on findings as a result of audits and examinations	25%	3	4	5	4.76
SUCCESSION PLANNING AND READINESS:
Level of readiness based on Audit Committee assessment	25%	Minimally Prepared (3)	Prepared (4)	Highly Prepared (5)	4.50

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At its November 2016 meeting, the Board established the goals, incentive weights and performance measures to determine the achievement level reached during the 2017 - 2019 deferral period of the 2016 Incentive Plan. The following table presents the goals and incentive weights for all Named Executive Officers, except the Senior Vice President - Internal Audit:

2016 Deferred Incentive Plan Goals (2017 - 2019 Performance Period)



OPERATING EFFICIENCY:
Ranking of Operating Efficiency Ratio in comparison to other FHLBanks	Weight: 20%
EARNINGS VOLATILITY ADJUSTED PROFITABILITY:
Ranking of Earnings Volatility Adjusted Profitability in comparison to other FHLBanks	Weight: 20%
MARKET CAPITALIZATION RATIO:
Ratio of Market Value of Equity to Par Value of Regulatory Capital Stock	Weight: 20%
ADVANCE UTILIZATION RATIO:
Ranking of average of each member's Advances-to-Assets ratio multiplied by the average member borrower penetration ratio in comparison to other FHLBanks	Weight: 20%
STRATEGIC BUSINESS PLAN ACHIEVEMENT:
Percentage of Strategic Business Plan strategies achieved	Weight: 20%

The performance measures and incentive weights used to determine the achievement level reached during the three-year deferral period for the Senior Vice President - Internal Audit included: (1) fulfillment of the Audit Committee Charter (50 percent weighting) and (2) tracking of findings from internal audits, external audits and examination findings (50 percent weighting).

The goals for the deferred component of the 2017 Incentive Plan, which include the 2018 - 2020 performance period, are expected to be set at the November 2017 Board meeting.

Non-Equity Incentive Plan Compensation Grants

The following table provides information on grants made under our Incentive Plans.

Grants of Plan-Based Awards



		Estimated Future Payouts Under Non-Equity Incentive Plan Awards
Name	Grant Date ⁽¹⁾	Threshold		Target		Maximum
Andrew S. Howell	November 17, 2016	$	400,000	$	600,000	$	800,000
Donald R. Able	November 17, 2016	168,000		252,000		336,000
R. Kyle Lawler	November 17, 2016	154,000		231,000		308,000
Stephen J. Sponaugle	November 17, 2016	144,000		216,000		288,000
James G. Dooley, Sr.	November 17, 2016	78,188		130,313		182,438


(1)	Awards granted on this date are for the 2017 Incentive Plan.

Under the awards shown above, 50 percent of the estimated future payout will be awarded in cash following the Plan year. The other 50 percent of the estimated future payout will be mandatorily deferred for three years after the end of the Plan year. The final value of the deferred award can be increased, decreased or remain the same based on the achievement level of the deferred goals during the three-year period. See the "Non-Equity Incentive Compensation Plan (Incentive Plan)" section above for further detail.

Retirement Benefits

We maintain a comprehensive retirement program for executive officers comprised of two qualified retirement plans (a defined benefit plan and a defined contribution plan) and a non-qualified pension plan. For our qualified plans, we participate in the Pentegra Defined Benefit Plan for Financial Institutions and the Pentegra Defined Contribution Plan for Financial Institutions. The non-qualified plan, the Benefit Equalization Plan (BEP), restores benefits that eligible highly compensated employees would have received were it not for Internal Revenue Service limitations on benefits from the defined benefit plan. Generally, benefits under the BEP vest and are payable according to the corresponding provisions of the qualified plans.

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The plans provide benefits based on a combination of an employee's tenure and annual compensation. As such, the benefits provided by the plans are one component of the total compensation opportunity for executive officers and, the Board believes, serve as valuable retention tools since retirement benefits increase as executives' tenure and compensation with the FHLB grow.

Qualified Defined Benefit Pension Plan. The Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB) is a funded tax-qualified plan that is maintained on a non-contributory basis, meaning, employee contributions are not required. Participants' pension benefits vest upon completion of five years of service.

