Attached files

file filename
EX-10.9 - EXHIBIT 10.9 - SECOND AMENDMENT TO CHANGE IN CONTROL AGREEMENT WITH GLEN SIMECEK - Federal Home Loan Bank of Des Moinesexhibit109-secondamendment.htm
EX-99.1 - EXHIBIT 99.1 - AUDIT COMMITTEE REPORT 2016 - Federal Home Loan Bank of Des Moinesexhibit991-auditcommitteer.htm
EX-32.2 - EXHIBIT 32.2 - SECTION 906 CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND CFO - Federal Home Loan Bank of Des Moinesexhibit322-certificationof.htm
EX-32.1 - EXHIBIT 32.1 - SECTION 906 CERTIFICATION OF THE PRESIDENT AND CEO - Federal Home Loan Bank of Des Moinesexhibit321-certificationof.htm
EX-31.2 - EXHIBIT 31.2 - SECTION 302 CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND CFO - Federal Home Loan Bank of Des Moinesexhibit312-certificationof.htm
EX-31.1 - EXHIBIT 31.1 - SECTION 302 CERTIFICATION OF THE PRESIDENT AND CEO - Federal Home Loan Bank of Des Moinesexhibit311-certificationof.htm
EX-12.1 - EXHIBIT 12.1 - COMPUTATION OF EARNINGS TO FIXED CHARGES 2016 - Federal Home Loan Bank of Des Moinesexhibit121-computationofea.htm
EX-10.20 - EXHIBIT 10.20 - DIRECTOR FEE POLICY 2017 - Federal Home Loan Bank of Des Moinesexhibit1020-directorfeepol.htm
EX-10.10 - EXHIBIT 10.10 - THIRD AMENDMENT TO CHANGE IN CONTROL AGREEMENT WITH GLEN SIMECEK - Federal Home Loan Bank of Des Moinesexhibit1010-thirdamendment.htm
EX-10.8 - EXHIBIT 10.8 - AMENDMENT TO CHANGE IN CONTROL AGREEMENT WITH GLEN SIMECEK - Federal Home Loan Bank of Des Moinesexhibit108-amendmenttochan.htm
EX-10.7 - EXHIBIT 10.7 - CHANGE IN CONTROL AGREEMENT WITH GLEN SIMECEK - Federal Home Loan Bank of Des Moinesexhibit107-changeincontrol.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
 
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

For the fiscal year ended December 31, 2016
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 

Commission File Number: 000-51999
 

FEDERAL HOME LOAN BANK OF DES MOINES
(Exact name of registrant as specified in its charter)
 
Federally chartered corporation
(State or other jurisdiction of incorporation or organization)
 
42-6000149
(I.R.S. employer identification number)
 
 
 
 
 
 
 
Skywalk Level
801 Walnut Street, Suite 200
Des Moines, IA
(Address of principal executive offices)
 


50309
(Zip code)
 

Registrant's telephone number, including area code: (515) 281-1000
 

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
Name of Each Exchange on Which Registered: None

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) of the Act. 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 (section 232.405 of this chapter) 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 (section 229.405 of this chapter) 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 of 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
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
Registrant's stock is not publicly traded and is only issued to members of the registrant. Such stock is issued and redeemed at par value, $100 per share, subject to certain regulatory and statutory limits. At June 30, 2016, the aggregate par value of the stock held by current and former members of the registrant was $5,938,837,000. At February 28, 2017, 65,214,243 shares of stock were outstanding.




Table of Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements contained in this report, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such as believes, projects, expects, anticipates, estimates, intends, strategy, plan, could, should, may, and will or their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. These risks and uncertainties include, but are not limited to, the following:
 
political or economic events, including legislative, regulatory, monetary, judicial, or other developments that affect us, our members, our counterparties, and/or our investors in the consolidated obligations of the 11 Federal Home Loan Banks (FHLBanks);

competitive forces, including without limitation, other sources of funding available to our borrowers that could impact the demand for our advances, other entities purchasing mortgage loans in the secondary mortgage market, and other entities borrowing funds in the capital markets;

risks related to the other FHLBanks that could trigger our joint and several liability for debt issued by the other FHLBanks;

disruptions in the credit and debt markets and the effect on future funding costs, sources, and availability;

changes in the relative attractiveness of consolidated obligations due to actual or perceived changes in the FHLBanks' credit ratings as well as the U.S. Government's long-term credit rating;

the ability to meet capital and liquidity requirements;

reliance on a relatively small number of member institutions for a large portion of our advance business;

the volatility of credit quality, market prices, interest rates, and other indices that could affect the value of collateral held by us as security for borrower and counterparty obligations;

general economic and market conditions that could impact the volume of business we do with our members, including, but not limited to, the timing and volatility of market activity, inflation/deflation, employment rates, housing prices, the condition of the mortgage and housing markets on our mortgage-related assets, including the level of mortgage prepayments, and the condition of the capital markets on our consolidated obligations;

the availability of derivative instruments in the types and quantities needed for risk management purposes from acceptable counterparties;

increases in delinquency or loss estimates on mortgage loans;

the volatility of reported results due to changes in the fair value of certain assets, liabilities, and derivative instruments;

the ability to develop and support internal controls, information systems, and other operating technologies that effectively manage the risks we face;

the ability to attract and retain key personnel;

member consolidations and failures; and

reliance on FHLBank of Chicago as Mortgage Partnership Finance (MPF) provider (Mortgage Partnership Finance and MPF are registered trademarks of the FHLBank of Chicago), and Fannie Mae, Redwood Trust Inc., and Ginnie Mae as the ultimate investors in certain MPF products.


3


These forward-looking statements apply only as of the date they are made, and we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. A detailed discussion of the more important risks and uncertainties that could cause actual results and events to differ from such forward-looking statements is included under “Item 1A. Risk Factors."

PART I

ITEM 1. BUSINESS
OVERVIEW
The Federal Home Loan Bank of Des Moines (the Bank, we, us, or our) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation (except real property taxes) and is one of 11 district FHLBanks. The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBanks' Office of Finance (Office of Finance), effective July 30, 2008. The Finance Agency's mission is to ensure that the Enterprises and FHLBanks operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.
We are a cooperative. This means we are owned by our customers, whom we call members. Our members include commercial banks, thrifts, credit unions, insurance companies, and community development financial institutions (CDFIs) in our district of Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. While not considered members, we also conduct certain business activities with state and local housing associates meeting certain statutory criteria.

MERGER

We completed the merger with the Federal Home Loan Bank of Seattle (Seattle Bank) (the Merger) on May 31, 2015 (merger date). The Merger had a significant impact on all aspects of our financial condition, results of operations, and cash flows. As a result, financial results for the periods after the Merger may not be directly comparable to financial results for periods prior to the Merger.
BUSINESS MODEL
Our mission is to provide funding and liquidity for our members and housing associates so they can meet the housing, economic development, and business needs of the communities they serve. We strive to achieve our mission within an operating principle that balances the trade-off between attractively priced products, reasonable returns on capital stock, and maintaining an adequate level of retained earnings to preserve par value of member-owned capital stock.
We are capitalized primarily through the purchase of capital stock by our members. As a condition of membership, all of our members must purchase and maintain membership capital stock based on a percentage of their total assets as of the preceding December 31st subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with us. Member demand for our products expands and contracts with economic and market conditions. Our self-capitalizing capital structure, which allows us to repurchase or require additional capital stock based on member activity, provides us with the flexibility to effectively and efficiently meet the changing needs of our membership. While eligible to borrow, housing associates are not members and, as such, are not permitted to purchase capital stock.

4


Our capital stock is not publicly traded. It is purchased and redeemed by members or repurchased by us at a par value of $100 per share. Our current and former members own all of our outstanding capital stock. Former members own capital stock (included in mandatorily redeemable capital stock) to support business transactions still carried in our Statements of Condition. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by our Board of Directors.
Our primary business activities are providing collateralized loans, known as advances, to members and housing associates and acquiring residential mortgage loans from or through our members. In addition, we invest in investment quality securities. Our primary source of funding and liquidity is the issuance of debt securities, referred to as consolidated obligations, in the capital markets. Consolidated obligations are the joint and several obligations of all FHLBanks and are backed only by the financial resources of the FHLBanks. A critical component to the success of our operations is the ability to issue consolidated obligations regularly in the capital markets under a wide range of maturities, structures, and amounts, and at relatively favorable spreads to market interest rates.
Our net income is primarily attributable to the difference between the interest income we earn on our advances, mortgage loans, and investments, and the interest expense we pay on our consolidated obligations and member deposits, as well as components of other income (loss) (e.g., gains and losses on derivatives and hedging activities and gains and losses on trading securities). A portion of our annual net income is used to fund our Affordable Housing Program (AHP), which provides grants and subsidized advances to members to support housing for very low to moderate income households. By regulation, we are required to contribute 10 percent of our net earnings each year to the AHP. In addition to the required AHP assessment, our Board may elect to make voluntary contributions to the AHP. For purposes of the required AHP assessment, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. For additional details on our AHP, refer to the "Affordable Housing Program Assessments" section of Item 1.
We have risk management policies that govern our exposure to market, liquidity, credit, operational, and strategic risk, as well as capital adequacy. Our primary objective is to manage assets, liabilities, and derivative exposures in ways that protect the par redemption value of our capital stock while earning a reasonable return. For additional information on our risk management practices, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management.”

MEMBERSHIP
Our membership includes commercial banks, thrifts, credit unions, insurance companies, and CDFIs. The majority of depository institutions in our district that are eligible for membership are currently members.
The following table summarizes our membership by type of institution:
 
 
December 31,
Institutional Entity
 
2016
 
2015
 
2014
Commercial banks
 
1,061

 
1,088

 
942

Thrifts
 
57

 
65

 
48

Credit unions
 
231

 
221

 
110

Non-captive insurance companies
 
56

 
54

 
48

Captive insurance companies
 
12

 
13

 
7

Community development financial institutions
 
5

 
4

 
1

Total
 
1,422


1,445


1,156



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The following table summarizes our membership by asset size:
 
 
December 31,
Membership Asset Size1
 
2016
 
2015
 
2014
Depository institutions2
 
 
 
 
 
 
Less than $100 million
 
30
%
 
31
%
 
35
%
$100 million to $500 million
 
46

 
46

 
47

Greater than $500 million
 
19

 
18

 
13

Insurance companies
 
 
 
 
 
 
Less than $100 million
 
1

 
1

 
1

$100 million to $500 million
 
1

 
1

 
1

Greater than $500 million
 
3

 
3

 
3

Total
 
100
%
 
100
%
 
100
%

1
Membership asset size is based on September 30, 2016 financial information received from members.

2
Depository institutions consist of commercial banks, thrifts, credit unions, and community development financial institutions.

Our membership level decreased during 2016 primarily due to 40 member consolidations and eight dissolved charters, partially offset by the addition of 27 new members. At December 31, 2016, approximately 73 percent of our members were Community Financial Institutions (CFIs). For 2016, CFIs were defined under the FHLBank Act to include all Federal Deposit Insurance Corporation (FDIC) insured institutions with average total assets over the previous three-year period of less than $1.128 billion. CFIs are eligible to pledge certain collateral types that non-CFIs cannot pledge, including secured business loans and lines of credit and secured agri-business loans and lines of credit.

BUSINESS SEGMENTS
We manage our operations as one business segment. Management and our Board of Directors review enterprise-wide financial information in order to make operating decisions and assess performance.
PRODUCTS AND SERVICES
Advances
We carry out our mission primarily through lending funds, which we call advances, to our members and eligible housing associates (collectively, borrowers). Our advance products are designed to provide liquidity and help borrowers meet the credit needs of their communities while competing effectively in their markets. Borrowers generally use our advance products as sources of wholesale funding for mortgage lending, affordable housing and other community lending (including economic development), and general asset-liability management.
Our advance products include the following:

Overnight Advance. This product has a maturity of one business day and is renewed automatically until the borrower pays off the advance. Interest rates are set daily.

Fixed Rate Advances. These advances are available over a variety of terms in amortizing and non-amortizing structures. Using an amortizing advance, a borrower makes predetermined principal payments at scheduled intervals throughout the term of the advance. Forward starting advances are a type of fixed rate non-amortizing advance with settlement dates up to two years in the future, allowing members to lock in an interest rate at the outset, while delaying the receipt of funding. Delayed amortizing advances are a type of fixed rate advance with a feature that delays commencement of the repayment of the principal up to five years, allowing members control over the principal cash flows and the repayment of the advance. Certain long-term fixed rate, amortizing, and forward starting advances contain a symmetrical prepayment feature. This feature allows borrowers to prepay an advance and potentially realize a gain if interest rates rise to a level greater than those existing when the advance was originated.

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Variable Rate Advances. These advances have interest rates that reset periodically to a specified interest rate index such as London Interbank Offered Rate (LIBOR). Capped LIBOR advances are a type of variable rate advance in which the interest rate cannot exceed a specified maximum interest rate. Certain variable rate advances provide for the borrower's ability to prepay at reset dates and our ability to adjust interest rates (including spread) at reset dates.

Callable Advances. These advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Callable advances can be either fixed or floating in nature. Floating rate callable advances may reset at different frequencies ranging from one to six months and are callable at each reset. These advances are often referred to as either Member Option Variable Rate Advances (MOVR) or Member Option LIBOR Advances (MOLA) and are a significant portion of our floating rate advances. Interest rates on MOVR advances reset at each call date to be consistent with the Bank's current offering rate, in line with our underlying cost of funds. Interest rates on MOLA reset at each call date consistent with the underlying LIBOR index. Fixed rate callable advances may have different call schedules based on member specifications, and principal balances may be amortizing in nature. In addition, we retain the right to adjust the price of these advances at each reset date. We generally fund advances indexed to a discount note rate with discount notes, and advances indexed to LIBOR with LIBOR indexed debt or debt swapped to a LIBOR index.

Putable Advances. These advances may, at our discretion, be terminated on predetermined dates prior to the stated maturity of the advances, requiring the borrower to repay the advance. Should an advance be terminated, replacement funding at the prevailing market rates and terms will be offered, based on our available advance products and subject to our normal credit and collateral requirements.

Community Investment Advances. These advances are below-market rate funds used by borrowers in both affordable housing projects and community development. Interest rates on these advances represent our cost of funds plus a mark-up to cover our administrative expenses. This mark-up is determined by our Asset-Liability Committee. On an annual basis, our Board of Directors establishes limits on the total amount of funds available for community investment advances.
For the years ended December 31, 2016, 2015, and 2014, advances represented 69, 61, and 63 percent of our total average assets and generated 57, 39, and 36 percent of our total interest income. For additional information on our advances, including our top five borrowers, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Advances.” In addition, refer to “Item 1A. Risk Factors” for a discussion on our exposure to customer concentration risk.
COLLATERAL
We are required by regulation to obtain and maintain a security interest in eligible collateral at the time we originate or renew an advance and throughout the life of the advance to ensure a fully collateralized position. Eligible collateral includes (i) whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including mortgage-backed securities (MBS) issued or guaranteed by Fannie Mae, Freddie Mac, or Government National Mortgage Association (Ginnie Mae) and Federal Family Education Loan Program (FFELP) guaranteed student loans, (iii) cash deposited with us, and (iv) other real estate-related collateral acceptable to us provided such collateral has a readily ascertainable value and we can perfect a security interest in such property. CFIs may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each member's capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.
Borrowers may pledge collateral to us by executing a blanket lien, specifically assigning collateral, or placing physical possession of collateral with us or our custodians. We perfect our security interest in all pledged collateral by filing Uniform Commercial Code financing statements or taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to us by our members, or any affiliates of our members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.

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Under a blanket lien, we are granted a security interest in all financial assets of the borrower to fully secure the borrower's obligation. Other than securities and cash deposits, we do not initially take delivery of collateral pledged by blanket lien borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower's obligation. With respect to non-blanket lien borrowers that are federally insured, we generally require collateral to be specifically assigned. With respect to non-blanket lien borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), we generally take control of collateral through the delivery of cash, securities, or loans to us or our custodians.
For additional information on our collateral requirements, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Advances.”
HOUSING ASSOCIATES
The FHLBank Act permits us to provide advances to eligible housing associates. Housing associates are approved mortgagees under Title II of the National Housing Act that meet certain criteria, including: (i) chartered under law and have succession, (ii) subject to inspection and supervision by some governmental agency, and (iii) lend their own funds as their principal activity in the mortgage field. The same regulatory lending requirements that apply to our members generally apply to housing associates. Because housing associates are not members, they are not subject to certain provisions of the FHLBank Act applicable to members and cannot own our capital stock. In addition, they may only pledge certain types of collateral including: (i) Federal Housing Administration (FHA) mortgages, (ii) Ginnie Mae securities backed by FHA mortgages, (iii) certain residential mortgage loans, and (iv) cash deposited with us.
PREPAYMENT FEES
We charge a borrower a prepayment fee when the borrower prepays certain advances before the original maturity. For advances with symmetrical prepayment features, we may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid.
Standby Letters of Credit
We may issue standby letters of credit on behalf of our members, certain other FHLBank members (through a master participation agreement), and housing associates to facilitate business transactions with third parties. These letters of credit are generally used to facilitate residential housing finance and community lending, assist with asset-liability management, or provide liquidity or other funding. Standby letters of credit must be fully collateralized with eligible collateral at the time of issuance.
Mortgage Loans
We invest in mortgage loans through the MPF program, a secondary mortgage market structure developed by the FHLBank of Chicago to help fulfill the housing mission of the FHLBanks. As a result of the Merger, we also acquired mortgage loans previously purchased by the Seattle Bank under the Mortgage Purchase Program (MPP). These programs are considered core mission activities of the FHLBanks, as defined by Finance Agency regulations.
MPF
Under the MPF program, we purchase or fund eligible mortgage loans (MPF loans) from or through, members or housing associates called participating financial institutions (PFIs). We may also acquire MPF loans through participations with other FHLBanks. MPF loans are conforming conventional or government-insured fixed rate mortgage loans secured by one-to-four family residential properties with maturities ranging from five to 30 years. For the years ended December 31, 2016, 2015, and 2014, MPF loans represented 4, 6, and 8 percent of our total average assets and generated 14, 27, and 36 percent of our total interest income.
MPF Provider
The FHLBank of Chicago serves as the MPF Provider for the MPF program. In its role as MPF Provider, the FHLBank of Chicago provides the infrastructure and operational support for the MPF program and is responsible for publishing and maintaining the MPF Guides, which detail the requirements PFIs must follow in originating, selling, and servicing MPF loans. The MPF Provider provides a service for FHLBanks, if needed, that establishes the base price of MPF loan products utilizing the agreed upon methodologies determined by the participating MPF FHLBanks. In exchange for providing these services, the MPF Provider receives a fee from each of the FHLBanks participating in the MPF program. The MPF Provider has engaged Wells Fargo Bank N.A. (Wells Fargo) as the master servicer for the MPF program.

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MPF Governance Committee
The MPF Governance Committee, which consists of representatives from each of the FHLBanks participating in the MPF program, is responsible for recommending and implementing strategic MPF program decisions, including, but not limited to, pricing methodology changes. Participating MPF FHLBanks are allowed to determine their own price or adjust the base price of MPF loan products established by the FHLBank of Chicago. Accordingly, we monitor daily market conditions and make price adjustments to our MPF loan products when deemed necessary. This allows us to impact the level of member demand in our MPF program as well as profitability, risk management, and regulatory requirements.
Participating Financial Institutions
Our members and eligible housing associates must apply to become a PFI. In order to do MPF business with us, each member or eligible housing associate must meet certain eligibility standards and sign a PFI Agreement. The PFI Agreement provides the terms and conditions for the sale or funding of MPF loans, including the servicing of MPF loans.
PFIs may either retain the servicing of MPF loans or sell the servicing to an approved third-party provider. If a PFI chooses to retain the servicing, it receives a servicing fee to manage the servicing activities. If a PFI chooses to sell the servicing rights to an approved third-party provider, the servicing is transferred concurrently with the sale of the MPF loans and a servicing fee is paid to the third-party provider. Throughout the servicing process, the master servicer monitors the PFI's compliance with MPF program requirements and makes periodic reports to the MPF Provider.
MPF Loan Types
We currently offer MPF closed loan products in which we purchase loans acquired or closed by the PFI. In addition, we offer certain off-balance sheet loan products. MPF Xtra is an off-balance sheet loan product in which we assign 100 percent of our interest in PFI master commitments to the FHLBank of Chicago. The FHLBank of Chicago then purchases mortgage loans from our PFIs and sells MPF Xtra loans to Fannie Mae. MPF Direct is an off-balance sheet jumbo loan product in which mortgage loans are sold from our PFIs to a real estate investment trust. MPF Government MBS is an off-balance sheet loan product where our PFIs sell government loans directly to the FHLBank of Chicago where they are pooled and securitized into Ginnie Mae MBS securities. We receive a small fee for our continued management of the PFI relationship under MPF Xtra, MPF Direct, and MPF Government MBS.
The PFI performs all traditional retail loan origination functions on our MPF loan products. We are responsible for managing the interest rate risk and liquidity risk associated with the MPF loans we purchase and carry in our Statements of Condition. In order to limit our credit risk exposure to approximately that of an investor in an investment grade MBS, we require a credit risk sharing arrangement with the PFI on all MPF loans at the time of purchase.
For additional discussion on our mortgage loans and their related credit risk, refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Mortgage Loans.”
MPF Loan Volume
Over the years, our member base for MPF loans has evolved from large-volume loan purchases from a small number of large PFIs to purchasing the majority of our MPF loans from a diverse base of banks and credit unions. Our ability to price MPF loans, coupled with the low interest rate environment, has allowed us to serve the liquidity needs of a broad range of members and maintain relatively stable mortgage loan volumes. During the years ended December 31, 2016, 2015, and 2014, we purchased $1.5 billion, $0.8 billion, and $0.9 billion of MPF loan products (excluding MPF Xtra, MPF Direct, and MPF Government MBS). In addition, our members delivered $1.4 billion, $1.0 billion, and $0.7 billion of MPF Xtra, MPF Direct, and MPF Government MBS loans during the years ended December 31, 2016, 2015, and 2014. We began offering MPF Direct in 2015 and MPF Government MBS in 2016.
If we exceed $2.5 billion in MPF loan purchases in a calendar year (excluding MPF Xtra, MPF Direct, and MPF Government MBS), we may become subject to housing goals as specified by the Finance Agency.

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MPP
Effective May 31, 2015, as a part of the Merger, we acquired mortgage loans previously purchased by the Seattle Bank under the MPP. Similar to the MPF program, the MPP includes a risk sharing arrangement under which we manage the interest rate risk and liquidity risk of MPP loans, while the members retain the primary credit risk.
Through the MPP, the Seattle Bank purchased mortgage loans directly from PFIs. MPP loans were conforming conventional or government-insured fixed rate mortgage loans secured by one-to-four family residential properties with maturities ranging from five to 30 years. MPP PFIs were responsible for all traditional retail loan origination functions related to MPP loans. MPP PFIs who sold MPP loans to the Seattle Bank could either continue to service the mortgage loans or sell the servicing rights to a third party service provider.
In 2005, the Seattle Bank ceased entering into new MPP master commitment contracts and therefore all MPP loans acquired were originated prior to 2006. We currently do not purchase mortgage loans under this program and we expect that the $416 million outstanding at December 31, 2016 will continue to decrease as the remaining MPP loans are paid off. We do not service the acquired MPP loans nor do we own any servicing rights. We have engaged Bank of New York Mellon as the MPP master servicer. For the year ended December 31, 2016, MPP loans represented less than 1 percent of our total average assets and generated one percent of our total interest income.
For additional information on our mortgage loans, see “Item 7. Management's Discussion and Analysis of Financial Condition and Risk Management — Credit Risk — Mortgage Loans” and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Mortgage Loans.”
TEMPORARY LOAN MODIFICATION PLANS

We offer loan modification plans for our MPF and MPP PFIs. Under these plans, we generally permit the recapitalization of past due amounts up to the original loan amount and/or reduce the interest rate for a specified period of time. No other terms of the original loan, including contractual maturity, are generally modified. At December 31, 2016, 68 modified loans totaling $18 million were outstanding in our Statements of Condition.
Investments
We maintain an investment portfolio primarily to provide investment income and liquidity. Our investment portfolio consists of both short- and long-term investments. Our short-term investments may include, but are not limited to, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, certificates of deposit, commercial paper, and U.S. treasury obligations. Our long-term investments may include, but are not limited to, other U.S. obligations, government-sponsored enterprise (GSE) and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. Our long-term investments generally provide higher spreads than our short-term investments. For the years ended December 31, 2016, 2015, and 2014, investments represented 26, 32, and 28 percent of our total average assets and generated 27, 32, and 28 percent of our total interest income.
We do not have any subsidiaries. We also have no equity positions in any partnerships, corporations, or off-balance sheet special purpose entities. In an effort to reduce credit risk, our Enterprise Risk Management Policy (ERMP) prohibits new purchases of private-label MBS. In addition, Finance Agency regulations limit the type of investments we may purchase.
The Finance Agency further limits our investments in MBS by requiring that the total book value of our MBS not exceed three times regulatory capital at the time of purchase. For details on our compliance with this regulatory requirement, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Investments.” For additional discussion on our investments and their related credit risk, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Investments."

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Standby Bond Purchase Agreements
We currently hold standby bond purchase agreements with housing associates within our district whereby, for a fee, we agree to serve as a standby liquidity provider if required, to purchase and hold the housing associate's bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which we would be required to purchase the bonds. If purchased, the bonds would be classified as available-for-sale (AFS) securities in our Statements of Condition. For additional details on our standby bond purchase agreements, refer to “Item 8. Financial Statements and Supplementary Data — Note 18 — Commitments and Contingencies.”
Deposits
We accept deposits from our members and eligible housing associates. We offer several types of deposit programs, including demand, overnight, and term deposits. Deposit programs provide us funding while providing members a low-risk interest-earning asset.
Consolidated Obligations
Our primary source of funding and liquidity is the issuance of debt securities, referred to as consolidated obligations, in the capital markets. Consolidated obligations (bonds and discount notes) are the joint and several obligations of all FHLBanks and are backed only by the financial resources of the FHLBanks. They are not obligations of the U.S. Government, and the U.S. Government does not guarantee them. At February 28, 2017, Standard & Poor's Ratings Services (S&P) and Moody's Investors Service, Inc. (Moody's) rated the consolidated obligations AA+/A-1+ and Aaa/P-1, both with a stable outlook.
The Office of Finance issues all consolidated obligations on behalf of the FHLBanks. It is also responsible for servicing all outstanding debt, coordinating transfers of debt between the FHLBanks, serving as a source of information for the FHLBanks on capital market developments, managing the FHLBank System's relationship with the rating agencies with respect to consolidated obligations, and preparing and making available the FHLBank System's Combined Financial Reports.
Although we are primarily responsible for the portion of consolidated obligations issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority.
To the extent that an FHLBank makes any payment on a consolidated obligation on behalf of another FHLBank, the paying FHLBank is entitled to reimbursement from the FHLBank otherwise responsible for the payment. However, if the Finance Agency determines that an FHLBank is unable to satisfy its obligations, then it may allocate the outstanding liability among the remaining FHLBanks on a pro-rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that it may determine.

The Finance Agency also requires each FHLBank to maintain unpledged qualifying assets, as defined by regulation, in an amount at least equal to the amount of that FHLBank’s participation in the total consolidated obligations outstanding. For details on our compliance with this regulatory requirement, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity Requirements.”

BONDS
Bonds are generally issued to satisfy our intermediate- and long-term funding needs. Typically, they have maturities ranging up to 30 years, although there is no statutory or regulatory limitation as to their maturity. Bonds are issued with either fixed or variable rate payment terms that use a variety of indices for interest rate resets such as LIBOR. To meet the specific needs of certain investors, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and call features. When bonds are issued on our behalf, we may concurrently enter into a derivative agreement to effectively convert the fixed rate payment stream to variable or to offset the embedded features in the bond.
Depending on the amount and type of funding needed, bonds may be issued through negotiated or competitively bid transactions with approved underwriters or selling group members (i.e., TAP Issue Program, auction, and Global Debt Program), or through debt transfers between FHLBanks.

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The TAP Issue Program is used to issue fixed rate, noncallable bonds with standard maturities of two, three, five, seven, or ten years. The goal of the TAP Issue Program is to aggregate frequent smaller bond issues into a larger bond issue that may have greater market liquidity.
An auction process is used to issue fixed rate, callable bonds. Auction structures are determined by the FHLBanks in consultation with the Office of Finance and the securities dealer community. We may receive zero to 100 percent of the proceeds of the bonds issued via the callable auction depending on (i) the amounts and costs for the bonds bid by underwriters, (ii) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the obligations, and (iii) the guidelines for allocation of bond proceeds among multiple participating FHLBanks administered by the Office of Finance.
The Global Debt Program allows the FHLBanks to diversify their funding sources to include overseas investors. Global Debt Program bonds may be issued in maturities ranging up to 30 years and can be customized with different terms and currencies. The FHLBanks approve the terms of the individual issues under the Global Debt Program.
For additional information on our bonds, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Consolidated Obligations” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”
DISCOUNT NOTES
Discount notes are generally issued to satisfy our short-term funding needs. They have maturities of up to 365/366 days and are offered daily through a discount note selling group and other authorized underwriters. Discount notes are generally sold at a discount and mature at par.
On a daily basis, we may request that specific amounts of discount notes with specific maturity dates be offered by the Office of Finance for sale through certain securities dealers. We may receive zero to 100 percent of the proceeds of the discount notes issued via this sales process depending on (i) the time of the request, (ii) the maximum costs we or other FHLBanks participating in the same issue, if any, are willing to pay for the discount notes, and (iii) the amount of orders for the discount notes submitted by dealers.
Twice weekly, we may request that specific amounts of discount notes with fixed maturities of four to 26 weeks be offered by the Office of Finance through competitive auctions conducted with securities dealers in the discount note selling group. One or more of the FHLBanks may also request that amounts of those same discount notes be offered for sale for their benefit through the same auction. The discount notes offered for sale through competitive auction are not subject to a limit on the maximum costs the FHLBanks are willing to pay. We may receive zero to 100 percent of the proceeds of the discount notes issued through a competitive auction depending on the amounts of the discount notes bid by underwriters and the guidelines for allocation of discount note proceeds among multiple participating FHLBanks administered by the Office of Finance.
For additional information on our discount notes, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Consolidated Obligations” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”
Derivatives
We use derivatives to manage interest rate risk in our Statements of Condition. Finance Agency regulations and our ERMP establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.
The goal of our interest rate risk management strategy is not to eliminate interest rate risk, but to manage it within appropriate limits. One key way we manage interest rate risk is to acquire and maintain a portfolio of assets and liabilities which, together with their associated derivatives, are conservatively matched with respect to the expected repricings.

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We can use interest rate swaps, swaptions, interest rate caps and floors, options, and future/forward contracts as part of our interest rate risk management strategies. These derivatives can be used as either a fair value hedge of a financial instrument or firm commitment or an economic hedge to manage certain defined risks in our Statements of Condition. We use economic hedges primarily to (i) manage mismatches between the coupon features of our assets and liabilities, (ii) offset prepayment risk in certain assets, (iii) mitigate the income statement volatility that occurs when financial instruments are recorded at fair value and hedge accounting is not permitted by accounting guidance, or (iv) to reduce exposure reset risk.
Additional information on our derivatives can be found in "Item 8. Financial Statements and Supplementary Data — Note 11 — Derivatives and Hedging Activities” and “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Derivatives.”
CAPITAL AND DIVIDENDS
Capital Stock
Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We generally issue a single class of capital stock (Class B capital stock). We have two subclasses of capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st subject to a cap of $10.0 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding in our Statements of Condition. All capital stock issued is subject to a five year notice of redemption period.

The capital stock requirements established in our Capital Plan are designed so that we remain adequately capitalized as member activity changes. Our Board of Directors may make adjustments to the capital stock requirements within ranges established in our Capital Plan.
 
Capital stock owned by members in excess of their capital stock requirement is deemed excess capital stock. Under our Capital Plan, we, at our discretion and upon 15 days' written notice, may repurchase excess membership capital stock. We, at our discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock.

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income.
For additional information on our capital, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital.”
Additional Capital from Merger
We recognized the net assets acquired from the Seattle Bank by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a capital account captioned “Additional capital from merger.” We treat this additional capital from merger as a component of total capital for regulatory capital purposes. Dividends to our members have been paid from this account since the merger date and we intend to pay future dividends to members, when and if declared, from this account until the additional capital from merger balance is depleted.
Retained Earnings
Our ERMP includes a target level of retained earnings and additional capital from merger based on the amount deemed necessary to help protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to enable us to attain our targeted level of retained earnings over time. At December 31, 2016, our actual retained earnings were 95 percent of target. Based on our projected earnings and assuming no material increase in our risk profile, we expect to be above target by the end of 2017.

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We entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of each FHLBank by allocating the earnings historically paid to satisfy the Resolution Funding Corporation obligation to a separate restricted retained earnings account. Under the JCE Agreement, each FHLBank allocates 20 percent of its quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in our Statements of Condition. At December 31, 2016 and 2015, our restricted retained earnings account totaled $231 million and $101 million. One percent of our average balance of outstanding consolidated obligations for the three months ended September 30, 2016 was $1.6 billion. To review the JCE Agreement, as amended, see Exhibit 99.1 of our Form 8-K filed with the Securities and Exchange Commission (SEC) on August 5, 2011.
Dividends
Our Board of Directors may declare and pay different dividends for each subclass of capital stock. Dividend payments may be made in the form of cash and/or additional shares of capital stock. Historically, we have only paid cash dividends. By regulation, we may pay dividends from current earnings, unrestricted retained earnings, or additional capital from merger, but we may not declare a dividend based on projected or anticipated earnings. We are prohibited from paying a dividend in the form of additional shares of capital stock if, after the issuance, the outstanding excess capital stock would be greater than one percent of our total assets. Our Board of Directors may not declare or pay dividends if it would result in our non-compliance with regulatory capital requirements.
Our Board of Directors believes any returns on capital stock above an appropriate benchmark rate that are not retained for capital growth should be returned to members that utilize our product and service offerings. Our current philosophy is to pay a membership capital stock dividend similar to a benchmark rate of interest, such as average-three month LIBOR over time, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. Our actual dividend is determined quarterly by our Board of Directors, based on policies, regulatory requirements, and actual performance.
For additional information on our dividends, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Dividends.”
COMPETITION
Advances
One of our primary businesses is to make advances to our members and eligible housing associates. Demand for our advances is affected by, among other things, the cost of other available sources of funding for our borrowers. We compete with other suppliers of secured and unsecured wholesale funding including, but not limited to, investment banks, commercial banks, other GSEs, and U.S. Government agencies. We may also compete with other FHLBanks to the extent that member institutions have affiliated institutions located outside of our district. Furthermore, our members may have access to brokered deposits and resale agreements, each of which represent competitive alternatives to our advances. Many of our competitors are not subject to the same body of regulation that we are, which enables those competitors to offer products and terms that we may not be able to offer. Efforts to effectively compete with other suppliers of wholesale funding by changing the pricing of our advances may result in a decrease in the profitability of our advance business.
Mortgage Loans
The purchase of mortgage loans through the MPF program is subject to competition on the basis of prices paid for mortgage loans, customer service, and ancillary services, such as automated underwriting and loan servicing options. We compete primarily with other GSEs, such as Fannie Mae, Freddie Mac, and other financial institutions and private investors for acquisition of conventional fixed rate mortgage loans.
Consolidated Obligations
Our primary source of funding is through the issuance of consolidated obligations. We compete with the U.S. Government, Fannie Mae, Freddie Mac, and other GSEs as well as corporate, sovereign, and supranational entities for funds raised through the issuance of debt in the national and global debt markets. In the absence of increased demand, increased supply of competing debt products may result in higher debt costs or lesser amounts of debt issued at the same cost. Although our debt issuances have kept pace with the funding needs of our members, there can be no assurance that this will continue.

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TAXATION
We are exempt from all federal, state, and local taxation except real property taxes.
AFFORDABLE HOUSING PROGRAM ASSESSMENTS
The FHLBank Act requires each FHLBank to establish and fund an AHP, which 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 to moderate income households. Annually, the FHLBanks must set aside for the AHP the greater of ten percent of their current year net earnings or their pro-rata share of an aggregate $100 million to be contributed in total by the FHLBanks. In addition to the required AHP assessment, our Board may elect to make voluntary contributions to the AHP. For purposes of the required AHP assessment, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency. We accrue the AHP assessment on a monthly basis and reduce our AHP liability as program funds are distributed. For additional information on our AHP, refer to “Item 8. Financial Statements and Supplementary Data — Note 14 — Affordable Housing Program.”
OVERSIGHT, AUDITS, AND EXAMINATIONS
The Finance Agency supervises and regulates the FHLBanks and the Office of Finance. The Finance Agency has a statutory responsibility and corresponding authority to ensure that the FHLBanks operate in a safe and sound manner. Consistent with that duty, the Finance Agency has an additional responsibility to ensure the FHLBanks carry out their housing and community development finance mission. In order to carry out those responsibilities, the Finance Agency establishes regulations governing the entire range of operations of the FHLBanks, conducts ongoing off-site monitoring and supervisory reviews, performs annual on-site examinations and periodic interim on-site reviews, and requires the FHLBanks to submit monthly and quarterly information regarding their financial condition, results of operations, and risk metrics.

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

As required by federal regulation, we have an internal audit department and an audit committee of our Board. An independent public accounting firm registered with the Public Company Accounting Oversight Board (PCAOB) audits our annual financial statements. Our independent registered public accounting firm, PricewaterhouseCoopers LLP, must adhere to PCAOB and Government Auditing Standards, as issued by the Comptroller General, when conducting our audits. Our Board, our senior management, and the Finance Agency receive these audit reports. We also submit annual management reports to Congress, the President of the United States, the Office of Management and Budget, and the Comptroller General. These reports include audited financial statements, a statement of internal accounting and administrative control systems, and the report of the independent registered public accounting firm on the financial statements.
AVAILABLE INFORMATION
We are required to file with the SEC an annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. The SEC maintains a website containing these reports and other information regarding our electronic filings located at www.sec.gov. These reports may also be read and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. Further information about the operation of the SEC's Public Reference Room may be obtained by calling 1-800-SEC-0330.

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We also make our annual reports, quarterly reports, current reports, and amendments to all such reports filed with or furnished to the SEC available, free of charge, on our internet website at www.fhlbdm.com as soon as reasonably practicable after such reports are available. Annual and quarterly reports for the FHLBanks on a combined basis are also available, free of charge, at the website of the Office of Finance as soon as reasonably practicable after such reports are available. The internet website address to obtain these reports is www.fhlb-of.com.
Information contained in the previously mentioned websites, or that can be accessed through those websites, is not incorporated by reference into this annual report on Form 10-K and does not constitute a part of this or any report filed with the SEC.
PERSONNEL
As of February 28, 2017, we employed 300 full-time and seven part-time employees. Our employees are not covered by a collective bargaining agreement.


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ITEM 1A. RISK FACTORS

The following discussion summarizes some of the more important risks we face. This discussion is not exhaustive, and there may be other risks we face, which are not described below. The risks described below, if realized, could negatively affect our business operations, financial condition, and future results of operations and, among other things, could result in our inability to pay dividends on our capital stock or repurchase capital stock.
WE ARE SUBJECT TO A COMPLEX BODY OF LAWS AND REGULATIONS THAT COULD CHANGE IN A MANNER DETRIMENTAL TO OUR BUSINESS OPERATIONS
The FHLBanks are GSEs, organized under the authority of the FHLBank Act, and as such, are governed by federal laws and regulations adopted and applied by the Finance Agency. From time to time, Congress may amend the FHLBank Act or other statutes in ways that affect the rights and obligations of the FHLBanks and the manner in which the FHLBanks carry out their housing finance mission and business operations. Due to the recent change in the U.S. Government, there are additional uncertainties in the legislative and regulatory environment. New or modified legislation enacted by Congress or regulations adopted by the Finance Agency or other financial services regulators could adversely impact our ability to conduct business or the cost of doing business.

For a discussion of recent legislative and regulatory activity that could affect us, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Legislative and Regulatory Developments.”
WE ARE JOINTLY AND SEVERALLY LIABLE FOR THE CONSOLIDATED OBLIGATIONS OF OTHER FHLBANKS AND MAY BE REQUIRED TO PROVIDE FINANCIAL ASSISTANCE TO OTHER FHLBANKS
Each of the FHLBanks relies upon the issuance of consolidated obligations as a primary source of funds. Consolidated obligations are the joint and several obligations of the 11 FHLBanks and are backed only by the financial resources of the FHLBanks. They are not obligations of the U.S. Government, and the U.S. Government does not guarantee them. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. Furthermore, if the Finance Agency determines that an FHLBank is unable to satisfy its obligations, it may allocate the outstanding liability among the remaining FHLBanks on a pro-rata basis in proportion to each FHLBank’s participation in all consolidated obligations outstanding, or on any other basis that it may determine. Accordingly, we could incur liability beyond our primary obligation under consolidated obligations, which could negatively affect our financial condition and results of operations. Moreover, we may not pay dividends to, or redeem or repurchase capital stock from, any of our members if timely payment of principal and interest on all FHLBank consolidated obligations has not been made. Accordingly, our ability to pay dividends or to redeem or repurchase capital stock may be affected not only by our financial condition, but by the financial condition of the other FHLBanks.
Due to our relationship with other FHLBanks, we could also be impacted by events other than the default on a consolidated obligation. Events that impact other FHLBanks include, but are not limited to, member failures, capital deficiencies, and other-than-temporary impairment (OTTI) charges. These events may cause the Finance Agency, at its discretion, to require any FHLBank to either provide capital to or buy assets of any other FHLBank. If we are called upon by the Finance Agency to do either of these items, it may negatively impact our financial condition.
ACTUAL OR PERCEIVED CHANGES IN THE FHLBANK'S CREDIT RATINGS AS WELL AS THE U.S. GOVERNMENT'S CREDIT RATING COULD ADVERSELY AFFECT OUR BUSINESS
Our consolidated obligations are currently rated AA+/A-1+ by S&P and Aaa/P-1 by Moody's, both with a stable outlook. These ratings are subject to reduction or withdrawal at any time by an NRSRO, and the FHLBank System may not be able to maintain these credit ratings. Adverse rating agency actions on the FHLBank System or U.S. Government may reduce investor confidence and negatively affect our cost of funds and ability to issue consolidated obligations on acceptable terms, which could adversely impact our financial condition and results of operations.

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A reduction in our credit rating could also trigger additional collateral posting requirements under our derivative agreements. For cleared derivatives, the Derivative Clearing Organization (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. We were not required to post additional initial margin by our clearing agents, based on credit considerations at December 31, 2016. For the majority of uncleared derivative contracts, we are required to deliver additional collateral on derivatives in net liability positions to counterparties if there is deterioration in our credit rating. Further, demand for certain Bank products, including, but not limited to, standby letters of credit and standby bond purchase agreements, is influenced by our credit rating. A reduction in our credit rating could weaken or eliminate demand for such products, and our financial condition and results of operations could be adversely affected.

WE COULD BE ADVERSELY AFFECTED BY OUR INABILITY TO ACCESS THE CAPITAL MARKETS

Our primary source of funds is through the issuance of consolidated obligations in the capital markets. Our ability to obtain funds through the issuance of consolidated obligations depends in part on our real and perceived relationship to the U.S. Government, prevailing market conditions in the capital markets, and rating agency actions, all of which are beyond our control. In addition, changes to the regulatory environment that affect bank counterparties and debt underwriters could adversely affect our ability to access the capital markets and the cost of that funding. We cannot make any assurance that we will be able to obtain funding on terms acceptable to us, if at all. If we cannot access funding when needed, our ability to support and continue business operations, including our ability to refund maturing debt and compliance with regulatory liquidity requirements, could be adversely impacted, which would thereby adversely impact our financial condition and results of operations. Although our debt issuances have historically kept pace with the funding needs of our members and eligible housing associates, there can be no assurance that this will continue.
FAILURE TO MEET MINIMUM REGULATORY CAPITAL REQUIREMENTS COULD ADVERSELY AFFECT OUR ABILITY TO REDEEM OR REPURCHASE CAPITAL STOCK, PAY DIVIDENDS, AND ATTRACT NEW MEMBERS
We are required to maintain capital to meet specific minimum requirements, as defined by the Finance Agency. Historically, our capital has exceeded all capital requirements and we have maintained adequate capital and leverage ratios. If we fail to meet any of these requirements or if our Board of Directors or the Finance Agency determines that we have incurred, or are likely to incur, losses resulting in, or losses that are expected to result in, a charge against capital, we would not be able to redeem or repurchase any capital stock while such charges are continuing or expected to continue. In addition, failure to meet our capital requirements could result in the Finance Agency's imposition of restrictions pertaining to dividend payments, lending, investing, or other business activities. Additionally, the Finance Agency could require that we call upon our members to purchase additional capital stock to meet our minimum regulatory capital requirements. Members may be unable or unwilling to satisfy such calls for additional capital, which could lead to a member's involuntary termination of membership as a result of noncompliance with the Bank's Capital Plan, which could adversely impact our financial condition and results of operations.
WE COULD BE ADVERSELY AFFECTED BY OUR EXPOSURE TO CUSTOMER CONCENTRATION RISK
We are subject to customer concentration risk as a result of our reliance on a relatively small number of member institutions for a large portion of our total advances and resulting interest income. At December 31, 2016 and 2015, advances outstanding to our top five borrowers totaled $92.2 billion and $50.5 billion, representing 70 and 57 percent of our total advances outstanding. At December 31, 2016 and 2015, our single largest borrower accounted for 59 and 42 percent of total advances outstanding. Advance balances with these and our other members could change due to factors such as a change in member demand or borrowing capacity, relocation of members out of our district, or members with affiliated institutions located outside of our district choosing to do business with another FHLBank. In addition, advance balances could change as a result of new or modified legislation enacted by Congress or regulations or other directives adopted by the Finance Agency or other financial services regulators. If, for any reason, we were to lose, or experience a decrease in the amount of business with our top five borrowers, our financial condition and results of operations could be negatively affected.  Refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Statements of Condition - Advances” for additional information on our top five borrowers.


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WE FACE COMPETITION FOR ADVANCES, MORTGAGE LOANS, AND FUNDING
Our primary business activities are providing advances to members and housing associates and acquiring residential mortgage loans from or through our members. Demand for our advances is affected by, among other things, the cost of other available sources of funding for our borrowers. We may from time to time compete with other suppliers of secured and unsecured wholesale funding including, but not limited to, investment banks, commercial banks, other GSEs, and U.S. Government agencies. We may also compete with other FHLBanks to the extent that member institutions have affiliated institutions located outside of our district. Furthermore, our members may have access to brokered deposits and resale agreements, each of which represent competitive alternatives to our advances. Many of our competitors are not subject to the same body of regulation that we are, which enables those competitors to offer products and terms that we may not be able to offer. Efforts to effectively compete with other suppliers of wholesale funding by changing the pricing of our advances may result in a decrease in the profitability of our advance business. A decrease in the demand for advances or a decrease in the profitability on advances would negatively affect our financial condition and results of operations.
The purchase of mortgage loans through the MPF program is subject to competition on the basis of prices paid for mortgage loans, customer service, and ancillary services, such as automated underwriting and loan servicing options. We compete primarily with other GSEs, such as Fannie Mae, Freddie Mac, and other financial institutions, the Federal Reserve, and private investors for acquisition of conventional fixed rate mortgage loans. Increased competition could result in a reduction in the amount of mortgage loans we are able to purchase, which could negatively affect our financial condition and results of operations.
We also compete with the U.S. Government, Fannie Mae, Freddie Mac, and other GSEs as well as corporate, sovereign, and supranational entities for raising funds through the issuance of debt in the national and global markets. In the absence of increased demand, increased supply of competing debt products may result in higher debt costs or lesser amounts of debt issued at the same cost. An increase in funding costs would negatively affect our financial condition and results of operations.
WE COULD BE ADVERSELY AFFECTED BY OUR EXPOSURE TO CREDIT RISK
We are exposed to credit risk if the market value of an obligation declines as a result of deterioration in the creditworthiness of the obligor or the credit quality of a security instrument. We assume unsecured and secured credit risk exposure in that a borrower or counterparty could default and we may suffer a loss if we are not able to fully recover amounts owed to us in a timely manner.
We attempt to mitigate unsecured credit risk by limiting the terms of unsecured investments and the borrowing capacity of our counterparties. We attempt to mitigate secured credit risk through collateral requirements and credit analysis of our borrowers and counterparties. We require collateral on advances, standby letters of credit, certain mortgage loan credit enhancements provided by PFIs, certain investments, and derivatives. All advances, standby letters of credit, and applicable mortgage loan credit enhancements are required to be fully collateralized. We evaluate the types of collateral pledged by our borrowers and counterparties and assign a borrowing capacity to the collateral, generally based on a percentage of its unpaid principal balance or estimated market value, if available. We generally have the ability to call for additional or substitute collateral during the life of an obligation to ensure we are fully collateralized. Notwithstanding these mitigating factors, we may suffer losses that could adversely impact our financial condition and results of operations.
If a borrower or counterparty fails, we have the right to take ownership of the collateral covering the obligation. However, if the liquidation value of the collateral is less than the value of the outstanding obligation, we may incur losses that could adversely affect our financial condition and results of operations. If we are unable to secure the obligations of borrowers and counterparties, our lending, investing, and hedging activities could decrease, which would negatively impact our financial condition and results of operations.

19


CHANGES IN ECONOMIC CONDITIONS OR FEDERAL FISCAL AND MONETARY POLICY COULD ADVERSELY IMPACT OUR BUSINESS
We operate with narrow margins and our net income is sensitive to changes in market conditions that can impact the interest we earn and pay and introduce volatility in other income (loss). These conditions include, but are not limited to, the following:
changes in interest rates;
fluctuations in both debt and equity capital markets;
conditions in the financial, credit, mortgage, and housing markets;
regulatory initiatives;
the willingness and ability of financial institutions to expand lending;
and the strength of the U.S. economy and the local economies in which we conduct business.
Our financial condition, results of operations, and ability to pay dividends could be negatively affected by changes in one or more of these conditions.
Additionally, our business and results of operations may be affected by the fiscal and monetary policies of the federal government and its agencies, including the Federal Reserve, which regulates the supply of money and credit in the U.S. The Federal Reserve's policies directly and indirectly influence the yield on interest-earning assets and the cost of interest-bearing liabilities, which could adversely affect our financial condition, results of operations, and ability to pay dividends.
WE COULD BE ADVERSELY AFFECTED BY OUR INABILITY TO ENTER INTO DERIVATIVE INSTRUMENTS ON ACCEPTABLE TERMS
We use derivatives to manage interest rate risk in our Statements of Condition. Our effective use of derivative instruments depends upon management's ability to determine the appropriate hedging strategies and positions in light of our assets and liabilities as well as prevailing and anticipated market conditions. In addition, the effectiveness of our hedging strategies depends upon our ability to enter into derivatives with acceptable counterparties, on terms desirable to us, and in quantities necessary to hedge our corresponding assets and liabilities. If we are unable to manage our hedging positions properly, or are unable to enter into derivative instruments on desirable terms, we may incur higher funding costs and be unable to effectively manage our interest rate risk and other risks, which could negatively affect our financial condition and results of operations.
EXPOSURE TO OPTION RISK IN OUR FINANCIAL ASSETS AND LIABILITIES COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS
Our mortgage assets provide homeowners the option to prepay their mortgages prior to maturity. The effect of changes in interest rates can exacerbate prepayment or extension risk, which is the risk that mortgage assets will be refinanced by the mortgagor in low interest rate environments or will remain outstanding longer than expected at below-market yields when interest rates increase. Our advances, consolidated obligations, and derivatives may provide us, the borrower, the issuer, or the counterparty with the option to call or put the asset or liability. These options leave us susceptible to unpredictable cash flows associated with our financial assets and liabilities. The exercise of the option and the prepayment or extension risk is dependent upon general market conditions and could have an adverse effect on our financial condition and results of operations.
INCREASES IN DELINQUENCY OR LOSS ESTIMATES ON OUR MPF AND MPP LOANS MAY HAVE AN ADVERSE IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The condition of the U.S. housing market can have a significant impact on the Bank. If economic conditions weaken and result in increased unemployment and a decline in home prices, we could see an increase in loan delinquencies or loss estimates and decide to increase our allowance for credit losses on mortgage loans. In addition, to the extent that mortgage insurance providers fail to fulfill their obligations to pay us for claims, we could bear additional losses on certain mortgage loans with outstanding mortgage insurance coverage. As a result, our financial condition and results of operations could be adversely impacted.

20


THE IMPACT OF FINANCIAL MODELS AND THE UNDERLYING ASSUMPTIONS USED TO VALUE FINANCIAL INSTRUMENTS AND COLLATERAL MAY HAVE AN ADVERSE IMPACT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The degree of management judgment involved in determining the fair value of financial instruments or collateral is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments and collateral that are actively traded and have quoted market prices or parameters readily available, there is little to no subjectivity in determining fair value. If market quotes are not available, fair values are based on discounted cash flows using market estimates of interest rates and volatility or on dealer prices or prices of similar instruments. We utilize external and internal pricing models to determine the fair value of certain financial instruments and collateral. For external pricing models, we review the vendors' pricing processes, methodologies, and control procedures for reasonableness. For internal pricing models, the underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. The assumptions used in both external and internal pricing models could have a significant effect on the reported fair values of assets and liabilities or collateral, the related income and expense, and the expected future behavior of assets and liabilities or collateral. While models we use to value financial instruments and collateral are subject to periodic validation by independent parties, rapid changes in market conditions could impact the value of our financial instruments and collateral. The use of different models and assumptions, as well as changes in market conditions, could impact our financial condition and results of operations as well as the amount of collateral we require from borrowers and counterparties.
The information provided by our internal financial models is also used in making business decisions relating to strategies, initiatives, transactions, and products. We have adopted controls, procedures, and policies to monitor and manage assumptions used in our internal models. However, models are inherently imperfect predictors of actual results because they are based on assumptions about future performance or activities. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different. If the results are not reliable due to inaccurate assumptions, we could make poor business decisions, including asset and liability management, or other decisions, which could result in an adverse financial impact.
FAILURES OR INTERRUPTIONS IN INTERNAL CONTROLS, INFORMATION SYSTEMS, AND OTHER OPERATING TECHNOLOGIES COULD HARM OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS, REPUTATION, AND RELATIONS WITH MEMBERS
Control failures, including failures in our controls over financial reporting, or business interruptions with members, vendors, or counterparties, could result from human error, fraud, breakdowns in information and computer systems, 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.
Moreover, we rely heavily upon information systems and other operating technologies to conduct and manage our business. To the extent that we, our members, vendors, or counterparties experience a technical failure or interruption in any of these systems or other operating technologies, including any "cyberattacks" or other breaches of technical security, we may be unable to conduct and manage our business effectively. Although we have implemented a disaster recovery and business continuity plan, we can make no assurance that it will be able to prevent, timely and adequately address, or mitigate the negative effects of any technical failure or interruption. Any technical failure or interruption could harm our customer relations, risk management, and profitability, and could adversely impact our financial condition and results of operations.
During 2016, we identified certain control deficiencies in our internal control over financial reporting. These control deficiencies were evaluated, individually and in the aggregate, and as a result, we determined one material weakness in our internal control over financial reporting remained from the previous year which related to our failure to maintain effective controls over spreadsheets used in our financial close and reporting process. This material weakness is described more fully in “Item 9A. Controls and Procedures”. These control deficiencies could result in a misstatement of any of our financial statement accounts and disclosures that could in turn result in a material misstatement of the annual or interim financial statements that would not be prevented or detected. Accordingly, management has concluded that these control deficiencies constitute a material weakness. In addition, other material weaknesses or deficiencies may be identified in the future.
If we are unable to correct the material weakness or deficiencies in internal control over financial reporting in a timely manner, our ability to record, process, summarize, and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected. This failure could cause our members to lose confidence in our reported financial information, subject us to government enforcement actions, and generally, materially, and adversely impact our business and financial condition.

21


THE INABILITY TO ATTRACT AND RETAIN KEY PERSONNEL COULD ADVERSELY IMPACT OUR BUSINESS
We rely heavily upon our employees in order to successfully execute our business and strategies. The success of our business mission depends, in large part, on our ability to attract and retain certain key personnel with required talents and skills. Should we be unable to hire or retain key personnel with the needed talents or skills, our business operations could be adversely impacted.
MEMBER CONSOLIDATIONS AND FAILURES COULD ADVERSELY AFFECT OUR BUSINESS
Member consolidations and failures could reduce the number of current and potential members in our district. During 2016, our membership level declined slightly, due primarily to 40 member consolidations. If the number of member consolidations and/or failures were to accelerate, we could experience a reduction in the level of our members' advance and other business activities. This loss of business could negatively impact our business operations, financial condition, and results of operations.
RELIANCE ON THE FHLBANK OF CHICAGO, AS MPF PROVIDER, AND FANNIE MAE, RED WOOD TRUST, INC., AND GINNIE MAE AS THE ULTIMATE INVESTORS IN THE MPF XTRA, MPF DIRECT, AND MPF GOVERNMENT MBS PRODUCTS, COULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS
As part of our business, we participate in the MPF program with the FHLBank of Chicago. In its role as MPF Provider, the FHLBank of Chicago provides the infrastructure and operational support for the MPF program and is responsible for publishing and maintaining the MPF Guides, which detail the requirements PFIs must follow in originating, selling, and servicing MPF loans. If the FHLBank of Chicago changes its MPF Provider role, ceases to operate the MPF program, or experiences a failure or interruption in its information systems and other technology, our mortgage purchase business could be adversely affected, and we could experience a related decrease in our net interest margin and profitability. In the same way, we could be adversely affected if any of the FHLBank of Chicago's third-party vendors supporting the operation of the MPF program were to experience operational or technical difficulties.
Additionally, under the MPF Xtra loan product, we assign 100 percent of our interest in PFI master commitments to the FHLBank of Chicago, who then purchases mortgage loans from our PFIs and sells those loans to Fannie Mae. Under the MPF Direct product, mortgage loans are sold directly from our PFIs to Redwood Trust, Inc., a real estate investment trust. Through the MPF Government MBS product our PFIs sell government loans directly to the FHLBank of Chicago where they are pooled and securitized into Ginnie Mae MBS securities. Should the FHLBank of Chicago, Fannie Mae, Redwood Trust, Inc., or Ginnie Mae experience any operational difficulties or inability to continue to do business, those difficulties could have a negative impact on the value of the Bank to our membership.


22


ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES
We lease approximately 43,000 square feet of office space located at 801 Walnut Street, Des Moines, Iowa from an affiliate of our member, Wells Fargo. We also maintain 12,500 square feet of leased office space at 666 Walnut Street, Des Moines, Iowa, and 8,200 square feet of office space at 901 5th Avenue, Seattle, Washington. These additional locations are used principally for information technology staff and employees serving our members in the western states within the Bank’s district. We also maintain a leased, off-site back-up facility with approximately 3,500 square feet in Urbandale, Iowa, and approximately 3,000 square feet of office space in Washington, D.C., which is shared with two other FHLBanks.

ITEM 3. LEGAL PROCEEDINGS

As a result of the Merger, we are currently involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairments of certain private-label MBS, as described below. Although the Seattle Bank sold all private-label MBS during the first quarter of 2015, we continue to be involved in these proceedings. The private-label MBS litigation is described below. After consultation with legal counsel, other than the private-label MBS litigation, we do not believe any legal proceedings to which we are a party could have a material impact on our financial condition, results of operations, or cash flows.

Private-Label MBS Litigation

As the Seattle Bank previously reported, in December of 2009, it filed 11 complaints in the Superior Court of Washington for King County relating to private-label MBS that it purchased from various dealers and financial institutions in an aggregate original principal amount of approximately $4 billion. The Seattle Bank's complaints under Washington State law requested rescission of its purchases of the securities and repurchases of the securities by the defendants for the original purchase prices plus eight percent per annum (plus related costs), minus distributions on the securities received by the Seattle Bank. The Seattle Bank asserted that the defendants made untrue statements and omitted important information in connection with their sales of the securities to the Seattle Bank.

Of the 11 cases initially filed, ten have been settled in whole or in part and one has been dismissed. We have appealed the dismissal of claims related to five certificates across three different cases. The aggregate consideration paid for the private-label MBS currently on appeal is $767 million.

Litigation Settlement Gains

Litigation settlement gains are considered realized and recorded when we receive cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when we enter into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, we consider potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
We record legal expenses related to litigation settlements as incurred in other expenses in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. We incur and recognize these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement. 
During 2016, we settled multiple private-label MBS claims and recognized $376 million in net gains on litigation settlements. During 2015, we recognized $14 million in net gains on litigation settlements.
ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


23


PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
We are a cooperative. This means we are owned by our customers, whom we call members. Our current and former members own all of our outstanding capital stock. Our capital stock is not publicly traded and has a par value of $100 per share. All shares are issued, redeemed, or repurchased by us at the stated par value. Our capital stock may be redeemed with a five year notice from the member or voluntarily repurchased by us at par value, subject to certain limitations set forth in our Capital Plan. At February 28, 2017, we had 1,416 current members that held 64.9 million shares of capital stock and 20 former members that held 0.3 million shares of mandatorily redeemable capital stock.
We paid the following quarterly cash dividends during 2016 and 2015 (dollars in millions):
 
 
2016
 
2015
Quarter Declared and Paid
 
Amount1
 
Annualized Rate2
 
Amount1
 
Annualized Rate2
First Quarter
 
$
31

 
2.82
%
 
$
26

 
2.94
%
Second Quarter
 
35

 
2.94

 
24

 
2.94

Third Quarter
 
36

 
2.98

 
25

 
2.87

Fourth Quarter
 
41

 
3.03

 
27

 
2.75


1
Amounts exclude cash dividends paid on mandatorily redeemable capital stock for each quarter of 2016 and 2015. The total dividends paid on mandatorily redeemable capital stock during 2016 were $21 million. Total dividends paid on mandatorily redeemable capital stock during 2015 were $3 million. For financial reporting purposes, these dividends were classified as interest expense.

2
Reflects the annualized rate paid on our average capital stock outstanding during the prior quarter regardless of its classification for financial reporting purposes as either capital stock or mandatorily redeemable capital stock.
For the first quarter during 2016, we paid an annualized rate of 3.50 percent on activity-based capital stock and an annualized rate of 0.50 percent on membership capital stock. For the remainder of 2016, we paid an annualized rate of 3.50 percent on activity-based capital stock and an annualized rate of 0.75 percent on membership capital stock. For each quarter during 2015, we paid an annualized rate of 3.50 percent on activity-based capital stock and an annualized rate of 0.50 percent on membership capital stock.
For additional information on our dividends, see “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital — Dividends.”


24


ITEM 6. SELECTED FINANCIAL DATA

The following tables present selected financial data for the periods indicated (dollars in millions):
 
December 31,
Statements of Condition1
2016
 
2015
 
2014
 
2013
 
2012
Cash
$
223

 
$
982

 
$
495

 
$
448

 
$
252

Investments2
41,218

 
40,167

 
23,079

 
20,131

 
13,433

Advances
131,601

 
89,173

 
65,168

 
45,650

 
26,614

Mortgage loans held for portfolio, net
6,913

 
6,755

 
6,562

 
6,557

 
6,952

Total assets
180,605

 
137,374

 
95,524

 
73,004

 
47,367

Consolidated obligations
 
 
 
 
 
 
 
 
 
Discount notes
80,947

 
98,990

 
57,773

 
38,137

 
8,675

Bonds
89,898

 
31,208

 
32,362

 
30,195

 
34,345

Total consolidated obligations3
170,845

 
130,198

 
90,135

 
68,332

 
43,020

Mandatorily redeemable capital stock
664

 
103

 
24

 
9

 
9

Total liabilities
173,204

 
131,749

 
91,212

 
69,547

 
44,533

Capital stock — Class B putable
5,917

 
4,714

 
3,469

 
2,692

 
2,063

Additional capital from merger
52

 
194

 

 

 

Retained earnings
1,450

 
801

 
720

 
678

 
622

Accumulated other comprehensive income (loss)
(18
)
 
(84
)
 
123

 
87

 
149

Total capital
7,401

 
5,625

 
4,312

 
3,457

 
2,834

 
For the Years Ended December 31,
Statements of Income1
2016
 
2015
 
2014
 
2013
 
2012
Net interest income
$
449

 
$
317

 
$
251

 
$
213

 
$
241

Provision (reversal) for credit losses on mortgage loans
3

 
2

 
(2
)
 
(6
)
 

Other income (loss)4
396

 
(30
)
 
(51
)
 
(35
)
 
(49
)
Other expense5
118

 
137

 
67

 
62

 
68

AHP assessments
75

 
15

 
14

 
12

 
13

AHP voluntary contributions

 
2

 

 

 

Net income
649

 
131

 
121

 
110

 
111

Selected Financial Ratios6,1
 
 
 
 
 
 
 
 
 
Net interest spread7
0.24
%
 
0.25
%
 
0.28
%
 
0.34
%
 
0.42
%
Net interest margin8
0.28

 
0.28

 
0.30

 
0.39

 
0.49

Return on average equity
10.09

 
2.74

 
3.17

 
3.68

 
3.98

Return on average capital stock
12.43

 
3.42

 
4.04

 
4.94

 
5.44

Return on average assets
0.40

 
0.12

 
0.14

 
0.20

 
0.23

Average equity to average assets
3.92

 
4.21

 
4.56

 
5.40

 
5.69

Regulatory capital ratio9
4.48

 
4.23

 
4.41

 
4.63

 
5.69

Dividend payout ratio10
21.83

 
78.99

 
65.16

 
48.72

 
52.46


1
Financial results for the periods after the Merger are not directly comparable to results for periods prior to the Merger.

2
Investments include interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, AFS securities, and held-to-maturity (HTM) securities.

3
The total par value of outstanding consolidated obligations of the 11 FHLBanks was $989.3 billion, $905.2 billion, $847.2 billion, $766.8 billion, and $687.9 billion at December 31, 2016, 2015, 2014, 2013, and 2012.

4
Other income (loss) includes, among other things, net gains (losses) on investment securities, net gains (losses) on derivatives and hedging activities, net gains (losses) on the extinguishment of debt, and gains on litigation settlements, net.

5
Other expense includes, among other things, compensation and benefits, professional fees, contractual services, merger related expenses, and gains and losses on real estate owned (REO).

6
Amounts used to calculate selected financial ratios are based on numbers in thousands. Accordingly, recalculations using numbers in millions may not produce the same results.

7
Represents yield on total interest-earning assets minus cost of total interest-bearing liabilities.

8
Represents net interest income expressed as a percentage of average interest-earning assets.

9
Represents period-end regulatory capital expressed as a percentage of period-end total assets. Regulatory capital includes Class B capital stock (including mandatorily redeemable capital stock), additional capital from merger, and retained earnings.

10
Represents dividends declared and paid in the stated period expressed as a percentage of net income in the stated period.

25


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

Our Management's Discussion and Analysis (MD&A) is designed to provide information that will help the reader develop a better understanding of our financial statements, changes in our financial statements from year to year, and the primary factors driving those changes. Our MD&A is organized as follows:
CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Income (Loss)
 
 
 
 
 
 
 
 
 
 
 
 
Affordable Housing Program Assessments and Voluntary Contributions
 
 
 
 
 
 
 
 
 
 
 
 
Cash and Due from Banks
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mandatorily Redeemable Capital Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

26


FORWARD-LOOKING INFORMATION

Statements contained in this annual report on Form 10-K, including statements describing the objectives, projections, estimates, or future predictions in our operations, may be forward-looking statements. These statements may be identified by the use of forward-looking terminology, such as believes, projects, expects, anticipates, estimates, intends, strategy, plan, could, should, may, and will or their negatives or other variations on these terms. By their nature, forward-looking statements involve risk or uncertainty, and actual results could differ materially from those expressed or implied or could affect the extent to which a particular objective, projection, estimate, or prediction is realized. As a result, you are cautioned not to place undue reliance on such statements. A detailed discussion of risks and uncertainties is included under “Item 1A. Risk Factors.”

EXECUTIVE OVERVIEW

Our Bank is a member-owned cooperative serving shareholder members in our district. Our mission is to provide funding and liquidity for our members and housing associates so they can meet the housing, economic development, and business needs of the communities they serve. We strive to achieve our mission within an operating principle that balances the trade-off between attractively priced products, reasonable returns on capital stock, and maintaining an adequate level of retained earnings to preserve par value of member-owned capital stock. Our members include commercial banks, thrifts, credit unions, insurance companies, and CDFIs.

Financial Results

On May 31, 2015, we completed the merger with the Federal Home Loan Bank of Seattle (Seattle Bank) (the Merger). The Merger had a significant impact on all aspects of our financial condition, results of operations, and cash flows. As a result, financial results for periods after the Merger may not be directly comparable to financial results for periods prior to the Merger.

In 2016, we reported net income of $649 million compared to $131 million in 2015. Our net income, calculated in accordance with accounting principles generally accepted in the United States of America (GAAP), was significantly impacted by net gains on litigation settlements of $376 million. We recorded $14 million of net gains on litigation settlements in 2015.

The litigation settlements are the result of settlements with certain defendants in our private-label MBS litigation. As a result of the Merger, we are currently involved in legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairments of certain private-label MBS. Although the Seattle Bank sold all private-label MBS during the first quarter of 2015, we continue to pursue these proceedings.

Net interest income totaled $449 million in 2016 compared to $317 million in 2015. The increase was primarily due to an increase in interest income resulting from the higher interest rate environment and higher advance and investment volumes, a portion of which was attributable to assets acquired in the Merger. Our net interest margin was 0.28 percent during 2016 and 2015.

We recorded a net gain of $396 million in 2016 in other income (loss) compared to a net loss of $30 million in 2015. Other income (loss) included net gains on litigation settlements which were the primary driver as discussed above. Other factors impacting other income (loss) in 2016 were net gains (losses) on derivatives and hedging activities and net gains (losses) on trading securities as described below.

In 2016, we recorded net gains of $7 million on our derivatives and hedging activities through other income (loss) compared to net losses of $38 million in 2015. The net gains were primarily driven by changes in interest rates. These changes impacted ineffectiveness on our AFS fair value hedge relationships and fair value changes on interest rate swaps we utilized to economically hedge our investment securities portfolio. We utilize derivative instruments to manage interest rate risk. Accounting rules require all derivatives to be recorded at fair value and therefore we may be subject to income statement volatility. Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Hedging Activities" for additional discussion on our derivatives and hedging activities, including the net impact of economic hedge relationships.

In 2016, we recorded net gains on trading securities of $3 million compared to net losses of $12 million in 2015. These changes in fair value were primarily due to the impact of changes in interest rates and credit spreads on our fixed rate trading securities. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

    

27


Other expense totaled $118 million for 2016 compared to $137 million for 2015. The decrease was primarily due to one-time merger related expenses of $39 million incurred during 2015. The decrease in other expenses was partially offset by an increase in compensation and benefits, professional fees, and other operating expenses during 2016 when compared to 2015 due primarily to additional costs associated with operating a larger institution and improving our internal control environment.

Our total assets increased to $180.6 billion at December 31, 2016 from $137.4 billion at December 31, 2015 due primarily to an increase in advances. Advances increased $42.4 billion, driven primarily by growth from a large depository institution member.

Our total liabilities increased to $173.2 billion at December 31, 2016 from $131.8 billion at December 31, 2015 due primarily to an increase in consolidated obligations issued to fund the increase in assets.

Total capital increased to $7.4 billion at December 31, 2016 from $5.6 billion at December 31, 2015. Total capital was primarily impacted by an increase in retained earnings and an increase in capital stock. Retained earnings increased to $1.5 billion due to net income earned. Capital stock increased due to increased member activity which was partially offset by the reclassification of $0.7 billion of capital stock, including all capital stock outstanding to captive insurance company members, to mandatorily redeemable capital stock. The capital stock reclassification was in response to the Finance Agency final rule affecting captive insurance company membership that became effective on February 19, 2016. Refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Statements of Condition — Advances" for additional discussion on the Finance Agency final rule.

Total regulatory capital increased to $8.1 billion at December 31, 2016, from $5.8 billion at December 31, 2015, both of which were above the required regulatory minimum. Regulatory capital includes all capital stock, mandatorily redeemable capital stock, additional capital from merger, and retained earnings.

Adjusted Earnings

As part of evaluating financial performance, we adjust GAAP net interest income and GAAP net income before assessments for the impact of (i) market adjustments relating to derivative and hedging activities and instruments held at fair value, (ii) realized gains (losses) on investment securities, and (iii) other non-routine and unpredictable items, including net asset prepayment fee income, debt extinguishment losses, merger related expenses, mandatorily redeemable capital stock interest expense, and net gains on litigation settlements. The resulting non-GAAP measure, referred to as our adjusted earnings, reflects both adjusted net interest income and adjusted net income before assessments.

Because our business model is primarily one of holding assets and liabilities to maturity, management believes that the adjusted earnings measure is helpful in understanding our operating results and provides a meaningful period-to-period comparison of our long-term economic value in contrast to GAAP results, which can be impacted by fair value changes driven by market volatility on financial instruments recorded at fair value or transactions that are considered to be unpredictable or not routine. As a result, management uses the adjusted earnings measure to assess performance under our incentive compensation plans and to ensure management remains focused on our long-term value and performance. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. While these non-GAAP measures can be used to assist in understanding the components of our earnings, it should not be considered a substitute for results reported under GAAP.

As indicated in the tables that follow, our adjusted net interest income and adjusted net income before assessments increased during 2016 when compared to 2015. The increase in our adjusted net interest income and adjusted net income before assessments was primarily due to an increase in interest income due to the higher interest rate environment and higher advance and investment volumes, a portion of which were acquired through the Merger.


28


The following table summarizes the reconciliation between GAAP and adjusted net interest income (dollars in millions):
 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
GAAP net interest income before provision (reversal) for credit losses on mortgage loans
 
$
449

 
$
317

 
$
251

Exclude:
 
 
 
 
 
 
Prepayment fees on advances, net1
 
8

 
11

 
6

Advance premium amortization
 
(1
)
 
(10
)
 

Prepayment fees on investments, net2
 
2

 
3

 

Mandatorily redeemable capital stock interest expense3
 
(21
)
 

 

Total adjustments
 
(12
)
 
4

 
6

Include items reclassified from other income (loss):
 
 
 
 
 
 
Net interest expense on economic hedges
 
(18
)
 
(21
)
 
(20
)
Adjusted net interest income
 
$
443

 
$
292

 
$
225

Adjusted net interest margin
 
0.27
%
 
0.26
%
 
0.27
%

1
Prepayment fees on advances, net includes basis adjustment amortization.

2
Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.

3
Effective January 1, 2016, the adjusted earnings methodology was approved to exclude mandatorily redeemable capital stock interest expense from adjusted net interest income.

The following table summarizes the reconciliation between GAAP net income before assessments and adjusted net income before assessments (dollars in millions):
 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
GAAP net income before assessments
 
$
724

 
$
148

 
$
135

Exclude:
 
 
 
 
 
 
Prepayment fees on advances, net1
 
8

 
11

 
6

 Advance premium amortization
 
(1
)
 
(10
)
 

Prepayment fees on investments, net2
 
2

 
3

 

Mandatorily redeemable capital stock interest expense3
 
(21
)
 

 

Net gains (losses) on trading securities
 
3

 
(12
)
 
68

Net gains (losses) from sale of available-for-sale securities
 

 

 
1

Net gains (losses) from sale of held-to-maturity securities
 

 

 
9

Net gains (losses) on derivatives and hedging activities
 
7

 
(38
)
 
(123
)
Net gains (losses) on extinguishment of debt
 

 

 
(13
)
Gains on litigation settlements, net
 
376

 
14

 

Merger related expenses
 

 
(39
)
 
(2
)
Include:
 
 
 
 
 
 
Net interest expense on economic hedges
 
(18
)
 
(21
)
 
(20
)
Adjusted net income before assessments
 
$
332

 
$
198

 
$
169


1
Prepayment fees on advances, net includes basis adjustment amortization.

2
Prepayment fees on investments, net includes basis adjustment amortization and premium and/or discount amortization.

3
Effective January 1, 2016, the adjusted earnings methodology was approved to exclude mandatorily redeemable capital stock interest expense from adjusted net interest income.

For additional discussion on items impacting our GAAP earnings, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”


29


CONDITIONS IN THE FINANCIAL MARKETS

Economy and Financial Markets

Economic and market data received prior to the Federal Open Market Committee (FOMC or Committee) meeting in December of 2016 indicated economic activity had been expanding moderately since mid-year. Conditions in the labor market have been solid in recent months and the unemployment rate has declined. Growth in household spending has been rising moderately, however business fixed investments have remained soft. Inflation increased since earlier in the year, but is still below the Committee's longer-run objective of two percent, partly reflecting earlier declines in energy prices and non-energy import prices. Market-based measurements of inflation adjusted compensation have moved up considerably, but still remain low.

In its December 14, 2016 statement, the FOMC stated it expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further toward levels the FOMC judges consistent with its dual mandate to foster maximum employment and price stability. The FOMC sees risks to the outlook for the economy and the labor market as nearly balanced in the near-term, but continues to monitor global economic and financial developments. In addition, the FOMC stated it anticipates that inflation will remain near recent low levels in the near term, but it anticipates inflation will rise towards its two percent objective over the medium term as the labor market improves further and the effects of lower energy prices and import prices dissipate. The FOMC will continue to monitor inflation closely.

Mortgage Markets

The housing market has continued to improve over the past year, as indicated by rising home prices, lower inventories of properties for sale, and increased housing construction activity along with increased sales of existing homes. More recently, improvements slowed due to seasonality and increases in interest rates. The improvement in the housing market has been partly attributable to the continued strengthening of the economy.

Market volatility and interest rate increases during the fourth quarter resulted in higher mortgage rates and a decrease in refinancing volume when compared to the first nine months of 2016. The increase in mortgage rates may have a negative impact on the demand for home purchases as the cost of debt has made homes less affordable.

Interest Rates

The following table shows information on key market interest rates1:
 
Fourth Quarter 2016
3-Month
Average
 
Fourth Quarter 2015
3-Month
Average
 
2016
12-Month
Average
 
2015
12-Month
Average
 
2016
Ending Rate
 
2015
Ending Rate
Federal funds
0.45
%
 
0.16
%
 
0.40
%
 
0.13
%
 
0.55
%
 
0.20
%
Three-month LIBOR
0.92

 
0.41

 
0.75

 
0.32

 
1.00

 
0.61

2-year U.S. Treasury
1.00

 
0.82

 
0.83

 
0.67

 
1.19

 
1.05

10-year U.S. Treasury
2.14

 
2.18

 
1.84

 
2.13

 
2.45

 
2.27

30-year residential mortgage note
3.80

 
3.89

 
3.65

 
3.85

 
4.32

 
4.01


1
Source is Bloomberg.


30


The Federal Reserve's key target interest rate, the Federal funds rate, maintained a range of 0.25 to 0.50 percent during most of 2016. In its December 14, 2016 statement, the FOMC decided to raise the target range for the Federal funds rate to 0.50 to 0.75 percent. The Committee's stance on monetary policy remains accommodative even after this increase, supporting further strengthening in labor market conditions and a return to two percent inflation. In determining the timing and size of future adjustments to the target range for the Federal funds rate, the FOMC will assess realized and expected economic progress towards its longer-run goals of maximum employment and a two percent inflation rate. The assessment will take into account measures of labor market conditions, indicators of inflation pressures, inflation expectations, and financial and international developments. The Committee anticipates it will be appropriate for only gradual increases to the target range for the Federal funds rate based on expectations of economic conditions. It is expected the Federal funds rate will remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the Federal funds rate will depend on the economic outlook as informed by incoming data.

During 2016, short-term interest rates increased, while the 10-year U.S. Treasury yields and mortgage rates decreased on average when compared to 2015. Interest rates were volatile as concerns about global growth and political uncertainties impacted markets globally. While the FOMC considers removing monetary policy accommodation as data warrants, foreign central banks eased monetary policy further in 2016.

In its December 14, 2016 statement, the FOMC stated that it is maintaining its existing policy of reinvesting principal payments from the Federal Reserve's holdings of agency debt and agency MBS into agency MBS and rolling over maturing U.S. Treasury securities at auction. The FOMC also stated that the policy of keeping the Federal Reserve's holdings of longer-term securities at sizable levels should help maintain accommodative financial conditions.

Funding Spreads

The following table reflects our funding spreads to LIBOR (basis points)1:
 
Fourth Quarter 2016
3-Month
Average
 
Fourth Quarter 2015
3-Month
Average
 
2016
12-Month
Average
 
2015
12-Month
Average
 
 2016
Ending Spread
 
 2015
Ending Spread
3-month
(44.6
)
 
(13.2
)
 
(33.8
)
 
(14.7
)
 
(42.7
)
 
(20.2
)
2-year
(12.4
)
 
0.7

 
(4.7
)
 
(7.8
)
 
(16.5
)
 
(0.2
)
5-year
12.8

 
17.5

 
17.3

 
6.8

 
9.0

 
16.2

10-year
51.6

 
61.4

 
57.2

 
49.1

 
57.7

 
59.5


1
Source is the Office of Finance.

As a result of our credit quality, we generally have ready access to funding at relatively competitive interest rates. During 2016, our funding spreads relative to LIBOR improved when compared to spreads at December 31, 2015 as investor demand increased with market volatility and higher interest rates, and in response to money market reform. During 2016, we utilized consolidated obligation discount notes in addition to fixed term and floating rate, callable, and step-up consolidated obligation bonds to capture attractive funding, to match the repricing structures on advances and meet liquidity requirements. Spreads relative to LIBOR experienced minor changes on long-term debt year-over-year.


31


RESULTS OF OPERATIONS

Net Income

The following table presents comparative highlights of our net income for the years ended December 31, 2016, 2015, and 2014 (dollars in millions). See further discussion of these items in the sections that follow.
 
 
 
 
 
2016 vs. 2015
 
 
 
2015 vs. 2014
 
2016
 
2015
 
$ Change
 
% Change
 
2014
 
$ Change
 
% Change
Net interest income
$
449

 
$
317

 
$
132

 
42
 %
 
$
251

 
$
66

 
26
%
Provision (reversal) for credit losses on mortgage loans
3

 
2

 
1

 
50

 
(2
)
 
4

 
200

Other income (loss)
396

 
(30
)
 
426

 
1,420

 
(51
)
 
21

 
41

Other expense
118

 
137

 
(19
)
 
(14
)
 
67

 
70

 
104

AHP assessments
75

 
15

 
60

 
400

 
14

 
1

 
7

AHP voluntary contributions

 
2

 
(2
)
 
100

 

 
2

 
100

Net income
$
649

 
$
131

 
$
518

 
395
 %
 
$
121

 
$
10

 
8
%

32


Net Interest Income

Our net interest income is impacted by changes in average interest-earning asset and interest-bearing liability balances, and the related yields. The following table presents average balances and rates of major asset and liability categories (dollars in millions):    
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
 
Average
Balance1
 
Yield
 
Interest
Income/
Expense
 
Average
Balance1
 
Yield
 
Interest
Income/
Expense
 
Average
Balance1
 
Yield
 
Interest
Income/
Expense
Interest-earning assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
852

 
0.37
%
 
$
3

 
$
554

 
0.12
%
 
$
1

 
$
358

 
0.07
%
 
$

Securities purchased under agreements to resell
5,257

 
0.36

 
19

 
6,450

 
0.10

 
7

 
7,640

 
0.05

 
4

Federal funds sold
5,089

 
0.40

 
21

 
4,276

 
0.12

 
5

 
3,160

 
0.08

 
2

Mortgage-backed securities2,3,4
19,772

 
1.15

 
226

 
16,644

 
0.97

 
162

 
9,919

 
1.19

 
118

    Other investments2,3,5
12,031

 
1.21

 
146

 
8,425

 
1.14

 
96

 
2,576

 
2.43

 
63

Advances3,6
114,047

 
0.77

 
876

 
69,784

 
0.46

 
324

 
52,983

 
0.45

 
239

Mortgage loans7
6,729

 
3.46

 
233

 
6,758

 
3.63

 
245

 
6,514

 
3.75

 
245

Loans to other FHLBanks
1

 
0.51

 

 
1

 
0.17

 

 

 

 

Total interest-earning assets
163,778

 
0.93

 
1,524

 
112,892

 
0.74

 
840

 
83,150

 
0.81

 
671

Non-interest-earning assets
544

 

 

 
646

 

 

 
657

 

 

Total assets
$
164,322

 
0.93
%
 
$
1,524

 
$
113,538

 
0.74
%
 
$
840

 
$
83,807

 
0.80
%
 
$
671

Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
970

 
0.08
%
 
$
1

 
$
822

 
0.03
%
 
$

 
$
533

 
0.01
%
 
$

Consolidated obligations
 
 
 
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Discount notes
93,282

 
0.44

 
414

 
70,818

 
0.15

 
106

 
53,136

 
0.08

 
43

Bonds3
61,476

 
1.04

 
639

 
35,962

 
1.15

 
414

 
25,401

 
1.48

 
377

Other interest-bearing liabilities8
636

 
3.32

 
21

 
77

 
3.26

 
3

 
12

 
2.11

 

Total interest-bearing liabilities
156,364

 
0.69

 
1,075

 
107,679

 
0.49

 
523

 
79,082

 
0.53

 
420

Non-interest-bearing liabilities
1,522

 

 

 
1,081

 

 

 
906

 

 

Total liabilities
157,886

 
0.68

 
1,075

 
108,760

 
0.48

 
523

 
79,988

 
0.53

 
420

Capital
6,436

 

 

 
4,778

 

 

 
3,819

 

 

Total liabilities and capital
$
164,322

 
0.65
%
 
$
1,075

 
$
113,538

 
0.46
%
 
$
523

 
$
83,807

 
0.50
%
 
$
420

Net interest income and spread9
 
 
0.24
%
 
$
449

 
 
 
0.25
%
 
$
317

 
 
 
0.28
%
 
$
251

Net interest margin10
 
 
0.28
%
 
 
 
 
 
0.28
%
 
 
 
 
 
0.30
%
 
 
Average interest-earning assets to interest-bearing liabilities
 
 
104.74
%
 
 
 
 
 
104.84
%
 
 
 
 
 
105.14
%
 
 

1
Average balances are calculated on a daily weighted average basis and do not reflect the effect of derivative master netting arrangements with counterparties and/or clearing agents.