The pension benefits payable under the Pentegra DB plan are determined using a pre-established formula that provides a single life annuity payable monthly at age 65 or normal retirement. The benefit formula for employees hired prior to January 1, 2006, which includes Messrs. Howell, Able, Lawler, and Sponaugle, is 2.50 percent for each year of benefit service multiplied by the highest three-year average compensation. Compensation is defined as base salary, excess accrued vacation benefits and annual incentive compensation and excludes any long-term or deferred incentive payments. In the event of retirement prior to attainment of age 65, a reduced pension benefit is payable under the plan, with payments commencing as early as age 45. For employees who are hired after January 1, 2006, which includes Mr. Dooley, the Pentegra DB was amended. The current benefit formula is 1.25 percent for each year of benefit service multiplied by the highest five-year average compensation, where compensation is defined as base salary only and excludes all other forms of compensation. In addition, the current plan provides for a reduced pension benefit in the event of retirement prior to attainment of age 65 with payment commencing as early as age 55 if the participant has 10 years or more of service. Lastly, the Pentegra DB plan provides certain actuarially equivalent forms of benefit payments other than a single life annuity, including a limited lump sum distribution option, which is available only to employees, including Named Executive Officers, hired prior to February 1, 2006.

Non-Qualified Defined Benefit Pension Plan. Executive officers and other employees whose pay exceeds IRS pension limitations are eligible to participate in the Defined Benefit component of the Benefit Equalization Plan (DB/BEP), an unfunded, non-qualified pension plan that mirrors the Pentegra DB plan in all material respects. In determining whether a restoration of retirement benefits is due an eligible employee, the DB/BEP utilizes the identical benefit formula applicable to the Pentegra DB plan. In the event that the benefits payable from the Pentegra DB plan have been reduced or otherwise limited, the executive's lost benefits are payable under the terms of the DB/BEP. Because the DB/BEP is a non-qualified plan, the benefits received from this plan do not receive the same tax treatment and funding protection associated with the qualified plan.

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The following table provides the present value of benefits payable to the Named Executive Officers upon retirement at age 65 from the Pentegra DB plan and the DB/BEP, and is calculated in accordance with the formula currently in effect for specified years-of-service and remuneration for participating in both plans. Our pension benefits do not include any reduction for a participant's Social Security benefits.

2016 Pension Benefits



Name	Plan Name	Number of Years Credited Service ⁽¹⁾	Present Value ⁽²⁾ of Accumulated Benefits
Andrew S. Howell	Pentegra DB	26.50	$	1,888,000
	DB/BEP	26.50	5,851,000

Donald R. Able	Pentegra DB	35.42	1,982,000
	DB/BEP	35.42	3,414,000

R. Kyle Lawler	Pentegra DB	15.50	1,286,000
	DB/BEP	15.50	1,077,000

Stephen J. Sponaugle	Pentegra DB	23.33	1,591,000
	DB/BEP	23.33	844,000

James G. Dooley, Sr.	Pentegra DB	9.33	333,000
	DB/BEP	9.33	—

(1)

For pension plan purposes, the calculation of credited service begins upon completion of a required waiting period following the date of employment. Accordingly, the years shown are less than the executive's actual years of employment. Because IRS regulations generally prohibit the crediting of additional years of service under the qualified plan, such additional service also is precluded under the DB/BEP, which only restores those benefits lost under the qualified plan.


(2)	See Note 17 of the Notes to Financial Statements for details regarding valuation assumptions.

Qualified Defined Contribution Plan. The Pentegra Defined Contribution Plan for Financial Institutions (Pentegra DC) is a tax-qualified defined contribution plan to which we make tenure-based matching contributions. For 2016, matching contributions begin upon completion of one year of employment and subsequently increase based on length of employment to a maximum of six percent of eligible compensation. For 2017, the one-year waiting period does not apply. Eligible compensation in the Pentegra DC plan is defined as base salary and annual bonus (current incentive award) and excludes any deferred incentive awards.