2
The average balance of AFS securities is reflected at amortized cost; therefore the resulting yields do not give effect to changes in fair value.

3
Average balances reflect the impact of fair value hedging adjustments and/or fair value option adjustments.

4
MBS interest income includes net prepayment fee income of $2 million and $3 million for the years ended December 31, 2016. and 2015. There were no MBS prepayments in 2014.

5
Other investments primarily include other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and Private Export Funding Corporation (PEFCO) bonds.

6
Advance interest income includes prepayment fee income of $8 million, $11 million, and $6 million for the years ended December 31, 2016, 2015, and 2014.

7
Non-accrual loans are included in the average balance used to determine the average yield.

8
Other interest-bearing liabilities consists of mandatorily redeemable capital stock and borrowings from other FHLBanks.

9
Represents yield on total interest-earning assets minus cost of total interest-bearing liabilities.

10
Represents net interest income expressed as a percentage of average interest-earning assets.



33


The following table presents changes in interest income and interest expense. Changes in interest income and interest expense that are not identifiable as either volume-related or rate-related, but rather equally attributable to both volume and rate changes, are allocated to the volume and rate categories based on the proportion of the absolute value of the volume and rate changes (dollars in millions).
 
2016 vs. 2015
 
2015 vs. 2014
 
Total Increase
(Decrease) Due to
 
Total Increase
(Decrease)
 
Total Increase
(Decrease) Due to
 
Total Increase
(Decrease)
 
Volume
 
Rate
 
 
Volume
 
Rate
 
Interest income
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits
$

 
$
2

 
$
2

 
$

 
$
1

 
1

Securities purchased under agreements to resell
(2
)
 
14

 
12

 
(1
)
 
4

 
3

Federal funds sold
1

 
15

 
16

 
1

 
2

 
3

Mortgage-backed securities
32

 
32

 
64

 
69

 
(25
)
 
44

Other investments
44

 
6

 
50

 
81

 
(48
)
 
33

Advances
268

 
284

 
552

 
79

 
5

 
84

Mortgage loans
(1
)
 
(11
)
 
(12
)
 
9

 
(8
)
 
1

Total interest income
342

 
342

 
684

 
238

 
(69
)
 
169

Interest expense
 
 
 
 
 
 
 
 
 
 
 
Deposits

 
1

 
1

 

 

 

Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
Discount notes
43

 
265

 
308

 
17

 
46

 
63

Bonds
268

 
(43
)
 
225

 
133

 
(96
)
 
37

Other interest-bearing liabilities
18

 

 
18

 
3

 

 
3

Total interest expense
329

 
223

 
552

 
153

 
(50
)
 
103

Net interest income
$
13

 
$
119

 
$
132

 
$
85

 
$
(19
)
 
$
66

    
NET INTEREST SPREAD

Net interest spread equals the yield on total interest-earning assets minus the cost of total interest-bearing liabilities. During 2016, our net interest spread was 0.24 percent compared to 0.25 percent and 0.28 percent for the same periods in 2015 and 2014. Our net interest spread during 2016 was primarily impacted by a higher cost on total interest-bearing liabilities and a higher proportion of advances that generate lower yields when compared to the majority of our other interest-earnings assets. The primary components of our interest income and interest expense are discussed below.

Advances

Interest income on advances (including prepayment fees on advances, net) increased during 2016 when compared to 2015 and during 2015 when compared to 2014 due to the higher short-term interest rate environment and higher average balances. Average advance balances increased in 2016, driven primarily by growth from a large depository institution member. Average advance balances increased in 2015, driven by growth from insurance company members and a large depository institution member. Average advance balances also increased during both 2016 and 2015 when compared to the prior year due to advances acquired as a result of the Merger.

Investments

Interest income on investments increased during 2016 when compared to 2015 and during 2015 when compared to 2014. The increase in 2016 was due primarily to higher average balances of MBS and other investments and the higher short-term interest rate environment. The increase in 2015 when compared to 2014 was due mainly to the higher average balances of MBS and other investments, partially offset by the low interest rate environment. Average investment balances increased during both 2016 and 2015 when compared to the prior year due to the acquisition of certain MBS and non-MBS investments as a result of the Merger. In addition, we purchased MBS in 2016.


34


Mortgage Loans

Interest income on mortgage loans decreased in 2016 when compared to 2015 and remained relatively stable during 2015 when compared to 2014. The decrease during 2016 was due to a decline in mortgage rates which resulted in an increase in mortgage loan refinancing activity.

Discount Notes

Interest expense on discount notes increased during 2016 when compared to 2015 and during 2015 when compared to 2014 due to the higher short-term interest rate environment and higher average balances. Discount notes were utilized to capture attractive funding, match repricing structures on advances, and provide additional liquidity. Average balances also increased during both 2016 and 2015 when compared to the prior year due to the assumption of discount notes as a result of the Merger.

Bonds

Interest expense on bonds increased during 2016 when compared to 2015 and during 2015 when compared to 2014 primarily due to higher average bond balances, offset in part by lower bond rates. The increase in average bond balances was due to our increased utilization of bonds to capture attractive funding, better match repricing structures on short-term and variable rate callable advances, and provide additional liquidity. Average bond balances also increased during both 2016 and 2015 when compared to the prior year due to bonds assumed as a result of the Merger.

Other Interest-Bearing Liabilities

Interest expense on other interest-bearing liabilities increased during 2016 when compared to 2015 due to higher interest expense on mandatorily redeemable capital stock. The average mandatorily redeemable capital stock balance increased as a result of the reclassification of $0.7 billion of capital stock, including all capital stock outstanding to captive insurance companies, to mandatorily redeemable capital stock during the year. This capital stock reclassification was in response to the Finance Agency final rule affecting captive insurance company membership effective February 19, 2016.

Other Income (Loss)

The following table summarizes the components of other income (loss) (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Net gains (losses) on trading securities
$
3

 
$
(12
)
 
$
68

Net gains (losses) from sale of available-for-sale securities

 

 
1

Net gains (losses) from sale of held-to-maturity securities

 

 
9

Net gains (losses) on derivatives and hedging activities
7

 
(38
)
 
(123
)
Net gains (losses) on extinguishment of debt

 

 
(13
)
Gains on litigation settlements, net
376

 
14

 

Other, net
10

 
6

 
7

Total other income (loss)
$
396

 
$
(30
)
 
$
(51
)
    
Other income (loss) can be volatile from period to period depending on the type of activity recorded. We recorded a net gain of $396 million in 2016 in other income (loss) compared to a net loss of $30 million in 2015 and a net loss of $51 million in 2014. During 2016, other income (loss) was primarily impacted by net gains on litigation settlements of $376 million as a result of settlements with certain defendants in our private-label MBS litigation. We also had net gains on litigation settlements of $14 million during 2015. Other factors impacting other income (loss) include net gains (losses) on derivatives and hedging activities, and net gains (losses) on trading securities, as described below.


35


During 2016, we recorded net gains of $7 million on our derivatives and hedging activities compared to net losses of $38 million in 2015. The net gains were primarily driven by changes in interest rates. These changes impacted ineffectiveness on our AFS fair value hedge relationships and fair value changes on interest rate swaps that we utilized to economically hedge our investment securities portfolio. During 2014, we recorded losses of $123 million on our derivative and hedging activities primarily due to the changes in interest rates on interest rate swaps that we utilized to economically hedge our investment securities portfolio and a divergence between the curves used to value our assets, liabilities, and derivatives. Due to this divergence and an increase in the volume of AFS investment hedge relationships that had longer terms to maturity, we experienced additional hedge ineffectiveness.

During 2016, we recorded net gains on trading securities of $3 million compared to net losses of $12 million in 2015 and net gains of $68 million in 2014. These changes in fair value were primarily due to the impact of changes in interest rates and credit spreads on our fixed rate trading securities. During 2015, credit spreads widened and, as a result, we incurred losses on both our trading securities and on the interest rate swaps hedging these securities. Trading securities are recorded at fair value with changes in fair value reflected through other income (loss).

During 2014, other income (loss) also included losses on the extinguishment of debt of $13 million and realized gains on the sale of AFS and HTM securities of $10 million. We did not sell any AFS or HTM securities or extinguish any debts during 2016 or 2015.

Hedging Activities

We use derivatives to manage interest rate risk in our Statements of Condition. Accounting rules affect the timing and recognition of income and expense on derivatives and therefore we may be subject to income statement volatility.

If a hedging activity qualifies for hedge accounting treatment (fair value hedge), we include the periodic cash flow components of the derivative related to interest income or expense in the relevant income statement caption consistent with the hedged asset or liability. We also record the amortization of fair value hedging adjustments from terminated hedges and the amortization of the financing element of our off market derivatives in interest income or expense or other income (loss). Changes in the fair value of both the derivative and the hedged item are recorded as a component of other income (loss) in “Net gains (losses) on derivatives and hedging activities."

If a hedging activity does not qualify for hedge accounting treatment (economic hedge), we record the derivative's components of interest income and expense, together with the effect of changes in fair value as a component of other income (loss) in “Net gains (losses) on derivatives and hedging activities”; however, there is no fair value adjustment for the corresponding asset or liability being hedged unless changes in the fair value of the asset or liability are normally marked to fair value through earnings (i.e., trading securities and fair value option instruments).


36


The following tables categorize the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Year Ended December 31, 2016
Net Effect of
Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
21

 
$
3

 
$
(2
)
 
$
1

 
$
23

Net interest settlements
 
(173
)
 
(149
)
 

 
87

 
(235
)
Total impact to net interest income
 
(152
)
 
(146
)
 
(2
)
 
88

 
(212
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
 
5

 
19

 

 
(11
)
 
13

Gains (losses) on economic hedges
 

 
(6
)
 

 

 
(6
)
Total net gains (losses) on derivatives and hedging activities
 
5

 
13

 

 
(11
)
 
7

Net gains (losses) on trading securities2
 

 
(1
)
 

 

 
(1
)
Total impact to other income (loss)
 
5

 
12

 

 
(11
)
 
6

Total net effect of hedging activities3
 
$
(147
)
 
$
(134
)
 
$
(2
)
 
$
77

 
$
(206
)

 
 
For the Year Ended December 31, 2015
Net Effect of
Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Discount Notes
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
7

 
$
2

 
$
(2
)
 
$
5

 
$

 
$
12

Net interest settlements
 
(203
)
 
(158
)
 

 
117

 

 
(244
)
Total impact to net interest income
 
(196
)
 
(156
)
 
(2
)
 
122

 

 
(232
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
 

 
(10
)
 

 
3

 

 
(7
)
Gains (losses) on economic hedges
 

 
(32
)
 
(1
)
 
1

 
1

 
(31
)
Total net gains (losses) on derivatives and hedging activities
 

 
(42
)
 
(1
)
 
4

 
1

 
(38
)
Net gains (losses) on trading securities2
 

 
(10
)
 

 

 

 
(10
)
Total impact to other income (loss)
 

 
(52
)
 
(1
)
 
4

 
1

 
(48
)
Total net effect of hedging activities3
 
$
(196
)
 
$
(208
)
 
$
(3
)
 
$
126

 
$
1

 
$
(280
)

1
Represents the amortization/accretion of fair value hedging adjustments on closed hedge relationships and the amortization of the financing element of off-market derivatives.

2
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

3
The hedging activity tables do not include the interest component on the related hedged items or the gross prepayment fee income on terminated advance or investment hedge relationships.



37


The following table categorizes the net effect of hedging activities on net income by product (dollars in millions):
 
 
For the Year Ended December 31, 2014
Net Effect of
Hedging Activities
 
Advances
 
Investments
 
Mortgage
Loans
 
Bonds
 
Total
Net interest income:
 
 
 
 
 
 
 
 
 
 
Net amortization/accretion1
 
$
(32
)
 
$

 
$
(2
)
 
$
24

 
$
(10
)
Net interest settlements
 
(163
)
 
(115
)
 

 
70

 
(208
)
Total impact to net interest income
 
(195
)
 
(115
)
 
(2
)
 
94

 
(218
)
Other income (loss):
 
 
 
 
 
 
 
 
 
 
Net gains (losses) on derivatives and hedging activities:
 
 
 
 
 
 
 
 
 
 
Gains (losses) on fair value hedges
 
2

 
(44
)
 

 
2

 
(40
)
Gains (losses) on economic hedges
 

 
(96
)
 

 
13

 
(83
)
Total net gains (losses) on derivatives and hedging activities
 
2

 
(140
)
 

 
15

 
(123
)
Net gains (losses) on trading securities2
 

 
68

 

 

 
68

Net amortization/accretion3
 

 

 

 
(1
)
 
(1
)
Total impact to other income (loss)
 
2

 
(72
)
 

 
14

 
(56
)
Total net effect of hedging activities4
 
$
(193
)
 
$
(187
)
 
$
(2
)
 
$
108

 
$
(274
)

1
Represents the amortization/accretion of fair value hedging adjustments on closed hedge relationships included in net interest income.

2
Represents the net gains (losses) on those trading securities in which we have entered into a corresponding economic derivative to hedge the risk of changes in fair value. As a result, this line item may not agree to the Statements of Income.

3
Represents the amortization/accretion of fair value hedging adjustments on closed bond hedge relationships included in other income (loss) as a result of debt extinguishments and/or closed investment hedge relationships included in other income (loss) as a result of investment sales.

4
The hedging activity tables do not include the interest component on the related hedged items.


NET AMORTIZATION/ACCRETION

Amortization/accretion varies from period to period depending on our hedge relationship termination activities and the maturity, call, or prepayment of assets or liabilities previously in hedge relationships. In addition, amortization is impacted by the financing element of our off market derivatives.

NET INTEREST SETTLEMENTS

Net interest settlements represent the interest component on derivatives that qualify for fair value hedge accounting. These amounts vary from period to period depending on our hedging activities and interest rates and are partially offset by the interest component on the related hedged item within net interest income. The hedging activity tables do not include the impact of the interest component on the related hedged item.

GAINS (LOSSES) ON FAIR VALUE HEDGES

Gains (losses) on fair value hedges are driven by hedge ineffectiveness. Hedge ineffectiveness occurs when changes in the fair value of the derivative and the related hedged item do not perfectly offset each other. The factors that affect hedge ineffectiveness include changes in the benchmark interest rate, volatility, and the divergence in valuation curves used to value our assets, liabilities, and derivatives. During 2016 and 2015, gains (losses) on fair value hedging relationships were the result of normal market activity. During 2014, a divergence between the curves used to value our hedged items and related derivatives occurred. Due to this divergence and an increase in the volume of AFS investment hedge relationships that had longer terms to maturity, we experienced additional hedge ineffectiveness.

GAINS (LOSSES) ON ECONOMIC HEDGES

We utilize economic derivatives to manage certain risks in our Statements of Condition. Gains and losses on economic derivatives are driven by changes in interest rates and volatility and include interest settlements. Interest settlements represent the interest component on economic derivatives. These amounts vary from period to period depending on our hedging activities and interest rates. The following discussion highlights key items impacting gains and losses on investment economic derivatives.


38


Investments
 
We utilize interest rate swaps to economically hedge a portion of our trading securities against changes in fair value. Gains and losses on these economic derivatives are due primarily to changes in interest rates. Gains and losses on our trading securities are due primarily to changes in interest rates and credit spreads.

The following table summarizes gains and losses on these economic derivatives as well as the related trading securities (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Gains (losses) on interest rate swaps economically hedging our investments
$
12

 
$
(10
)
 
$
(73
)
Interest settlements
(18
)
 
(22
)
 
(23
)
Net gains (losses) on investment derivatives
(6
)
 
(32
)
 
(96
)
Net gains (losses) on related trading securities
(1
)
 
(10
)
 
68

Net gains (losses) on economic investment hedge relationships
$
(7
)
 
$
(42
)
 
$
(28
)

Other Expense
The following table shows the components of other expense (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Compensation and benefits
$
53

 
$
45

 
$
32

Contractual services
10

 
13

 
7

Professional fees
12

 
10

 
4

Merger related expenses

 
39

 
2

Other operating expenses
19

 
15

 
10

Total operating expenses
94

 
122

 
55

Federal Housing Finance Agency
8

 
7

 
4

Office of Finance
7

 
5

 
3

Other, net
9

 
3

 
5

Total other expense
$
118

 
$
137

 
$
67


Other expense decreased $19 million during 2016 when compared to 2015 and increased $70 million during 2015 when compared to 2014. Both the decrease in 2016 and the increase in 2015 when compared to the prior years were primarily due to one-time merger related expenses incurred during 2015. The decrease in other expense during 2016 when compared to 2015 was partially offset by an increase in compensation and benefits, professional fees, and other operating expenses due primarily to additional costs associated with operating a larger institution and improving our internal control environment.

Affordable Housing Program Assessments and Voluntary Contributions

Annually, we must set aside for the AHP the greater of 10 percent of our current year net earnings or our pro-rata share of an aggregate $100 million to be contributed in total by the FHLBanks. For purposes of the required AHP assessment, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency.

We accrue the AHP assessment on a monthly basis and reduce our AHP liability as program funds are distributed. We recorded AHP assessments of $75 million for 2016 compared to $15 million for 2015. The increase in AHP assessments during 2016 was due to an increase in net income. In addition to the required AHP assessment, our Board may elect to make voluntary contributions to the AHP. Our Board of Directors approved a voluntary contribution of $2 million for 2015. The voluntary contribution was made to bring our total 2015 contribution in alignment with what the Des Moines and Seattle banks contributed in 2014. This voluntary contribution was awarded in 2016 together with our 10 percent required contribution.


39


STATEMENTS OF CONDITION

Financial Highlights

Our total assets increased to $180.6 billion at December 31, 2016 from $137.4 billion at December 31, 2015. Our total liabilities increased to $173.2 billion at December 31, 2016 from $131.8 billion at December 31, 2015. Total capital increased to $7.4 billion at December 31, 2016 from $5.6 billion at December 31, 2015. See further discussion of changes in our financial condition in the appropriate sections that follow.

Cash and Due from Banks

At December 31, 2016, our total cash balance was $223 million compared to $982 million at December 31, 2015. Our cash balance was high at December 31, 2015 due to limited investment opportunities at the end of the year.

Advances

The following table summarizes our advances by type of institution (dollars in millions):
 
December 31,
 
2016
 
2015
Commercial banks
$
94,939

 
$
52,643

Thrifts
1,376

 
2,771

Credit unions
2,903

 
2,647

Non-captive insurance companies
17,441

 
13,601

Captive insurance companies
14,510

 
15,219

Community development financial institutions
3

 
3

Total member advances
131,172

 
86,884

Housing associates
61

 
123

Non-member borrowers
304

 
1,904

Total par value
$
131,537

 
$
88,911


Our total advance par value increased $42.6 billion or 48 percent at December 31, 2016 when compared to December 31, 2015. The increase was driven primarily by growth from a large depository institution member.

The following table summarizes our advances by product type (dollars in millions):
 
December 31, 2016
 
December 31, 2015
 
Amount
 
% of Total
 
Amount
 
% of Total
Variable rate
$
104,594

 
80
 
$
57,942

 
65
Fixed rate
25,453

 
19
 
29,788

 
34
Amortizing
1,490

 
1
 
1,181

 
1
Total par value
131,537

 
100
 
88,911

 
100
Premiums
83

 
 
 
128

 
 
Discounts
(7
)
 
 
 
(9
)
 
 
Fair value hedging adjustments
(12
)
 
 
 
143

 
 
Total advances
$
131,601

 
 
 
$
89,173

 
 

Fair value hedging adjustments changed $155 million at December 31, 2016 when compared to December 31, 2015 due primarily to a decrease in cumulative fair value adjustments on advances in hedge relationships resulting from changes in interest rates.



40


INTEREST RATE PAYMENT TERMS

The following table summarizes advances by interest rate payment terms and contractual maturity (dollars in millions):
 
December 31,
 
2016
 
2015
Fixed rate
 
 
 
Due in one year or less
$
12,352

 
$
16,938

Due after one year
14,591

 
14,031

Total fixed rate
26,943

 
30,969

Variable rate
 
 
 
Due in one year or less
10,181

 
2,030

Due after one year
94,413

 
55,912

Total variable rate
104,594

 
57,942

Total par value
$
131,537

 
$
88,911


At December 31, 2016 and December 31, 2015, 59 and 61 percent of our advances, respectively, were variable rate callable advances. Callable advances may be prepaid by borrowers on pertinent dates (call dates) and therefore provide borrowers a source of long-term financing with prepayment flexibility. Interest rates on our variable rate callable advances reset at each call date to be consistent with either the underlying LIBOR index or our current offering rate in line with our underlying cost of funds. In addition, we retain the flexibility to adjust the spread relative to our cost of funds for the majority of these variable rate advances on each reset date. We generally fund our variable rate callable advances with either discount notes, LIBOR indexed debt, or debt swapped to a LIBOR index. For additional discussion on our funding strategies, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

At December 31, 2016 and 2015, advances outstanding to our five largest member borrowers totaled $92.2 billion and $50.5 billion, representing 70 percent and 57 percent of our total advances outstanding. The following table summarizes advances outstanding to our five largest member borrowers at December 31, 2016 (dollars in millions):
 
Amount
 
% of Total Advances
Wells Fargo Bank, National Association
$
77,075

 
59
Transamerica Life Insurance Company1
4,170

 
3
TH Insurance Holdings Company LLC2
4,000

 
3
Truman Insurance Company2
3,588

 
3
HICA Education Loan Corporation2
3,396

 
2
Total par value
$
92,229

 
70

1
Excludes $1.6 billion of outstanding advances with Transamerica Premier Life Insurance Company, an affiliate of Transamerica Life Insurance Company.

2
Represents a captive insurance company member whose membership will terminate within five years of the Finance Agency's final rule on membership that became effective February 19, 2016.

On January 20, 2016, the Finance Agency issued a final rule effective February 19, 2016 that changes the eligibility requirements for FHLBank members by rendering captive insurance companies ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014 (the date the Finance Agency proposed this rule) will have their memberships terminated no later than February 19, 2021. Captive insurance company members that were admitted as members after September 12, 2014 will have their memberships terminated no later than February 19, 2017. As of December 31, 2016, we had 12 captive insurance company members with advances outstanding of $14.5 billion, which represented 11 percent of our total advances outstanding. Of our captive insurance company members, six members with advance balances outstanding of $11.0 billion will have their membership terminated within five years of the effective date of the final rule and six members with advance balances outstanding of $3.5 billion will have their membership terminated within one year of the effective date, according to the final rule. As indicated in the table above, three of our top five largest member borrowers are captive insurance company members. The magnitude of the impact of the final rule will depend, in part, on our size and profitability at the time of membership termination or maturity of the related advances.


41


We manage our credit exposure to advances through an approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower's financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws and regulations.

The FHLBank Act requires that we obtain sufficient collateral on advances to protect against losses. We have never experienced a credit loss on an advance to a member or eligible housing associate. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on advances, management has determined that there were no probable credit losses on our advances as of December 31, 2016 and 2015. Accordingly, we have not recorded any allowance for credit losses on our advances. See additional discussion regarding our collateral requirements in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Advances.”

Mortgage Loans

The following tables summarize information on our mortgage loans held for portfolio (dollars in millions):
 
December 31, 2016
 
MPF
 
MPP
 
Total
Fixed rate conventional loans
$
5,907

 
$
361

 
$
6,268

Fixed rate government-insured loans
513

 
42

 
555

Total unpaid principal balance
6,420

 
403

 
6,823

Premiums
82

 
14

 
96

Discounts
(8
)
 
(1
)
 
(9
)
Basis adjustments from mortgage loan commitments
5

 

 
5

Total mortgage loans held for portfolio
6,499

 
416

 
6,915

Allowance for credit losses
(2
)
 

 
(2
)
Total mortgage loans held for portfolio, net
$
6,497

 
$
416

 
$
6,913


 
December 31, 2015
 
MPF
 
MPP
 
Total
Fixed rate conventional loans
$
5,602

 
$
464

 
$
6,066

Fixed rate government-insured loans
547

 
50

 
597

Total unpaid principal balance
6,149

 
514

 
6,663

Premiums
76

 
18

 
94

Discounts
(9
)
 
(1
)
 
(10
)
Basis adjustments from mortgage loan commitments
9

 

 
9

Total mortgage loans held for portfolio
6,225

 
531

 
6,756

Allowance for credit losses
(1
)
 

 
(1
)
Total mortgage loans held for portfolio, net
$
6,224

 
$
531

 
$
6,755


Our total mortgage loans remained relatively stable at December 31, 2016 when compared to December 31, 2015. The slight increase was primarily due to MPF loan purchases exceeding principal paydowns.

We manage our credit risk exposure on mortgage loans by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs, and (iv) establishing credit loss reserves to reflect management's estimate of probable credit losses inherent in the portfolio.

For additional discussion on our mortgage loan credit risk, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Credit Risk — Mortgage Loans.”


42


Investments

The following table summarizes the carrying value of our investments (dollars in millions):
 
December 31, 2016
 
December 31, 2015
 
Amount
 
% of Total
 
Amount
 
% of Total
Short-term investments1
 
 
 
 
 
 
 
Interest-bearing deposits
$
1

 
 
$
1

 
Securities purchased under agreements to resell
5,925

 
14
 
6,775

 
17
Federal funds sold
5,095

 
12
 
2,270

 
6
State or local housing agency obligations

 
 
8

 
Total short-term investments
11,021

 
26
 
9,054

 
23
Long-term investments2
 
 
 
 
 
 
 
Interest-bearing deposits
1

 
 
1

 
Mortgage-backed securities
 
 
 
 
 
 
 
GSE single-family
4,804

 
12
 
6,260

 
16
GSE multifamily
12,156

 
30
 
10,145

 
25
Other U.S. obligations single-family3
3,864

 
9
 
2,317

 
6
Other U.S. obligations commercial3
4

 
 
6

 
Private-label residential
16

 
 
20

 
Total mortgage-backed securities
20,844

 
51
 
18,748

 
47
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations3
3,745

 
9
 
4,222

 
11
GSE and Tennessee Valley Authority obligations
3,359

 
8
 
5,593

 
14
State or local housing agency obligations
1,697

 
4
 
1,995

 
4
Other
551

 
2
 
554

 
1
Total non-mortgage-backed securities
9,352

 
23
 
12,364

 
30
Total long-term investments
30,197

 
74
 
31,113

 
77
Total investments
$
41,218

 
100
 
$
40,167

 
100

1
Short-term investments have original maturities equal to or less than one year.

2
Long-term investments have original maturities of greater than one year.

3
Represents investment securities backed by the full faith and credit of the U.S. Government.

INTEREST RATE PAYMENT TERMS

The following tables summarize the interest rate payment terms of investment securities (dollars in millions):
 
December 31,
 
2016
 
2015
Trading securities at fair value
 
 
 
Fixed rate
$
1,001

 
$
1,029

Variable rate
1,552

 
3,018

Total trading securities
$
2,553

 
$
4,047

 
 
 
 
AFS at amortized cost
 
 
 
Fixed rate
$
8,820

 
$
10,091

Variable rate
14,163

 
10,979

Total AFS
$
22,983

 
$
21,070

 
 
 
 
HTM at amortized cost
 
 
 
Fixed rate
$
1,464

 
$
1,720

Variable rate
3,210

 
4,365

Total HTM
$
4,674

 
$
6,085



43


Our investments increased $1.1 billion or 3 percent at December 31, 2016 when compared to December 31, 2015. The increase was primarily due to the purchase of money market investments and variable rate agency MBS securities during the year. At December 31, 2016, we had GSE MBS purchases with a total par value of $114 million that had traded but not yet settled. These investments have been recorded as "available-for-sale" in our Statements of Condition with a corresponding payable recorded in "other liabilities".

The Finance Agency limits our investments in MBS by requiring that the total book value of our MBS not exceed three times regulatory capital at the time of purchase. At December 31, 2016, our ratio of MBS to regulatory capital was 2.58. At December 31, 2015, our ratio of MBS to regulatory capital was 3.23 due to the Merger, and as a result, we were precluded from purchasing any additional MBS until this ratio fell below 3.00.

We evaluate AFS and HTM securities in an unrealized loss position for OTTI on at least a quarterly basis. As part of our OTTI evaluation, we consider our intent to sell each debt security and whether it is more likely than not that we will be required to sell the security before its anticipated recovery. If either of these conditions is met, we will recognize an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, we perform analyses to determine if any of these securities are other-than-temporarily impaired. At December 31, 2016 and 2015, we did not consider any of our securities to be other-than-temporarily impaired. Refer to “Item 8. Financial Statements and Supplementary Data — Note 7 — Other-Than-Temporary Impairment” for additional information on our OTTI analysis performed at December 31, 2016.

Consolidated Obligations

Consolidated obligations, which include bonds and discount notes, are the primary source of funds to support our advances, mortgage loans, and investments. At December 31, 2016 and 2015, the carrying value of consolidated obligations for which we are primarily liable totaled $170.8 billion and $130.2 billion.

DISCOUNT NOTES

The following table summarizes our discount notes, all of which are due within one year (dollars in millions):
 
December 31,
 
2016
 
2015
Par value
$
81,019

 
$
99,074

Discounts and concession fees1
(72
)
 
(84
)
Total
$
80,947

 
$
98,990


1
Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation discount notes.

Our discount notes decreased $18.0 billion or 18 percent at December 31, 2016 when compared to December 31, 2015. The decrease was primarily due to our utilization of bonds in place of discount notes to manage our funding needs throughout 2016. For additional information on our discount notes, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

BONDS

The following table summarizes information on our bonds (dollars in millions):
 
December 31,
 
2016
 
2015
Total par value
$
90,053

 
$
30,899

Premiums
254

 
312

Discounts and concession fees1
(79
)
 
(35
)
Fair value hedging adjustments
(330
)
 
32

Total bonds
$
89,898

 
$
31,208


1
Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation bonds.


44


INTEREST RATE PAYMENT TERMS
 
The following table summarizes our bonds by interest rate payment terms (dollars in millions):
 
December 31,
 
2016
 
2015
Fixed rate
$
40,843

 
$
27,104

Simple variable rate
48,650

 
3,025

Step-up
435

 
645

Step-down
125

 
125

Total par value
$
90,053

 
$
30,899


Our bonds increased $58.7 billion at December 31, 2016 when compared to December 31, 2015. The increase was primarily due to our utilization of fixed rate and simple variable rate bonds to capture attractive funding, match repricing structures on short-term and variable rate advances, and to provide additional liquidity. Fair value hedging adjustments changed $362 million at December 31, 2016 when compared to December 31, 2015 due to the impact of interest rates on our cumulative fair value adjustments on bonds in hedge relationships. In addition, there was an increase in the volume of bonds in hedge relationships.

For additional information on our bonds, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Sources of Liquidity.”

Deposits

Deposit levels will vary based on member alternatives for short-term investments. Our deposits increased $3 million at December 31, 2016 when compared to December 31, 2015 due primarily to an increase in interest-bearing deposits, partially offset by a decrease in non-interest-bearing deposits. The following table summarizes our term deposits with a denomination of $100,000 or more by remaining maturity (dollars in millions):
 
December 31,
 
2016
 
2015
Three months or less
$
41

 
$
75

Over three months but within six months
95

 
120

Over six months but within 12 months
29

 
6

Total
$
165

 
$
201


Mandatorily Redeemable Capital Stock

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.

Our total mandatorily redeemable capital stock balance increased $561 million at December 31, 2016 when compared to December 31, 2015 due primarily to the reclassification of $723 million in captive insurance company member capital stock to mandatorily redeemable capital stock in the first quarter of 2016 in response to the Finance Agency final rule affecting membership eligibility that became effective February 19, 2016. The final rule changed the eligibility requirements for FHLBank members by rendering captive insurance companies ineligible for FHLBank membership. According to the final rule, captive insurance company members that were admitted as members prior to September 12, 2014 (the date the Finance Agency proposed this rule) will have their memberships terminated no later than February 19, 2021. Captive insurance company members that were admitted as members after September 12, 2014 will have their memberships terminated no later than February 19, 2017. At December 31, 2016 and December 31, 2015, our mandatorily redeemable capital stock totaled $664 million and $103 million.


45


Capital

The following table summarizes information on our capital (dollars in millions):
 
December 31,
 
2016
 
2015
Capital stock
$
5,917

 
$
4,714

Additional capital from merger
52

 
194

Retained earnings
1,450

 
801

Accumulated other comprehensive income (loss)
(18
)
 
(84
)
Total capital
$
7,401

 
$
5,625


Our capital increased $1.8 billion or 32 percent at December 31, 2016 when compared to December 31, 2015. The increase was primarily due to an increase in capital stock outstanding and retained earnings. Capital stock increased $1.2 billion due to an increase in member activity, partially offset by the reclassification of $742 million of capital stock, including all capital stock outstanding to captive insurance company members, to mandatorily redeemable capital stock. Retained earnings increased $649 million due to net income earned. Refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital ” for additional information on our capital.

Derivatives

We use derivatives to manage interest rate risk in our Statements of Condition. The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor our overall exposure to credit and market risk.

The following table categorizes the notional amount of our derivatives by type (dollars in millions):
 
December 31,
 
2016
 
2015
Interest rate swaps
 
 
 
Noncallable
$
49,887

 
$
33,927

Callable by counterparty
3,287

 
4,976

Callable by the Bank
136

 
79

Total interest rate swaps
53,310

 
38,982

Interest rate swaption

 
200

Forward settlement agreements (TBAs)
94

 
45

Mortgage delivery commitments
102

 
51

Total notional amount
$
53,506

 
$
39,278

    
The notional amount of our derivative contracts increased $14.2 billion at December 31, 2016 when compared to December 31, 2015. During 2016, we increased our utilization of swapped consolidated obligation bonds, in addition to discount notes, to capture attractive funding, match repricing structures on advances, and provide additional liquidity.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital positions are actively managed in an effort to preserve stable, reliable, and cost-effective sources of funds to meet current and projected future operating financial commitments, as well as regulatory, liquidity, and capital requirements.

Liquidity

SOURCES OF LIQUIDITY

We utilize several sources of liquidity to carry out our business activities. These include, but are not limited to, proceeds from the issuance of consolidated obligations, payments collected on advances and mortgage loans, proceeds from investment securities, member deposits, the issuance of capital stock, and current period earnings.


46


Our primary source of liquidity is proceeds from the issuance of consolidated obligations (bonds and discount notes) in the capital markets. During 2016, proceeds from the issuance of bonds and discount notes were $98.7 billion and $272.9 billion compared to $20.1 billion and $283.5 billion for the same period in 2015. We continued to issue shorter-term discount notes as well as term fixed and floating rate, callable. and step-up rate consolidated obligation bonds to capture attractive funding, match repricing structures on advances, and provide additional liquidity.

We maintained continual access to funding and adapted our debt issuance to meet the needs of our members, including demand for variable rate callable advance products that generally favored the issuance of shorter-term debt. Access to short-term debt markets has been reliable as investors have sought the FHLBanks' short-term debt as an asset of choice, which has led to advantageous funding opportunities and increased utilization of consolidated obligation short-term bonds as well as discount notes. However, due to the short-term maturity of the debt, we may be exposed to additional risks associated with refinancing and our ability to access the capital markets.

In 2016 we began monitoring our debt refinancing risk and we continue to enhance our liquidity and funding management. In measuring the level of assets requiring refinancing, we consider the maturity characteristics of our assets and liabilities. The following table presents the composition of our assets and liabilities by maturity (dollars in millions):
 
 
December 31, 2016
 
 
1 year or less
 
> 1 year
 
Total
Assets
 
 
 
 
 
 
Investments1
 
$
14,265

 
$
26,653

 
$
40,918

Advances2
 
22,533

 
109,004

 
131,537

Mortgage loans held for portfolio3
 
862

 
5,961

 
6,823

Other interest earning assets4
 
200

 

 
200

   Subtotal
 
$
37,860

 
$
141,618

 
179,478

Other5
 
 
 
 
 
1,127

Total assets
 
 
 
 
 
$
180,605

 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
Consolidated obligation bonds6
 
$
47,733

 
$
42,320

 
$
90,053

Consolidated obligation discount notes6
 
81,019

 

 
81,019

   Subtotal
 
$
128,752

 
$
42,320

 
171,072

Other5
 
 
 
 
 
2,132

Total liabilities
 
 
 
 
 
$
173,204

Maturity gap
 
$
90,892

 
 
 
 
Maturity gap percentage7
 
50
%
 
 
 
 

1
Represents the principal balance of interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, AFS securities, and HTM securities. MBS and asset-backed investments are based on expected maturity, which factors in projected prepayments; all other investments are based on contractual maturity. Certain assumptions are factored into the greater than one year bucket as they are not monitored as part of the maturity gap.

2
Represents the principal balance of advances based on contractual maturity. At December 31, 2016, 60 percent of our advances are callable, many of which have call dates in the next year. For further detail of our advance call dates, refer to "Item 1. Financial Statements — Note 8 — Advances".

3
Represents the principal balance of MPF and MPP mortgage loans based on expected maturity, which factors in projected prepayments. Certain assumptions are factored into the greater than one year bucket as they are not monitored as part of the maturity gap.

4
Represents loans outstanding to other FHLBanks at December 31, 2016.

5
Represents all other assets or liabilities reflected in the Bank's Statement of Condition that are not monitored as part of the maturity gap.

6
Represents the principal balance of consolidated obligations based on contractual maturity.

7
The maturity gap percentage is calculated as the maturity gap divided by total assets.

We monitor the maturity gap between assets and liabilities and are currently striving to reduce our maturity gap percentage and the level of refinancing risk that could potentially occur if we could not obtain funding in the capital markets due to an unforeseen event. This may be accomplished by shortening the maturity of our assets and/or lengthening the maturity of our liabilities. Our maturity gap objective and the time period for achieving this may vary based on a number of factors including our member borrowing needs, supply and demand in the debt markets, and other factors.


47


Our ability to raise funds in the capital markets as well as our cost of borrowing may be affected by our credit ratings. As of February 28, 2017, our consolidated obligations were rated AA+/A-1+ by Standard and Poor's and Aaa/P-1 by Moody's and both ratings had a stable outlook. For further discussion of how credit rating changes and our ability to access the capital markets may impact us in the future, refer to “Item 1A. Risk Factors.”

Although we are primarily liable for the portion of consolidated obligations that are issued on our behalf, we are also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all consolidated obligations issued by the FHLBank System. At December 31, 2016 and 2015, the total par value of outstanding consolidated obligations for which we are primarily liable was $171.1 billion and $130.0 billion. At December 31, 2016 and 2015, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which we are jointly and severally liable was approximately $818.2 billion and $775.2 billion.

The Office of Finance and FHLBanks have contingency plans in place that prioritize the allocation of proceeds from the issuance of consolidated obligations during periods of financial distress if consolidated obligations cannot be issued in sufficient amounts to satisfy all FHLBank demand. In the event of significant market disruptions or local disasters, our President or his designee is authorized to establish interim borrowing relationships with other FHLBanks. To provide further access to funding, the FHLBank Act also authorizes the U.S. Treasury to directly purchase new issue consolidated obligations of the GSEs, including FHLBanks, up to an aggregate principal amount of $4.0 billion. As of February 28, 2017, no purchases had been made by the U.S. Treasury under this authorization.

USES OF LIQUIDITY

We use our available liquidity, including proceeds from the issuance of consolidated obligations, primarily to repay consolidated obligations, fund advances, and purchase investments. During 2016, repayments of consolidated obligations totaled $330.5 billion compared to $289.7 billion for the same period in 2015. A portion of these payments were due to the call of certain bonds in an effort to better match our projected asset cash flows. During 2016 and 2015, we called bonds with a total par value of $1.6 billion and $16.0 billion.

During 2016, advance disbursements totaled $217.4 billion compared to $145.2 billion for the same period in 2015. The increase was driven primarily by growth from a large depository institution member. During 2016, investment purchases (excluding overnight investments) totaled $123.6 billion compared to $147.5 billion during 2015. Investment purchases during each period were primarily driven by the purchase of money market investments, including secured resale agreements in an effort to manage our liquidity position.

We also use liquidity to purchase mortgage loans, repay member deposits, pledge collateral to derivative counterparties, redeem or repurchase capital stock, pay expenses, and pay dividends.

LIQUIDITY REQUIREMENTS

Finance Agency regulations mandate three liquidity requirements. First, we are required to maintain contingent liquidity sufficient to meet our liquidity needs, which shall, at a minimum, cover five calendar days of inability to access the consolidated obligation debt markets. The following table shows our compliance with this requirement (dollars in billions):
 
December 31,
 
2016
 
2015
Unencumbered marketable assets maturing within one year
$
12.9

 
$
14.3

Advances maturing in seven days or less
2.3

 
3.2

Unencumbered assets available for repurchase agreement borrowings
25.6

 
26.0

Total contingent liquidity
40.8

 
43.5

Liquidity needs for five calendar days
9.2

 
10.5

Excess contingent liquidity
$
31.6

 
$
33.0




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Second, we are required to have available at all times an amount greater than or equal to members' current deposits invested in advances with maturities not to exceed five years, deposits in banks or trust companies, and obligations of the U.S. Treasury. The following table shows our compliance with this requirement (dollars in billions):
 
December 31,
 
2016
 
2015
Advances with maturities not exceeding five years
$
117.2

 
$
80.1

Deposits in banks or trust companies

 

U.S. Treasury obligations

 

Total
117.2

 
80.1

Deposits1
1.2

 
1.1

Excess liquidity2
$
116.0

 
$
79.0


1 Amount does not reflect the effect of derivative master netting arrangements with counterparties and/or clearing agents.

2 Increase in excess liquidity due primarily to an increase in advance volumes during 2016.

Third, we are required to maintain, in the aggregate, unpledged qualifying assets in an amount at least equal to the amount of our participation in total consolidated obligations outstanding. The following table shows our compliance with this requirement (dollars in billions):
 
December 31,
 
2016
 
2015
Qualifying assets free of lien or pledge
$
180.3

 
$
137.2

Consolidated obligations outstanding
170.8

 
130.2

Excess liquidity
$
9.5

 
$
7.0

At December 31, 2016 and 2015, we were in compliance with all three of the Finance Agency liquidity requirements.
In addition to the liquidity measures previously discussed, the Finance Agency has provided us with guidance to maintain sufficient liquidity in an amount at least equal to our anticipated cash outflows under two different scenarios. One scenario (roll-off scenario) assumes that we cannot access the capital markets to issue debt for a period of 10 to 20 days with initial guidance set at 15 days and that during that time members do not renew any maturing, prepaid, and called advances. The second scenario (renew scenario) assumes that we cannot access the capital markets to issue debt for a period of three to seven days with initial guidance set at five days and that during that time we will automatically renew maturing and called advances for all members except very large, highly-rated members. This guidance is designed to protect against temporary disruptions in the debt markets that could lead to a reduction in market liquidity and thus the inability for us to provide advances to our members. At December 31, 2016 and 2015, we were in compliance with this liquidity guidance.