Under the Pentegra DC plan, a participant may elect to contribute up to 100 percent of eligible compensation (75 percent for 2017) on either a before-tax or after-tax basis. The plan permits participants to self-direct investment elections into one or more investment funds. All returns are at the market rate of the related fund. Investment fund elections may be changed daily by the participants. A participant may withdraw vested account balances while employed, subject to certain plan limitations, which include those under IRS regulations. Participants also are permitted to revise their contribution/deferral election once each pay period. However, the revised election is only applicable to future earnings and may also be limited by IRS regulations.

Fringe Benefits and Perquisites

Executive officers are eligible to participate in the traditional fringe benefit plans made available to all other employees, including participation in the retirement plans, medical, dental and vision insurance program and group term life and standard long term disability (LTD) insurance plans, as well as annual leave (i.e., vacation) and sick leave policies. Executives participate in our subsidized medical, dental and vision insurance and group term life and standard LTD insurance programs on the same basis and terms as all of our employees. However, executives are required to pay higher premiums for medical coverage. Executive officers also receive on-site parking at our expense.

During 2016, the President was also provided with an FHLB-owned vehicle for his business and personal use. The operating expenses associated with the vehicle, including an automobile club membership for emergency roadside assistance, also were provided. An executive officer's personal use of an FHLB-owned vehicle, including use for the daily commute to and from work, is reported as a taxable fringe benefit. In addition to the standard LTD insurance plan provided to all FHLB employees, Named Executive Officers may elect to receive additional LTD coverage. The premiums the FHLB pays for the additional LTD

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coverage are considered a taxable fringe benefit. Additionally, with prior approval, our current Travel Policy permits a spouse to accompany an executive officer on authorized business trips. The transportation and other related expenses associated with the spouse's travel are reimbursed by the FHLB and reported as a taxable fringe benefit.

The perquisites provided by the FHLB represent a small fraction of an executive officer's annual compensation. During 2016, perquisites totaled $11,315 for Mr. Howell, as shown in the Summary Compensation Table. Perquisites did not individually or collectively exceed $10,000 for any other Named Executive Officers and are therefore excluded from the Summary Compensation Table.

Employment Arrangements and Severance Benefits

Pursuant to the FHLBank Act, all employees of the FHLB are “at will” employees. Accordingly, an employee may resign employment at any time and an employee's employment may be terminated at any time for any reason, with or without cause and with or without notice.

We have no employment arrangements with any Named Executive Officer. Other than normal pension benefits and eligibility to participate in our retiree medical and life insurance programs (if hired prior to August 1, 1990), no perquisites, tax gross-ups or other special benefits are provided to our executive officers in the event of a change in control, resignation, retirement or other termination of employment.

We have a severance policy under which employees, including executive officers, may receive benefits in the event of termination of employment resulting from job elimination, substantial job modification, job relocation or a planned reduction in staff that causes an involuntary termination of employment. Under this policy, an executive officer is entitled to one month's pay for every full year of employment, pro-rated for partial years of employment, with a minimum of one month and a maximum of six months' severance pay. At our discretion, executive officers and employees receiving benefits under this policy may also receive outplacement assistance as well as continuation of health insurance coverage on a limited basis.

COMPENSATION COMMITTEE REPORT

The Personnel and Compensation Committee of the Board of Directors (the Committee) of the FHLB has furnished the following report for inclusion in this annual report on Form 10-K:

The Committee has reviewed and discussed the 2016 Compensation Discussion and Analysis set forth above with the FHLB's management. Based on such review and discussions, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.

Donald J. Mullineaux (Chair)

Grady P. Appleton

Leslie D. Dunn

Charles J. Koch

Michael R. Melvin

William J. Small (Vice Chair)

Nancy E. Uridil

COMPENSATION OF DIRECTORS

As required by Finance Agency regulations and the FHLBank Act, we have established a formal policy governing the compensation and travel reimbursement provided to our directors. The goal of the policy is to compensate Board members for work performed on behalf of the FHLB. Under our policy, compensation is comprised of a maximum base fee that is divided into two equal parts: (1) a quarterly retainer fee, and (2) a per meeting fee, subject to an annual cap, and reimbursement for reasonable FHLB travel-related expenses. The fees are intended to compensate directors for time spent reviewing materials sent to them, preparing for meetings, participating in other FHLB activities and attending the meetings of the Board of Directors and its committees.

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The following table sets forth the quarterly retainer fees, per meeting fees, and the maximum base fees for 2016 and 2017:



	Quarterly Retainer Fee		Per Meeting Fee		Maximum Base Fees
Chair	$	16,875	$	9,650	$	135,000
Vice Chair	15,000		8,580		120,000
Other Members	12,500		7,150		100,000

In addition to the base fees, annual fees are paid to the Audit Committee Chair and Other Committee Chairs of $17,000 and $14,000, respectively. These fees are subject to certain attendance requirements.

During 2016, total directors' fees and travel expenses incurred by the FHLB were $1,828,000 and $262,222, respectively.

With prior approval, our current Travel Policy permits a spouse to accompany a director on authorized business trips. The transportation and other related expenses associated with the spouse's travel are reimbursed by the FHLB, subject to certain limitations, and reported as a taxable fringe benefit. During 2016, there were 14 directors that received reimbursement for spousal travel expenses. These expenses did not individually or collectively exceed $10,000 for any director and are therefore excluded from the Directors Compensation Table below.

The following table sets forth the fees earned by each director for the year ended December 31, 2016.

2016 Directors Compensation Table



Name	Fees Earned or Paid in Cash		Total
J. Lynn Anderson	$	117,000	$	117,000
Grady P. Appleton	100,000		100,000
Greg W. Caudill	100,000		100,000
James R. DeRoberts	114,000		114,000
Leslie D. Dunn	114,000		114,000
James A. England	100,000		100,000
Charles J. Koch	100,000		100,000
Robert T. Lameier	100,000		100,000
Michael R. Melvin	100,000		100,000
Thomas L. Moore	100,000		100,000
Donald J. Mullineaux, Chair	135,000		135,000
Alvin J. Nance	100,000		100,000
Charles J. Ruma	114,000		114,000
David E. Sartore	100,000		100,000
William J. Small, Vice Chair	120,000		120,000
William S. Stuard, Jr.	114,000		114,000
Nancy E. Uridil	100,000		100,000
Total	$	1,828,000	$	1,828,000

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The following table summarizes the total number of board meetings and meetings of its designated committees held in 2015 and 2016.



	Number of Meetings Held
Meeting Type	2015	2016
Board Meeting	9	9
Audit Committee	11	10
Finance and Risk Management Committee ⁽¹⁾	7	N/A
Risk Committee	N/A	7
Business and Operations Committee	N/A	6
Governance	6	6
Housing and Community Development Committee	5	5
Personnel and Compensation Committee	6	5
Executive Committee	1	—


(1)	The Finance and Risk Management Committee was split into two new committees in 2016 to form the Risk Committee and Business and Operations Committee.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Personnel and Compensation Committee of the Board of Directors is charged with responsibility for the FHLB's compensation policies and programs. None of the 2016 or 2017 Personnel and Compensation Committee members are or previously were officers or employees of the FHLB. Additionally, none of the FHLB's executive officers served or serve on the board of directors or the compensation committee of any entity whose executive officers served on the FHLB's Personnel and Compensation Committee or Board of Directors. This Committee was and is composed of the following members:



2016		2017
Donald J. Mullineaux (Chair)		Donald J. Mullineaux (Chair)
Grady P. Appleton		Grady P. Appleton
Leslie D. Dunn		Leslie D. Dunn
Charles J. Koch		Charles J. Koch
Michael R. Melvin		Michael R. Melvin
William J. Small (Vice Chair)		William J. Small (Vice Chair)
		Nancy E. Uridil

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Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

We have one class of capital stock, Class B Stock, all of which is owned by our current and former member institutions. Individuals, including directors and officers of the FHLB, are not permitted to own our capital stock. Therefore, we have no equity compensation plans.