Capital

CAPITAL REQUIREMENTS

We are subject to three regulatory capital requirements. First, the FHLBank Act requires that we maintain at all times permanent capital greater than or equal to the sum of our credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement. Second, the FHLBank Act requires a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes all Class B capital stock (including mandatorily redeemable capital stock), additional capital from merger, and retained earnings. It does not include AOCI. Third, the FHLBank Act imposes a five percent minimum leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. Nonpermanent capital includes additional capital from merger. At December 31, 2016 and 2015, we were in compliance with all three of the Finance Agency's regulatory capital requirements. Refer to "Item 8. Financial Statements and Supplementary Data — Note 15 — Capital" for additional information.


49


CAPITAL STOCK
Our capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. We generally issue a single class of capital stock (Class B stock). We have two subclasses of Class B capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding. All Class B capital stock issued is subject to a five year notice of redemption period.

The capital stock requirements established in our Capital Plan are designed so that we remain adequately capitalized as member activity changes. Our Board of Directors may make adjustments to the capital stock requirements within ranges established in our Capital Plan.

Because membership is voluntary, a member can provide a notice of withdrawal from membership at any time. If a member provides a notice of withdrawal from membership, we will not repurchase or redeem any membership stock until five years from the date of receipt of a notice of withdrawal. If a member that withdraws from membership owns any activity-based capital stock, we will redeem the required activity-based capital stock consistent with the level of activity outstanding.
A member may cancel any pending notice of redemption before the completion of the five-year redemption period by providing a written notice of cancellation. We charge a cancellation fee equal to a percentage of the par value of the shares of capital stock subject to redemption. This fee is currently set at a range of one to five percent depending on when we receive notice of cancellation from the member. Our Board of Directors retains the right to change the cancellation fee at any time. We will provide at least 15 days' written notice to each member of any adjustment or amendment to our cancellation fee.
We cannot repurchase or redeem any membership or activity-based capital stock if the repurchase or redemption would cause a member to be out of compliance with its required investment. In addition, there are statutory and regulatory restrictions on our obligation or right to redeem outstanding capital stock.
First, in no case may we redeem any capital stock if, following such redemption, we would fail to satisfy our minimum regulatory capital requirements. By law, all member holdings of our capital stock immediately become nonredeemable if we become undercapitalized.
Second, we are precluded by regulation from redeeming any capital stock without the prior approval of the Finance Agency if either our Board of Directors or the Finance Agency determines that we incurred or are likely to incur losses resulting in or likely to result in a charge against capital.
Third, we cannot redeem shares of capital stock from any member if the principal or interest on any consolidated obligation of the FHLBank System is not paid in full when due, or under certain circumstances if (i) we project, at any time, that we will fail to comply with statutory or regulatory liquidity requirements, or will be unable to timely and fully meet all of our current obligations, (ii) we actually fail to comply with statutory or regulatory liquidity requirements or to timely and fully meet all of our current obligations, or enter or negotiate to enter into an agreement with one or more other FHLBanks to obtain financial assistance to meet our current obligations, or (iii) the Finance Agency determines that we will cease to be in compliance with statutory or regulatory liquidity requirements, or will lack the capacity to timely or fully meet all of our current obligations.
If we are liquidated, after payment in full to our creditors, our stockholders will be entitled to receive the par value of their capital stock as well as any additional capital from merger and 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, our Board of Directors shall determine the rights and preferences of our stockholders, subject to applicable Finance Agency regulations, as well as any terms and conditions imposed by the Finance Agency.

50


The following table summarizes our regulatory capital stock by type of member (dollars in millions):
 
December 31,
 
2016
 
2015
Commercial banks
$
4,549

 
$
2,823

Thrifts
121

 
176

Credit unions
320

 
293

Non-captive insurance companies
296

 
768

Captive insurance companies
631

 
654

Total GAAP capital stock
5,917

 
4,714

Mandatorily redeemable capital stock
664

 
103

Total regulatory capital stock
$
6,581

 
$
4,817


The increase in GAAP and regulatory capital stock held at December 31, 2016 when compared to December 31, 2015 was due primarily due to an increase in member activity. In addition, mandatorily redeemable capital stock increased due primarily to the reclassification of captive insurance company capital stock to mandatorily redeemable capital stock in the first quarter of 2016 in response to the Finance Agency final rule affecting membership eligibility that became effective February 19, 2016.

Mandatorily Redeemable Capital Stock

We reclassify capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) when a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership.
Shares meeting this definition are reclassified to a liability at fair value. The fair value of mandatorily redeemable capital stock is generally par value as all shares are issued, redeemed, or repurchased by us at the stated par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to a liability (if applicable), until such amount is paid. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income.
If a member cancels its written notice of redemption or notice of withdrawal, we will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.
For GAAP purposes, mandatorily redeemable capital stock is not included as a component of capital. For determining compliance with our regulatory capital requirements, the Finance Agency requires that such outstanding capital stock be considered capital.
At December 31, 2016 and 2015, we had $664 million and $103 million of mandatorily redeemable capital stock. The increase was primarily a result of the reclassification of $723 million in captive insurance company member capital stock to mandatorily redeemable capital stock in the first quarter of 2016 in response to the Finance Agency final rule affecting membership eligibility that became effective February 19, 2016. For additional information on our mandatorily redeemable capital stock, refer to "Item 8. Financial Statements and Supplementary Data — Note 15 — Capital."

ADDITIONAL CAPITAL FROM MERGER

We recognized net assets acquired from the Seattle Bank by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a capital account captioned “Additional capital from merger.” We treat this additional capital from merger as a component of total capital for regulatory capital purposes. Dividends on capital stock have been paid from this account since the merger date and we intend to pay future dividends, when and if declared, from this account until the additional capital from merger balance is depleted.


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RETAINED EARNINGS
Our ERMP includes a target level of retained earnings and additional capital from merger based on the amount we believe necessary to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We monitor our achievement of this target and may utilize tools such as restructuring our balance sheet, generating additional income, reducing our risk exposures, increasing capital stock requirements, or reducing our dividends to enable us to return to our targeted level of retained earnings over time. At December 31, 2016, our actual retained earnings were 95 percent of target. Based on our projected earnings and assuming no material increase in our risk profile, we expect to be above target by the end of 2017.
We entered into a JCE Agreement with all of the other FHLBanks in February 2011. The JCE Agreement, as amended, is intended to enhance our capital position by allocating the earnings historically paid to satisfy the Resolution Funding Corporation obligation to a separate restricted retained earnings account. Under the JCE Agreement, we allocate 20 percent of our quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of our average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in our Statements of Condition. At December 31, 2016 and 2015, our restricted retained earnings balance totaled $231 million and $101 million. One percent of our average balance of outstanding consolidated obligations for the three months ended September 30, 2016 was $1.6 billion.

DIVIDENDS

Our Board of Directors may declare and pay different dividends for each subclass of capital stock. Dividend payments may be made in the form of cash and/or additional shares of capital stock. Historically, we have only paid cash dividends. By regulation, we may pay dividends from current earnings or unrestricted retained earnings, but we may not declare a dividend based on projected or anticipated earnings. As a result of the Merger, our Board of Directors approved the payment of dividends from additional capital from merger. Dividends on capital stock have been paid from this account since the merger date and we intend to pay future dividends to members, when and if declared, from this account until the additional capital from merger balance is depleted. We are prohibited from paying a dividend in the form of additional shares of capital stock, if after the issuance, the outstanding excess capital stock would be greater than one percent of our total assets. Our Board of Directors may not declare or pay dividends if it would result in our non-compliance with regulatory capital requirements.

Our Board of Directors believes any returns on capital stock above an appropriate benchmark rate that are not retained for capital growth should be returned to members that utilize our product and service offerings. Our current dividend philosophy is to pay a membership capital stock dividend similar to a benchmark rate of interest, such as average three-month LIBOR over time, and an activity-based capital stock dividend, when possible, at a level above the membership capital stock dividend. Our actual dividend payout is determined quarterly by our Board of Directors, based on policies, regulatory requirements, actual performance, and other considerations.

The following table summarizes dividend-related information (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Aggregate cash dividends paid1
$
142

 
$
102

 
$
79

Effective combined annualized dividend rate paid on capital stock
2.94
%
 
2.87
%
 
2.82
%
Annualized dividend rate paid on membership capital stock
0.63
%
 
0.50
%
 
0.50
%
Annualized dividend rate paid on activity-based capital stock
3.50
%
 
3.50
%
 
3.50
%
Average three-month LIBOR
0.75
%
 
0.32
%
 
0.23
%

1
Amount excludes $21 million, $3 million, and less than $1 million paid on mandatorily redeemable capital stock for 2016, 2015, and 2014, which is recorded as interest expense in the Bank's Statements of Income.


52


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our financial statements in accordance with GAAP requires management to make a number of judgments and assumptions that affect our reported results and disclosures. Several of our accounting policies are inherently subject to valuation assumptions and other subjective assessments and are more critical than others to our financial results. Given the assumptions and judgment used, we have identified the following accounting policies as critical to understanding our financial condition and results of operations:

fair value measurements;

derivatives and hedging activities;

allowance for credit losses; and

other-than-temporary impairment.

We evaluate our critical accounting policies and estimates on an ongoing basis. While management believes our estimates and assumptions are reasonable based on historical experience and other factors, actual results could differ from those estimates and differences could be material to the financial statements.


Fair Value Measurements

We record trading securities, AFS securities, derivative assets and liabilities, certain other assets, and certain advances and consolidated obligations for which the fair value option has been elected at fair value in the Statements of Condition on a recurring basis and on occasion, certain impaired MPF and MPP loans on a non-recurring basis. Fair value is a market-based measurement and is defined as the price received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date under current market conditions. In general, the transaction price will equal the exit price and, therefore, represent the fair value of the asset or liability at initial recognition. In determining whether a transaction price represents the fair value of the asset or liability at initial recognition, we are required to consider factors specific to the asset or liability, the principal or most advantageous market for the asset or liability, and market participants with whom we would transact in that market.

Fair values play an important role in our valuation of certain assets, liabilities, and hedging transactions. Fair value is first determined based on quoted market prices or market-based prices, where available. If quoted market prices or market-based prices are not available, fair values are determined based on external or internal pricing models that use discounted cash flows using market estimates of interest rates and volatility, dealer prices, or prices of similar instruments.
For external pricing models, we annually review the vendors' pricing processes, methodologies, and control procedures for reasonableness. For internal pricing models, the underlying assumptions are based on management's best estimates for discount rates, prepayments, market volatility, and other factors. The assumptions used in both external and internal pricing models could have a significant effect on the reported fair values of assets and liabilities, including the related income and expense. The use of different assumptions, as well as changes in market conditions, could result in materially different values.
We categorize our financial instruments carried at fair value into a three-level hierarchy. The hierarchy is based upon the transparency (observable or unobservable) of inputs used to value the asset or liability as of the measurement date. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. At December 31, 2016 and 2015, we did not carry any financial assets or liabilities, measured on a recurring basis, at fair value in our Statements of Condition based on unobservable inputs.

Refer to “Item 8. Financial Statements and Supplementary Data — Note 17 — Fair Value” for additional discussion on our fair value measurements.


53


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

We document at inception all relationships between derivatives designated as hedging instruments and hedged items, our risk management objectives and strategies for undertaking various hedge transactions, and our method of assessing effectiveness for all derivatives qualifying for hedge accounting. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition and firm commitments. We also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives that we use in hedging transactions have been effective in offsetting changes in fair value of the hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective in future periods. We typically use regression analyses to assess the effectiveness of our hedges.
Derivative Designations. Derivative instruments are designated by the Bank as:
a fair value hedge of an associated financial instrument or firm commitment (fair value hedge); or
an economic hedge to manage certain defined risks in the Bank's Statements of Condition (economic hedge). These hedges are primarily used to: (i) manage mismatches between the coupon features of the Bank's assets and liabilities, (ii) offset prepayment risk in certain assets, (iii) mitigate the income statement volatility that occurs when financial instruments are recorded at fair value and hedge accounting is not permitted by accounting guidance, or (iv) to reduce exposure reset risk.
FAIR VALUE HEDGES
If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the fair value hedging relationship and an expectation to be highly effective, they qualify for fair value hedge accounting and the changes in fair value of derivatives along with the offsetting changes in fair value of the hedged items attributable to the hedged risk are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.” The amount by which the change in fair value of the derivative differs from the change in fair value of the hedged item is known as hedge ineffectiveness. Two approaches to fair value hedge accounting include:
Long-haul hedge accounting. The application of long-haul hedge accounting requires us to formally assess (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 hedged items due to benchmark interest rate changes and whether those derivatives are expected to remain effective in future periods.
Short-cut hedge accounting. Transactions that meet certain criteria qualify for short-cut hedge accounting in which an assumption can be made that the change in fair value of a hedged item due to changes in the benchmark interest rate exactly offsets the change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the interest rate swap is considered to be effective at achieving offsetting changes in fair value of the hedged asset or liability.

Derivatives are typically executed at the same time as the hedged item, and we designate the hedged item in a fair value hedge relationship at the trade date. In many hedging relationships, we may designate the fair value hedging relationship upon our 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. We then record the changes in fair value of the derivative and the hedged item beginning on the trade date.


54


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 fair value hedge accounting, but is an acceptable hedging strategy under our risk management program. Changes in the fair value of derivatives that are designated as economic hedges are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities” with no offsetting fair value adjustments for the underlying assets, liabilities, or firm commitments, unless changes in the fair value of the assets or liabilities are normally marked to fair value through earnings (e.g., trading securities and fair value option instruments).
ACCRUED INTEREST RECEIVABLES AND PAYABLES
The net settlements of interest receivables and payables related to derivatives designated as fair value hedges are recognized as adjustments to the interest income or interest expense of the designated hedged item. The net settlements of interest receivables and payables related to derivatives designated as economic hedges are recognized in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”
DISCONTINUANCE OF HEDGE ACCOUNTING
We discontinue fair value hedge accounting prospectively when either (i) we determine that the derivative is no longer effective in offsetting changes in the fair value of a hedged item due to changes in the benchmark interest rate, (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised, (iii) a hedged firm commitment no longer meets the definition of a firm commitment, or (iv) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When fair value hedge accounting is discontinued, we either terminate the derivative or continue to carry the derivative in the Statements of Condition at its fair value. For any remaining hedged item, we cease to adjust the hedged item for changes in fair value and amortize the cumulative basis adjustment on the hedged item into earnings over the remaining contractual life of the hedged item using a level-yield methodology.

When fair value hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, we continue to carry the derivative in the Statements of Condition at its fair value, removing from the Statements of Condition any hedged item that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

EMBEDDED DERIVATIVES

We may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the debt, advance, 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. If we determine that the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and 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 an economic derivative instrument. However, if we elect to carry the entire contract (the host contract and the embedded derivative) at fair value in the Statements of Condition, changes in fair value of the entire contract will be reported in current period earnings.

Refer to “Item 8. Financial Statements and Supplementary Data — Note 11 — Derivatives and Hedging Activities” for additional discussion on our derivatives.

Allowance for Credit Losses

We have an allowance for credit losses methodology for each of our financing receivable portfolio segments: advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, MPF conventional mortgage loans held for portfolio, MPP conventional mortgage loans held for portfolio, and term securities purchased under agreements to resell. The following discussion highlights those methodologies that we consider critical to our financial results. For a complete discussion of our allowance methodologies, refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses.”


55


CREDIT PRODUCTS

We manage our credit exposure to credit products through an approach that includes establishing a credit limit for each borrower, ongoing reviews of each borrower's financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

We are required by regulation to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each borrower's credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal balance or market value, if available, of the collateral. Eligible collateral includes (i) whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and FFELP guaranteed student loans, (iii) cash deposited with us, and (iv) other real estate-related collateral acceptable to us provided such collateral has a readily ascertainable value and we can perfect a security interest in such property. In addition, CFIs may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each member's capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Using a risk-based approach and taking into consideration each borrower's financial strength, we consider the types and level of collateral to be the primary indicator of credit quality on our credit products. At December 31, 2016 and 2015, we had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of our outstanding extensions of credit.

We have never experienced a credit loss on our credit products. Based upon our collateral and lending policies, the collateral held as security, and the repayment history on our credit products, management has determined that there were no probable credit losses on our credit products as of December 31, 2016 and 2015. Accordingly, we have not recorded any allowance for credit losses.

GOVERNMENT-INSURED MORTGAGE LOANS

We invest in government-insured fixed rate mortgage loans in both the MPF and MPP portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, we only have credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance. Management views this risk as remote and has never experienced a credit loss on its government-insured mortgage loans. As a result, we did not establish an allowance for credit losses for our government-insured mortgage loans at December 31, 2016 and 2015. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

MPF CONVENTIONAL MORTGAGE LOANS

Our management of credit risk in the MPF program involves several layers of legal loss protection that are defined in agreements among us and our participating PFIs. For conventional MPF loans, the availability of loss protection may differ slightly among MPF products. Our loss protection consists of the following loss layers, in order of priority:

Homeowner Equity.

Primary Mortgage Insurance (PMI). At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value, whichever is less and as applicable to the specific loan.

First Loss Account (FLA). The FLA is a memorandum account used to track our potential loss exposure under each master commitment prior to the PFI's credit enhancement obligation.


56


Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation at the time a mortgage loan is purchased to absorb certain losses in excess of the FLA in order to limit our loss exposure to approximately that of an investor in an investment grade MBS. PFIs pledge collateral to secure this obligation.

MPP CONVENTIONAL MORTGAGE LOANS

For conventional MPP loans, the loss protection consists of the following loss layers, in order of priority:

Homeowner Equity.

Primary Mortgage Insurance. At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value, whichever is less and as applicable to the specific loan.


ALLOWANCE METHODOLOGY

We utilize an allowance for credit losses to reserve for estimated losses in our conventional MPF and MPP mortgage loan portfolios at the balance sheet date. The measurement of our MPF and MPP allowance for credit losses is determined by the following:

reviewing similar conventional mortgage loans for impairment on a collective basis. This evaluation is primarily based on the following factors: (i) current loan delinquencies, (ii) loans migrating to collateral-dependent status, and (iii) actual historical loss severities.

reviewing conventional mortgage loans for impairment on an individual basis; and

estimating additional credit losses in the conventional mortgage loan portfolio. These losses result from other factors
the may not be captured in the methodology previously described at the balance sheet date, which include but are not limited to certain quantifiable economic factors, such as unemployment rates and home prices impacting housing markets.

Other-Than-Temporary Impairment

We evaluate our individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. A security is considered impaired when its fair value is less than its amortized cost basis. We consider an OTTI to have occurred under any of the following circumstances:
we have an intent to sell the impaired debt security;
based on available evidence, we believe it is more likely than not that we will be required to sell the impaired debt security before the recovery of its amortized cost basis; or
we do not expect to recover the entire amortized cost basis of the impaired debt security.

If either of the first two conditions is met, we recognize an OTTI charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value as of the reporting date. If neither of the first two conditions is met, we perform an analysis to determine if we believe we will recover the entire amortized cost basis of the debt security, which includes a cash flow analysis for private-label MBS. The present value of the cash flows expected to be collected is compared to the amortized cost basis of the debt security to determine whether a credit loss exists. If there is a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security), the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors is recognized in AOCI. The credit loss on a debt security is limited to the amount of that security's unrealized loss. The total OTTI is presented in the Statements of Income with an offset for the amount of the non-credit portion of OTTI that is recognized in AOCI, if applicable.

Refer to “Item 8. Financial Statements and Supplementary Data — Note 7 — Other-than-Temporary Impairment” for additional discussion on our OTTI analysis.

57


LEGISLATIVE AND REGULATORY DEVELOPMENTS

FHFA Final Rule on Acquired Member Assets

On December 19, 2016, the Finance Agency published the final Acquired Member Assets (AMA) rule, which governs our ability to purchase and hold certain types of mortgage loans from our members. The final rule, effective January 18, 2017, has, among other things:

expanded the types of assets that will qualify as AMA to include mortgage loans insured or guaranteed by a department or agency of the U.S. government that exceed the conforming loan limits and certificates representing interests in whole loans under certain conditions;

enhanced the credit risk sharing requirement by allowing us to utilize our own model to determine the credit enhancement for AMA loan assets and pool loans in lieu of a NRSRO ratings model. The assets delivered must now be credit enhanced by the member up to our determined “AMA investment grade” instead of a specific NRSRO rating; and

retained the option to allow a member to meet its credit enhancement obligation by purchasing loan level supplemental mortgage insurance (SMI) or pool level insurance once we have established standards for qualified insurers.

We do not anticipate that the final rule will have a negative impact on the volume of AMA loan assets or on our costs of operation.

FHFA Final Rule on New Business Activities

On December 19, 2016, the Finance Agency issued a final rule effective January 18, 2017, that, among other things, reduces the scope of new business activities (NBAs) for which we must seek approval from the Finance Agency. In addition, the final rule establishes certain timelines for Finance Agency review and approval of NBA notices. The final rule also clarifies the protocol for Finance Agency review of NBAs. Under the final rule, acceptance of new types of legally permissible collateral by us would not constitute a new business activity or require approval from the Finance Agency prior to acceptance. Instead, the Finance Agency would review new collateral types as part of the annual exam process.

We do not anticipate that the final rule will have a material impact on our financial condition or results of operations.

FHFA Proposed Rule on Minority and Women Inclusion

On October 27, 2016, the Finance Agency proposed amendments to its Minority and Women Inclusion regulations that, if adopted, would clarify the scope of our obligation to promote diversity and ensure inclusion. These proposed amendments update existing Finance Agency regulations aimed at promoting diversity and the inclusion and utilization of minorities, women, and individuals with disabilities in all Bank business and activities, including management, employment and contracting.

The proposed amendments would:

require us to develop standalone diversity and inclusion strategic plans or incorporate diversity and inclusion into our existing strategic planning processes and adopt strategies for promoting diversity and ensuring inclusion;

encourage us to expand contracting opportunities for minorities, women, and individuals with disabilities through subcontracting arrangements;

require us to amend our policies on equal opportunity in employment and contracting by adding sexual orientation, gender identity, and status as a parent to the list of protected classifications; and

require us to provide information in our annual reports to the Finance Agency about our efforts to advance diversity and inclusion through capital market transactions, affordable housing and community investment programs, initiatives to improve access to mortgage credit, and strategies for promoting the diversity of supervisors and managers.


58


We submitted a joint comment letter with the other FHLBanks and the Office of Finance on December 27, 2016, which primarily related to the proposed rule’s enhanced reporting and contract requirements. The proposed rule, if adopted, may substantially increase the amount of tracking, monitoring, and reporting that would be required.

FHFA Proposed Rule on Indemnification Payments

On September 20, 2016, the Finance Agency issued a re-proposed rule that, if adopted, would establish standards for identifying whether an indemnification payment by us or the Office of Finance to an officer, director, employee, or other entity-affiliated party in connection with an administrative proceeding or civil action instituted by the Finance Agency is prohibited or permissible. Under the proposed rule, those payments with respect to an administrative proceeding or civil action instituted by the Finance Agency are only permitted if they relate to:

premiums for professional liability insurance or fidelity bonds for directors and officers, to the extent that the insurance or fidelity bond covers expenses and restitution, but not a judgment in favor of the Finance Agency or a civil money penalty;

expenses of defending an action, subject to an agreement to repay those expenses in certain instances; and

amounts due under an indemnification agreement entered into on or prior to September 20, 2016.

The proposed rule also outlines the process our board of directors must undertake prior to making any permitted indemnification payment for expenses of defending an action initiated by the Finance Agency. We submitted a joint comment letter with the other FHLBanks and the Office of Finance on the proposed rule on December 21, 2016. We are continuing to assess the effect of the proposed rule but do not anticipate that, if adopted, it would have a material impact on our financial condition or results of operations.

OFF-BALANCE SHEET ARRANGEMENTS
Our significant off-balance sheet arrangements consist of the following:

joint and several liability for consolidated obligations issued on behalf of the other FHLBanks;
 
standby letters of credit;

standby bond purchase agreements; and

commitments to issue consolidated obligations.
 
For a complete discussion of our off-balance sheet arrangements, refer to "Item 8 — Financial Statements and Supplementary Data — Note 18 — Commitments and Contingencies."

CONTRACTUAL OBLIGATIONS
The following table shows our contractual obligations due by payment period at December 31, 2016 (dollars in millions):
 
 
Payments Due by Period
 
 
< 1 Year
 
1 to 3 Years
 
>3 to 5 Years
 
>5 Years
 
Total
Bonds1
 
$
47,733

 
$
28,549

 
$
9,440

 
$
4,331

 
$
90,053

Operating leases
 
1

 
3

 
3

 
5

 
12

Mandatorily redeemable capital stock
 
4

 
9

 
1

 
650

 
664

Commitments to purchase mortgage loans
 
102

 

 

 

 
102

Pension and postretirement contributions2
 
2

 
1

 
2

 
5

 
10

Total
 
$
47,842

 
$
28,562

 
$
9,446

 
$
4,991

 
$
90,841


1
Excludes contractual interest payments related to bonds. Total is based on contractual maturities; the actual timing of payments could be impacted by factors affecting redemptions.

2
Represents the future funding contribution for our qualified defined benefit multiemployer plan and the scheduled benefit payments for our nonqualified defined benefit plans.

59


RISK MANAGEMENT
    
We have risk management policies, established by our Board of Directors, that monitor and control our exposure to market, liquidity, credit, operational, and strategic risk, as well as capital adequacy. Our primary objective is to manage our assets and liabilities in ways that protect the par redemption value of our capital stock. We periodically evaluate our risk management policies in order to respond to changes in our financial position and general market conditions.

VALUATION MODELS

We use sophisticated risk management systems to evaluate our financial position and risk exposure. These systems employ various mathematical models and valuation techniques to measure interest rate risk. For example, we use valuation techniques designed to model explicit and embedded options and other cash flow uncertainties across a number of hypothetical interest rate environments. The techniques used to model options rely on:
understanding the contractual and behavioral features of each instrument;
using appropriate market data, such as yield curves and implied volatilities; and
using appropriate option valuation models and prepayment estimates or forecasts to describe the evolution of interest rates over time and the expected cash flows of financial instruments in response.
The method for calculating fair value is dependent on the instrument type. Option-free instruments, such as plain vanilla interest rate swaps, bonds, and advances require an assessment of the future course of interest rates. Once the course of interest rates has been specified and the expected cash flows determined, the appropriate forward rates are used to discount the future cash flows to a fair value. Options and option-embedded instruments, such as cancelable interest rate swaps, swaptions, interest rate caps and floors, callable bonds, and mortgage-related instruments, are typically evaluated using an interest rate tree (lattice) or Monte Carlo simulations that generate a large number of possible interest rate scenarios.
Models are inherently imperfect predictors of actual results because they are based on assumptions about future performance. Changes in any models or in any of the assumptions, judgments, or estimates used in the models may cause the results generated by the model to be materially different. Our risk computations require the use of instantaneous shifts in assumptions, such as interest rates, spreads, volatilities, and prepayment speeds. These computations may differ from our actual interest rate risk exposure because they do not take into account any portfolio re-balancing and hedging actions that are required to maintain risk exposures within our policies and guidelines. We have adopted controls, procedures, and policies to monitor and manage assumptions used in these models which are regularly validated.

Market Risk

We define market risk as the risk that Market Value of Capital Stock (MVCS) or net income will change as a result of changes in market conditions, such as interest rates, spreads, and volatilities. Interest rate risk was our predominant type of market risk exposure during 2016 and 2015. Our general approach toward managing interest rate risk is to acquire and maintain a portfolio of assets, liabilities, and derivatives, which taken together, limit our expected exposure to interest rate risk. Management regularly reviews our sensitivity to interest rate changes by monitoring our market risk measures in parallel and non-parallel interest rate shifts and spread and volatility movements.

Our key market risk measures are MVCS Sensitivity and Projected Income Sensitivity.

MARKET VALUE OF CAPITAL STOCK SENSITIVITY
  
We define MVCS as an estimate of the market value of assets minus the market value of liabilities (excluding mandatorily redeemable capital stock) divided by the total shares of capital stock (including mandatorily redeemable capital stock) outstanding. It represents an estimation of the “liquidation value” of one share of our capital stock if all assets and liabilities were liquidated at current market prices. MVCS does not represent our long-term value, as it takes into account short-term market price fluctuations. These fluctuations are often unrelated to the long-term value of the cash flows from our assets and liabilities.


60


The MVCS calculation uses market prices, as well as interest rates and volatilities, and assumes a run-off balance sheet. The timing and variability of balance sheet cash flows are calculated by an internal model. To ensure the accuracy of the MVCS calculation, we reconcile the computed market prices of complex instruments, such as derivatives and mortgage assets, to market observed prices or dealers' quotes.

Interest rate risk stress tests of MVCS involve instantaneous parallel and non-parallel shifts in interest rates. The resulting percentage change in MVCS from the base case value is an indication of longer-term repricing risk and option risk embedded in the balance sheet.

To protect the MVCS from large interest rate swings, we manage the interest rate risk of our balance sheet by using hedging transactions, such as entering into or canceling interest rate swaps, caps, floors, and swaptions and issuing consolidated obligation bonds, including those with step-up, callable, or other structured features.

We monitor and manage to the MVCS policy limits to ensure the stability of the Bank's value. Our policy limits are based on declines from the base case in parallel and non-parallel interest rate shift scenarios. Any policy limit breach requires a prompt action to address the measure outside of the policy limit and the breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the MVCS policy limits at December 31, 2016 and 2015.

Our down 200 basis point policy limit is suspended when the 10-year swap rate is below 2.50 percent and remains so for five consecutive days. At December 31, 2016, and 2015, the 10-year swap rate was below 2.50 percent and therefore the associated policy limit was suspended.

The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous parallel shifts in interest rates at December 31, 2016 and 2015:
 
Market Value of Capital Stock (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2016
$
119.8

 
$
120.3

 
$
120.0

 
$
119.6

 
$
118.7

 
$
117.6

 
$
114.9

2015
$
110.4

 
$
113.8

 
$
115.4

 
$
116.9

 
$
117.5

 
$
117.5

 
$
116.3

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2016
0.2
 %
 
0.6
 %
 
0.4
 %
 
%
 
(0.7
)%
 
(1.7
)%
 
(3.9
)%
2015
(5.5
)%
 
(2.6
)%
 
(1.2
)%
 
%
 
0.5
 %
 
0.5
 %
 
(0.5
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2016 and 2015
(12.0
)%
 
(5.0
)%
 
(2.2
)%
 
%
 
(2.2
)%
 
(5.0
)%
 
(12.0
)%

The following tables show our policy limits and base case and change from base case MVCS in dollars per share and percent change respectively, based on outstanding shares of capital stock, including shares classified as mandatorily redeemable, assuming instantaneous non-parallel shifts in interest rates at December 31, 2016 and 2015:
 
Market Value of Capital Stock (dollars per share)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2016
$
121.0

 
$
120.9

 
$
120.4

 
$
119.6

 
$
118.3

 
$
117.0

 
$
114.2

2015
$
118.1

 
$
118.2

 
$
117.8

 
$
116.9

 
$
115.4

 
$
114.0

 
$
110.3

 
% Change from Base Case
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2016
1.2
%
 
1.1
%
 
0.7
%
 
%
 
(1.0
)%
 
(2.1
)%
 
(4.5
)%
2015
1.0
%
 
1.1
%
 
0.8
%
 
%
 
(1.3
)%
 
(2.5
)%
 
(5.6
)%
 
Policy Limits (declines from base case)
 
Down 200
 
Down 100
 
Down 50
 
Base Case
 
Up 50
 
Up 100
 
Up 200
2016 and 2015
(13.0
)%
 
(5.5
)%
 
(2.5
)%
 
%
 
(2.5
)%
 
(5.5
)%
 
(13.0
)%

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Our base case MVCS was 119.6 at December 31, 2016 compared to 116.9 at December 31, 2015. The change was primarily attributable to the following factors:

Increase in Retained Earnings: We recorded net income of $649 million, which included net gains on litigation settlements in the amount of $376 million during the year ended December 31, 2016. This had a positive impact on the market value of our assets, thereby increasing MVCS.

Increased shares of capital stock: Our capital stock balance increased at December 31, 2016 when compared to December 31, 2015 due to increased member advance activity. As we issued this capital stock at par, which is below our current MVCS value, our MVCS was negatively impacted.

PROJECTED INCOME SENSITIVITY

We monitor the Bank’s projected 24-month income sensitivity through our review of the projected return on capital stock measure. Projected return on capital stock is computed as an annualized ratio of projected net income over a 24 month period to average projected capital stock over the same period.
We monitor and manage projected 24-month income sensitivity in an effort to limit the short-term earnings volatility of the Bank. The projected 24-month income sensitivity policy limits are based on the forward interest rates, business, and risk management assumptions.
Our primary income sensitivity policy limits specify a floor on our projected return on capital stock of no less than 50 percent of average projected 3-month LIBOR over 24 months for the up and down 100 and 200 basis point parallel interest rate shift scenarios as well as for the up and down 100 basis point non-parallel interest rate shift for each shock scenario. Any policy limit breach requires a prompt action to address the measure outside of the policy limit.The breach must be reported to the Enterprise Risk Committee of the Bank and the Risk Committee of the Board of Directors. We were in compliance with the projected 24-month income sensitivity policy limits at both December 31, 2016 and 2015.
The following table shows our projected return on capital stock over 24 months and associated policy limits, assuming instantaneous parallel shifts in interest rates at December 31, 2016 and 2015:
 
Projected Return on Capital Stock
 
Down 200
 
Down 100
 
Base Case
 
Up 100
 
Up 200
2016
3.4
%
 
4.6
%
 
6.4
%
 
7.9
%
 
9.2
%
2015
2.7
%
 
3.7
%
 
6.6
%
 
8.7
%
 
10.8
%
 
Policy Limits
 
Down 200
 
Down 100
 
Base Case
 
Up 100
 
Up 200
2016
%
 
0.3
%
 
%
 
1.3
%
 
1.8
%
2015
%
 
0.2
%
 
%
 
1.1
%
 
1.7
%
The following table shows our projected return on capital stock over 24 months and associated policy limits, assuming instantaneous non-parallel shifts in interest rates at December 31, 2016 and 2015:
 
Projected Return on Capital Stock
 
Down 100
 
Base Case
 
Up 100
2016
7.1
%
 
6.4
%
 
5.8
%
2015
8.0
%
 
6.6
%
 
4.8
%
 
Policy Limits
 
Down 100
 
Base Case
 
Up 100
2016
1.0
%
 
%
 
0.6
%
2015
0.8
%
 
%
 
0.4
%


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Our base case projected return on capital stock was 6.4 percent at December 31, 2016 compared to 6.6 percent December 31, 2015. The change was primarily attributable to the following factors:

Projected Average Capital Stock: Our base case projected return on capital stock at December 31, 2016 declined over the prior year due to an increase in projected average capital stock. Projected average capital stock increased at December 31, 2016 when compared to December 31, 2015 due to capital stock issued as a result of increased member advance activity. This had a negative impact on projected return on capital stock.

Projected Net Income: Projected net income increased at December 31, 2016 when compared to December 31, 2015 due to higher average interest earning assets and higher interest rates. Higher interest rates resulted in slower projected prepayment speeds and higher projected returns on capital. This had a positive impact on return on capital stock.

DERIVATIVES
We use derivatives to manage the interest rate risk in our Statements of Condition. Finance Agency regulations and our ERMP establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.
Our hedging strategies include hedges of specific assets and liabilities that qualify for fair value hedge accounting and economic hedges that are used to reduce overall market risk exposure in our Statements of Condition. All hedging strategies are approved by our Asset-Liability Committee. See additional discussion regarding our derivative contracts in “Item 8. Financial Statements and Supplementary Data — Note 11 — Derivatives and Hedging Activities.”

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The following table summarizes our interest rate exchange agreements by type of hedged item, hedging instrument, associated hedging strategy, accounting designation as specified under the accounting for derivative instruments and hedging activities, and notional amount as of December 31, 2016 and 2015:
 
 
 
 
 
 
December 31,
Hedged Item / Hedging Instrument
 
Hedging Strategy
 
Hedge Accounting Designation
 
2016
 Notional Amount
 
2015
 Notional Amount
Advances
 
 
 
 
 
 
 
 
Pay-fixed, receive floating interest rate swap (without options)1,2
 
Converts the advance's fixed rate to a variable rate index.
 
Fair Value
 
$
12,017

 
$
12,524

Pay-fixed, receive floating interest rate swap (with options)1
 
Converts the advance's fixed rate to a variable rate index and offsets option risk in the advance.
 
Fair Value
 
1,887

 
2,573

 
 
 
 
Economic
 

 
2

Investments
 
 
 
 
 
 
 
 
Pay-fixed, receive floating interest rate swap3
 
Converts the investment's fixed rate to a variable rate index.
 
Fair Value
 
7,789

 
8,151

 
 
 
 
Economic
 
991

 
981

Mortgage Loans
 
 
 
 
 
 
 
 
Forward settlement agreement
 
Protects against changes in market value of fixed rate mortgage delivery commitments resulting from changes in interest rates.
 
Economic
 
94

 
45

Mortgage delivery commitment
 
Exposes us to fair value risk associated with fixed rate mortgage purchase commitments.
 
Economic
 
102

 
51

Bonds
 
 
 
 
 
 
 
 
Receive-fixed or structured, pay floating interest rate swap (without options)4
 
Converts the bond's fixed or structured rate to a variable rate index.
 
Fair Value
 
28,668

 
11,848

Receive-fixed or structured, pay floating interest rate swap (with options)4
 
Converts the bond's fixed or structured rate to a variable rate index and offsets option risk in the bond.
 
Fair Value
 
1,535

 
2,430

Balance Sheet
 
 
 
 
 
 
 
 
Interest rate swaption
 
Provides the option to enter into an interest rate swap to offset interest rate or prepayment risk.
 
Economic
 

 
200

Offsetting Positions
 
 
 
 
 
 
 
 
Pay-fixed, receive-float interest rate swap and receive-fixed, pay-float interest rate swap
 
Represents offsetting positions on interest rate swaps acquired from the Merger.
 
Economic
 
423

 
473

Total
 
 
 
 
 
$
53,506

 
$
39,278


1
At December 31, 2016 and 2015, the par value of fixed rate advances outstanding was $26.9 billion and $31.0 billion, of which 51 percent and 48 percent were swapped to a variable rate index.

2
Includes fair value hedge firm commitments of $269 million for forward starting advances at December 31, 2016.

3
At December 31, 2016 and 2015, the amortized cost of fixed rate AFS securities outstanding was $8.8 billion and $10.1 billion, of which 92 and 85 percent were swapped to a variable rate index. At both December 31, 2016 and 2015, the fair value of fixed rate trading securities outstanding was $1.0 billion and all of these trading securities were swapped to a variable rate index.

4
At December 31, 2016 and 2015, the par value of fixed rate bonds outstanding was $41.4 billion and $27.9 billion, of which 73 and 51 percent were swapped to a variable rate index.

Advances
We offer a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics, and optionality. We may use derivatives to adjust the repricing and/or option characteristics of advances in order to more closely match the characteristics of the funding liabilities. For example, we may hedge a fixed rate advance with an interest rate swap where we pay a fixed rate coupon and receive a variable rate coupon, effectively converting the fixed rate advance to a variable rate advance. This type of hedge is typically treated as a fair value hedge. In addition, we may hedge a callable advance, which gives the borrower the option to extinguish the fixed rate advance, by entering into a cancelable interest rate swap.

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We may hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap (fair value hedge). In this case, the interest rate swap will function as the hedging instrument for both the firm commitment and the subsequent advance. We may also enter into economic derivatives in an effort to mitigate the income statement volatility that occurs when advances are recorded under the fair value option and hedge accounting is not permitted.
Investments
We primarily invest in other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, and MBS, and classify them as either trading, AFS, or HTM. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. We may fund investment securities with fixed rate long-term and callable consolidated obligations or utilize interest rate swaps, caps, floors, or swaptions to manage interest rate risk.
The prepayment options embedded in MBS can result in extensions or contractions in the expected maturities of these investments, depending on changes in and levels of interest rates, as well as other factors related to the mortgage market. The Finance Agency limits this source of interest rate risk by restricting the types of MBS we may own to those with limited average life changes under certain interest rate shock scenarios.
Mortgage Loans
We invest in fixed rate mortgage loans and certain mortgage purchase commitments with our PFIs that are considered derivatives. We normally hedge these commitments by selling TBA MBS for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date for an established price. Upon expiration of the mortgage purchase commitment, we purchase the TBA to close the hedged position.
Consolidated Obligations
We may enter into derivatives to hedge the interest rate risk associated with our consolidated obligations. For example, we may issue and hedge a fixed rate consolidated obligation with an interest rate swap where we receive a fixed rate coupon and pay a variable rate coupon, effectively converting the fixed rate consolidated obligation to a variable rate consolidated obligation. This type of hedge is typically treated as a fair value hedge. We may also issue variable interest rate consolidated obligations indexed to a variety of indices, such as LIBOR, and simultaneously execute interest rate swaps to hedge the basis risk of the variable interest rate debt. Interest rate swaps used to hedge the basis risk of variable interest rate debt do not qualify for hedge accounting. As a result, this type of hedge is treated as an economic hedge. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables us to offer a wider range of attractively priced advances to our borrowers and may allow us to reduce our funding costs. While consolidated obligations are the joint and several obligations of the FHLBanks, each FHLBank serves as sole counterparty to derivative agreements associated with specific debt issues for which it is the primary obligor.
We may also enter into economic derivatives in an effort to mitigate the income statement volatility that occurs when consolidated obligations are recorded under the fair value option and hedge accounting is not permitted.
Balance Sheet
We may enter into certain economic derivatives as macro balance sheet hedges to protect against changes in interest rates, including prepayments on mortgage assets. These economic derivatives may include interest rate caps, floors, swaps, and swaptions.
Offsetting Positions
As a result of the Merger, we acquired certain offsetting interest rate swaps and classified these as economic derivatives.

Capital Adequacy

An adequate capital position is necessary for providing safe and sound operations of the Bank. Our key capital adequacy measure is MVCS. In addition to MVCS, we maintain capital levels in accordance with Finance Agency regulations and monitor retained earnings and additional capital from merger. For a discussion of our key capital adequacy measure, MVCS, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk — Market Value of Capital Stock Sensitivity".


65


RETAINED EARNINGS AND ADDITIONAL CAPITAL FROM MERGER TARGET LEVEL AND REGULATORY CAPITAL REQUIREMENTS

Our ERMP includes a target level of retained earnings and additional capital from merger based on the amount we believe necessary to protect the redemption value of capital stock, facilitate safe and sound operations, maintain regulatory capital ratios, and support our ability to pay a relatively stable dividend. We are also subject to three regulatory capital requirements. For additional information on our compliance with these requirements, refer to “Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources".