The following table lists institutions holding five percent or more of outstanding capital stock at February 28, 2017 and includes any known affiliates that are members of the FHLB:



(Dollars in thousands)
		Capital		Percent of Total		Number
Name	Address	Stock		Capital Stock		of Shares
JPMorgan Chase Bank, N.A.	1111 Polaris Parkway Columbus, OH 43240	$	1,317,000	31	%	13,170,000
U.S. Bank, N.A.	425 Walnut Street Cincinnati, OH 45202	475,393		11		4,753,927
Fifth Third Bank	38 Fountain Square Plaza Cincinnati, OH 45202	247,687		6		2,476,870
The Huntington National Bank	41 South High Street Columbus, OH 43215	243,684		6		2,436,836

The following table lists capital stock outstanding as of February 28, 2017 held by member institutions that have an officer or director who serves as a director of the FHLB:



(Dollars in thousands)
		Capital		Percent of Total
Name	Address	Stock		Capital Stock
Western & Southern Financial Group ⁽¹⁾	400 Broadway Street Cincinnati, OH 45202	$	94,166	2.2	%
The Park National Bank	50 North Third Street Newark, OH 43058	50,086		1.2
First Federal Bank of the Midwest	601 Clinton Street Defiance, OH 43512	13,792		0.3
F&M Bank	50 Franklin Street Clarksville, TN 37040	3,378		0.1
Perpetual Federal Savings Bank	120 North Main Street Urbana, OH 43078	2,794		0.1
Field & Main Bank	140 North Main Street Henderson, KY 42420	1,799		0.0
Farmers National Bank	304 West Main Street Danville, KY 40423	1,722		0.0
The Arlington Bank	2130 Tremont Center Upper Arlington, OH 43221	1,063		0.0
Miami Savings Bank	8008 Ferry Street Miamitown, OH 45041	730		0.0
Decatur County Bank	56 North Pleasant Street Decaturville, TN 38329	646		0.0
The Plateau Group ⁽²⁾	2701 North Main Street Crossville, TN 38555	93		0.0


(1)	Includes five subsidiaries (Western-Southern Life Assurance Co., Integrity Life Insurance Company, Lafayette Life Insurance Company, Columbus Life Insurance Company and National Integrity Life Insurance Company), which are FHLB members.


(2)	Includes two subsidiaries (Plateau Casualty Insurance Company and Plateau Insurance Company), which are FHLB members.

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Item 13.	Certain Relationships and Related Transactions, and Director Independence.

DIRECTOR INDEPENDENCE

Because we are a cooperative, capital stock ownership is a prerequisite to transacting any business with us. Transactions with our stockholders are part of the ordinary course of - and are essential to the purpose of - our business.

Our capital stock is not permitted to be publicly traded and is not listed on any stock exchange. Therefore, we are not governed by stock exchange rules relating to director independence. If we were so governed, arguably none of our industry directors, who are elected by our members, would be deemed independent because all are directors and/or officers of members that do business with us. Messrs. Appleton, Koch, Mullineaux, Nance and Ruma and Mses. Anderson, Dunn and Uridil, our eight non-industry directors, have no material transactions, relationships or arrangements with the FHLB other than in their capacity as directors. Therefore, our Board of Directors has determined that each of them is independent under the independence standards of the New York Stock Exchange.

The Finance Agency director independence standards specify independence criteria for members of our Audit Committee. Under these criteria, all of our directors serving on the Audit Committee are independent.

TRANSACTIONS WITH RELATED PERSONS

See Note 22 of the Notes to Financial Statements for information on transactions with stockholders, including information on transactions with Directors' Financial Institutions and concentrations of business, and transactions with nonmember affiliates, which information is incorporated herein by reference.

See also “Item 11. Executive Compensation - Compensation Committee Interlocks and Insider Participation.”

Review and Approval of Related Persons Transactions. Ordinary course transactions with Directors' Financial Institutions and with members holding five percent or more of our capital stock are reviewed and approved by our management in the normal course of events so as to assure compliance with Finance Agency regulations.