Liquidity Risk

We define liquidity risk as the risk that we will be unable to meet our obligations as they come due or meet the credit needs of our members and housing associates in a timely and cost efficient manner. To manage this risk, we maintain liquidity in accordance with Finance Agency regulations. For additional information on compliance with these requirements, refer to “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Liquidity — Liquidity Requirements".

Credit Risk

We define credit risk as the potential that our borrowers or counterparties will fail to meet their obligations in accordance with agreed upon terms. Our primary credit risks arise from our ongoing lending, investing, and hedging activities. Our overall objective in managing credit risk is to operate a sound credit granting process and to maintain appropriate credit administration, measurement, and monitoring practices.

ADVANCES

We manage our credit exposure to advances through an approach that provides for an established credit limit for each borrower, ongoing reviews of each borrower's financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, we lend to our borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

We are required by regulation to obtain sufficient collateral to fully secure our advances and other credit products. Eligible collateral includes (i) whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and FFELP, (iii) cash deposited with us, and (iv) other real estate-related collateral acceptable to us provided such collateral has a readily ascertainable value and we can perfect a security interest in such property. CFIs may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that we have a lien on each borrower's capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Borrowers may pledge collateral to us by executing a blanket lien, specifically assigning collateral, or placing physical possession of collateral with us or our custodians. We perfect our security interest in all pledged collateral by filing Uniform Commercial Code financing statements or taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to us by our members, or any affiliates of our members, has priority over the claims and rights of any other party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.

Under a blanket lien, we are granted a security interest in all financial assets of the borrower to fully secure the borrower's obligation. Other than securities and cash deposits, we do not initially take delivery of collateral pledged by blanket lien borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, we have the ability to require delivery of pledged collateral sufficient to secure the borrower's obligation. With respect to non-blanket lien borrowers that are federally insured, we generally require collateral to be specifically assigned. With respect to non-blanket lien borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), we generally take control of collateral through the delivery of cash, securities, or loans to us or our custodians.


66


Although management has policies and procedures in place to manage credit risk, we may be exposed to this risk if our outstanding advance value exceeds the liquidation value of our collateral. We mitigate this risk by applying collateral discounts or haircuts to the unpaid principal balance or market value, if available, of the collateral to determine the advance equivalent value of the collateral securing each borrower's obligation. The amount of these discounts will vary based on the type of collateral and security agreement. We determine these discounts or haircuts using data based upon historical price changes, discounted cash flow analyses, and loan level modeling.
 
At December 31, 2016 and 2015, borrowers pledged $330.4 billion and $268.8 billion of collateral (net of applicable discounts) to support activity with us, including advances. At December 31, 2016 and 2015, our advance balances were $131.6 billion and $89.2 billion. Borrowers pledge collateral in excess of their collateral requirement mainly to demonstrate available liquidity and to borrow additional amounts in the future.
 
The following table shows the amount of collateral pledged to us (net of applicable discounts) by collateral type (dollars in billions):    
 
 
December 31,
 
 
2016
 
2015
Collateral Type
 
Discount Range1
 
Amount
 
% of Total
 
Discount Range1
 
Amount
 
% of Total
Single-family loans
 
15-42%
 
$
201.4

 
61
 
   17-45%
 
$
165.8

 
62
Multi-family loans
 
31-34
 
10.6

 
3
 
21-43
 
9.2

 
3
Other real estate
 
15-65
 
82.2

 
25
 
14-62
 
61.0

 
23
Securities
 
 
 
 
 
 
 
 
 
 
 
 
Cash, agency and RMBS2
 
0-34
 
24.0

 
7
 
0-45
 
21.2

 
8
CMBS3
 
13-25
 
3.9

 
1
 
13-29
 
3.3

 
1
Government-insured loans
 
9-21
 
4.7

 
2
 
4-18
 
4.9

 
2
Secured small business and agribusiness loans
 
28-32
 
3.6

 
1
 
26-43
 
3.4

 
1
Total
 
 
 
$
330.4

 
100
 
 
 
$
268.8

 
100

1
Represents the range of discounts applied to the unpaid principal balance or market value of collateral pledged. Discount range for Housing Associates is 5 percent lower than the indicated range.

2
Represents cash, agency securities and residential mortgage-backed securities (RMBS).

3
Represents commercial mortgage-backed securities (CMBS).

Based upon our collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there are no probable credit losses on our credit products as of December 31, 2016 and 2015. Accordingly, we have not recorded any allowance for credit losses on our credit products.

MORTGAGE LOANS

We are exposed to credit risk through our participation in the MPF program and MPP. Mortgage loan credit risk is the risk that we will not receive timely payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage loans is affected by a number of factors, including loan type, borrower's credit history, and other factors such as home price fluctuations, unemployment levels, and other economic factors in the local market or nationwide.

Through our participation in the MPF program, we invest in conventional and government-insured residential mortgage loans that are acquired through or purchased from a PFI. In addition, MPF Xtra, MPF Direct, and MPF Government MBS are off-balance sheet loan products that are passed through to a third-party investor and are not maintained in our Statements of Condition.

Effective May 31, 2015, as part of the Merger, we acquired mortgage loans previously purchased by the Seattle Bank under the MPP. This program involved investment by the Seattle Bank in single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to the Seattle Bank. In 2005, the Seattle Bank ceased entering into new MPP master commitment contracts and therefore all MPP loans acquired were originated prior to 2006. We currently do not purchase mortgage loans under this program.


67


The following table presents the unpaid principal balance of our MPF portfolio by product type (dollars in millions):
 
 
December 31,
Product Type
 
2016
 
2015
MPF Conventional:
 
$
5,907

 
$
5,602

MPF Government
 
513

 
547

Total MPF
 
6,420

 
6,149

 
 
 
 
 
MPP Conventional
 
361

 
464

MPP Government
 
42

 
50

Total MPP
 
403

 
514

Total MPF unpaid principal balance
 
$
6,823

 
$
6,663


We manage the credit risk on mortgage loans acquired in the MPF program and MPP by (i) adhering to our underwriting standards, (ii) using agreements to establish credit risk sharing responsibilities with our PFIs, (iii) monitoring the performance of the mortgage loan portfolio and creditworthiness of PFIs, and (iv) establishing credit loss reserves to reflect management's estimate of probable credit losses inherent in the portfolio.

Government-Insured Mortgage Loans. For our government-insured mortgage loans, our loss protection consists of the loan guarantee, the ability of the loan servicer to repurchase any government-insured loan once it reaches 90 days delinquent, and the contractual obligation of the loan servicer to liquidate a government-insured loan in full upon sale of the REO property if not repurchased previously. Therefore, we have not recorded any allowance for credit losses on government-insured mortgage loans.

Conventional Mortgage Loans. For our conventional mortgage loans, we have several layers of legal loss protection that are defined in agreements among us and our PFIs. For our MPF loans, these loss layers may vary depending on the MPF product alternatives selected and consist of (i) homeowner equity, (ii) PMI, (iii) a FLA, and (iv) a credit enhancement obligation of the PFI. For our MPP loans, these loss layers consist of (i) homeowner equity, and (ii) PMI. For a detailed discussion of these loss layers, refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses.”

The following table shows conventional MPF and MPP loans by FICO® score. All percentages are calculated based on unpaid principal balances as of the applicable period end.
 
 
December 31,
 
December 31,
 
 
2016
 
2015
 
2016
 
2015
FICO® Score1
 
MPF
 
MPP
<620
 
1
%
 
1
%
 
%
 
%
620 to < 660
 
6

 
6

 
4

 
4

660 to < 700
 
13

 
14

 
21

 
20

700 to < 740
 
19

 
20

 
33

 
32

>= 740
 
61

 
59

 
42

 
44

Total
 
100
%
 
100
%
 
100
%
 
100
%
Weighted average FICO score
 
746

 
743

 
730

 
731


1
Represents the lowest original FICO® score of the borrowers and co-borrowers.

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The following table shows conventional MPF and MPP loans by loan-to-value ratio at origination. All percentages are calculated based on unpaid principal balances as of the applicable period end.

 
 
December 31,
 
December 31,
 
 
2016
 
2015
 
2016
 
2015
Loan-to-Value1
 
MPF
 
MPP
<= 60%
 
14
%
 
14
%
 
20
%
 
20
%
> 60% to 70%
 
14

 
15

 
21

 
22

> 70% to 80%
 
58

 
26

 
51

 
51

> 80% to 90%2
 
7

 
39

 
4

 
4

> 90%2
 
7

 
6

 
4

 
3

Total
 
100
%
 
100
%
 
100
%
 
100
%
Weighted average loan-to-value
 
74.1
%
 
72.2
%
 
70.0
%
 
70.0
%

1
Represents the loan-to-value at origination for the related loan.

2
These conventional loans were required to have PMI at origination.

The following table shows the state concentrations of our conventional MPF portfolio. All percentages are calculated based on unpaid principal balances as of the applicable period end.
 
December 31,
 
2016
 
2015
Iowa
39
%
 
37
%
Missouri
20

 
20

Minnesota
17

 
17

South Dakota
8

 
7

Illinois
2

 
2

California
2

 
2

All others
12

 
15

Total
100
%
 
100
%

The following table shows the state concentrations of our conventional MPP portfolio. All percentages are calculated based on unpaid principal balances as of the applicable period end.
 
December 31,
 
2016
 
2015
California
28
%
 
28
%
Illinois
11

 
11

New York
8

 
7

Florida
6

 
6

Massachusetts
5

 
5

All others
42

 
43

Total
100
%
 
100
%

Allowance for Credit Losses. We utilize an allowance for credit losses to reserve for estimated losses in our conventional MPF and MPP mortgage loan portfolios at the balance sheet date. The measurement of our MPF and MPP allowance for credit losses is determined by (i) reviewing similar conventional mortgage loans for impairment on a collective basis, (ii) reviewing conventional mortgage loans for impairment on an individual basis, and (iii) estimating additional credit losses in the conventional mortgage loan portfolio. The allowance for credit losses on our conventional MPF mortgage loans was $2 million and $1 million at December 31, 2016 and 2015. The allowance for credit losses on our conventional MPP mortgage loans was less than $1 million at both December 31, 2016 and 2015.

Refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses” for additional information on our allowance for credit losses on our MPF and MPP mortgage loans.


69


Non-Accrual Loans and Delinquencies. We place a conventional mortgage loan on non-accrual status if it is determined that either the collection of interest or principal is doubtful or interest or principal is 90 days or more past due. We do not place a government-insured mortgage loan on non-accrual status due to the U.S. Government guarantee of the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. Refer to “Item 8. Financial Statements and Supplementary Data — Note 10 — Allowance for Credit Losses” for a summary of our non-accrual loans and mortgage loan delinquencies.

INVESTMENTS

We maintain an investment portfolio primarily to provide investment income and liquidity. Our primary credit risk on investments is the counterparties' ability to meet repayment terms. We mitigate this credit risk by purchasing investment quality securities. We define investment quality as a security with adequate financial backings so that full and timely payment of principal and interest on such security is expected and there is minimal risk that the timely payment of principal and interest would not occur because of adverse changes in economic and financial conditions during the projected life of the security. We consider a variety of credit quality factors when analyzing potential investments, including collateral performance, marketability, asset class or sector considerations, local and regional economic conditions, NRSRO credit ratings, and/or the financial health of the underlying issuer.

Finance Agency regulations limit the type of investments we may purchase. We are prohibited from investing in financial instruments issued by non-U.S. entities other than those issued by U.S. branches and agency offices of foreign commercial banks, unless otherwise approved by the Finance Agency. Our unsecured credit exposures to U.S. branches and agency offices of foreign commercial banks include the risk that, as a result of political or economic conditions in a country, the counterparty may be unable to meet their contractual repayment obligations. Our unsecured credit exposures to domestic counterparties and U.S. subsidiaries of foreign commercial banks include the risk that these counterparties have extended credit to foreign counterparties. At December 31, 2016, we were in compliance with the above regulation and did not own any financial instruments issued by non-U.S. entities, other than those issued by U.S. branches and agency offices of foreign commercial banks, and those approved by the Finance Agency.

Finance Agency regulations also include limits on the amount of unsecured credit we may extend to a counterparty or to a group of affiliated counterparties. This limit is based on a percentage of eligible regulatory capital and the counterparty's overall credit rating. Under these regulations, the level of eligible regulatory capital is determined as the lesser of our total regulatory capital or the eligible amount of regulatory capital of the counterparty. The eligible amount of regulatory capital is then multiplied by a stated percentage. The percentage that we may offer for term extensions of unsecured credit ranges from three to 15 percent based on the counterparty's credit rating. Our total overnight unsecured exposure to a counterparty may not exceed twice the regulatory limit for term exposures, or a total of six to 30 percent of the eligible amount of regulatory capital, based on the counterparty's credit rating. At December 31, 2016, we were in compliance with the regulatory limits established for unsecured credit.

Our short-term portfolio may include, but is not limited to, interest-bearing deposits, Federal funds sold, securities purchased under agreements to resell, certificates of deposit, commercial paper, and U.S. Treasury bill obligations. Our long-term portfolio may include, but is not limited to, other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, taxable municipal bonds, and MBS. We face credit risk from unsecured exposures primarily within our short-term portfolio. We consider investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC to be of the highest credit quality and therefore those exposures are not monitored with other unsecured investments.

We generally limit our unsecured credit exposure to the following overnight investment types:

Federal funds sold. Unsecured loans of reserve balances at the Federal Reserve Banks between financial institutions.

Commercial paper. Unsecured debt issued by corporations, typically for the financing of accounts receivable, inventories, and meeting short-term liabilities.


70


At December 31, 2016, our unsecured investment exposure consisted of Federal funds sold. The following table presents our unsecured investment exposure by counterparty credit rating and domicile at December 31, 2016 (excluding accrued interest receivable) (dollars in millions):
 
 
Credit Rating1,2
Domicile of Counterparty
 
AA
 
A
 
BBB
 
Total
Domestic
 
$

 
$
100

 
$
845

 
$
945

U.S. subsidiaries of foreign commercial banks
 

 
125

 

 
125

U.S. branches and agency offices of foreign commercial banks
 
 
 
 
 
 
 
 
Canada
 

 
825

 

 
825

Sweden
 
200

 

 

 
200

Germany
 

 
600

 

 
600

Netherlands
 

 
500

 

 
500

Norway
 

 
600

 

 
600

Japan
 

 
600

 

 
600

France
 

 
700

 

 
700

Total U.S. branches and agency offices of foreign commercial banks
 
200

 
3,825

 

 
4,025

Total unsecured investment exposure
 
$
200

 
$
4,050

 
$
845

 
$
5,095


1
Represents the lowest credit rating available for each investment based on an NRSRO. In instances where an NRSRO rating is not available for the investment, the issuer rating is applied.

2
Table excludes investments issued or guaranteed by the U.S. Government, an agency or instrumentality of the U.S. Government, or the FDIC.

The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
December 31, 2016
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB
 
Unrated
 
Total
Interest-bearing deposits2
$

 
$
2

 
$

 
$

 
$

 
$

 
$
2

Securities purchased under agreements to resell
1,425

 
250

 
500

 
3,750

 

 

 
5,925

Federal funds sold

 
200

 
4,050

 
845

 

 

 
5,095

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
GSE single-family

 
4,804

 

 

 

 

 
4,804

GSE multifamily

 
12,156

 

 

 

 

 
12,156

Other U.S. obligations single-family3

 
3,864

 

 

 

 

 
3,864

Other U.S. obligations commercial3

 
4

 

 

 

 

 
4

Private-label residential

 

 
5

 
9

 
2

 

 
16

Total mortgage-backed securities

 
20,828

 
5

 
9

 
2

 

 
20,844

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations3

 
3,745

 

 

 

 

 
3,745

GSE and Tennessee Valley Authority obligations

 
3,359

 

 

 

 

 
3,359

State or local housing agency obligations
1,242

 
455

 

 

 

 

 
1,697

Other
449

 
102

 

 

 

 

 
551

Total non-mortgage-backed securities
1,691

 
7,661

 

 

 

 

 
9,352

Total investments4
$
3,116

 
$
28,941

 
$
4,555

 
$
4,604

 
$
2

 
$

 
$
41,218


1
Represents the lowest credit rating available for each investment based on an NRSRO. In instances where an NRSRO rating is not available for the investment, the issuer rating is applied.

2
Interest bearing deposits are rated AA because they are guaranteed by the FDIC up to $250,000.

3
Represents investment securities backed by the full faith and credit of the U.S. Government.

4
At December 31, 2016, twelve percent of our total investments were unsecured.

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The following table summarizes the carrying value of our investments by credit rating (dollars in millions):
 
December 31, 2015
 
Credit Rating1
 
AAA
 
AA
 
A
 
BBB
 
BB
 
Unrated
 
Total
Interest-bearing deposits2
$

 
$
2

 
$

 
$

 
$

 
$

 
$
2

Securities purchased under agreements to resell
1,625

 
150

 

 
5,000

 

 

 
6,775

Federal funds sold

 
450

 
1,820

 

 

 

 
2,270

Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 


Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 


GSE single-family

 
6,260

 

 

 

 

 
6,260

GSE multifamily

 
10,145

 

 

 

 

 
10,145

Other U.S. obligations single-family3

 
2,317

 

 

 

 

 
2,317

Other U.S. obligations commercial3

 
6

 

 

 

 

 
6

Private-label residential

 

 
7

 
11

 
2

 

 
20

Total mortgage-backed securities

 
18,728

 
7

 
11

 
2

 

 
18,748

Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations3

 
4,222

 

 

 

 

 
4,222

GSE and Tennessee Valley Authority obligations

 
5,593

 

 

 

 

 
5,593

State or local housing agency obligations
1,465

 
538

 

 

 

 

 
2,003

Other
451

 
103

 

 

 

 

 
554

Total non-mortgage-backed securities
1,916

 
10,456

 

 

 

 

 
12,372

Total investments4
$
3,541

 
$
29,786

 
$
1,827

 
$
5,011

 
$
2

 
$

 
$
40,167


1
Represents the lowest credit rating available for each investment based on an NRSRO. In instances where an NRSRO rating is not available for the investment, the issuer rating is applied.

2
Interest bearing deposits are rated AA because they are guaranteed by the FDIC up to $250,000.

3
Represents investment securities backed by the full faith and credit of the U.S. Government.

4
At December 31, 2015, six percent of our total investments were unsecured.
    
Our total investments increased at December 31, 2016 when compared to December 31, 2015. The increase was due in part to the purchase of money market investments and variable rate agency MBS securities during the year.

At December 31, 2016 and 2015, we did not consider any of our investments to be other-than-temporarily impaired. For more information on our evaluation of OTTI, refer to “Item 8. Financial Statements and Supplementary Data — Note 7 — Other-Than-Temporary Impairment.”

Mortgage-Backed Securities

We are exposed to mortgage asset credit risk through our investments in MBS. Mortgage asset credit risk is the risk that we will not receive payments of principal and interest due from mortgage borrowers because of borrower defaults. Credit risk on mortgage assets is affected by a number of factors, including the strength and ability to guarantee the payments from the agency that created the structure, underlying loan performance, and other economic factors in the local market or nationwide.

We limit our investments in MBS to those guaranteed by the U.S. Government or issued by a GSE. Further, our ERMP prohibits new purchases of private-label MBS. We perform ongoing analysis on these investments to determine potential credit issues. At December 31, 2016 and 2015, we owned $20.8 billion and $18.7 billion of MBS, of which approximately 99.9 percent were guaranteed by the U.S. Government or issued by GSEs and 0.1 percent were private-label MBS at each period end.


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DERIVATIVES

We execute most of our derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly with a counterparty (uncleared derivatives) or cleared through a Futures Commission Merchant (i.e., clearing agent), with a Derivative Clearing Organization (cleared derivatives).

We are subject to credit risk due to the risk of nonperformance by counterparties to our derivative agreements. The amount of credit risk on derivatives depends on the extent to which netting procedures and collateral requirements are used and are effective in mitigating the risk. We manage credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in our policies and Finance Agency regulations.

Uncleared Derivatives. Due to risk of nonperformance by the counterparties to our derivative agreements, we generally require collateral on uncleared derivative agreements. The amount of net unsecured credit exposure that is permissible with respect to each counterparty depends on the credit rating of that counterparty. A counterparty generally must deliver collateral to us if the total market value of our exposure to that counterparty rises above a specific trigger point. As a result of these risk mitigation initiatives, we do not anticipate any credit losses on our uncleared derivative agreements.

Cleared Derivatives. For cleared derivatives, the Clearinghouse is our counterparty. We are subject to risk of nonperformance by the Clearinghouse and clearing agent. The requirement that we post initial and variation margin through the clearing agent, to the Clearinghouse, exposes us to institutional credit risk in the event that the clearing agent or the Clearinghouse fails to meet its obligations. However, the use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. We do not anticipate any credit losses on our cleared derivatives.

The contractual or notional amount of derivatives reflects our involvement in the various classes of financial instruments. Our maximum credit risk is the estimated cost of replacing derivatives if there is a default, minus the value of any related collateral, including initial and variation margin. In determining maximum credit risk, we consider accrued interest receivables and payables as well as our ability to net settle positive and negative positions with the same counterparty and/or clearing agent when netting requirements are met.

The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
December 31, 2016
Credit Rating1
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty
 
Net Credit Exposure
 to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
A
 
$
94

 
$
1

 
$

 
$
1

Liability positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
BBB
 
736

 
(8
)
 
9

 
1

Cleared derivatives2
 
40,678

 
(374
)
 
563

 
189

Total derivative positions with credit exposure to non-member counterparties
 
41,508

 
(381
)
 
572

 
191

Member institutions3,4
 
49

 

 

 

Total
 
41,557

 
$
(381
)
 
$
572

 
$
191

Derivative positions without credit exposure
 
11,949

 
 
 
 
 
 
Total notional
 
$
53,506

 
 
 
 
 
 

1
Represents the lowest credit rating available for each counterparty based on an NRSRO.

2
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing's parent, CME Group Inc. was rated Aa3 by Moody's and AA- by Standard and Poor's at December 31, 2016.

3
Net credit exposure is less than $1 million.

4
Represents mortgage delivery commitments with our member institutions.



73


The following table shows our derivative counterparty credit exposure (dollars in millions):
 
 
December 31, 2015
Credit Rating1
 
Notional Amount
 
Net Derivatives
Fair Value Before Collateral
 
Cash Collateral Pledged
To (From) Counterparty
 
Net Credit Exposure
to Counterparties
Non-member counterparties:
 
 
 
 
 
 
 
 
Asset positions with credit exposure
 
 
 
 
 
 
 
 
Uncleared derivatives
 
 
 
 
 
 
 
 
   A4
 
$
15

 
$

 
$

 
$

Liability positions with credit exposure
 
 
 
 
 
 
 


Uncleared derivatives
 
 
 
 
 
 
 
 
   A4
 
370

 
(11
)
 
11

 

BBB4
 
1,268

 
(23
)
 
23

 

Cleared derivatives2
 
22,851

 
(254
)
 
348

 
94

Total derivative positions with credit exposure to non-member counterparties
 
24,504

 
(288
)
 
382

 
94

Member institutions3,4
 
34

 

 

 

Total
 
24,538

 
$
(288
)
 
$
382

 
$
94

Derivative positions without credit exposure
 
14,740

 
 
 
 
 


Total notional
 
$
39,278

 


 


 



1
Represents the lowest credit rating available for each counterparty based on an NRSRO.

2
Represents derivative transactions cleared with CME Clearing, our clearinghouse, who is not rated. CME Clearing's parent, CME Group Inc. was rated Aa3 by Moody's and AA- by Standard and Poor's at December 31, 2015.

3
Represents mortgage delivery commitments with our member institutions.

4
Net credit exposure is less than $1 million.


Operational Risk

We define operational risk as the risk of loss or harm from inadequate or failed processes, people, and/or systems, including those emanating from external sources. Operational risk is inherent in all of our business activities and processes. Management has established policies and procedures to reduce the likelihood of operational risk and designed our annual risk assessment process to provide ongoing identification, measurement, and monitoring of operational risk. Due to the manual nature of many of our processes, our operational risk is elevated. To mitigate this risk, we continue to focus on process and control improvements, system upgrades, and assessments of staffing adequacy. During 2016, we have added staff to lead and support critical business functions, designed a new control structure surrounding spreadsheets and other applications used in the financial reporting and close process, and implemented enhancements to access controls over key IT applications. In addition, we made changes to the governance of our internal control infrastructure and processes to facilitate timely analysis of control exceptions. This process included a review and assessment of our system of internal control over financial reporting. The effort to improve our control framework and reduce operational risk will be ongoing.

Strategic Risk

We define strategic risk as the risk of an adverse impact on our mission, financial condition, or current and future profitability resulting from external factors that may occur in both the short- and long-term. Strategic risk includes political, reputation, regulatory, and/or environmental factors, many of which are beyond our control. From time to time, proposals are made, or legislative and regulatory changes are considered, which could affect our cost of doing business or other aspects of our business. We mitigate strategic risk through strategic business planning and monitoring of our external environment. For additional information on some of the more important risks we face, refer to "Item 1A. Risk Factors."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Management — Market Risk” and the sections referenced therein for quantitative and qualitative disclosures about market risk.


74


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

AUDITED FINANCIAL STATEMENTS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 21 - Subsequent Events
 
 
 
 
SUPPLEMENTARY DATA:
 
 
 
 


75


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of the Federal Home Loan Bank of Des Moines:

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 Des Moines (the "Bank") 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 Bank did not maintain, 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) because a material weakness in internal control over financial reporting related to the Bank’s controls over spreadsheets utilized in financial reporting and close process existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness referred to above is described in the Report of Management on Internal Control over Financial Reporting appearing under Item 9A. We considered this material weakness in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2016 financial statements, and our opinion regarding the effectiveness of the Bank’s internal control over financial reporting does not affect our opinion on those financial statements. The Bank'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 in management's report referred to above. Our responsibility is to express opinions on these financial statements and on the Bank'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.

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.

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota
March 21, 2017



76


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CONDITION
(dollars and shares in millions, except capital stock par value)


 
December 31,
 
 
2016
 
2015
ASSETS
 
 
 
 
Cash and due from banks (Note 3)
 
$
223

 
$
982

Interest-bearing deposits
 
2

 
2

Securities purchased under agreements to resell
 
5,925

 
6,775

Federal funds sold
 
5,095

 
2,270

Investment securities
 
 
 
 
Trading securities (Note 4)
 
2,553

 
4,047

Available-for-sale securities (Note 5)
 
22,969

 
20,988

Held-to-maturity securities (fair value of $4,706 and $6,142) (Note 6)
 
4,674

 
6,085

Total investment securities
 
30,196

 
31,120

Advances (includes $0 and $8 at fair value under the fair value option) (Note 8)
 
131,601

 
89,173

Mortgage loans held for portfolio, net of allowance for credit losses of $2 and $1 (Notes 9 and 10)
 
6,913

 
6,755

Loans to other FHLBanks
 
200

 

Accrued interest receivable
 
197

 
143

Derivative assets, net (Note 11)
 
191

 
94

Other assets
 
62

 
60

TOTAL ASSETS
 
$
180,605

 
$
137,374

LIABILITIES
 
 
 
 
Deposits (Note 12)
 
 
 
 
Interest-bearing
 
$
1,021

 
$
924

Non-interest-bearing
 
92

 
186

Total deposits
 
1,113

 
1,110

Consolidated obligations (Note 13)
 
 
 
 
Discount notes
 
80,947

 
98,990

Bonds (includes $0 and $15 at fair value under the fair value option)
 
89,898

 
31,208

Total consolidated obligations
 
170,845

 
130,198

Mandatorily redeemable capital stock (Note 15)
 
664

 
103

Accrued interest payable
 
180

 
119

Affordable Housing Program payable (Note 14)
 
116

 
62

Derivative liabilities, net (Note 11)
 
76

 
102

Other liabilities
 
210

 
55

TOTAL LIABILITIES
 
173,204

 
131,749

Commitments and contingencies (Note 18)
 

 

CAPITAL (Note 15)
 
 
 
 
Capital stock - Class B putable ($100 par value); 59 and 47 issued and outstanding shares
 
5,917

 
4,714

Additional capital from merger
 
52

 
194

Retained earnings
 
 
 
 
Unrestricted
 
1,219

 
700

Restricted
 
231

 
101

Total retained earnings
 
1,450

 
801

Accumulated other comprehensive income (loss)
 
(18
)
 
(84
)
TOTAL CAPITAL
 
7,401

 
5,625

TOTAL LIABILITIES AND CAPITAL
 
$
180,605

 
$
137,374

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

77


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF INCOME
(dollars in millions)

 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
INTEREST INCOME
 
 
 
 
 
 
Advances
 
$
868

 
$
313

 
$
233

Prepayment fees on advances, net
 
8

 
11

 
6

Interest-bearing deposits
 
3

 
1

 

Securities purchased under agreements to resell
 
19

 
7

 
4

Federal funds sold
 
21

 
5

 
2

Trading securities
 
50

 
36

 
33

Available-for-sale securities
 
246

 
163

 
105

Held-to-maturity securities
 
76

 
59

 
43

Mortgage loans held for portfolio
 
233

 
245

 
245

Total interest income
 
1,524

 
840

 
671

INTEREST EXPENSE
 
 
 
 
 
 
Consolidated obligations - Discount notes
 
414

 
106

 
43

Consolidated obligations - Bonds
 
639

 
414

 
377

Deposits
 
1

 

 

Mandatorily redeemable capital stock
 
21

 
3

 

Total interest expense
 
1,075

 
523

 
420

NET INTEREST INCOME
 
449

 
317

 
251

Provision (reversal) for credit losses on mortgage loans
 
3

 
2

 
(2
)
NET INTEREST INCOME AFTER PROVISION (REVERSAL) FOR CREDIT LOSSES
 
446

 
315

 
253

OTHER INCOME (LOSS)
 
 
 
 
 
 
Net gains (losses) on trading securities
 
3

 
(12
)
 
68

Net gains (losses) from sale of available-for-sale securities
 

 

 
1

Net gains (losses) from sale of held-to-maturity securities
 

 

 
9

Net gains (losses) on derivatives and hedging activities
 
7

 
(38
)
 
(123
)
Net gains (losses) on extinguishment of debt
 

 

 
(13
)
Gains on litigation settlements, net
 
376

 
14

 

Other, net
 
10

 
6

 
7

Total other income (loss)
 
396

 
(30
)
 
(51
)
OTHER EXPENSE
 
 
 
 
 
 
Compensation and benefits
 
53

 
45

 
32

Contractual services
 
10

 
13

 
7

Professional fees
 
12

 
10

 
4

Merger related expenses
 

 
39

 
2

Other operating expenses
 
19

 
15

 
10

Federal Housing Finance Agency
 
8

 
7

 
4

Office of Finance
 
7

 
5

 
3

Other, net
 
9

 
3

 
5

Total other expense
 
118

 
137

 
67

NET INCOME BEFORE ASSESSMENTS
 
724

 
148

 
135

Affordable Housing Program assessments
 
75

 
15

 
14

Affordable Housing Program voluntary contributions
 

 
2

 

NET INCOME
 
$
649

 
$
131

 
$
121

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

78



FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)

 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
Net income
 
$
649

 
$
131

 
$
121

Other comprehensive income (loss)
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
68

 
(208
)
 
39

Reclassification of realized net gains included in net income
 

 

 
(1
)
Total net unrealized gains (losses) on available-for-sale securities
 
68

 
(208
)
 
38

Pension and postretirement benefits
 
(2
)
 
1

 
(2
)
Total other comprehensive income (loss)
 
66

 
(207
)
 
36

TOTAL COMPREHENSIVE INCOME (LOSS)
 
$
715

 
$
(76
)
 
$
157

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




79


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL
(dollars and shares in millions)

 
 
Capital Stock Class A (putable)
 
Capital Stock Class B (putable)
 
Total Capital Stock
 
 
Shares
 
Par Value
 
Shares
 
Par Value
 
Shares
 
Par Value
BALANCE, DECEMBER 31, 2013
 

 
$

 
27

 
$
2,692

 
27

 
$
2,692

Comprehensive income (loss)
 

 

 

 

 

 

Proceeds from issuance of capital stock
 

 

 
27

 
2,666

 
27

 
2,666

Repurchases/redemptions of capital stock
 

 

 
(19
)
 
(1,858
)
 
(19
)
 
(1,858
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 
(31
)
 

 
(31
)
Cash dividends on capital stock
 

 

 

 

 

 

BALANCE, DECEMBER 31, 2014
 

 
$

 
35

 
$
3,469

 
35

 
$
3,469

Comprehensive income (loss)
 

 

 

 

 

 

Proceeds from issuance of capital stock
 

 

 
36

 
3,664

 
36

 
3,664

Capital stock issued from merger
 

 
31

 
9

 
863

 
9

 
894

Repurchases/redemptions of capital stock
 

 
(31
)
 
(34
)
 
(3,354
)
 
(34
)
 
(3,385
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 
1

 
72

 
1

 
72

Additional capital from merger
 

 

 

 

 

 

Cash dividends on capital stock
 

 

 

 

 

 

BALANCE, DECEMBER 31, 2015
 

 
$

 
47

 
$
4,714

 
47

 
$
4,714

Comprehensive income (loss)
 

 

 

 

 

 

Proceeds from issuance of capital stock
 

 

 
60

 
6,050

 
60

 
6,050

Repurchases/redemptions of capital stock
 

 

 
(41
)
 
(4,105
)
 
(41
)
 
(4,105
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 
(7
)
 
(742
)
 
(7
)
 
(742
)
Cash dividends on capital stock
 

 

 

 

 

 

BALANCE, DECEMBER 31, 2016
 

 
$

 
59

 
$
5,917

 
59

 
$
5,917

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



80


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CAPITAL (continued from previous page)
(dollars and shares in millions)

 
 
Additional Capital from Merger
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Capital
 
 
 
Unrestricted
 
Restricted
 
Total
 
 
BALANCE, DECEMBER 31, 2013
 
$

 
$
627

 
$
51

 
$
678

 
$
87

 
$
3,457

Comprehensive income (loss)
 

 
97

 
24

 
121

 
36

 
157

Proceeds from issuance of capital stock
 

 

 

 

 

 
2,666

Repurchases/redemptions of capital stock
 

 

 

 

 

 
(1,858
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 

 
(31
)
Cash dividends on capital stock
 

 
(79
)
 

 
(79
)
 

 
(79
)
BALANCE, DECEMBER 31, 2014
 
$

 
$
645

 
$
75

 
$
720

 
$
123

 
$
4,312

Comprehensive income (loss)
 

 
105

 
26

 
131

 
(207
)
 
(76
)
Proceeds from issuance of capital stock
 

 

 

 

 

 
3,664

Capital stock issued from merger
 

 

 

 

 

 
894

Repurchases/redemptions of capital stock
 

 

 

 

 

 
(3,385
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 

 
72

Additional capital from merger
 
246

 

 

 

 

 
246

Cash dividends on capital stock
 
(52
)
 
(50
)
 

 
(50
)
 

 
(102
)
BALANCE, DECEMBER 31, 2015
 
$
194

 
$
700

 
$
101

 
$
801

 
$
(84
)
 
$
5,625

Comprehensive income (loss)
 

 
519

 
130

 
649

 
66

 
715

Proceeds from issuance of capital stock
 

 

 

 

 

 
6,050

Repurchases/redemptions of capital stock
 

 

 

 

 

 
(4,105
)
Net shares reclassified (to) from mandatorily redeemable capital stock
 

 

 

 

 

 
(742
)
Cash dividends on capital stock
 
(142
)
 

 

 

 

 
(142
)
BALANCE, DECEMBER 31, 2016
 
$
52

 
$
1,219

 
$
231

 
$
1,450

 
$
(18
)
 
$
7,401

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


81


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS
(dollars in millions)
 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
OPERATING ACTIVITIES
 
 
 
 
 
 
Net income
 
$
649

 
$
131

 
$
121

Adjustments to reconcile net income to net cash provided by (used in) operating activities
 
 
 
 
 
 
Depreciation and amortization
 
48

 
57

 
16

Net (gains) losses on trading securities
 
(3
)
 
12

 
(68
)
Net (gains) losses from sale of available-for-sale securities
 

 

 
(1
)
Net (gains) losses from sale of held-to-maturity securities
 

 

 
(9
)
Net change in derivatives and hedging activities
 
(88
)
 
27

 
84

Net (gains) losses on extinguishment of debt
 

 

 
13

Other adjustments
 
(5
)
 
1

 
(5
)
Net change in:
 
 
 
 
 
 
Accrued interest receivable
 
(83
)
 
(26
)
 
(18
)
Other assets
 
(3
)
 
8

 
2

Accrued interest payable
 
61

 
(10
)
 
8

Other liabilities
 
84

 
(11
)
 
5

Total adjustments
 
11

 
58

 
27

Net cash provided by (used in) operating activities
 
660

 
189

 
148

INVESTING ACTIVITIES
 
 
 
 
 
 
Net change in:
 
 
 
 
 
 
Interest-bearing deposits
 
(115
)
 
17

 
(141
)
Securities purchased under agreements to resell
 
850

 
(1,684
)
 
3,109

Federal funds sold
 
(2,825
)
 
(410
)
 
(660
)
Premises, software, and equipment
 
(8
)
 
(9
)
 
(3
)
Loans to other FHLBanks
 
(200
)
 

 

Cash transferred for merger
 

 
2,341

 

Trading securities
 
 
 
 
 
 
Proceeds from maturities of long-term
 
3,093

 
574

 
23

Purchases of long-term
 
(1,597
)
 
(1,550
)
 
(1,470
)
Available-for-sale securities
 
 
 
 
 
 
Proceeds from sales and maturities of long-term
 
2,462

 
1,880

 
1,115

Purchases of long-term
 
(4,317
)
 
(1,108
)
 
(5,235
)
Held-to-maturity securities
 
 
 
 
 
 
Proceeds from sales and maturities of long-term
 
1,455

 
1,035

 
571

Purchases of long-term
 
(64
)
 
(89
)
 

Advances
 
 
 
 
 
 
Principal collected
 
174,767

 
130,212

 
100,214

Originated
 
(217,392
)
 
(145,151
)
 
(119,806
)
Mortgage loans held for portfolio
 
 
 
 
 
 
Principal collected
 
1,317

 
1,198

 
903

Originated or purchased
 
(1,509
)
 
(802
)
 
(924
)
Proceeds from sales of foreclosed assets
 
13

 
14

 
15

Net cash provided by (used in) investing activities
 
(44,070
)
 
(13,532
)
 
(22,289
)
The accompanying notes are an integral part of these financial statements.

82


FEDERAL HOME LOAN BANK OF DES MOINES
STATEMENTS OF CASH FLOWS (continued from previous page)
(dollars in millions)
 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
FINANCING ACTIVITIES
 
 
 
 
 
 
Net change in deposits
 
5

 
226

 
(265
)
Net payments on derivative contracts with financing elements
 
(7
)
 
(8
)
 
(9
)
Net proceeds from issuance of consolidated obligations
 
 
 
 
 
 
Discount notes
 
272,871

 
283,542

 
215,049

Bonds
 
98,684

 
20,139

 
24,565

Payments for maturing and retiring consolidated obligations
 
 
 
 
 
 
Discount notes
 
(290,948
)
 
(254,806
)
 
(195,416
)
Bonds
 
(39,576
)
 
(34,866
)
 
(22,449
)
Proceeds from issuance of capital stock
 
6,050

 
3,664

 
2,666

Payments for repurchases/redemptions of capital stock
 
(4,105
)
 
(3,385
)
 
(1,858
)
Net payments for repurchases/redemptions of mandatorily redeemable capital stock
 
(181
)
 
(574
)
 
(16
)
Cash dividends paid
 
(142
)
 
(102
)
 
(79
)
Net cash provided by (used in) financing activities
 
42,651

 
13,830

 
22,188

Net increase (decrease) in cash and due from banks
 
(759
)
 
487

 
47

Cash and due from banks at beginning of the period
 
982

 
495

 
448

Cash and due from banks at end of the period
 
$
223

 
$
982

 
$
495

 
 
 
 
 
 
 
SUPPLEMENTAL DISCLOSURES
 
 
 
 
 
 
Cash transactions:
 
 
 
 
 
 
Interest paid
 
$
1,675

 
$
1,159

 
$
842

Affordable Housing Program payments
 
21

 
13

 
11

Non-cash transactions:
 
 
 
 
 
 
Capitalized interest on reverse mortgage investment securities
 
29

 
15

 
5

Mortgage loan charge-offs
 
3

 
6

 
1

Transfers of mortgage loans to other assets
 
7

 
8

 
10

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
 
742

 
(72
)
 
31

Capital stock issued from merger
 

 
894

 

Assets acquired (liabilities assumed) from merger:
 
 
 
 
 
 
Trading securities
 

 
551

 

Available-for-sale securities
 

 
9,825

 

Held-to-maturity securities
 

 
5,829

 

Advances
 

 
9,191

 

Mortgage loans held for portfolio
 

 
615

 

Accrued interest receivable
 

 
47

 

Premises, software, and equipment
 

 
3

 

Derivative assets
 

 
40

 

Other assets
 

 
22

 

Deposits
 

 
(371
)
 

Consolidated obligation discount notes
 

 
(12,449
)
 

Consolidated obligation bonds
 

 
(13,613
)
 

Mandatorily redeemable capital stock
 

 
(725
)
 

Accrued interest payable
 

 
(38
)
 

Affordable Housing Program payable
 

 
(17
)
 

Derivative liabilities
 

 
(74
)
 

Other liabilities
 

 
(37
)
 

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


83


FEDERAL HOME LOAN BANK OF DES MOINES
NOTES TO THE FINANCIAL STATEMENTS

Background Information

The Federal Home Loan Bank of Des Moines (the Bank) is a federally chartered corporation organized on October 31, 1932, that is exempt from all federal, state, and local taxation (except real property taxes) and is one of 11 district Federal Home Loan Banks (FHLBanks). The FHLBanks were created under the authority of the Federal Home Loan Bank Act of 1932 (FHLBank Act). With the passage of the Housing and Economic Recovery Act of 2008 (Housing Act), the Federal Housing Finance Agency (Finance Agency) was established and became the new independent federal regulator of Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac) (collectively, Enterprises), as well as the FHLBanks and FHLBanks' Office of Finance, effective July 30, 2008. The Finance Agency's mission is to ensure that the Enterprises and FHLBanks operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment. The Finance Agency establishes policies and regulations governing the operations of the Enterprises and FHLBanks. Each FHLBank operates as a separate entity with its own management, employees, and board of directors.

The FHLBanks are government-sponsored enterprises (GSEs) that serve the public by enhancing the availability of funds for residential mortgages and targeted community development. The Bank provides a readily available source of funding to its member institutions and eligible housing associates in Alaska, Hawaii, Idaho, Iowa, Minnesota, Missouri, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and the U.S. Pacific territories of American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. Commercial banks, thrifts, credit unions, insurance companies, and community development financial institutions (CDFIs) may apply for membership. State and local housing associates that meet certain statutory criteria may also borrow from the Bank; while eligible to borrow, housing associates are not members of the Bank and, as such, are not permitted to hold capital stock.

The Bank is a cooperative. This means the Bank is owned by its customers, whom the Bank calls members. As a condition of membership in the Bank, all members must purchase and maintain membership capital stock based on a percentage of their total assets, subject to a minimum and maximum amount, as of the preceding December 31st. Each member is also required to purchase and maintain activity-based capital stock to support certain business activities with the Bank.

The Bank's current and former members own all of the outstanding capital stock of the Bank. Former members own capital stock (included in mandatorily redeemable capital stock) to support business transactions still carried on the Bank's Statements of Condition. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by the Bank's Board of Directors.




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Note 1 — Summary of Significant Accounting Policies

BASIS OF PRESENTATION

The Bank prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP).

The Bank completed the merger with the Federal Home Loan Bank of Seattle (Seattle Bank) (the Merger) on May 31, 2015 (merger date). The Merger had a significant impact on all aspects of the Bank's financial condition, result of operations, and cash flows. As a result, financial results for the periods after the Merger are not directly comparable to results for periods prior to the Merger.

The following unaudited pro forma information has been prepared by adjusting the Bank's historical data to give effect to the Merger as if it had occurred on January 1, 2014 (dollars in million):
 
For the Years Ended December 31,
 
2015
 
2014
Interest income
$
970

 
$
913

Net income
$
140

 
$
156


The unaudited pro forma information was prepared in accordance with the acquisition method of accounting for mutual entities under existing standards and is not necessarily indicative of the results of operations that would have occurred if the Merger had been completed on the date indicated, nor is it indicative of the future operating results of the Bank.

Change in Accounting Principle

On January 1, 2016, the Bank retrospectively adopted Accounting Standards Codification Update 2015-03, Simplifying the Presentation of Debt Issuance Costs issued by the Financial Accounting Standards Board (FASB) on April 7, 2015. As a result, $7 million of unamortized concessions 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 of $4 million in “Consolidated obligation discount notes” and of $3 million in “Consolidated obligation bonds” at December 31, 2015. Accordingly, the Bank’s total assets and total liabilities each decreased by $7 million at December 31, 2015. The adoption of this guidance did not have any effect on the Bank’s results of operations or cash flows. See “Note 2 — Recently Adopted and Issued Accounting Guidance” for discussion on this guidance.

Reclassifications

Certain amounts in the Bank's 2015 and 2014 financial statements and footnotes have been reclassified to conform to the presentation for the year ended December 31, 2016. These amounts were not deemed to be material.
 
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make subjective assumptions and estimates that may affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of income and expense. The most significant of these estimates include the fair value of derivatives, certain advances, certain investment securities, and certain consolidated obligations that are reported at fair value on the Statements of Condition, and the allowance for credit losses on mortgage loans. Actual results could significantly differ from these estimates.
Fair Value. The fair value amounts, recorded in the Bank's Statements of Condition and presented in the footnote disclosures, have been determined by the Bank using available market information and management's best judgment of appropriate valuation methods. Although management uses its best judgment in estimating the fair value of financial instruments, there are inherent limitations in any valuation technique. Therefore, these fair values may not be indicative of the amounts that would have been realized in market transactions at the reporting dates. See “Note 17 — Fair Value” for more information.


85


Business Combinations

The Bank applies the acquisition method of accounting for business combinations of mutual entities. Under the acquisition method, the Bank recognizes the identifiable assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed, is recorded as goodwill.

Consideration transferred includes (i) equity interests of the Bank (i.e. par value of capital stock exchanged on a one-for-one basis for Seattle capital stock outstanding) and (ii) member interests in the Bank (i.e. the post-merger interest of Seattle members in the Bank, including a proportionate interest in the liquidation value of the Bank). Consideration transferred is recognized by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion being reflected in a capital account captioned “Additional capital from merger.” Acquisition-related costs are expensed as incurred.

Financial Instruments Meeting Netting Requirements

The Bank has certain financial instruments, including derivative instruments and securities purchased under agreements to resell, that may be presented on a net basis when there is a legal right of offset and all other requirements for netting are met (collectively referred to as the netting requirements). The Bank has elected to offset its derivative asset and liability positions, as well as cash collateral received or pledged, when it has met the netting requirements.

The net exposure for these financial instruments can change on a daily basis and therefore, there may be a delay between the time this exposure change is identified and additional collateral is requested, and the time when this collateral is received or pledged. Likewise, there may be a delay for excess collateral to be returned. For derivative instruments that meet the requirements for netting, any excess cash collateral received or pledged is recognized as a derivative liability or derivative asset. Additional information regarding these agreements is provided in “Note 11 — Derivatives and Hedging Activities.”

Based on the fair value of the related collateral held, the Bank's securities purchased under agreements to resell were fully collateralized for the periods presented. There were no offsetting liabilities related to these securities at December 31, 2016 and 2015.
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 deposit not meeting the definition of a security. The Bank treats securities purchased under agreements to resell as short-term secured investments. These secured investments are held in safekeeping in the name of the Bank by third-party custodians approved by the Bank. Should the market value of the underlying securities decrease below the market value required as collateral, the counterparty must either place an equivalent amount of additional securities in safekeeping in the name of the Bank or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will be decreased accordingly. Federal funds sold consist of short-term, unsecured loans generally transacted with counterparties that are considered by the Bank to be of investment quality.
Investment Securities
The Bank classifies investment securities as trading, available-for-sale (AFS), and held-to-maturity (HTM) at the date of acquisition. Purchases and sales of investment securities are recorded on a trade date basis. The Bank records interest on investment securities to interest income as earned. The Bank amortizes/accretes premiums, discounts, and fair value hedging adjustments on AFS and HTM investment securities to income using the contractual level-yield method (level-yield method). The level-yield method recognizes the income effects of these adjustments over the contractual life of the securities based on the actual behavior of the underlying assets, including adjustments for actual prepayment activities, and reflects the contractual terms of the securities without regard to changes in estimated prepayments based on assumptions about future borrower behavior. The Bank computes gains and losses on sales of investment securities using the specific identification method and includes these gains and losses in other income (loss).

86


Trading. Securities classified as trading are carried at fair value and generally entered into for liquidity purposes. In addition, the Bank classifies certain securities as trading that do not qualify for hedge accounting, primarily in an effort to mitigate the potential income statement volatility that can arise when an economic derivative is adjusted for changes in fair value but the related hedged item is not. The Bank records changes in the fair value of these securities through other income (loss) as “Net gains (losses) on trading securities.” Finance Agency regulation prohibits trading in or the speculative use of these instruments.
Available-for-Sale. Securities that are not classified as trading or HTM are classified as AFS and carried at fair value. The Bank records changes in the fair value of these securities through accumulated other comprehensive income (loss) (AOCI) as “Net unrealized gains (losses) on available-for-sale securities.” For AFS securities that have been hedged and qualify as a fair value hedge, the Bank records the portion of the change in fair value related to the risk being hedged together with the related change in fair value of the derivative through other income (loss) as “Net gains (losses) on derivatives and hedging activities.” The Bank records the remainder of the change in fair value through AOCI as “Net unrealized gains (losses) on available-for-sale securities.”
Held-to-Maturity. Securities that the Bank has both the ability and intent to hold to maturity are classified as HTM and carried at amortized cost, which represents 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 Bank 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 HTM 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, non-recurring, and unusual for the Bank that could not have been reasonably anticipated may cause the Bank to sell or transfer an HTM security without necessarily calling into question its intent to hold other debt securities to maturity. In addition, the sale of a debt security that meets either of the following two conditions would not be considered inconsistent with the original classification of that security: (i) the sale occurs near enough to its maturity date (or call date if exercise of the call is probable) that interest rate risk is substantially eliminated as a pricing factor and the changes in market interest rates would not have a significant effect on the security's fair value or (ii) the sale occurs after the Bank has already collected a substantial portion (at least 85 percent) of the principal outstanding at acquisition due either to prepayments on the debt security or to scheduled payments on the debt security payable in equal installments (both principal and interest) over its term.
Investment Securities - Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for other-than-temporary impairment (OTTI) on a quarterly basis. A security is considered impaired when its fair value is less than its amortized cost basis. The Bank considers an OTTI to have occurred under any of the following conditions:

it has an intent to sell the impaired debt security;

it 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

it does not expect to recover the entire amortized cost basis of the impaired debt security.
Recognition of OTTI. If either of the first two conditions is met, the Bank recognizes an OTTI charge in earnings equal to the entire difference between the security's amortized cost basis and its fair value as of the reporting date. If neither of the first two conditions is met, the Bank performs an analysis to determine if it will recover the entire amortized cost basis of the debt security, which includes a cash flow analysis for private-label mortgage-backed securities (MBS). The present value of the cash flows expected to be collected is compared to the amortized cost basis of the debt security to determine whether a credit loss exists. If there is a credit loss (the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security), the carrying value of the debt security is adjusted to its fair value. However, rather than recognizing the entire difference between the amortized cost basis and fair value in earnings, only the amount of the impairment representing the credit loss (i.e., the credit component) is recognized in earnings, while the amount related to all other factors is recognized in AOCI. The credit loss on a debt security is limited to the amount of that security's unrealized losses. The total OTTI is presented in the Statements of Income with an offset for the amount of the non-credit portion of OTTI that is recognized in AOCI, if applicable. See "Note 7 — Other-Than-Temporary Impairment" for additional information.

87


Variable Interest Entities
The Bank has determined its investments in private-label MBS to be variable interest entities (VIEs). These securities are classified as HTM in the Bank's Statements of Condition. The Bank has no liabilities related to these VIEs. The maximum loss exposure for these VIEs is limited to the Bank's investments in the VIEs.

If the Bank determines it is the primary beneficiary of a VIE, it would be required to consolidate that VIE. On a quarterly basis, the Bank performs an evaluation to determine whether it is the primary beneficiary of its VIEs. To perform this evaluation, the Bank considers whether it possesses both of the following characteristics: (i) the power to direct the VIEs activities that most significantly affect the VIEs economic performance and (ii) the obligation to absorb the VIEs losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Based on an evaluation of these characteristics, the Bank has determined that consolidation is not required for its VIEs for the periods presented. The Bank has not provided financial or other support (explicitly or implicitly) to its VIEs and does not intend to provide that support in the future.
Advances
The Bank reports advances (secured loans to members, former members, or eligible housing associates) at amortized cost, which is net of premiums, discounts, and fair value hedging adjustments unless the Bank has elected the fair value option, in which case, the advances are carried at fair value. The Bank records interest on advances to interest income as earned. The Bank amortizes/accretes premiums, discounts, and fair value hedging adjustments on advances to income using the level-yield method over the contractual life of the advances.

Advance Modifications. In cases in which the Bank funds a new advance to a borrower concurrently with or within a short period of time before or after the prepayment of an existing advance, the Bank 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 Bank 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 ten percent difference in the present value of the cash flows or if the Bank concludes the difference between the advances is more than minor based on a qualitative assessment of the modifications made to the original contractual terms, then the advance is accounted for as a new advance. In all other instances, the advance is accounted for as a modification.

Prepayment Fees. The Bank charges a borrower a prepayment fee when the borrower prepays certain advances before the original maturity. For advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid.

The Bank records prepayment fees or credits net of fair value hedging adjustments 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 an existing advance, any prepayment fee, net of fair value hedging adjustments on the prepaid advance is deferred, recorded in the basis of the modified advance, and amortized over the contractual life of the modified advance using a level-yield methodology to advance interest income.

Mortgage Loans Held for Portfolio
The Bank classifies mortgage loans that it has the intent and ability to hold for the foreseeable future or until maturity or payoff as held for portfolio. Accordingly, these mortgage loans are reported net of premiums, discounts, basis adjustments from mortgage loan delivery commitments, and the allowance for credit losses. The Bank records interest on mortgage loans to interest income as earned. The Bank amortizes/accretes premiums, discounts, and basis adjustments on mortgage loan delivery commitments to income using the level-yield method over the contractual life of the mortgage loans.

Other Fees. The Bank may receive other non-origination fees, such as delivery commitment extension fees, pair-off fees, and price adjustment fees. Delivery commitment extension fees are received when a PFI requests to extend the delivery commitment period beyond the original stated expiration. These fees compensate the Bank for lost interest as a result of late funding and are recorded in other income (loss). Pair-off fees represent a make-whole provision and are received when the amount funded is less than a specific percentage of the delivery commitment amount. These fees are also recorded in other income (loss). Price adjustment fees are received when the amount funded is greater than a specified percentage of the delivery commitment amount. These fees are recorded as a part of the carrying value of the loan.

88


Allowance for Credit Losses

An allowance for credit losses is a valuation allowance separately established for each identified portfolio segment to provide for probable losses inherent in the Bank's portfolio of financing receivables as of the reporting date. To the extent necessary, an allowance for credit losses for off-balance sheet credit exposures is recorded as a liability. See "Note 10 — Allowance for Credit Losses" for details on each of the Bank's allowance methodologies.

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 Bank has developed and documented a systematic methodology for determining an allowance for credit losses for credit products (advances, standby letters of credit, and other extensions of credit to borrowers), government-insured mortgage loans held for portfolio, conventional MPF loans held for portfolio, conventional MPP loans held for portfolio, and term securities purchased under agreements to resell.

Classes of Financing Receivables. Classes of financing receivables generally are a disaggregation of a portfolio segment to the extent that it is needed to understand the exposure to credit risk arising from the financing receivables. The Bank assesses and measures its credit risk arising from financing receivables at the portfolio segment level. As such, it has determined that no further disaggregation of the portfolio segments identified above is needed.

Non-Accrual Loans. The Bank places a conventional mortgage loan on non-accrual status if it is determined that either the collection of interest or principal is doubtful or interest or principal is 90 days or more past due. The Bank does not place a government-insured mortgage loan on non-accrual status due to the U.S. Government guarantee or insurance on the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. For those mortgage loans placed on non-accrual status, accrued but uncollected interest is reversed against interest income and cash payments received are recorded as a reduction of principal. A loan on non-accrual status may be restored to accrual status when none of its contractual principal and interest is due and unpaid and the Bank expects repayment of the remaining contractual principal and interest.

Troubled Debt Restructurings. The Bank considers a troubled debt restructuring (TDR) 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 Bank's TDRs include loans granted under its loan modification plans and loans discharged under Chapter 7 bankruptcy that have not been reaffirmed by the borrower. The Bank does not consider government-insured mortgage loans to be TDRs due to the U.S. Government guarantee or insurance on the loan and contractual obligation of the loan servicer to repurchase the loan when certain criteria are met. The Bank places all TDRs on non-accrual status at the time of modification.

Impairment Methodology. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank considers all TDRs and collateral-dependent loans to be impaired. Collateral-dependent loans are loans in which repayment is expected to be provided solely by the sale of the underlying collateral. The Bank's collateral-dependent loans include loans in process of foreclosure, loans 180 days or more past due, and bankruptcy loans and TDRs 60 days or more past due. The Bank measures impairment of collateral-dependent loans based on the estimated fair value of the underlying collateral, which is determined using property values, less selling costs and expected proceeds from primary mortgage insurance (PMI). The Bank generally measures impairment of TDRs based on the present value of expected future cash flows discounted at the loan's effective interest rate. Interest income on impaired loans is recognized in the same manner as non-accrual loans noted above.

Charge-Off Policy. A charge-off is recorded if it is estimated that the recorded investment in a loan will not be recovered. The Bank evaluates whether to record a charge-off based upon the occurrence of a confirming event, including but not limited to, the occurrence of foreclosure or when a loan is deemed collateral-dependent. The Bank charges-off the portion of the outstanding conventional mortgage loan balance in excess of the fair value of the underlying collateral, which is determined using property values, less selling costs and expected proceeds from PMI.

Loans to Other FHLBanks

The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates.

89


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

The Bank documents at inception all relationships between derivatives designated as hedging instruments and hedged items, its risk management objectives and strategies for undertaking various hedge transactions, and its method of assessing effectiveness for all derivatives qualifying for hedge accounting. This process includes linking all derivatives that are designated as fair value hedges to assets and liabilities on the Statements of Condition and firm commitments. The Bank also formally assesses (both at the hedge's inception and at least quarterly) whether the derivatives that it uses in hedging transactions have been effective in offsetting changes in fair value of the hedged items attributable to the hedged risk and whether those derivatives may be expected to remain effective in future periods. The Bank typically uses regression analyses to assess the effectiveness of its hedges.
Derivative Designations. Derivative instruments are designated by the Bank as:
a fair value hedge of an associated financial instrument or firm commitment (fair value hedge); or
an economic hedge to manage certain defined risks in the Bank's Statements of Condition (economic hedge). These hedges are primarily used to: (i) manage mismatches between the coupon features of the Bank's assets and liabilities, (ii) offset prepayment risk in certain assets, (iii) mitigate the income statement volatility that occurs when financial instruments are recorded at fair value and hedge accounting is not permitted by accounting guidance, or (iv) to reduce exposure to reset risk.
Accounting for Fair Value Hedges. If hedging relationships meet certain criteria, including, but not limited to, formal documentation of the fair value hedging relationship and an expectation to be highly effective, they qualify for fair value hedge accounting and the changes in fair value of derivatives along with the offsetting changes in fair value of the hedged items attributable to the hedged risk are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities.” The amount by which the change in fair value of the derivative differs from the change in fair value of the hedged item is known as hedge ineffectiveness. Two approaches to fair value hedge accounting include:
Long-haul hedge accounting. The application of long-haul hedge accounting requires the Bank to formally assess (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 hedged items due to benchmark interest rate changes and whether those derivatives are expected to remain effective in future periods.
Short-cut hedge accounting. Transactions that meet certain criteria qualify for short-cut hedge accounting in which an assumption can be made that the change in fair value of a hedged item due to changes in the benchmark interest rate exactly offsets the change in fair value of the related derivative. Under the short-cut method, the entire change in fair value of the interest rate swap is considered to be effective at achieving offsetting changes in fair value of the hedged asset or liability.

Derivatives are typically executed at the same time as the hedged item, and the Bank designates the hedged item in a fair value hedge relationship at the trade date. In many hedging relationships, the Bank may designate the fair value 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 Bank then records the changes in fair value of the derivative and the hedged item beginning on the trade date.

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 fair value hedge accounting, but is an acceptable hedging strategy under the Bank’s risk management program. Changes in the fair value of derivatives that are designated as economic hedges are recorded in other income (loss) as “Net gains (losses) on derivatives and hedging activities” with no offsetting fair value adjustments for the underlying assets, liabilities, or firm commitments, unless changes in the fair value of the assets or liabilities are normally marked to fair value through earnings (e.g., trading securities and fair value option instruments).

90


Accrued Interest Receivables and Payables. The net settlements of interest receivables and payables related to derivatives designated as fair value hedges are recognized as adjustments to the interest income or interest expense of the designated hedged item. The net settlements of interest receivables and payables related to derivatives designated as economic hedges are recognized in other income (loss) as “Net gains (losses) on derivatives and hedging activities.”
Discontinuance of Hedge Accounting. The Bank discontinues fair value hedge accounting prospectively when either (i) it determines that the derivative is no longer effective in offsetting changes in the fair value of a hedged item due to changes in the benchmark interest rate, (ii) the derivative and/or the hedged item expires or is sold, terminated, or exercised, (iii) a hedged firm commitment no longer meets the definition of a firm commitment, or (iv) management determines that designating the derivative as a hedging instrument is no longer appropriate.
When fair value hedge accounting is discontinued, the Bank either terminates the derivative or continues to carry the derivative on the Statements of Condition at its fair value. For any remaining hedged item, the Bank ceases to adjust the hedged item for changes in fair value and amortizes the cumulative basis adjustment on the hedged item into earnings over the remaining contractual life of the hedged item using the level-yield method.

When fair value hedge accounting is discontinued because the hedged item no longer meets the definition of a firm commitment, the Bank continues to carry the derivative on the Statements of Condition at its fair value, removing from the Statements of Condition any hedged item that was recorded to recognize the firm commitment and recording it as a gain or loss in current period earnings.

Embedded Derivatives. The Bank may issue debt, make advances, or purchase financial instruments in which a derivative instrument is “embedded.” Upon execution of these transactions, the Bank assesses whether the economic characteristics of the embedded derivative are clearly and closely related to the economic characteristics of the remaining component of the debt, advance, 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. If the Bank determines that the embedded derivative has economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and 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 an economic derivative instrument. However, if the Bank elects to carry the entire contract (the host contract and the embedded derivative) at fair value in the Statements of Condition, changes in fair value of the entire contract will be reported in current period earnings.
Premises, Software, and Equipment
The Bank records premises, software, and equipment at cost less accumulated depreciation and amortization and computes depreciation and amortization using the straight-line method over the estimated useful lives of assets, which range from approximately two to 20 years. The Bank amortizes leasehold improvements using the straight-line method over the shorter of the estimated useful life of the improvement or the remaining term of the lease. The Bank may capitalize improvements and major renewals but expenses ordinary maintenance and repairs when incurred. The Bank includes gains and losses on the disposal of premises, software, and equipment in other income (loss).
Accumulated Depreciation and Amortization. At December 31, 2016 and 2015, accumulated depreciation and amortization related to premises, software, and equipment was $21 million and $17 million.
Depreciation and Amortization Expense. At December 31, 2016, depreciation and amortization expense for premises, software, and equipment was $5 million. For the years ended December 31, 2015 and 2014, depreciation and amortization expense for premises, software, and equipment was $3 million.
Consolidated Obligations
The Bank reports consolidated obligations at amortized cost, which is net of premiums, discounts, concessions, and fair value hedging adjustments unless the Bank has elected the fair value option, in which case, the consolidated obligations are carried at fair value. The Bank records interest on consolidated obligations bonds to interest expense as incurred. The Bank amortizes/accretes premiums, discounts, concessions, and fair value hedging adjustments on consolidated obligations to expense using the level-yield method over the contractual life of the consolidated obligations.

91


Concessions. The Bank pays concessions to dealers in connection with the issuance of certain consolidated obligations. The Office of Finance prorates the amount of the concession to each FHLBank based upon the percentage of the debt issued that is attributed to that FHLBank. Concessions paid on consolidated obligations designated under the fair value option are expensed as incurred and recorded in other expense. Concessions paid on consolidated obligations not designated under the fair value option are deferred and amortized over the contractual life of the consolidated obligations using the level-yield method. Unamortized concessions are included as a direct deduction from the carrying amount of “Consolidated obligation discount notes” or “Consolidated obligation bonds” in the Statements of Condition and the amortization of those concessions is included in consolidated obligation interest expense.
Mandatorily Redeemable Capital Stock
The Bank reclassifies capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of redemption, gives notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Shares meeting this definition are reclassified to a liability at fair value. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income. The repurchase or redemption of mandatorily redeemable capital stock is transacted at par value and 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 Bank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense.

Additional Capital from Merger

The Bank recognized the net assets acquired from the Seattle Bank by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a capital account captioned “Additional capital from merger.” The Bank treats this additional capital from merger as a component of total capital for regulatory capital purposes. Dividends on capital stock have been paid from this account since the merger date and the Bank intends to pay future dividends, when and if declared, from this account until the additional capital from merger balance is depleted.
Restricted Retained Earnings
The Bank entered into a Joint Capital Enhancement Agreement (JCE Agreement) with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of each FHLBank by allocating the earnings historically paid to satisfy the Resolution Funding Corporation obligation to a separate restricted retained earnings account. Under the JCE Agreement, each FHLBank allocates 20 percent of its quarterly net income to a restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends and are presented separately in the Statements of Condition.
Litigation Settlement Gains, Net
Litigation settlement gains are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
The Bank records legal expenses related to litigation settlements as incurred in other expense in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement through other income (loss) in the Statements of Income. 

92


Finance Agency Expenses
The FHLBanks are assessed for a portion of the costs of operating the Finance Agency. Each FHLBank is required to pay their pro-rata share of the annual assessment based on the ratio between each FHLBank's minimum required regulatory capital and the minimum required regulatory capital of all FHLBanks.
Office of Finance Expenses
The Bank is assessed for a portion of the costs of operating the Office of Finance. The Office of Finance allocates its operating and capital expenditures to the FHLBanks as follows: (i) two-thirds based on each FHLBank's share of total consolidated obligations outstanding and (ii) one-third based upon an equal pro-rata allocation.
Assessments
The FHLBank Act requires each FHLBank to establish and fund an Affordable Housing Program (AHP), which 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 to moderate income households. Annually, the FHLBanks must set aside for the AHP the greater of ten percent of their current year net earnings or their pro-rata share of an aggregate $100 million to be contributed in total by the FHLBanks. For purposes of the AHP assessment, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. In addition to the required AHP assessment, the Bank's Board of Directors may elect to make voluntary contributions to the AHP.

93


Note 2 — Recently Adopted and Issued Accounting Guidance

ADOPTED ACCOUNTING GUIDANCE

Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

On August 27, 2014, the FASB issued guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures if substantial doubt exists. This guidance requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year after the date the financial statements are issued or within one year after the financial statements are available to be issued, when applicable. Substantial doubt exists if it is probable that the entity will be unable to meet its obligations for the assessed period. This guidance became effective for the Bank beginning on December 31, 2016. The adoption of this guidance did not have an effect on disclosures to the Bank's financial statements.

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. The guidance would have become effective for the Bank in 2017 but the guidance allowed early adoption. The Bank elected to early adopt this guidance prospectively on January 1, 2016. The adoption of this guidance did not have an effect on the Bank’s financial condition, results of operations, or cash flows.

Simplifying the Accounting for Measurement-Period Adjustments

On September 25, 2015, the FASB issued guidance to simplify the accounting for measurement-period adjustments recognized in a business combination. This guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. It also requires that the acquirer present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance became effective for the Bank beginning on January 1, 2016 and was adopted prospectively. The adoption of this guidance did not have an effect on the Bank’s financial condition, results of operations, or cash flows.

Cloud Computing Arrangements

On April 15, 2015, the FASB issued amendments to clarify a customer's accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers on determining whether a cloud computing arrangement includes a software license that should be accounted for as internal-use software. If the arrangement does not contain a software license, it would be accounted for as a service contract. The guidance became effective for the Bank beginning on January 1, 2016 and was adopted prospectively. The adoption of this guidance did not have an effect on the Bank's financial condition, results of operations, or cash flows.

Simplifying the Presentation of Debt Issuance Costs
On April 7, 2015, the FASB issued guidance to simplify the presentation of debt issuance costs. This guidance requires that debt issuance costs related a recognized debt liability be presented on the statement of condition as a direct deduction from the carrying amount of that debt liability, consistent with the presentation of debt discounts. This guidance became effective for the Bank beginning on January 1, 2016 and was adopted on a retrospective basis. The adoption of this guidance resulted in a reclassification of unamortized debt issuance costs from other assets to consolidated obligations on the Bank's Statement of Condition. The adoption of this guidance did not have a material effect on the Bank's financial condition, result of operations, or cash flows. Refer to "Note 1 - Summary of Significant Accounting Policies" for additional detail on this reclassification.

94


Amendments to the Consolidation Analysis
On February 18, 2015, the FASB issued amended guidance intended to enhance consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). The new guidance primarily focuses on the following:

Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met. 

Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE.

Changing consolidation conclusions for entities in several industries that typically make use of limited partnerships or VIEs.

This guidance became effective for the Bank beginning on January 1, 2016. The adoption of this guidance did not have an effect on the Bank’s financial condition, results of operations, or cash flows.

ISSUED ACCOUNTING GUIDANCE

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 in the statement of cash flows. This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. The adoption of this guidance will have no effect on the Bank's financial condition, results of operations, or 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 measure expected credit losses 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. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The new guidance requires a financial asset, or a group of financial assets, measured at amortized cost to be presented at the net amount expected to be collected. The guidance also requires, among other things, the following:
The statement of income to reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.

Entities to determine the allowance for credit losses for purchased financial assets with a more-than-insignificant amount of credit deterioration since origination that are measured at amortized cost in a similar manner to other financial assets measured at amortized cost. The initial allowance for credit losses is required to be added to the purchase price of the assets acquired.

Entities to record credit losses relating to AFS debt securities through an allowance for credit losses. The amendments limit the allowance for credit losses to the amount by which fair value is below amortized cost.

Public entities to further disaggregate the current disclosure of credit quality indicators in relation to the amortized cost of financing receivables by the year of origination (i.e., vintage).


95


This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2020. Early application is permitted as of the interim and annual reporting periods beginning after December 15, 2018. This 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 PCD assets upon adoption and for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Bank does not intend to adopt the new guidance early. While the Bank is in the process of evaluating this guidance, the Bank expects the adoption of the guidance will result in an increase in the allowance for credit losses and may include an allowance for debt securities given the requirement to assess losses for the entire estimated life of the financial asset. The effect on the Bank's financial condition, results of operations, and cash flows will depend upon the composition of financial assets held by the Bank at the adoption date as well as 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 Bank beginning on January 1, 2017. The adoption of this guidance did not have an effect on the Bank's financial condition, results of operations, or 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. Specifically, 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. 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. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from operating leases on the statement of condition. While this guidance does not fundamentally change lessor accounting, some changes have been made to align that guidance with the lessee guidance and other areas within GAAP.

This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2019, and early application is permitted. This 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 Bank does not intend to adopt this new guidance early. Upon adoption, the Bank expects to report higher assets and liabilities as a result of recording right-of-use assets and lease liabilities on its statements of condition. The Bank is in the process of evaluating this guidance but its effect on the Bank's financial condition, results of operations, or cash flows has not yet been determined.

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 to measure the liability at fair value in accordance with the fair value option for financial instruments.

Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet 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 that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.

96


This guidance becomes effective for the Bank for the interim and annual periods beginning on January 1, 2018, 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 balance sheet as of the beginning of the period of adoption. The Bank is in the process of evaluating this guidance, but its effect on the Bank's financial condition, results of operations, or cash flows is not expected to be material.

Revenue from Contracts with Customers

On May 28, 2014, the FASB issued guidance on revenue from contracts with customers. This guidance outlines a single comprehensive model for recognizing revenue arising from contracts with customers and supersedes most current revenue recognition guidance. In addition, this guidance amends the existing requirements for the recognition of a gain or loss on the transfer of non-financial assets that are not in a contract with a customer. This guidance applies to all contracts with customers except those that are within the scope of certain other standards, such as financial instruments, certain guarantees, insurance contracts, and lease contracts. The guidance provides entities with the option of using either of the following adoption methods: a full retrospective method, retrospectively to each prior reporting period presented; or a modified retrospective method, retrospectively with the cumulative effect of initially applying this guidance recognized at the date of initial application.

On August 12, 2015, the FASB issued an amendment to defer the effective date of this guidance issued in May 2014 by one year. In 2016, the FASB has issued additional amendments to clarify certain aspects of the new revenue guidance. However, these amendments do not change the core principle in the new revenue standard.

This guidance is effective for the Bank for interim and annual periods beginning on January 1, 2018. Early application is permitted only as of the interim and annual reporting periods beginning after December 15, 2016. The Bank does not intend to adopt this new guidance early. Given that the majority of the Bank's financial instruments and other contractual rights that generate revenue are covered by other U.S. GAAP, the effect of this guidance on the Bank's financial condition, results of operations, and cash flows is not expected to be material.

Note 3 — Cash and Due from Banks

Cash and due from banks 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 Bank maintains collected cash balances with commercial banks in return for certain services. These arrangements contain no legal restrictions on the withdrawal of funds. Average collected cash balances were $148 million and $131 million for the years ended December 31, 2016 and 2015.

PASS-THROUGH DEPOSIT RESERVES

The Bank acts as a pass-through correspondent for certain member institutions required to deposit reserves with the Federal Reserve Bank of Chicago. At December 31, 2016 and 2015, pass-through deposit reserves amounted to $9 million and $22 million.


97


Note 4 — Trading Securities

MAJOR SECURITY TYPES

Trading securities were as follows (dollars in millions):
 
December 31,
 
2016
 
2015
Non-mortgage-backed securities
 
 
 
Other U.S. obligations1
$
216

 
$
237

GSE and Tennessee Valley Authority obligations
1,611

 
3,077

Other2
273

 
276

     Total non-mortgage-backed securities
2,100

 
3,590

Mortgage-backed securities
 
 
 
GSE multifamily
453

 
457

Total fair value
$
2,553

 
$
4,047


1
Represents investment securities backed by the full faith and credit of the U.S. Government.

2
Consists of taxable municipal bonds.

NET GAINS (LOSSES) ON TRADING SECURITIES

The Bank did not sell any trading securities during the years ended December 31, 2016, 2015, and 2014. During the year ended December 31, 2016, the Bank recorded net holding gains of $3 million on its trading securities compared to net holding losses of $12 million and net holding gains of $68 million for the same periods in 2015 and 2014.

Note 5 — Available-for-Sale Securities

MAJOR SECURITY TYPES

AFS securities were as follows (dollars in millions):
 
December 31, 2016
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
3,537

 
$
5

 
$
(13
)
 
$
3,529

GSE and Tennessee Valley Authority obligations
1,341

 
11

 
(1
)
 
1,351

State or local housing agency obligations
1,010

 

 
(1
)
 
1,009

Other3
272

 
6

 

 
278

Total non-mortgage-backed securities
6,160

 
22

 
(15
)
 
6,167

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
 
3,852

 
2

 
(16
)
 
3,838

GSE single-family
1,257

 
7

 
(3
)
 
1,261

GSE multifamily
11,714

 
30

 
(41
)
 
11,703

Total mortgage-backed securities
16,823

 
39

 
(60
)
 
16,802

Total
$
22,983

 
$
61

 
$
(75
)
 
$
22,969

 

98



AFS securities were as follows (dollars in millions):
 
December 31, 2015
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 

Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations2
$
4,010

 
$
4

 
$
(29
)
 
$
3,985

GSE and Tennessee Valley Authority obligations
2,124

 
14

 
(23
)
 
2,115

State or local housing agency obligations
1,048

 

 
(1
)
 
1,047

Other3
276

 
4

 
(2
)
 
278

Total non-mortgage-backed securities
7,458

 
22

 
(55
)
 
7,425

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
 
2,284

 

 
(14
)
 
2,270

GSE single-family
1,593

 
13

 
(1
)
 
1,605

GSE multifamily
9,735

 
36

 
(83
)
 
9,688

Total mortgage-backed securities
13,612

 
49

 
(98
)
 
13,563

Total
$
21,070

 
$
71

 
$
(153
)
 
$
20,988


1
Amortized cost includes adjustments made to the cost basis of an investment for accretion, amortization, and/or fair value hedge accounting adjustments.

2
Represents investment securities backed by the full faith and credit of the U.S. Government.

3
Consists of taxable municipal bonds and/or Private Export Funding Corporation (PEFCO) bonds.


99



UNREALIZED LOSSES

The following tables summarize AFS securities with unrealized losses by major security type and length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
December 31, 2016
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations1
$
209

 
$

 
$
2,972

 
$
(12
)
 
$
3,181

 
$
(12
)
GSE and Tennessee Valley Authority obligations

 

 
126

 
(1
)
 
126

 
(1
)
State or local housing agency obligations
354

 
(1
)
 
395

 
(1
)
 
749

 
(2
)
Total non-mortgage-backed securities
563

 
(1
)
 
3,493

 
(14
)
 
4,056

 
(15
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family1
1,123

 
(2
)
 
2,076

 
(14
)
 
3,199

 
(16
)
GSE single-family
545

 
(3
)
 
32

 

 
577

 
(3
)
GSE multifamily
2,713

 
(6
)
 
6,315

 
(35
)
 
9,028

 
(41
)
Total mortgage-backed securities
4,381

 
(11
)
 
8,423

 
(49
)
 
12,804

 
(60
)
Total
$
4,944

 
$
(12
)
 
$
11,916

 
$
(63
)
 
$
16,860

 
$
(75
)

 
December 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations1
$
3,645

 
$
(29
)
 
$

 
$

 
$
3,645

 
$
(29
)
GSE and Tennessee Valley Authority obligations
1,701

 
(23
)
 

 

 
1,701

 
(23
)
State or local housing agency obligations
555

 
(1
)
 
6

 

 
561

 
(1
)
Other2
97

 
(2
)
 

 

 
97

 
(2
)
Total non-mortgage-backed securities
5,998

 
(55
)
 
6

 

 
6,004

 
(55
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family1
2,270

 
(14
)
 

 

 
2,270

 
(14
)
GSE single-family
277

 
(1
)
 
33

 

 
310

 
(1
)
GSE multifamily
8,166

 
(66
)
 
926

 
(17
)
 
9,092

 
(83
)
Total mortgage-backed securities
10,713

 
(81
)
 
959

 
(17
)
 
11,672

 
(98
)
Total
$
16,711

 
$
(136
)
 
$
965

 
$
(17
)
 
$
17,676

 
$
(153
)

1
Represents investment securities backed by the full faith and credit of the U.S. Government.

2
Consists of taxable municipal bonds and/or PEFCO bonds.


100


CONTRACTUAL MATURITY

The following table summarizes AFS securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
December 31, 2016
 
December 31, 2015
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
133

 
$
134

 
$
430

 
$
431

Due after one year through five years
 
489

 
496

 
968

 
978

Due after five years through ten years
 
4,452

 
4,447

 
4,664

 
4,637

Due after ten years
 
1,086

 
1,090

 
1,396

 
1,379

Total non-mortgage-backed securities
 
6,160

 
6,167

 
7,458

 
7,425

Mortgage-backed securities
 
16,823

 
16,802

 
13,612

 
13,563

Total
 
$
22,983

 
$
22,969

 
$
21,070

 
$
20,988


NET GAINS (LOSSES) FROM SALE OF AFS SECURITIES

During the year ended December 31, 2016, the Bank received $287 million in proceeds from the sale of AFS securities and recognized gains of less than $1 million. During the year ended December 31, 2015, the Bank did not sell any AFS securities. During the year ended December 31, 2014, the Bank received $97 million in proceeds from the sale of an AFS security and recognized gross gains of $1 million.


101


Note 6 — Held-to-Maturity Securities

MAJOR SECURITY TYPES

HTM securities were as follows (dollars in millions):
 
December 31, 2016
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
397

 
$
60

 
$
(1
)
 
$
456

State or local housing agency obligations
688

 
1

 
(11
)
 
678

Total non-mortgage-backed securities
1,085

 
61

 
(12
)
 
1,134

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
26

 

 

 
26

Other U.S. obligations commercial2
4

 

 

 
4

GSE single-family
3,543

 
4

 
(20
)
 
3,527

Private-label residential
16

 

 
(1
)
 
15

Total mortgage-backed securities
3,589

 
4

 
(21
)
 
3,572

Total
$
4,674

 
$
65

 
$
(33
)
 
$
4,706


 
December 31, 2015
 
Amortized
Cost
1
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
401

 
$
57

 
$
(2
)
 
$
456

State or local housing agency obligations
956

 
9

 

 
965

Total non-mortgage-backed securities
1,357

 
66

 
(2
)
 
1,421

Mortgage-backed securities
 
 
 
 
 
 
 
Other U.S. obligations single-family2
47

 

 

 
47

Other U.S. obligations commercial2
6

 

 

 
6

GSE single-family
4,655

 
9

 
(15
)
 
4,649

Private-label residential
20

 

 
(1
)
 
19

Total mortgage-backed securities
4,728

 
9

 
(16
)
 
4,721

Total
$
6,085

 
$
75

 
$
(18
)
 
$
6,142


1
Amortized cost includes adjustments made to the cost basis of an investment for accretion and/or amortization.

2
Represents investment securities backed by the full faith and credit of the U.S. Government.


102


UNREALIZED LOSSES

The following tables summarize HTM securities with unrealized losses by major security type and the length of time that individual securities have been in a continuous unrealized loss position (dollars in millions). In cases where the gross unrealized losses for an investment category are less than $1 million, the losses are not reported.
 
December 31, 2016
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
73

 
$
(1
)
 
$

 
$

 
$
73

 
$
(1
)
State or local housing agency obligations
291

 
(11
)
 
10

 

 
301

 
(11
)
Total non-mortgage backed securities
364

 
(12
)
 
10

 

 
374

 
(12
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family1
12

 

 

 

 
12

 

Other U.S. obligations commercial1

 

 
3

 

 
3

 

GSE single-family
1,918

 
(15
)
 
1,224

 
(5
)
 
3,142

 
(20
)
Private-label residential
5

 

 
10

 
(1
)
 
15

 
(1
)
Total mortgage-backed securities
1,935

 
(15
)
 
1,237

 
(6
)
 
3,172

 
(21
)
Total
$
2,299

 
$
(27
)
 
$
1,247

 
$
(6
)
 
$
3,546

 
$
(33
)

 
December 31, 2015
 
Less than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Non-mortgage backed securities
 
 
 
 
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations
$
96

 
$
(2
)
 
$

 
$

 
$
96

 
$
(2
)
State or local housing agency obligations
93

 

 

 

 
93

 

Total non-mortgage backed securities
189

 
(2
)
 

 

 
189

 
(2
)
Mortgage-backed securities
 
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family1
40

 

 

 

 
40

 

Other U.S. obligations commercial1
5

 

 

 

 
5

 

GSE single-family
3,052

 
(15
)
 
20

 

 
3,072

 
(15
)
Private-label residential

 

 
13

 
(1
)
 
13

 
(1
)
Total mortgage-backed securities
3,097

 
(15
)
 
33

 
(1
)
 
3,130

 
(16
)
Total
$
3,286

 
$
(17
)
 
$
33

 
$
(1
)
 
$
3,319

 
$
(18
)

1
Represents investment securities backed by the full faith and credit of the U.S. Government.



103


CONTRACTUAL MATURITY

The following table summarizes HTM securities by contractual maturity. Expected maturities of some securities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment fees (dollars in millions):
 
 
December 31, 2016
 
December 31, 2015
Year of Contractual Maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Non-mortgage-backed securities
 
 
 
 
 
 
 
 
Due in one year or less
 
$
11

 
$
11

 
$
18

 
$
18

Due after one year through five years
 
62

 
62

 
131

 
131

Due after five years through ten years
 
367

 
399

 
409

 
440

Due after ten years
 
645

 
662

 
799

 
832

Total non-mortgage-backed securities
 
1,085

 
1,134

 
1,357

 
1,421

Mortgage-backed securities
 
3,589

 
3,572

 
4,728

 
4,721

Total
 
$
4,674

 
$
4,706

 
$
6,085

 
$
6,142


NET GAINS (LOSSES) FROM SALE OF HTM SECURITIES

During the years ended December 31, 2016 and 2015, the Bank did not sell any HTM securities. During the year ended December 31, 2014, the Bank sold HTM securities with a carrying amount of $66 million and recognized gross gains of $9 million. The HTM securities sold had less than 15 percent of the acquired principal outstanding at the time of sale. As such, the sales were considered maturities for purpose of security classification and did not impact the Bank's ability and intent to hold the remaining HTM securities through their stated maturities.