As required by Finance Agency regulations, we have a written conflict of interest policy. This policy requires directors (1) to disclose to the Board of Directors any known personal financial interests that they, their immediate family members or their business associates have in any matter to be considered by the Board and in any other matter in which another person or entity does or proposes to do business with the FHLB and (2) to recuse themselves from considering or voting on any such matter. The scope of the Finance Agency's conflict of interest Regulation (available at www.fhfa.gov) and our conflict of interest policy (posted on our Web site at www.fhlbcin.com) is similar, although not identical, to the scope of the SEC's requirements governing transactions with related persons. In March 2007, our Board of Directors adopted a written related person transaction policy that is intended to close any gaps between Finance Agency and SEC requirements. The policy includes procedures for identifying, approving and reporting related person transactions as defined by the SEC. One of the tools that we used to monitor non-ordinary course transactions and other relationships with our directors and executive officers is an annual questionnaire that uses the New York Stock Exchange criteria for independence. Finally, our Insider Trading Policy provides that any request for redemption of excess stock (except for de minimis amounts) held by a Director's Financial Institution must be approved by the Board of Directors or by the Executive Committee of the Board.

We believe these policies are effective in bringing to the attention of management and the Board any non-ordinary course transactions that require Board review and approval and that all such transactions since January 1, 2016 have been so reviewed and approved.

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Item 14.	Principal Accountant Fees and Services.

The following table sets forth the aggregate fees billed to the FHLB for the years ended December 31, 2016 and 2015 by its independent registered public accounting firm, PricewaterhouseCoopers LLP:



	For the Years Ended
(In thousands)	December 31,
	2016		2015
Audit fees	$	689	$	695
Audit-related fees	125		53
Tax fees	—		—
All other fees	6		20
Total fees	$	820	$	768

Audit fees were for professional services rendered for the audits of the FHLB's financial statements.

Audit-related fees were for assurance and services related to the performance of the audit and review of the FHLB's financial statements and primarily consisted of accounting consultations, control advisory services and fees related to participation in and presentations at conferences.

The FHLB is exempt from all federal, state and local income taxation. Therefore, no fees were paid for tax services during the years presented.

All other fees represent non-audit services related to an FHLBank System project on certain employee benefits during 2016 and 2015.

The Audit Committee approves the annual engagement letter for the FHLB's audit. The Audit Committee also establishes a fixed dollar limit for other recurring annual accounting related consultations, which include the FHLB's share of FHLBank System-related accounting issues. The status of these services is periodically reviewed by the Audit Committee throughout the year with any increase in these services requiring pre-approval. All other services provided by the independent accounting firm are specifically approved by the Audit Committee in advance of commitment.

The FHLB paid additional fees to PricewaterhouseCoopers LLP in the form of assessments paid to the Office of Finance. The FHLB is assessed its proportionate share of the costs of operating the Office of Finance, which includes the expenses associated with the annual audits of the combined financial statements of the FHLBanks. These assessments, which totaled $49,000 and $51,000 in 2016 and 2015, respectively, are not included in the table above.

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PART IV


Item 15.	Exhibits and Financial Statement Schedules.


(a)	Financial Statements. The following financial statements of the Federal Home Loan Bank of Cincinnati, set forth in Item 8 above, are filed as a part of this registration statement.

Report of Independent Registered Public Accounting Firm

Statements of Condition as of December 31, 2016 and 2015

Statements of Income for the years ended December 31, 2016, 2015 and 2014

Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014

Statements of Capital for the years ended December 31, 2016, 2015 and 2014

Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014

Notes to Financial Statements


(b)	Exhibits.

See Index of Exhibits


Item 16.	Form 10-K Summary.

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, as of the 16th day of March 2017.

FEDERAL HOME LOAN BANK OF CINCINNATI

(Registrant)



By:	/s/ Andrew S. Howell
	Andrew S. Howell
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of the 16th day of March 2017.



	Signatures		Title

	/s/ Andrew S. Howell		President and Chief Executive Officer
	Andrew S. Howell		(principal executive officer)

	/s/ Donald R. Able		Executive Vice President-Chief Operating Officer and Chief Financial Officer
	Donald R. Able		(principal financial officer)

	/s/ J. Christopher Bates		Senior Vice President-Chief Accounting Officer
	J. Christopher Bates		(principal accounting officer)