Note 7 — Other-Than-Temporary Impairment

The Bank evaluates its individual AFS and HTM securities in an unrealized loss position for OTTI on a quarterly basis. As part of its evaluation of securities for OTTI, the Bank considers its intent to sell each debt security and whether it is more likely than not that it will be required to sell the security before its anticipated recovery. If either of these conditions is met, the Bank will recognize an OTTI charge to earnings equal to the entire difference between the security's amortized cost basis and its fair value at the reporting date. For securities in an unrealized loss position that meet neither of these conditions, the Bank performs analyses to determine if any of these securities are other-than-temporarily impaired. The analysis of the Bank's AFS and HTM investment securities in an unrealized loss position at December 31, 2016 is discussed below:

Other U.S. obligations and GSE and Tennessee Valley Authority securities. The unrealized losses were due primarily to changes in interest rates and credit spreads, and not to a significant deterioration in the fundamental credit quality of the obligations. The strength of the issuers' guarantees through direct obligations or support from the U.S. Government was sufficient to protect the Bank from losses based on current expectations. The Bank expects to recover the amortized cost bases on these securities and neither intends to sell these securities nor considers it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at December 31, 2016.

State or local housing agency obligations. The unrealized losses were due to changes in interest rates, credit spreads, and illiquidity in the credit markets, and not to a significant deterioration in the fundamental credit quality of the obligations. The creditworthiness of the issuers and the strength of the underlying collateral and credit enhancements were sufficient to protect the Bank from losses based on current expectations. The Bank does not intend to sell these securities nor is it more likely than not that it will be required to sell these securities before recovery of their amortized cost bases. As such, the Bank did not consider these securities to be other-than-temporarily impaired at December 31, 2016.



104


Private-label residential mortgage-backed securities. On a quarterly basis, the Bank engages other designated FHLBanks to perform cash flow analyses on its private-label MBS. As of December 31, 2016, the Bank compared the present value of cash flows expected to be collected with respect to its private-label MBS to the amortized cost bases of the securities to determine whether a credit loss existed. At December 31, 2016, the Bank's cash flow analyses for private-label MBS did not project any credit losses. Even under an adverse scenario that delays recovery of the housing price index, no credit losses were projected. The Bank does not intend to sell its private-label MBS and it is not more likely than not that the Bank will be required to see its private-label MBS before recovery of their amortized cost bases. As a result, the Bank did not consider any of its private-label MBS to be other-than-temporarily impaired at December 31, 2016.

Note 8 — Advances

The Bank 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 overnight to 30 years. Variable rate advances generally have maturities ranging from one year to 20 years, where the interest rates reset periodically to a specified interest rate index such as London Interbank Offered Rate (LIBOR) or other specified index. At December 31, 2016, the Bank had advances outstanding with interest rates ranging from 0.58 percent to 8.25 percent.

CONTRACTUAL MATURITY

The following table summarizes the Bank's advances outstanding by contractual maturity (dollars in millions):
 
 
December 31, 2016
 
December 31, 2015
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Overdrawn demand deposit accounts
 
$
1

 
3.81
%
 
$
1

 
3.34
%
Due in one year or less
 
22,532

 
1.13

 
18,967

 
0.77

Due after one year through two years
 
29,791

 
1.12

 
8,608

 
1.48

Due after two years through three years
 
30,023

 
0.98

 
18,517

 
0.93

Due after three years through four years
 
17,615

 
1.00

 
17,439

 
0.60

Due after four years through five years
 
17,197

 
1.11

 
16,521

 
0.74

Thereafter
 
14,378

 
1.11

 
8,858

 
1.36

Total par value
 
131,537

 
1.07
%
 
88,911

 
0.89
%
Premiums
 
83

 
 
 
128

 
 
Discounts
 
(7
)
 
 
 
(9
)
 
 
Fair value hedging adjustments
 
(12
)
 
 
 
143

 
 
Total
 
$
131,601

 
 
 
$
89,173

 
 
 
The following table summarizes advances at December 31, 2016 and 2015, by year of contractual maturity or next call date for callable advances, and by year of contractual maturity or next put date for putable advances (dollars in millions):
 
 
Year of Contractual Maturity
or Next Call Date
 
Year of Contractual Maturity
or Next Put Date
 
 
2016
 
2015
 
2016
 
2015
Overdrawn demand deposit accounts
 
$
1

 
$
1

 
$
1

 
$
1

Due in one year or less
 
93,471

 
73,242

 
23,532

 
21,156

Due after one year through two years
 
9,978

 
4,513

 
28,983

 
7,549

Due after two years through three years
 
15,515

 
4,377

 
30,023

 
17,576

Due after three years through four years
 
2,734

 
2,337

 
17,615

 
17,439

Due after four years through five years
 
7,670

 
1,818

 
17,026

 
16,521

Thereafter
 
2,168

 
2,623

 
14,357

 
8,669

Total par value
 
$
131,537

 
$
88,911

 
$
131,537

 
$
88,911



105


The Bank offers advances to members and eligible housing associates that may be prepaid on pertinent dates (call dates) prior to maturity without incurring prepayment fees (callable advances). Other advances may only be prepaid by paying a fee to the Bank (prepayment fee) that makes the Bank financially indifferent to the prepayment of the advance. At December 31, 2016 and 2015, the Bank had callable advances outstanding totaling $78.5 billion and $54.8 billion.

The Bank also offers putable advances. With a putable advance, the Bank has the right to terminate the advance from the borrower on predetermined exercise date. Generally these put options are exercised when interest rates increase relative to contractual rates. At December 31, 2016 and 2015, the Bank had putable advances outstanding totaling $1.9 billion and $2.6 billion.

PREPAYMENT FEES

The Bank generally charges a prepayment fee for advances that a borrower elects to terminate prior to the stated maturity or outside of a predetermined call or put date. The fees charged are priced to make the Bank financially indifferent to the prepayment of the advance. For certain advances with symmetrical prepayment features, the Bank may charge the borrower a prepayment fee or pay the borrower a prepayment credit, depending on certain circumstances, such as movements in interest rates, when the advance is prepaid. Prepayment fees and credits are recorded net of fair value hedging adjustments in the Statements of Income.

The following table summarizes the Bank's prepayment fees on advances, net (dollars in millions):
 
 
For the Years Ended December 31,
 
 
2016
 
2015
 
2014
Prepayment fee income
 
$
16

 
$
23

 
$
30

Fair value hedging adjustments1
 
(8
)
 
(12
)
 
(24
)
Prepayment fees on advances, net
 
$
8

 
$
11

 
$
6


1
Represents the amortization/accretion of fair value hedging adjustments on closed advance fair value hedge relationships resulting from advance prepayments.

CREDIT RISK EXPOSURE AND SECURITY TERMS

The Bank's potential credit risk from advances is concentrated in commercial bank, thrifts, and insurance companies. At December 31, 2016 and 2015, the Bank had outstanding advances of $77 billion and $37 billion to one member that individually held 10 percent or more of the Bank's advances, which represents 59 percent and 42 percent of total outstanding advances. The members were the same each year. For information related to the Bank's credit risk exposure on advances, refer to "Note 10 — Allowance for Credit Losses."

Note 9 — Mortgage Loans Held for Portfolio

The Bank participates in the MPF program. This program involves investment by the Bank in single-family mortgage loans held for portfolio that are either purchased from PFIs or funded by the Bank through PFIs. MPF loans may also be acquired through participations in pools of eligible mortgage loans purchased from other FHLBanks. The Bank's MPF PFIs generally originate, service, and credit enhance mortgage loans that are sold to the Bank. MPF PFIs participating in the servicing release program do not service the loans owned by the Bank. The servicing on these loans is sold concurrently by the MPF PFI to a designated mortgage service provider.

Effective May 31, 2015, as a part of the Merger, the Bank acquired mortgage loans previously purchased by the Seattle Bank under the MPP. This program involved investment by the Seattle Bank in single-family mortgage loans that were purchased directly from MPP PFIs. Similar to the MPF program, MPP PFIs generally originated, serviced, and credit enhanced the mortgage loans sold to the Seattle Bank. In 2005, the Seattle Bank ceased entering into new MPP master commitment contracts and therefore all MPP loans acquired by the Bank were originated prior to 2006. The Bank does not currently purchase mortgage loans under this program.


106


The following tables present information on the Bank's mortgage loans held for portfolio (dollars in millions):
 
December 31, 2016
 
MPF
 
MPP
 
Total
Fixed rate, long-term single-family mortgage loans
$
5,272

 
$
397

 
$
5,669

Fixed rate, medium-term1 single-family mortgage loans
1,148

 
6

 
1,154

Total unpaid principal balance
6,420

 
403

 
6,823

Premiums
82

 
14

 
96

Discounts
(8
)
 
(1
)
 
(9
)
Basis adjustments from mortgage loan commitments
5

 

 
5

Total mortgage loans held for portfolio
$
6,499

 
$
416

 
$
6,915

Allowance for credit losses
(2
)
 

 
(2
)
Total mortgage loans held for portfolio, net
$
6,497

 
$
416

 
$
6,913


 
December 31, 2015
 
MPF
 
MPP
 
Total
Fixed rate, long-term single-family mortgage loans
$
4,884

 
$
500

 
$
5,384

Fixed rate, medium-term1 single-family mortgage loans
1,265

 
14

 
1,279

Total unpaid principal balance
6,149

 
514

 
6,663

Premiums
76

 
18

 
94

Discounts
(9
)
 
(1
)
 
(10
)
Basis adjustments from mortgage loan commitments
9

 

 
9

Total mortgage loans held for portfolio
$
6,225

 
$
531

 
$
6,756

Allowance for credit losses
(1
)
 

 
(1
)
Total mortgage loans held for portfolio, net
$
6,224

 
$
531

 
$
6,755


1
Medium-term is defined as a term of 15 years or less.

The following tables present the Bank's mortgage loans held for portfolio by collateral or guarantee type (dollars in millions):
 
December 31, 2016
 
MPF
 
MPP
 
Total
Conventional mortgage loans
$
5,907

 
$
361

 
$
6,268

Government-insured mortgage loans
513

 
42

 
555

Total unpaid principal balance
$
6,420

 
$
403

 
$
6,823

 
December 31, 2015
 
MPF
 
MPP
 
Total
Conventional mortgage loans
$
5,602

 
$
464

 
$
6,066

Government-insured mortgage loans
547

 
50

 
597

Total unpaid principal balance
$
6,149

 
$
514

 
$
6,663


For information related to the Bank's credit risk exposure on mortgage loans held for portfolio, refer to "Note 10 — Allowance for Credit Losses."

Note 10 — Allowance for Credit Losses

The Bank has established an allowance for credit losses methodology for each of its financing receivable portfolio segments: advances, standby letters of credit, and other extensions of credit to borrowers (collectively, credit products), government-insured mortgage loans held for portfolio, MPF conventional mortgage loans held for portfolio, MPP conventional mortgage loans held for portfolio, and term securities purchased under agreements to resell.


107


CREDIT PRODUCTS

The Bank manages its credit exposure to credit products through an approach that includes establishing a credit limit for each borrower, ongoing reviews of each borrower's financial condition, and detailed collateral and lending policies to limit risk of loss while balancing borrowers' needs for a reliable source of funding. In addition, the Bank lends to eligible borrowers in accordance with the FHLBank Act, Finance Agency regulations, and other applicable laws.

The Bank is required by regulation to obtain sufficient collateral to fully secure credit products. The estimated value of the collateral required to secure each borrower's credit products is calculated by applying collateral discounts, or haircuts, to the unpaid principal balance or market value, if available, of the collateral. Eligible collateral includes (i) whole first mortgages on improved residential real property or securities representing a whole interest in such mortgages, (ii) loans and securities issued, insured, or guaranteed by the U.S. Government or any agency thereof, including MBS issued or guaranteed by Fannie Mae, Freddie Mac, or Government National Mortgage Association and Federal Family Education Loan Program guaranteed student loans, (iii) cash deposited with the Bank, and (iv) other real estate-related collateral acceptable to the Bank provided such collateral has a readily ascertainable value and the Bank can perfect a security interest in such property. In addition, community financial institutions may also pledge collateral consisting of secured small business, small agri-business, or small farm loans. As additional security, the FHLBank Act provides that the Bank has a lien on each member's capital stock investment; however, capital stock cannot be pledged as collateral to secure credit exposures.

Collateral arrangements may vary depending upon borrower credit quality, financial condition and performance, borrowing capacity, and overall credit exposure to the borrower. The Bank can also require additional or substitute collateral to protect its security interest. The Bank periodically evaluates and makes changes to its collateral guidelines and collateral haircuts.

Borrowers may pledge collateral to the Bank by executing a blanket lien, specifically assigning collateral, or placing physical possession of collateral with the Bank or its custodians. The Bank perfects its security interest in all pledged collateral by filing Uniform Commercial Code financing statements or by taking possession or control of the collateral. Under the FHLBank Act, any security interest granted to the Bank by its members, or any affiliates of its members, has priority over the claims and rights of any party (including any receiver, conservator, trustee, or similar party having rights of a lien creditor), unless those claims and rights would be entitled to priority under otherwise applicable law and are held by actual purchasers or by parties that have perfected security interests.
Under a blanket lien, the Bank is granted a security interest in all financial assets of the borrower to fully secure the borrower's obligation. Other than securities and cash deposits, the Bank does not initially take delivery of collateral pledged by blanket lien borrowers. In the event of deterioration in the financial condition of a blanket lien borrower, the Bank has the ability to require delivery of pledged collateral sufficient to secure the borrower's obligation. With respect to non-blanket lien borrowers that are federally insured, the Bank generally requires collateral to be specifically assigned. With respect to non-blanket lien borrowers that are not federally insured (typically insurance companies, CDFIs, and housing associates), the Bank generally takes control of collateral through the delivery of cash, securities, or loans to the Bank or its custodians.

Using a risk-based approach and taking into consideration each borrower's financial strength, the Bank considers the types and level of collateral to be the primary indicator of credit quality on its credit products. At December 31, 2016 and 2015, the Bank had rights to collateral on a borrower-by-borrower basis with an unpaid principal balance or market value, if available, in excess of its outstanding extensions of credit.

At December 31, 2016 and 2015, none of the Bank's credit products were past due, on non-accrual status, or considered impaired. In addition, there were no TDRs related to credit products during the years ended December 31, 2016 and 2015.

The Bank has never experienced a credit loss on its credit products. Based upon the Bank's collateral and lending policies, the collateral held as security, and the repayment history on credit products, management has determined that there were no probable credit losses on its credit products as of December 31, 2016 and 2015. Accordingly, the Bank has not recorded any allowance for credit losses for its credit products.


108


GOVERNMENT-INSURED MORTGAGE LOANS

The Bank invests in government-insured fixed rate mortgage loans in both the MPF and MPP portfolios that are insured or guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, and/or the Rural Housing Service of the Department of Agriculture. The servicer or PFI obtains and maintains insurance or a guaranty from the applicable government agency. The servicer or PFI is responsible for compliance with all government agency requirements and for obtaining the benefit of the applicable guarantee or insurance with respect to defaulted government-insured mortgage loans. Any losses incurred on these loans that are not recovered from the insurer/guarantor are absorbed by the servicers. As such, the Bank only has credit risk for these loans if the servicer or PFI fails to pay for losses not covered by the guarantee or insurance. Management views this risk as remote and has never experienced a credit loss on its government-insured mortgage loans. As a result, the Bank did not establish an allowance for credit losses for its government-insured mortgage loans at December 31, 2016 and 2015. Furthermore, none of these mortgage loans have been placed on non-accrual status because of the U.S. Government guarantee or insurance on these loans and the contractual obligation of the loan servicer to repurchase the loans when certain criteria are met.

MPF CONVENTIONAL MORTGAGE LOANS

The Bank's management of credit risk in the MPF program involves several layers of legal loss protection that are defined in agreements among the Bank and its participating PFIs. For conventional MPF loans, the availability of loss protection may differ slightly among MPF products. The Bank's loss protection consists of the following loss layers, in order of priority:

Homeowner Equity.

Primary Mortgage Insurance. At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value, whichever is less and as applicable to the specific loan.

First Loss Account (FLA). The FLA is a memorandum account used to track the Bank's potential loss exposure under each master commitment prior to the PFI's credit enhancement obligation.

Credit Enhancement Obligation of PFI. PFIs have a credit enhancement obligation at the time a mortgage loan is purchased to absorb certain losses in excess of the FLA in order to limit the Bank's loss exposure to that of an investor in an investment grade MBS. PFIs pledge collateral to secure this obligation.

MPP CONVENTIONAL MORTGAGE LOANS

For conventional MPP loans, the loss protection consists of the following loss layers, in order of priority:

Homeowner Equity.

Primary Mortgage Insurance. At the time of origination, PMI is required on all loans with homeowner equity of less than 20 percent of the original purchase price or appraised value, whichever is less and as applicable to the specific loan.

ALLOWANCE METHODOLOGY

The Bank utilizes an allowance for credit losses to reserve for estimated losses in its conventional MPF and MPP mortgage loan portfolios at the balance sheet date. The measurement of the Bank's MPF and MPP allowance for credit losses is determined by the following:

reviewing similar conventional mortgage loans for impairment on a collective basis. This evaluation is primarily based on the following factors: (i) current loan delinquencies, (ii) loans migrating to collateral-dependent status, and (iii) actual historical loss severities;

reviewing conventional mortgage loans for impairment on an individual basis; and

109


estimating additional credit losses in the conventional mortgage loan portfolio. These losses result from other factors that may not be captured in the methodology previously described at the balance sheet date, which include but are not limited to certain quantifiable economic factors, such as unemployment rates and home prices impacting housing markets.

The following table summarizes the allowance for credit losses and recorded investment of the Bank's conventional mortgage loan portfolio by impairment methodology (dollars in millions):
 
MPF
 
MPP1
 
Total
Allowance for credit losses, December 31, 2016
 
 
 
 
 
Collectively evaluated for impairment
$
2

 
$

 
$
2

 
 
 
 
 
 
Allowance for credit losses, December 31, 2015
 
 
 
 
 
Collectively evaluated for impairment
$
1

 
$

 
$
1

 
 
 
 
 
 
Recorded investment, December 31, 20162
 
 
 
 
 
Collectively evaluated for impairment
$
5,960

 
$
346

 
$
6,306

Individually evaluated for impairment, without a related allowance
45

 
27

 
72

Total recorded investment
$
6,005

 
$
373

 
$
6,378

 
 
 
 
 
 
Recorded investment, December 31, 20152
 
 
 
 
 
Collectively evaluated for impairment
$
5,659

 
$
449

 
$
6,108

Individually evaluated for impairment, without a related allowance
37

 
31

 
68

Total recorded investment
$
5,696

 
$
480

 
$
6,176


1
The allowance for credit losses on MPP loans was less than $1 million at December 31, 2016 and 2015.

2
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.


110


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 tables below summarize the Bank's key credit quality indicators for mortgage loans (dollars in millions):
 
December 31, 2016
 
MPF
 
MPP
 
 
 
Conventional
 
Government
 
Conventional
 
Government
 
Total
Past due 30 - 59 days
$
50

 
$
18

 
$
11

 
$
4

 
$
83

Past due 60 - 89 days
17

 
7

 
5

 
2

 
31

Past due 90 - 179 days
9

 
6

 
2

 
1

 
18

Past due 180 days or more
22

 
5

 
12

 
2

 
41

Total past due mortgage loans
98

 
36

 
30

 
9

 
173

Total current mortgage loans
5,907

 
491

 
343

 
35

 
6,776

Total recorded investment of mortgage loans1
$
6,005

 
$
527

 
$
373

 
$
44

 
$
6,949

 
 
 
 
 
 
 
 
 
 
In process of foreclosure (included above)2
$
16

 
$
2

 
$
7

 
$

 
$
25

Serious delinquency rate3
1
%
 
2
%
 
4
%
 
7
%
 
1
%
Past due 90 days or more and still accruing interest4
$

 
$
11

 
$

 
$
3

 
$
14

Non-accrual mortgage loans5
$
36

 
$

 
$
24

 
$

 
$
60


 
December 31, 2015
 
MPF
 
MPP
 
 
 
Conventional
 
Government
 
Conventional
 
Government
 
Total
Past due 30 - 59 days
$
57

 
$
21

 
$
13

 
$
5

 
$
96

Past due 60 - 89 days
16

 
7

 
4

 
2

 
29

Past due 90 - 179 days
12

 
5

 
3

 
1

 
21

Past due 180 days or more
30

 
5

 
16

 
3

 
54

Total past due mortgage loans
115

 
38

 
36

 
11

 
200

Total current mortgage loans
5,581

 
524

 
444

 
42

 
6,591

Total recorded investment of mortgage loans1
$
5,696

 
$
562

 
$
480

 
$
53

 
$
6,791

 
 
 
 
 
 
 
 
 
 
In process of foreclosure (included above)2
$
19

 
$
4

 
$
9

 
$

 
$
32

Serious delinquency rate3
1
%
 
2
%
 
4
%
 
8
%
 
1
%
Past due 90 days or more and still accruing interest4
$

 
$
10

 
$

 
$
4

 
$
14

Non-accrual mortgage loans5
$
46

 
$

 
$
32

 
$

 
$
78



1
Represents the unpaid principal balance adjusted for accrued interest, unamortized premiums, discounts, basis adjustments, and direct write-downs.

2
Includes loans where the decision of foreclosure or 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 depending on their payment status.

3
Represents mortgage loans that are 90 days or more past due or in the process of foreclosure expressed as a percentage of the total recorded investment.

4
Represents government-insured mortgage loans that are 90 days or more past due.

5
Represents conventional mortgage loans that are 90 days or more past due and TDRs.

INDIVIDUALLY EVALUATED IMPAIRED LOANS

As previously described, the Bank evaluates certain conventional mortgage loans for impairment individually. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.

The Bank did not recognize any interest income on impaired loans during the years ended December 31, 2016, 2015, and 2014.


111


The following table summarizes the average recorded investment of the Bank's individually evaluated impaired loans (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Impaired loans with an allowance
 
 
 
 
 
Conventional MPF Loans
$

 
$

 
$
19

Conventional MPP Loans

 

 

Impaired loans without an allowance
 
 
 
 
 
Conventional MPF Loans
41

 
44

 
26

Conventional MPP Loans
29

 
19

 

Total
 
 
 
 
 
Conventional MPF Loans
$
41

 
$
44

 
$
45

Conventional MPP Loans
$
29

 
$
19

 
$



TERM SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL

Term securities purchased under agreements to resell are considered collateralized financing agreements and represent short-term investments. The terms of these investments are structured such that if the market value of the underlying securities decreases below the market value required as collateral, the counterparty must place an equivalent amount of additional securities as collateral or remit an equivalent amount of cash. Otherwise, the dollar value of the resale agreement will decrease accordingly. If an agreement to resell is deemed to be impaired, the difference between the fair value of the collateral and the amortized cost of the agreement will be charged to earnings to establish an allowance for credit losses. Based upon the collateral held as security, the Bank determined that no allowance for credit losses was needed for its term securities purchased under agreements to resell at December 31, 2016 and 2015.

OFF-BALANCE SHEET CREDIT EXPOSURES

At December 31, 2016 and 2015, the Bank did not record a liability to reflect an allowance for credit losses for off-balance sheet credit exposures. For additional information on the Bank's off-balance sheet credit exposures, see "Note 18 — Commitments and Contingencies."

Note 11 — Derivatives and Hedging Activities

NATURE OF BUSINESS ACTIVITY

The Bank is exposed to interest rate risk primarily from the effect of interest rate changes on its interest-earning assets and its related funding sources. The goal of the Bank'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 Bank has established policies and procedures, which include guidelines on the amount of exposure to interest rate changes it is willing to accept.

The Bank enters into derivative contracts to manage the interest rate risk exposures inherent in its otherwise unhedged assets and funding positions. Finance Agency regulations and the Bank's Enterprise Risk Management Policy (ERMP) establish guidelines for derivatives, prohibit trading in or the speculative use of derivatives, and limit credit risk arising from derivatives.

Derivative financial instruments are used by the Bank to achieve its financial and risk management objectives. The Bank reevaluates its hedging strategies from time to time and may change the hedging techniques it uses or may adopt new strategies. The most common ways in which the Bank uses derivatives are to:
 
reduce the interest rate sensitivity and repricing gaps of assets and liabilities;

preserve an interest rate spread between the yield of an asset and the cost of the related liability. Without the use of derivatives, this interest rate spread could be reduced or eliminated when a change in the interest rate on the asset does not match a change in the interest rate on the liability;

mitigate the adverse earnings effects of the shortening or extension of certain assets and liabilities;

manage embedded options in assets and liabilities; and

112


reduce funding costs by combining a derivative with a consolidated obligation, as the cost of a combined funding structure can be lower than the cost of a comparable consolidated obligation;

APPLICATION OF DERIVATIVES
 
The Bank transacts most of its derivative transactions with large banks and major broker-dealers. Over-the-counter derivative transactions may be either executed directly 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 Bank is not a derivative dealer and does not trade derivatives for short-term profit.

TYPES OF DERIVATIVES

The Bank may use 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 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 amount at a variable interest rate index for the same period of time. The variable interest rate received or paid by the Bank in most derivative transactions is the LIBOR.

Options. An option is an agreement between two entities that conveys the right, but not the obligation, to engage in a future transaction on some underlying security or other financial asset at an agreed upon price during a certain period of time or on a specific date. Premiums or swap fees paid to acquire options are considered the fair value of the option at inception of the hedge and are reported as derivative assets or derivative liabilities in the Statements of Condition.

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. When used as a hedge, a swaption can protect the Bank against future interest rate changes. The Bank may enter into both payer 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.

Interest Rate Caps and Floors. In an interest rate cap agreement, a cash flow is generated if the price or interest rate of an underlying variable rises above a certain threshold (or “cap”) price. In an interest rate floor agreement, a cash flow is generated if the price or interest rate of an underlying variable falls below a certain threshold (or “floor”) price. Interest rate caps and floors are designed as protection against the interest rate on a variable rate asset or liability falling below or rising above a certain level.

Futures/Forwards Contracts. Futures and 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 Bank are considered derivatives. The Bank may hedge these commitments by selling “to-be-announced” (TBA) MBS for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date for an established price.

113


TYPES OF HEDGED ITEMS

The Bank may have the following types of hedged items:

Investment Securities. The Bank primarily invests in other U.S. obligations, GSE and Tennessee Valley Authority obligations, state or local housing agency obligations, and MBS, and classifies them as either trading, AFS, or HTM. The interest rate and prepayment risk associated with these investment securities is managed through a combination of debt issuance and derivatives. The Bank may fund investment securities with callable consolidated obligations or utilize interest rate swaps, caps, floors, or swaptions to manage interest rate risk. The Bank manages the risk arising from changing market prices of trading securities by entering into economic derivatives that generally offset the changes in fair value of the securities.

Advances. The Bank offers a wide range of fixed and variable rate advance products with different maturities, interest rates, payment characteristics, and optionality. The Bank may use derivatives to adjust the repricing and/or option characteristics of advances in order to more closely match the characteristics of its funding liabilities. In general, whenever a borrower executes a fixed rate advance or a variable rate advance with embedded options, the Bank may simultaneously execute a derivative with terms that offset the terms and embedded options, if any, in the advance. For example, the Bank may hedge a fixed rate advance with an interest rate swap where the Bank pays a fixed rate coupon and receives a variable rate coupon, effectively converting the fixed rate advance to a variable rate advance. This type of hedge is typically treated as a fair value hedge. In addition, the Bank may hedge a callable advance, which gives the borrower the option to extinguish the fixed rate advance, by entering into a cancelable interest rate swap.
       
Mortgage Loans. The Bank 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 Bank manages the interest rate risk associated with mortgage loans through a combination of debt issuance and derivatives. The Bank may issue 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 Bank may also purchase interest rate caps, floors, or swaptions to minimize the interest rate risk embedded in mortgage assets. Although these derivatives are valid economic hedges, they are not specifically linked to individual mortgage assets and, therefore, do not receive fair value hedge accounting. The fair value changes on these derivatives are recorded through earnings with no offsetting hedged item fair value adjustment. As a result, they introduce the potential for earnings variability.

Consolidated Obligations. The Bank may enter into derivatives to hedge the interest rate risk associated with its consolidated obligations. For example, the Bank may issue and hedge a fixed rate consolidated obligation with an interest rate swap where the Bank receives a fixed rate coupon and pays a variable rate coupon, effectively converting the fixed rate consolidated obligation to a variable rate consolidated obligation. This type of hedge is typically treated as a fair value hedge. The Bank may also issue variable interest rate consolidated obligations indexed to LIBOR, the U.S. Prime rate, or the Federal funds rate and simultaneously execute interest rate swaps to hedge the basis risk of the variable interest rate debt. Interest rate swaps used to hedge the basis risk of variable interest rate debt do not qualify for hedge accounting. As a result, this type of hedge is treated as an economic hedge. This strategy of issuing consolidated obligations while simultaneously entering into derivatives enables the Bank to offer a wider range of attractively priced advances to its borrowers and may allow the Bank to reduce its funding costs.
  
Firm Commitments. Certain mortgage loan purchase commitments are considered derivatives. The Bank normally hedges these commitments by selling TBA MBS for forward settlement. A TBA represents a forward contract for the sale of MBS at a future agreed upon date for an established price. The mortgage purchase commitment and the TBA used in the firm commitment hedging strategy are considered economic hedges. When the mortgage loan purchase commitment derivative settles, the current market value of the commitment is included with the basis of the mortgage loan and amortized over the contractual life of the mortgage loan using the level-yield method. The Bank may also hedge a firm commitment for a forward-starting advance through the use of an interest-rate swap (fair value hedge). In this case, the interest rate swap will function as the hedging instrument for both the firm commitment and the subsequent advance and is treated as a fair value hedge.

For additional information on the Bank's derivative and hedging accounting policy, see "Note 1 — Summary of Significant Account Policies."


114


FINANCIAL STATEMENT EFFECT AND ADDITIONAL FINANCIAL INFORMATION

The notional amount of derivatives serves as a factor in determining periodic interest payments and cash flows received and paid. However, the notional amount of derivatives represents neither the actual amounts exchanged nor the overall exposure of the Bank to credit and market risk. The risks of derivatives 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.

The following table summarizes the Bank's notional amount and the fair value of derivative instruments, including the effect of netting adjustments and cash collateral. For purposes of this disclosure, the derivative values include the fair value of derivatives and the related accrued interest (dollars in millions):
 
 
December 31, 2016
 
December 31, 2015
 
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
 
Notional
Amount
 
Derivative
Assets
 
Derivative
 Liabilities
Derivatives designated as hedging instruments (fair value hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
51,896

 
$
183

 
$
688

 
$
37,526

 
$
134

 
$
635

Derivatives not designated as hedging instruments (economic hedges)
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
1,414

 
20

 
56

 
1,456

 
21

 
70

Interest rate swaptions
 

 

 

 
200

 

 

Forward settlement agreements (TBAs)
 
94

 
1

 

 
45

 

 

Mortgage delivery commitments
 
102

 

 

 
51

 

 

Total derivatives not designated as hedging instruments
 
1,610

 
21

 
56

 
1,752

 
21

 
70

Total derivatives before netting and collateral adjustments
 
$
53,506

 
204

 
744

 
$
39,278

 
155

 
705

Netting adjustments and cash collateral1
 
 
 
(13
)
 
(668
)
 
 
 
(61
)
 
(603
)
Total derivative assets and derivative liabilities
 
 
 
$
191

 
$
76

 
 
 
$
94

 
$
102


1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty. Cash collateral posted by the Bank (including accrued interest) was $658 million and $542 million at December 31, 2016 and 2015. At December 31, 2016 the Bank received $2 million of cash collateral from clearing agents and/or counterparties. At December 31, 2015, the Bank had not received any cash collateral from clearing agents and/or counterparties.

The following table summarizes the components of “Net gains (losses) on derivatives and hedging activities” as presented in the Statements of Income (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Derivatives designated as hedging instruments (fair value hedges)
 
 
 
 
 
Interest rate swaps
$
13

 
$
(7
)
 
$
(40
)
Derivatives not designated as hedging instruments (economic hedges)
 
 
 
 
 
Interest rate swaps
12

 
(10
)
 
(63
)
Interest rate caps

 

 

Forward settlement agreements (TBAs)
2

 
(1
)
 
(5
)
Mortgage delivery commitments
(2
)
 

 
5

Net interest settlements
(18
)
 
(20
)
 
(20
)
Total net gains (losses) related to derivatives not designated as hedging instruments
(6
)
 
(31
)
 
(83
)
Net gains (losses) on derivatives and hedging activities
$
7

 
$
(38
)
 
$
(123
)

115


The following tables summarize, by type of hedged item, the gains (losses) on derivatives and the related hedged items in fair value hedging relationships, the net fair value hedge ineffectiveness, and the effect of those derivatives on the Bank's net interest income (dollars in millions):
 
 
For the Year Ended December 31, 2016
Hedged Item Type
 
Gains (Losses) on
Derivatives
 
Gains (Losses) on
Hedged Items
 
Net Fair Value
Hedge
Ineffectiveness
 
Effect on
Net Interest
Income1
Available-for-sale investments
 
$
99

 
$
(80
)
 
$
19

 
$
(142
)
Advances2
 
147

 
(142
)
 
5

 
(140
)
Consolidated obligation bonds
 
(359
)
 
348

 
(11
)
 
76

Total
 
$
(113
)
 
$
126

 
$
13

 
$
(206
)
 
 
For the Year Ended December 31, 2015
Hedged Item Type
 
Gains (Losses) on
Derivatives
 
Gains (Losses) on
Hedged Items
 
Net Fair Value
Hedge
Ineffectiveness
 
Effect on
Net Interest
Income1
Available-for-sale investments
 
$
(51
)
 
$
41

 
$
(10
)
 
$
(154
)
Advances2
 
65

 
(65
)
 

 
(177
)
Consolidated obligation bonds
 
18

 
(15
)
 
3

 
110

Total
 
$
32

 
$
(39
)
 
$
(7
)
 
$
(221
)
 
 
For the Year Ended December 31, 2014
Hedged Item Type
 
Gains (Losses) on
Derivatives
 
Gains(Losses) on
Hedged Items
 
Net Fair Value
Hedge
Ineffectiveness
 
Effect on
Net Interest
Income1
Available-for-sale investments
 
$
(325
)
 
$
281

 
$
(44
)
 
$
(115
)
Advances2
 
45

 
(43
)
 
2

 
(163
)
Consolidated obligation bonds
 
66

 
(64
)
 
2

 
70

Total
 
$
(214
)
 
$
174

 
$
(40
)
 
$
(208
)

1
Represents the net interest settlements on derivatives in fair value hedge relationships and the amortization of the financing element of off-market derivatives, both of which are included in the interest income or interest expense line item of the respective hedged item type. The amortization for off-market derivatives totaled $28 million and $23 million for the years ended December 31, 2016 and 2015. In 2014, the Bank did not record any amortization for off-market derivatives through net interest income.

2
Includes net gains (losses) on fair value hedge firm commitments of forward starting advances. The Bank did not hedge firm commitments of forward starting advances in 2014.

MANAGING CREDIT RISK ON DERIVATIVES

The Bank is subject to credit risk due to the risk of nonperformance by counterparties to its derivative contracts. The Bank manages credit risk through credit analyses, collateral requirements, and adherence to the requirements set forth in the Bank's policies, U.S. Commodity Futures Trading Commission regulations, and Finance Agency regulations.

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. The Bank requires collateral agreements with collateral delivery thresholds on the majority of its uncleared derivatives.

Certain of the Bank's uncleared derivative instruments contain provisions that require the Bank to post additional collateral with its counterparties if there is deterioration in the Bank's credit rating. If the Bank's credit rating is lowered by a NRSRO, the Bank may be required to deliver additional collateral on uncleared derivative instruments in net liability positions. The aggregate fair value of all uncleared derivative instruments 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 $167 million, for which the Banks posted collateral with a fair value of $95 million in the normal course of business. If the Bank's credit rating had been lowered from its current rating to the next lower rating that would have triggered additional collateral to be delivered, the Bank would have been required to deliver an additional $43 million of collateral at fair value to its uncleared derivatives counterparties at December 31, 2016.

116


For cleared derivatives, the Clearinghouse is the Bank's counterparty. The Clearinghouse notifies the clearing agent of the required initial and variation margin and the clearing agent in turn notifies the Bank. The requirement that the Bank post initial and variation margin through the clearing agent, to the Clearinghouse, exposes the Bank to institutional credit risk if the clearing agent or the Clearinghouse fails to meet its obligations. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral for changes in the fair value of cleared derivatives is posted daily through a clearing agent.

The Bank has analyzed the enforceability of offsetting rights incorporated in its cleared derivative transactions and has determined that the exercise of those offsetting rights by a non-defaulting party under these transactions should be upheld under applicable law upon an event of default, including a bankruptcy, insolvency, or similar proceeding involving the Clearinghouse or the clearing agent, or both. Based on this analysis, the Bank presents a net derivative receivable or payable for all of its transactions through a particular clearing agent with a particular Clearinghouse. 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. The Bank was not required to post additional initial margin by its clearing agents, based on credit considerations, at December 31, 2016.

OFFSETTING OF DERIVATIVE ASSETS AND DERIVATIVE LIABILITIES

The Bank presents derivative instruments, related cash collateral, including 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. Additional information regarding these agreements is provided in “Note 1 — Summary of Significant Accounting Policies.”

The following table presents the fair value of derivative instruments meeting or not meeting the netting requirements, including the related collateral received from or pledged to counterparties (dollars in millions):
 
December 31, 2016
 
December 31, 2015
 
Derivative Assets
 
Derivative Liabilities
 
Derivative Assets
 
Derivative Liabilities
Derivative instruments meeting netting requirements
 
 
 
 
 
 
 
Gross recognized amount
 
 
 
 
 
 
 
Uncleared derivatives
$
97

 
$
263

 
$
110

 
$
406

Cleared derivatives
107

 
481

 
45

 
299

Total gross recognized amount
204

 
744

 
155

 
705

Gross amounts of netting adjustments and cash collateral
 
 
 
 
 
 
 
Uncleared derivatives
(95
)
 
(187
)
 
(109
)
 
(304
)
Cleared derivatives
82

 
(481
)
 
48

 
(299
)
Total gross amounts of netting adjustments and cash collateral
(13
)
 
(668
)
 
(61
)
 
(603
)
Net amounts after netting adjustments and cash collateral
 
 
 
 
 
 
 
Uncleared derivatives
2

 
76

 
1

 
102

Cleared derivatives
189

 

 
93

 

Total derivative assets and derivative liabilities
$
191

 
$
76

 
$
94

 
$
102




117


Note 12 — Deposits
The Bank offers demand and overnight deposits as well as short-term interest bearing deposits to members and qualifying non-members. Deposits classified as demand and overnight pay interest based on a daily interest rate. Short-term interest bearing deposits pay interest based on a fixed rate determined at the issuance of the deposit. Average interest rates paid on interest-bearing deposits were 0.08 percent, 0.03 percent, and 0.01 percent for the years ended December 31, 2016, 2015, and 2014.
The following table details the Bank's interest bearing and non-interest bearing deposits (dollars in millions):
 
December 31,
 
2016
 
2015
Interest-bearing
 
 
 
Demand and overnight
$
855

 
$
722

Term
166

 
202

Non-interest-bearing
 
 
 
Demand
92

 
186

Total
$
1,113

 
$
1,110


The aggregate amount of term deposits with a denomination of $250 thousand or more (Federal Deposit Insurance Corporation insured limit) was $165 million and $201 million at December 31, 2016 and 2015.

Note 13 — Consolidated Obligations

Consolidated obligations consist of bonds and discount notes. The FHLBanks issue consolidated obligations through the Office of Finance as their agent. Bonds are issued primarily to raise intermediate- and long-term funds for the Bank and are not subject to any statutory or regulatory limits on their maturity. Discount notes are issued primarily to raise short-term funds for the Bank and have original maturities of up to one year. Discount notes sell at or below their face amount and are redeemed at par value when they mature.

Although the Bank is primarily liable for the portion of consolidated obligations issued on its behalf, it is also jointly and severally liable with the other FHLBanks for the payment of principal and interest on all FHLBank System consolidated obligations. The Finance Agency, at its discretion, may require any FHLBank to make principal and/or interest payments due on any consolidated obligation, whether or not the primary obligor FHLBank has defaulted on the payment of that consolidated obligation. The Finance Agency has never exercised this discretionary authority. At December 31, 2016 and 2015, the total par value of outstanding consolidated obligations of the FHLBanks was $989.3 billion and $905.2 billion.

DISCOUNT NOTES

The following table summarizes the Bank's discount notes (dollars in millions):
 
December 31, 2016
 
December 31, 2015
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Par value
$
81,019

 
0.49
%
 
$
99,074

 
0.31
%
Discounts and concessions1
(72
)
 
 
 
(84
)
 
 
Total
$
80,947

 
 
 
$
98,990

 
 

1
Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation discount notes.



118


BONDS

The following table summarizes the Bank's bonds outstanding by contractual maturity (dollars in millions):
 
 
December 31, 2016
 
December 31, 2015
Year of Contractual Maturity
 
Amount
 
Weighted
Average
Interest
Rate
 
Amount
 
Weighted
Average
Interest
Rate
Due in one year or less
 
$
47,733

 
0.88
%
 
$
15,676

 
0.78
%
Due after one year through two years
 
13,135

 
0.94

 
3,808

 
2.91

Due after two years through three years
 
15,414

 
1.48

 
1,604

 
2.13

Due after three years through four years
 
2,288

 
3.28

 
2,780

 
2.93

Due after four years through five years
 
7,152

 
1.66

 
2,243

 
3.35

Thereafter
 
4,331

 
3.04

 
4,788

 
3.08

Total par value
 
90,053

 
1.22
%
 
30,899

 
1.85
%
Premiums
 
254

 
 
 
312

 
 
Discounts and concessions1
 
(79
)
 
 
 
(35
)
 
 
Fair value hedging adjustments
 
(330
)
 
 
 
32

 
 
Total
 
$
89,898

 
 
 
$
31,208

 
 

1    Concessions represent fees paid to dealers in connection with the issuance of certain consolidated obligation bonds.

The following table summarizes the Bank's bonds outstanding by call features (dollars in millions):
 
December 31,
 
2016
 
2015
Noncallable or nonputable
$
87,804

 
$
28,050

Callable
2,249

 
2,849

Total par value
$
90,053

 
$
30,899


The following table summarizes the Bank's bonds outstanding by year of contractual maturity or next call date (dollars in millions):
 
 
December 31,
Year of Contractual Maturity or Next Call Date
 
2016
 
2015
Due in one year or less
 
$
50,182

 
$
18,420

Due after one year through two years
 
12,942

 
3,863

Due after two years through three years
 
14,158

 
1,065

Due after three years through four years
 
2,138

 
1,440

Due after four years through five years
 
6,717

 
1,813

Thereafter
 
3,916

 
4,298

Total par value
 
$
90,053

 
$
30,899

Bonds are issued with fixed or variable rate payment terms that use a variety of indices for interest rate resets such as LIBOR. To meet the specific needs of certain investors, both fixed and variable rate bonds may also contain certain embedded features, which result in complex coupon payment terms and call features. When bonds are issued on the Bank's behalf, it may concurrently enter into a derivative agreement to effectively convert the fixed rate payment stream to variable or to offset the embedded features in the bond.