	/s/ J. Lynn Anderson*		Director
	J. Lynn Anderson

	/s/ Grady P. Appleton*		Director
	Grady P. Appleton

	/s/ Brady T. Burt*		Director
	Brady T. Burt

	/s/ Greg W. Caudill*		Director
	Greg W. Caudill

	/s/ James R. DeRoberts*		Director
	James R. DeRoberts

	/s/ Leslie D. Dunn*		Director
	Leslie D. Dunn

	/s/ James A. England*		Director
	James A. England

	/s/ Charles J. Koch*		Director
	Charles J. Koch

	/s/ Robert T. Lameier*		Director
	Robert T. Lameier

	/s/ Michael R. Melvin*		Director
	Michael R. Melvin

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	/s/ Donald J. Mullineaux*		Director (Chair)
	Donald J. Mullineaux

	/s/ Alvin J. Nance*		Director
	Alvin J. Nance

	/s/ Charles J. Ruma*		Director
	Charles J. Ruma

	/s/ David E. Sartore*		Director
	David E. Sartore

	/s/ William J. Small*		Director (Vice Chair)
	William J. Small

	/s/ William S. Stuard, Jr.*		Director
	William S. Stuard, Jr.

	/s/ Nancy E. Uridil*		Director
	Nancy E. Uridil

	/s/ James J. Vance*		Director
	James J. Vance

	* Pursuant to Power of Attorney

	/s/ Andrew S. Howell
	Andrew S. Howell
	Attorney-in-fact

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INDEX OF EXHIBITS



Exhibit Number ⁽¹⁾	Description of exhibit	Document filed or furnished, as indicated below

3.1	Organization Certificate	Form 10, filed December 5, 2005

3.2	Bylaws, as amended through January 21, 2016	Form 10-K, filed March 17, 2016

4	Capital Plan, as of September 15, 2016	Form 10-Q, filed November 10, 2016

10.1.A	Form of Blanket Agreement for Advances and Security Agreement, as in effect for signatories prior to November 21, 2005	Form 10, filed December 5, 2005

10.1.B	Form of Blanket Security Agreement, for new signatories on and after November 21, 2005	Form 10, filed December 5, 2005

10.2	Form of Mortgage Purchase Program Master Selling and Servicing Master Agreement	Form 10, filed December 5, 2005

10.3	Federal Home Loan Banks P&I Funding and Contingency Plan Agreement, entered into as of July 20, 2006, by and among the Office of Finance and each of the Federal Home Loan Banks, as amended and restated on January 1, 2017	Filed Herewith

10.4	Joint Capital Enhancement Agreement, as amended on August 5, 2011, by and among each of the Federal Home Loan Banks	Form 8-K, filed August 5, 2011

10.5⁽²⁾	Incentive Compensation Plan	Form 10-Q, filed August 9, 2012

10.6 ⁽²⁾	Transitional Executive Long-Term Incentive Plan	Form 10-Q, filed August 9, 2012

10.7 ⁽²⁾	Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement)	Form 10-K, filed March 18, 2010

10.8 ⁽²⁾	First Amendment to the Federal Home Loan Bank of Cincinnati Benefit Equalization Plan (December 2008 Restatement)	Form 10-K, filed March 18, 2010

10.9	Form of indemnification agreement between the Federal Home Loan Bank and each of its directors and executive officers (used from July 29, 2009 to December 31, 2016)	Form 8-K, filed July 30, 2009

10.10	Form of indemnification agreement between the Federal Home Loan Bank and each of its directors and executive officers (used after December 31, 2016)	Filed Herewith

12	Statements of Computation of Ratio of Earnings to Fixed Charges	Filed Herewith

18	Preferability letter from PricewaterhouseCoopers LLP dated March 16, 2017	Filed Herewith

24	Powers of Attorney	Filed Herewith

31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer	Filed Herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer	Filed Herewith

32	Section 1350 Certifications	Furnished Herewith

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Exhibit Number ⁽¹⁾	Description of exhibit	Document filed or furnished, as indicated below

99.1	Audit Committee Letter	Furnished Herewith

99.2	Audit Committee Charter	Furnished Herewith

101.INS	XBRL Instance Document	Filed Herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed Herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed Herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed Herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed Herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed Herewith


(1)	Numbers coincide with Item 601 of Regulation S-K.


(2)	Indicates management compensation plan or arrangement.

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Attached files

Federal Home Loan Bank of Cincinnati Reports