119


Beyond having fixed or variable rate payment terms, bonds may also have the following broad terms regarding either principal repayment or interest payments:
Indexed Principal Redemption Bonds (Index Amortizing Notes). These notes repay principal according to amortization schedules that are linked to the level of a certain index and have fixed rate coupon payment terms. Usually, as market interest rates rise (fall), the average life of the index amortizing notes extends (contracts); and
Optional Principal Redemption Bonds (Callable Bonds). These bonds may be redeemed by the Bank in whole or in part at its discretion on predetermined call dates according to the terms of the bond offerings.
With respect to interest payments, bonds may also have the following terms:
Step-Up Bonds. These bonds pay interest at increasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the Bank to call the bonds at its option on the step-up dates.
Step-Down Bonds. These bonds pay interest at decreasing fixed rates for specified intervals over the life of the bond. These bonds generally contain provisions enabling the Bank to call the bonds at its option on the step-down dates.

Extinguishment of Debt

During the years ended December 31, 2016 and 2015, the Bank did not extinguish any bonds. During the year ended December 31, 2014, the Bank extinguished certain bonds and recognized losses of $13 million in other income (loss).

Note 14 — Affordable Housing Program

The FHLBank Act requires each FHLBank to establish and fund an AHP, which 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 to moderate income households. Annually, the FHLBanks must set aside for the AHP the greater of 10 percent of their current year net earnings or their pro-rata share of an aggregate $100 million to be contributed in total by the FHLBanks. For purposes of the AHP assessment, net earnings is defined as net income before assessments, plus interest expense related to mandatorily redeemable capital stock. The exclusion of interest expense related to mandatorily redeemable capital stock is a regulatory interpretation of the Finance Agency. The Bank accrues the AHP assessment on a monthly basis and reduces the AHP liability as program funds are distributed.

If the Bank experienced a net loss during a quarter, but still had net earnings for the year, the Bank's obligation to the AHP would be calculated based on its year-to-date net earnings. If the Bank had net earnings in subsequent quarters, it would be required to contribute additional amounts to meet its calculated annual obligation. If the Bank experienced a net loss for a full year, it would have no obligation to the AHP for the year, because its required annual AHP contribution is limited to its annual net earnings. If the aggregate 10 percent AHP calculation previously discussed was less than $100 million for the FHLBanks, each FHLBank would be required to assure that the aggregate contribution of the FHLBanks equals $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, subject to the annual earnings limitation previously discussed. In addition to the required AHP assessment, the Bank's Board of Directors may elect to make voluntary contributions to the AHP.

There was no shortfall, as described above, in 2016, 2015, or 2014. If an FHLBank finds that its required contributions are contributing to its financial instability, it may apply to the Finance Agency for a temporary suspension of its contributions. The Bank did not make any such application in 2016, 2015, or 2014. Although the Bank did not experience a shortfall, its Board of Directors approved a voluntary contribution of $2 million for the year ended December 31, 2015. The voluntary contribution was included in "AHP voluntary contributions" in the Statements of Income. The voluntary contribution was awarded in 2016 together with the Bank's 10 percent required contribution.


120


The following table presents a rollforward of the Bank’s AHP liability (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Balance, beginning of year
$
62

 
$
41

 
$
38

Acquired from merger

 
17

 

Assessments
75

 
15

 
14

Voluntary contributions

 
2

 

Disbursements
(21
)
 
(13
)
 
(11
)
Balance, end of year
$
116

 
$
62

 
$
41


Note 15 — Capital

CAPITAL STOCK

The Bank's capital stock has a par value of $100 per share, and all shares are issued, redeemed, and repurchased only at the stated par value. The Bank generally issues a single class of capital stock (Class B capital stock). The Bank has two subclasses of capital stock: membership and activity-based. Each member must purchase and hold membership capital stock in an amount equal to 0.12 percent of its total assets as of the preceding December 31st, subject to a cap of $10 million and a floor of $10,000. Each member is also required to purchase activity-based capital stock equal to 4.00 percent of its advances and mortgage loans outstanding in the Bank's Statements of Condition. All capital stock issued is subject to a five year notice of redemption period.

The capital stock requirements established in the Bank's Capital Plan are designed so that the Bank can remain adequately capitalized as member activity changes. The Bank's Board of Directors may make adjustments to the capital stock requirements within ranges established in the Capital Plan.

EXCESS STOCK

Capital stock owned by members in excess of their investment requirement is deemed excess capital stock. Under its Capital Plan, the Bank, at its discretion and upon 15 days' written notice, may repurchase excess membership capital stock. The Bank, at its discretion, may also repurchase excess activity-based capital stock to the extent that (i) the excess capital stock balance exceeds an operational threshold set forth in the Capital Plan, which is currently set at zero, or (ii) a member submits a notice to redeem all or a portion of the excess activity-based capital stock. At December 31, 2016 and 2015, the Bank had no excess capital stock outstanding.

MANDATORILY REDEEMABLE CAPITAL STOCK

The Bank reclassifies capital stock subject to redemption from equity to a liability (mandatorily redeemable capital stock) at the time shares meet the definition of a mandatorily redeemable financial instrument. This occurs after a member provides written notice of intention to withdraw from membership, becomes ineligible for continuing membership, or attains non-member status by merger or consolidation, charter termination, or other involuntary termination from membership. Dividends on mandatorily redeemable capital stock are classified as interest expense in the Statements of Income.

As a result of the final rule on membership issued by the Finance Agency effective February 19, 2016, the eligibility requirements for FHLBank members were changed rendering captive insurance companies ineligible for FHLBank membership. Captive insurance company members that were admitted as members prior to September 12, 2014 (the date of the Finance Agency proposed this rule) will have their memberships terminated no later than February 19, 2021. Captive insurance company members that were admitted as members after September 12, 2014 will have their memberships terminated no later than February 19, 2017. On the effective date of the final rule, the Bank reclassified $723 million of capital stock, the total outstanding capital stock held by all of the captive insurance companies that were Bank members, to mandatorily redeemable capital stock. At December 31, 2016 and 2015, the Bank's mandatorily redeemable capital stock totaled $664 million and $103 million.

If a member cancels its written notice of redemption or notice of withdrawal, the Bank will reclassify mandatorily redeemable capital stock from a liability to equity. After the reclassification, dividends on the capital stock will no longer be classified as interest expense. The Bank recorded interest expense on mandatorily redeemable capital stock of $21 million and $3 million for the years ended December 31, 2016 and 2015. For 2014, interest expense on mandatorily redeemable capital stock was less than $1 million.

121


The following table summarizes changes in mandatorily redeemable capital stock (dollars in millions):
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Balance, beginning of period
$
103

 
$
24

 
$
9

Mandatorily redeemable capital stock assumed from merger

 
725

 

Capital stock reclassified to (from) mandatorily redeemable capital stock, net
742

 
(72
)
 
31

Repurchases/redemptions of mandatorily redeemable capital stock
(181
)
 
(574
)
 
(16
)
Balance, end of period
$
664

 
$
103

 
$
24


The following table summarizes the Bank's mandatorily redeemable capital stock by year of contractual redemption (dollars in millions):
 
 
December 31,
Year of Contractual Redemption1
 
2016
 
2015
Due in one year or less
 
$
4

 
$
7

Due after one year through two years
 
5

 
4

Due after two years through three years
 
4

 
65

Due after three years through four years
 

 
4

Due after four years through five years
 
1

 

Thereafter2
 
631

 

Past contractual redemption date due to outstanding activity with the Bank
 
19

 
23

Total
 
$
664

 
$
103


1
At the Bank's election, the mandatorily redeemable capital stock may be redeemed prior to the expiration of the five year redemption period that commences on the date of the notice of redemption, or in the case of captive insurance company members, on the date of the membership termination.

2
Represents mandatorily redeemable capital stock resulting from the Finance Agency rule previously discussed that makes captive insurance companies ineligible for FHLBank membership. The related mandatorily redeemable capital stock is not required to be redeemed until five years after the member's termination.

ADDITIONAL CAPITAL FROM MERGER

The Bank recognized the net assets acquired from the Seattle Bank by recording the par value of capital stock issued in the transaction as capital stock, with the remaining portion of net assets acquired reflected in a capital account captioned “Additional capital from merger.” The Bank treats this additional capital from merger as a component of total capital for regulatory capital purposes. Dividends on capital stock have been paid from this account since the merger date and the Bank intends to pay future dividends, when and if declared, from this account until the additional capital from merger balance is depleted. At December 31, 2016 and 2015, the Bank's additional capital from merger balance totaled $52 million and $194 million.

RESTRICTED RETAINED EARNINGS

The Bank entered into a JCE Agreement with all of the other FHLBanks in 2011. The JCE Agreement, as amended, is intended to enhance the capital position of the Bank over time. It requires the Bank to allocate 20 percent of its quarterly net income to a separate restricted retained earnings account until the balance of that account equals at least one percent of its average balance of outstanding consolidated obligations for the previous quarter. The restricted retained earnings are not available to pay dividends. At December 31, 2016 and 2015, the Bank's restricted retained earnings account totaled $231 million and $101 million.


122


ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes changes in AOCI (dollars in millions):
 
Net unrealized gains (losses) on AFS securities (Notes 5 and 7)
 
Pension and postretirement benefits (Note 16)
 
Total AOCI
Balance, December 31, 2013
$
88

 
$
(1
)
 
$
87

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
39

 

 
39

Reclassifications from other comprehensive income (loss) to net income
 
 
 
 
 
Net realized (gains) losses on sale of securities
(1
)
 

 
(1
)
Amortization - pension and postretirement

 
(2
)
 
(2
)
Net current period other comprehensive income (loss)
38

 
(2
)
 
36

Balance, December 31, 2014
126

 
(3
)
 
123

Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
(208
)
 

 
(208
)
Amortization - pension and postretirement

 
1

 
1

Net current period other comprehensive income (loss)
(208
)
 
1

 
(207
)
Balance, December 31, 2015
(82
)
 
(2
)
 
(84
)
Other comprehensive income (loss) before reclassifications
 
 
 
 
 
Net unrealized gains (losses) on AFS securities
68

 

 
68

Amortization - pension and postretirement

 
(2
)
 
(2
)
Net current period other comprehensive income (loss)
68

 
(2
)
 
66

Balance, December 31, 2016
$
(14
)
 
$
(4
)
 
$
(18
)

REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to three regulatory capital requirements:

Risk-based capital. The Bank must maintain at all times permanent capital greater than or equal to the sum of its credit, market, and operations risk capital requirements, all calculated in accordance with Finance Agency regulations. Only permanent capital, defined as Class B capital stock (including mandatorily redeemable capital stock), and retained earnings can satisfy this risk-based capital requirement.

Regulatory capital. The Bank is required to maintain a minimum four percent capital-to-asset ratio, which is defined as total regulatory capital divided by total assets. Total regulatory capital includes Class B stock (including mandatorily redeemable capital stock), additional capital from merger, and retained earnings. It does not include AOCI.

Leverage capital. The Bank is required to maintain a minimum five percent leverage ratio, which is defined as the sum of permanent capital weighted 1.5 times and nonpermanent capital weighted 1.0 times, divided by total assets. At December 31, 2016 and 2015, nonpermanent capital included additional capital from merger.

If the Bank's capital falls below the required levels, the Finance Agency has authority to take actions necessary to return it to levels that it deems to be consistent with safe and sound business operations.

123


The following table shows the Bank's compliance with the Finance Agency's regulatory capital requirements (dollars in millions) as of December 31, 2016 and 2015:
 
December 31, 2016
 
December 31, 2015
 
Required
 
Actual
 
Required
 
Actual
Regulatory capital requirements
 
 
 
 
 
 
 
Risk-based capital
$
1,046

 
$
8,031

 
$
951

 
$
5,618

Regulatory capital
$
7,224

 
$
8,083

 
$
5,495

 
$
5,812

Leverage capital
$
9,030

 
$
12,098

 
$
6,869

 
$
8,621

Capital-to-assets ratio
4.00
%
 
4.48
%
 
4.00
%
 
4.23
%
Leverage ratio
5.00
%
 
6.70
%
 
5.00
%
 
6.28
%

CAPITAL CLASSIFICATION DETERMINATION

The Bank is subject to the Finance Agency's regulation on FHLBank capital classification and critical capital levels (the Capital Rule). The Capital Rule, among other things, establishes criteria for four capital classifications (adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized) and corrective action requirements for FHLBanks that are classified in any classification other than adequately capitalized. An adequately capitalized FHLBank is one that has sufficient permanent and total capital to satisfy its risk-based and minimum capital requirements. The Bank satisfied these requirements at December 31, 2016 and was classified as adequately capitalized. If the Bank becomes classified into a capital classification other than adequately capitalized, it will be subject to the corrective action requirements for that capital classification in addition to being subject to prohibitions on declaring dividends and redeeming or repurchasing capital stock.

Note 16 — Pension and Postretirement Benefit Plans
QUALIFIED DEFINED BENEFIT MULTIEMPLOYER PLAN
The Bank participates in the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan), a tax-qualified defined benefit pension plan. The Pentegra DB Plan is treated as a multiemployer 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 multiemployer plan disclosures are not applicable to the Pentegra DB Plan. Under the Pentegra DB Plan, contributions made by a 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.

In August of 2016, the Bank's Board of Directors elected to freeze the Pentegra DB Plan effective January 1, 2017. After the freeze, participants no longer accrue new benefits under the Pentegra DB Plan.

As a result of the Merger with the Seattle Bank, the Bank has two defined benefit pension plans under the same multiemployer plan. Prior to the plan freeze, employees of the Des Moines Bank were eligible to participate in the Des Moines Pentegra Defined Benefit Pension Plan (Des Moines Bank DB Plan) if hired on or before December 31, 2010. Employees previously employed by the Seattle Bank were eligible to participate in the Seattle Pentegra Defined Benefit Pension Plan (Seattle Bank DB Plan) if they were hired before January 1, 2005.
The Pentegra DB Plan operates on a fiscal year from July 1 through June 30. The Pentegra DB 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 that require contributions to the plan.
The Pentegra DB 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 DB Plan accepts contributions for the prior plan year up to eight and a half months after the asset valuation date. 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 DB Plan is for the year ended June 30, 2015. The Bank's contributions for the plan years ended June 30, 2015 and June 30, 2014 were not more than five percent of the total contributions to the Pentegra DB Plan.

124



The following table summarizes the net pension cost and funded status of the Pentegra DB Plan (dollars in millions):
 
2016
 
2015
 
2014
Net pension cost1
$
4

 
$
14

 
$
2

Pentegra DB Plan's funded status as of July 1
104.12
%
 
106.89
%
 
111.44
%
Des Moines Bank DB Plan's funded status as of July 1
106.67
%
 
115.83
%
 
123.13
%
Seattle Bank DB Plan's funded status as of July 1
108.16
%
 
113.3
%
 
N/A


1
Represents the net pension cost charged to compensation and benefits expense in the Statements of Income for the years ended December 31, 2016, 2015, and 2014.

The increase in 2015 net pension cost was due to the acquisition of the Seattle Bank DB Plan as a result of the Merger. During 2015, the Bank made a $10 million discretionary contribution to increase this plan's funding status to a level similar to the Des Moines DB Plan.

The Pentegra DB Plan's funded status as of July 1, 2016 is preliminary and may further increase because plan participants are permitted to make contributions for the plan year ended June 30, 2016 through March 31, 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).

The Pentegra DB Plan's funded status as of July 1, 2015 includes all contributions made by plan participants through March 15, 2016. 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).
OTHER POSTRETIREMENT BENEFIT PLANS
In addition to the Pension Plan, we have one qualified defined contribution benefit plan, the Federal Home Loan Bank of Des Moines 401(k) Savings Plan. The Bank also offers the Benefit Equalization Plan (BEP), a nonqualified retirement plan which includes both a nonqualified defined contribution plan and a nonqualified defined benefit plan. In August of 2016, the Bank's Board of Directors elected to freeze the BEP defined benefit plan effective January 1, 2017. After the freeze, participants no longer accrue new benefits under the BEP defined benefit plan.

Note 17 — Fair Value

Fair value amounts are determined by the Bank using available market information and reflect the Bank's best judgment of appropriate valuation methods. The fair value hierarchy requires an entity to maximize the use of significant observable inputs and minimize the use of significant unobservable inputs when measuring fair value. The inputs are evaluated and an overall level for the fair value measurement is determined. This overall level is an indication of market observability of the fair value measurement for the asset or liability.

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 Bank 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: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) 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, implied volatilities, and credit spreads), and (iv) market-corroborated inputs.

Level 3 Inputs. Unobservable inputs for the asset or liability.

The Bank reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of the valuation inputs may result in a reclassification of certain assets or liabilities. These reclassifications are reported as transfers in/out as of the beginning of the quarter in which the changes occur. There were no material transfers during the years ended December 31, 2016 and 2015.

125


  
The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank's financial instruments at December 31, 2016 (dollars in millions). The fair values do not represent an estimate of the overall market value of the Bank as a going concern, which would take into account future business opportunities and the net profitability of assets and liabilities.
 
 
 
 
Fair Value
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 

Cash and due from banks
 
$
223

 
$
223

 
$

 
$

 
$

 
$
223

Interest-bearing deposits
 
2

 

 
2

 

 

 
2

Securities purchased under agreements to resell
 
5,925

 

 
5,925

 

 

 
5,925

Federal funds sold
 
5,095

 

 
5,095

 

 

 
5,095

Trading securities
 
2,553

 

 
2,553

 

 

 
2,553

Available-for-sale securities
 
22,969

 

 
22,969

 

 

 
22,969

Held-to-maturity securities
 
4,674

 

 
4,691

 
15

 

 
4,706

Advances
 
131,601

 

 
131,772

 

 

 
131,772

Mortgage loans held for portfolio, net
 
6,913

 

 
6,918

 
71

 

 
6,989

Loans to other FHLBanks
 
200

 

 
200

 

 

 
200

Accrued interest receivable
 
197

 

 
197

 

 

 
197

Derivative assets, net
 
191

 

 
204

 

 
(13
)
 
191

Other assets
 
24

 
24

 

 

 

 
24

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,113
)
 

 
(1,113
)
 

 

 
(1,113
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(80,947
)
 

 
(80,943
)
 

 

 
(80,943
)
Bonds
 
(89,898
)
 

 
(90,370
)
 

 

 
(90,370
)
Total consolidated obligations
 
(170,845
)
 

 
(171,313
)
 

 

 
(171,313
)
Mandatorily redeemable capital stock
 
(664
)
 
(664
)
 

 

 

 
(664
)
Accrued interest payable
 
(180
)
 

 
(180
)
 

 

 
(180
)
Derivative liabilities, net
 
(76
)
 

 
(744
)
 

 
668

 
(76
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.


126


The following table summarizes the carrying value, fair value, and fair value hierarchy of the Bank's financial instruments at December 31, 2015 (dollars in millions):
 
 
 
 
Fair Value
Financial Instruments
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
$
982

 
$
982

 
$

 
$

 
$

 
$
982

Interest-bearing deposits
 
2

 

 
2

 

 

 
2

Securities purchased under agreements to resell
 
6,775

 

 
6,775

 

 

 
6,775

Federal funds sold
 
2,270

 

 
2,270

 

 

 
2,270

Trading securities
 
4,047

 

 
4,047

 

 

 
4,047

Available-for-sale securities
 
20,988

 

 
20,988

 

 

 
20,988

Held-to-maturity securities
 
6,085

 

 
6,123

 
19

 

 
6,142

Advances
 
89,173

 

 
89,212

 

 

 
89,212

Mortgage loans held for portfolio, net
 
6,755

 

 
6,792

 
112

 

 
6,904

Accrued interest receivable
 
143

 

 
143

 

 

 
143

Derivative assets, net
 
94

 

 
155

 

 
(61
)
 
94

Other assets
 
19

 
19

 

 

 

 
19

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
(1,110
)
 

 
(1,110
)
 

 

 
(1,110
)
Consolidated obligations
 
 
 
 
 
 
 
 
 
 
 
 
Discount notes
 
(98,990
)
 

 
(98,984
)
 

 

 
(98,984
)
Bonds
 
(31,208
)
 

 
(31,610
)
 

 

 
(31,610
)
Total consolidated obligations
 
(130,198
)
 

 
(130,594
)
 

 

 
(130,594
)
Mandatorily redeemable capital stock
 
(103
)
 
(103
)
 

 

 

 
(103
)
Accrued interest payable
 
(119
)
 

 
(119
)
 

 

 
(119
)
Derivative liabilities, net
 
(102
)
 

 
(705
)
 

 
603

 
(102
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

SUMMARY OF VALUATION TECHNIQUES AND PRIMARY INPUTS
 
Cash and Due from Banks. The fair value equals the carrying value.

Interest-Bearing Deposits. For interest-bearing deposits with less than three months to maturity, the fair value approximates the carrying value. For interest-bearing deposits with more than three months to maturity, the fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable.

Securities Purchased under Agreements to Resell. For overnight and term securities purchased under agreements to resell with less than three months to maturity, the fair value approximates the carrying value. For term securities purchased under agreements to resell with more than three months to maturity, the fair value is determined by calculating the present value of the expected 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.

Federal Funds Sold. The fair value approximates the carrying value.


127


Investment Securities. The Bank's valuation technique incorporates prices from four designated third-party pricing vendors, when available. The pricing vendors generally use various proprietary models to price investment securities. The inputs to those models are derived from various sources including, but not limited to, benchmark securities and yields, reported trades, dealer estimates, issuer spreads, bids, offers, and other market-related data. Since many investment securities 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 securities. Each pricing vendor has an established process in place to challenge investment valuations, which facilitates resolution of questionable prices identified by the Bank. Annually, the Bank conducts reviews of the four pricing vendors to confirm and further augment its understanding of the vendors' pricing processes, methodologies, and control procedures for investment securities.

The Bank's valuation technique for estimating the fair values of its investment securities 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, and/or non-binding dealer estimates) 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 (or outliers) is (are) 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. In limited instances, when no prices are available from the four designated pricing services, the Bank obtains prices from dealers.

As of December 31, 2016 and 2015, four prices were received for the majority of the Bank's investment securities and the final prices for those securities were computed by averaging the prices received. Based on the Bank'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 Bank believes its final prices are representative of the prices that would have been received if the assets had been sold at the measurement date (i.e., exit prices) and further, that the fair value measurements are classified appropriately in the fair value hierarchy.

Advances. The fair value of advances is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest receivable. For advances elected under the fair value option, fair value includes accrued interest receivable. The discount rates used in these calculations are equivalent to the replacement advance rates for advances with similar terms. In accordance with Finance Agency regulations, advances generally require a prepayment fee sufficient to make the Bank financially indifferent to a borrower's decision to prepay the advances. Therefore, the fair value of advances assumes no prepayment risk.

The Bank uses the following inputs for measuring the fair value of advances:

Consolidated Obligation Curve (CO Curve). The Office of Finance constructs a market-observable curve referred to as the CO Curve. The CO Curve is constructed using the U.S. Treasury Curve as a base curve which is then adjusted by adding indicative spreads obtained largely from market-observable sources. These market indications are generally derived from pricing indications from dealers, historical pricing relationships, recent GSE trades, and secondary market activity. The Bank utilizes the CO Curve as its input to fair value for advances because it represents the Bank's cost of funds and is used to price advances.

Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

Spread assumption. Represents a spread adjustment to the CO Curve.

Mortgage Loans Held for Portfolio. The fair value of mortgage loans held for portfolio is estimated based on quoted market prices of similar mortgage loans available in the market, if available, or modeled prices. The modeled prices start with prices for new MBS issued by GSEs or similar new mortgage loans. The prices are adjusted for credit risk, servicing spreads, seasoning, liquidity, and cash flow remittances. The prices for new MBS or similar new mortgage loans are highly dependent upon the underlying prepayment assumptions priced in the secondary market. Changes in expected prepayment rates often have a material effect on the fair value estimates.

128


Impaired Mortgage Loans Held for Portfolio. The fair value of impaired mortgage loans held for portfolio is estimated by obtaining property values from an external pricing vendor. This vendor utilizes multiple pricing models that generally factor in market observable inputs, including actual sales transactions and home price indices. The Bank applies an adjustment to these values to capture certain limitations in the estimation process and takes into consideration estimated selling costs and expected PMI proceeds. In limited instances, the Bank may estimate the fair value of an impaired mortgage loan by calculating the present value of expected future cash flows discounted at the loan's effective interest rate.  

Loans to other FHLBanks. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. The fair value approximates the carrying value.

Accrued Interest Receivable and Payable. The fair value approximates the carrying value.

Derivative Assets and Liabilities. The fair value of derivatives is generally estimated using standard valuation techniques such as discounted cash flow analyses and comparisons to similar instruments. In limited instances, fair value estimates for interest-rate related derivatives may be obtained using an external pricing model that utilizes observable market data. The Bank is subject to credit risk in derivatives transactions due to the potential nonperformance of its derivatives counterparties. The use of cleared derivatives is intended to mitigate credit risk exposure because a central counterparty is substituted for individual counterparties and collateral is posted daily, through a clearing agent, for changes in the fair value of cleared derivatives. To mitigate credit risk on uncleared derivatives, the Bank enters into master netting agreements with its counterparties as well as collateral agreements that provide for the delivery of collateral at specified levels tied to those counterparties' credit ratings. The Bank has evaluated the potential for the fair value of its derivatives to be affected by counterparty credit risk and its own credit risk and has determined that no adjustments were significant to the overall fair value measurements.

The fair values of the Bank's derivative assets and derivative liabilities include accrued interest receivable/payable and 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. The fair values of derivatives are netted by clearing agent and/or counterparty if the netting requirements are met. If these netted amounts are positive, they are classified as an asset and, if negative, they are classified as a liability.

The Bank's discounted cash flow model utilizes market-observable inputs (inputs that are actively quoted and can be validated to external sources). The Bank uses the following inputs for measuring the fair value of interest-related derivatives:

Discount rate assumption. The Bank utilizes the Overnight-Index Swap (OIS) curve. 

Forward interest rate assumption. The Bank utilizes the LIBOR swap curve.

Volatility assumption. Market-based expectations of future interest rate volatility implied from current market prices for similar options.

For forward settlement agreements (TBAs), the Bank utilizes TBA securities prices that are determined by coupon class and expected term until settlement. For mortgage delivery commitments, the Bank utilizes TBA securities prices adjusted for factors such as credit risk and servicing spreads.
 
Other Assets. These represent grantor trust assets, which are carried at estimated fair value based on quoted market prices as of the last business day of the reporting period.

Deposits. For deposits with three months or less to maturity, the fair value approximates the carrying value. For deposits with more than three months to maturity, the fair value is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest payable. The discount rates used in these calculations are the cost of deposits with similar terms.


129


Consolidated Obligations. The fair value of consolidated obligations is determined by calculating the present value of the expected future cash flows and reducing the amount for accrued interest payable. For consolidated obligations elected under the fair value option, fair value includes accrued interest payable. The discount rates used in these calculations are for consolidated obligations with similar terms. The Bank uses the CO Curve and a volatility assumption for measuring the fair value of these consolidated obligations.

Mandatorily Redeemable Capital Stock. The fair value of capital stock subject to mandatory redemption is generally reported at par value. Fair value also includes an estimated dividend earned at the time of reclassification from equity to a liability (if applicable), until such amount is paid. Capital stock can only be acquired by members at par value and redeemed at par value. Capital stock is not publicly traded and no market mechanism exists for the exchange of stock outside the cooperative structure.

Subjectivity of Estimates. Estimates of the fair value of financial assets and liabilities using the methods previously described are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows, prepayment speed assumptions, expected interest rate volatility, possible distributions of future interest rates used to value options, and the selection of discount rates that appropriately reflect market and credit risks. The use of different assumptions could have a material effect on the fair value estimates.

FAIR VALUE ON A RECURRING BASIS

The following table summarizes, for each hierarchy level, the Bank's assets and liabilities that are measured at fair value in the Statements of Condition at December 31, 2016 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
 
$

 
$
216

 
$

 
$

 
$
216

GSE and Tennessee Valley Authority obligations
 

 
1,611

 

 

 
1,611

Other non-MBS
 

 
273

 

 

 
273

GSE multifamily MBS
 

 
453

 

 

 
453

Total trading securities
 

 
2,553

 

 

 
2,553

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
 

 
3,529

 

 

 
3,529

GSE and Tennessee Valley Authority obligations
 

 
1,351

 

 

 
1,351

State or local housing agency obligations
 

 
1,009

 

 

 
1,009

Other non-MBS
 

 
278

 

 

 
278

Other U.S. obligations single-family MBS
 

 
3,838

 

 

 
3,838

GSE single-family MBS
 

 
1,261



 

 
1,261

GSE multifamily MBS
 

 
11,703

 

 

 
11,703

Total available-for-sale securities
 

 
22,969

 

 

 
22,969

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 

 
204

 

 
(13
)
 
191

Other assets
 
24

 

 

 

 
24

Total recurring assets at fair value
 
$
24

 
$
25,726

 
$

 
$
(13
)
 
$
25,737

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 

 
(744
)
 

 
668

 
(76
)
Total recurring liabilities at fair value
 
$

 
$
(744
)
 
$

 
$
668

 
$
(76
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.



130


The following table summarizes, for each hierarchy level, the Bank's assets and liabilities that are measured at fair value in the Statements of Condition at December 31, 2015 (dollars in millions):
Recurring Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustment1
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
Trading securities
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
 
$

 
$
237

 
$

 
$

 
$
237

GSE and Tennessee Valley Authority obligations
 

 
3,077

 

 

 
3,077

Other non-MBS
 

 
276

 

 

 
276

GSE multifamily MBS
 

 
457

 

 

 
457

Total trading securities
 

 
4,047

 

 

 
4,047

Available-for-sale securities
 
 
 
 
 
 
 
 
 
 
Other U.S. obligations
 

 
3,985

 

 

 
3,985

GSE and Tennessee Valley Authority obligations
 

 
2,115

 

 

 
2,115

State or local housing agency obligations
 

 
1,047

 

 

 
1,047

Other non-MBS
 

 
278

 

 

 
278

Other U.S. obligations single-family MSB
 

 
2,270

 

 

 
2,270

GSE single-family MBS
 

 
1,605

 

 

 
1,605

GSE multifamily MBS
 

 
9,688

 

 

 
9,688

Total available-for-sale securities
 

 
20,988

 

 

 
20,988

Advances2
 
 
 
8

 
 
 
 
 
8

Derivative assets, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 

 
155

 

 
(61
)
 
94

Other assets
 
19

 

 

 

 
19

Total recurring assets at fair value
 
$
19

 
$
25,198

 
$

 
$
(61
)
 
$
25,156

Liabilities
 
 
 
 
 
 
 
 
 
 
Bonds2
 

 
(15
)
 

 

 
(15
)
Derivative liabilities, net
 
 
 
 
 
 
 
 
 
 
Interest-rate related
 

 
(705
)
 

 
603

 
(102
)
Total recurring liabilities at fair value
 
$

 
$
(720
)
 
$

 
$
603

 
$
(117
)

1
Amounts represent the application of the netting requirements that allow the Bank to net settle positive and negative positions and also cash collateral and the related accrued interest held or placed with the same clearing agent and/or counterparty.

2
Represents financial instruments recorded under the fair value option.


FAIR VALUE ON A NON-RECURRING BASIS

The Bank measures certain impaired mortgage loans held for portfolio at level 3 fair value on a non-recurring basis. These assets are subject to fair value adjustments in certain circumstances.The Bank estimates fair value of these assets based primarily on a broker price opinion or property values from an external pricing vendor. The Bank applies a haircut on these values which can range between 10 and 20 percent, to capture certain limitations in the estimation process and takes into consideration estimated selling costs of 10 percent and expected PMI proceeds. At December 31, 2016 and 2015, impaired mortgage loans held for portfolio recorded at fair value as a result of a non-recurring change in fair value were $15 million and $25 million. These fair values were as of the date the fair value adjustment was recorded during the years ended December 31, 2016 and 2015.






131


Note 18 — Commitments and Contingencies

Joint and Several Liability. The FHLBanks have joint and several liability for all consolidated obligations issued. Accordingly, if an FHLBank were unable to repay any consolidated obligation for which it is the primary obligor, each of the other FHLBanks could be called upon by the Finance Agency to repay all or part of such obligations. No FHLBank has ever been asked or required to repay the principal or interest on any consolidated obligation on behalf of another FHLBank. At December 31, 2016 and 2015, the total par value of outstanding consolidated obligations issued on behalf of other FHLBanks for which the Bank is jointly and severally liable was approximately $818.2 billion and $775.2 billion.

The following table summarizes additional off-balance sheet commitments for the Bank (dollars in millions):
 
December 31, 2016
 
December 31, 2015
 
Expire
within one year
 
Expire
after one year
 
Total
 
Total
Standby letters of credit
$
7,130

 
$
151

 
$
7,281

 
$
5,482

Standby bond purchase agreements
135

 
323

 
458

 
560

Commitments to purchase mortgage loans
102

 

 
102

 
51

Commitments to issue discount notes

 

 

 
2,500

Commitments to fund advances
245

 
35

 
280

 
145

Other commitments

 

 

 
87


Standby Letters of Credit. A standby letter of credit is a financing arrangement between the Bank and a member. Standby letters of credit are executed with members for a fee. If the Bank is required to make payment for a beneficiary's draw, the payment is withdrawn from the member's demand account. Any resulting overdraft is converted into a collateralized advance to the member. The original terms of standby letters of credit range from less than one month to 13 years, currently no later than 2025. Unearned fees for standby letters of credit are recorded in “Other liabilities” in the Statements of Condition and amounted to $3 million and $2 million at December 31, 2016 and 2015.

The Bank monitors the creditworthiness of its standby letters of credit based on an evaluation of its borrowers. The Bank has established parameters for the measurement, review, classification, and monitoring of credit risk related to these standby letters of credit. Based on management's credit analyses and collateral requirements, the Bank does not deem it necessary to have any provision for credit losses on these standby letters of credit. All standby letters of credit are fully collateralized at the time of issuance.

Standby Bond Purchase Agreements. The Bank has entered into standby bond purchase agreements with state housing associates within its district whereby, for a fee, it agrees to serve as a standby liquidity provider if required, to purchase and hold the housing associate's bonds until the designated marketing agent can find a suitable investor or the housing associate repurchases the bonds according to a schedule established by the agreement. Each standby bond purchase agreement includes the provisions under which the Bank would be required to purchase the bonds. At December 31, 2016, the Bank had standby bond purchase agreements with five housing associates. The standby bond purchase commitments entered into by the Bank have original expiration periods of up to seven years, currently no later than 2024. During the years ended December 31, 2016, 2015, and 2014, the Bank was not required to purchase any bonds under these agreements. For each of the years ended December 31, 2016, 2015, and 2014, the Bank received fees for the guarantees totaling $2 million.

Commitments to Purchase Mortgage Loans. The Bank enters into commitments that unconditionally obligate it to purchase mortgage loans from its members. Commitments are generally for periods not to exceed 45 days. These commitments are considered derivatives and their estimated fair value at December 31, 2016 and 2015 is reported in “Note 11 — Derivatives and Hedging Activities” as mortgage delivery commitments.

Commitments to Issue Discount Notes. At December 31, 2016, the Bank had no commitments to issue consolidated obligation discount notes. At December 31, 2015, the Bank had commitments to issue $2.5 billion of consolidated obligation discount notes.

Commitments to Fund Advances. The Bank enters into commitments that legally bind it to fund additional advances up to 24 months in the future. At December 31, 2016 and 2015, the Bank had commitments to fund advances of $280 million and $145 million.


132


Lease Commitments. The Bank charged to operating expenses net rental costs of $2 million, $4 million, and $1 million for the years ended December 31, 2016, 2015, and 2014. Total future minimum lease payments for premises and equipment were $12 million at December 31, 2016. Lease agreements for Bank premises generally provide for increases in the basic rentals resulting from the increases in property taxes and maintenance expenses. These increases are not expected to have a material effect on the Bank.

Other Commitments. On December 30, 2013, the Bank entered into an agreement with the Iowa Finance Authority (IFA) to purchase up to $100 million of taxable multi-family mortgage revenue bonds. As of December 31, 2015, the Bank had a commitment to purchase $87 million of bonds under the IFA agreement. As of December 31, 2016, the Bank did not have a commitment to purchase bonds as the IFA agreement expired on June 30, 2016.
The Bank has an FLA memorandum account which is used to track the Bank's potential loss exposure under each MPF master commitment prior to the PFI's credit enhancement obligation. For absorbing certain losses in excess of the FLA, PFIs are paid a credit enhancement fee, a portion of which may be performance-based. To the extent the Bank experiences losses under the FLA, it may be able to recapture performance-based credit enhancement fees paid to the PFI to offset these losses. The FLA balance for all MPF master commitments with a PFI credit enhancement obligation was $99 million and $93 million at December 31, 2016 and 2015. For additional information related to the FLA commitment, refer to "Note 10 — Allowance for Credit Losses.”
Legal Proceedings. As a result of the Merger, the Bank is currently involved in a number of legal proceedings initiated by the Seattle Bank against various entities relating to its purchases and subsequent impairment of certain private-label MBS. Although the Seattle Bank sold all private-label MBS during the first quarter of 2015, the Bank continues to pursue these proceedings. Other than the private-label MBS litigation, the Bank does not believe any legal proceedings to which it is a party could have a material impact on its financial condition, results of operations, or cash flows.
Litigation settlement gains are considered realized and recorded when the Bank receives cash or assets that are readily convertible to known amounts of cash or claims to cash. In addition, litigation settlement gains are considered realizable and recorded when the Bank enters into a signed agreement that is not subject to appeal, where the counterparty has the ability to pay, and the amount to be received can be reasonably estimated. Prior to being realized or realizable, the Bank considers potential litigation settlement gains to be gain contingencies, and therefore they are not recorded in the Statements of Income.
The Bank records legal expenses related to litigation settlements as incurred in other expense in the Statements of Income with the exception of certain legal expenses related to litigation settlement awards that are contingent based fees for the attorneys representing the Bank. The Bank incurs and recognizes these contingent based legal fees only when litigation settlement awards are realized, at which time these fees are netted against the gains recognized on the litigation settlement.  During the year ended December 31, 2016, the Bank recognized $376 million in net gains on litigation settlements through other income (loss) due to the settlement of certain private-label MBS claims. During the year ended December 31, 2015, the Bank recognized $14 million in net gains on litigation settlements.

Note 19 — Activities with Stockholders

The Bank is a cooperative whose current members own nearly all of the outstanding capital stock of the Bank. Former members own the remaining capital stock, included in mandatorily redeemable capital stock, to support business transactions still carried on the Bank's Statements of Condition. All stockholders, including current and former members, may receive dividends on their capital stock investment to the extent declared by the Bank's Board of Directors.

TRANSACTIONS WITH DIRECTOR'S FINANCIAL INSTITUTIONS

In the normal course of business, the Bank extends credit to its members whose directors and officers serve as Bank directors (Directors' Financial Institutions). Finance Agency regulations require that transactions with Directors' Financial Institutions be made on the same terms and conditions as those with any other member.


133


The following table summarizes the Bank's outstanding transactions with Directors' Financial Institutions (dollars in millions):
 
 
December 31, 2016
 
December 31, 2015
 
 
Amount
 
% of Total
 
Amount
 
% of Total
Advances
 
$
2,497

 
2
 
$
1,606

 
2
Mortgage loans
 
186

 
3
 
151

 
2
Deposits
 
82

 
7
 
17

 
2
Capital stock
 
157

 
2
 
120

 
2

BUSINESS CONCENTRATIONS

The Bank considers itself to have business concentrations with stockholders owning 10 percent or more of its total capital stock outstanding (including mandatorily redeemable capital stock). At December 31, 2016, the Bank had the following business concentrations with stockholders (dollars in millions):
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans
 
Income2
Wells Fargo Bank, N.A.
 
$
3,093

 
47
 
$
77,075

 
$

 
$
429

Superior Guaranty Insurance Company3
 
28

 
1
 

 
683

 

Wells Fargo Bank Northwest N.A.3
 
2

 
 

 
38

 

Total
 
$
3,123

 
48
 
$
77,075

 
$
721

 
$
429


1
Pursuant to applicable Finance Agency regulations, the Bank's voting structure limits the voting rights of these stockholders and other members holding a significant amount of the Bank's capital stock.

2
Represents interest income earned on advances during the year ended December 31, 2016. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.

3
Superior Guaranty Insurance Company and Wells Fargo Bank Northwest, N.A. are affiliates of Wells Fargo Bank, N.A.

At December 31, 2015, the Bank had the following business concentrations with stockholders (dollars in millions):
 
 
Capital Stock
 
 
 
Mortgage
 
Interest
Stockholder
 
Amount
 
% of Total1
 
Advances
 
Loans
 
Income2
Wells Fargo Bank, N.A.
 
$
1,490

 
31
 
$
37,000

 
$

 
$
99

Superior Guaranty Insurance Company3
 
37

 
1
 

 
899

 

Wells Fargo Bank Northwest N.A.3
 
2

 
 

 
48

 

Total
 
$
1,529

 
32
 
$
37,000

 
$
947

 
$
99



1
Pursuant to applicable Finance Agency regulations, the Bank's voting structure limits the voting rights of these stockholders and other members holding a significant amount of the Bank's capital stock.

2
Represents interest income earned on advances during the year ended December 31, 2015. Interest income on mortgage loans is excluded from this table as this interest relates to the borrower, not to the stockholder.

3
Superior Guaranty Insurance Company and Wells Fargo Bank Northwest, N.A. are affiliates of Wells Fargo Bank, N.A.


134


Note 20 — Activities with Other FHLBanks

Overnight Funds. The Bank may lend or borrow unsecured overnight funds to or from other FHLBanks. All such transactions are at current market rates. The following table summarizes loan activity to other FHLBanks during the years ended December 31, 2016, 2015, and 2014 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Loans
 
Principal
Repayment
 
Ending
Balance
2016
 
 
 
 
 
 
 
 
Cincinnati
 
$

 
$
100

 
$
(100
)
 
$

San Francisco
 

 
200

 

 
200

 
 
$

 
$
300

 
$
(100
)
 
$
200

 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
Topeka
 
$

 
$
210

 
$
(210
)
 
$

 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
Chicago
 
$

 
$
10

 
$
(10
)
 
$

Topeka
 

 
10

 
(10
)
 

 
 
$

 
$
20

 
$
(20
)
 
$


The following table summarizes borrowing activity from other FHLBanks during the years ended December 31, 2016, 2015, and 2014 (dollars in millions):
Other FHLBank
 
Beginning
Balance
 
Borrowing
 
Principal
Payment
 
Ending
Balance
2016
 
 
 
 
 
 
 
 
Atlanta
 
$

 
$
300

 
$
(300
)
 
$

Boston
 

 
100

 
(100
)
 

Chicago
 

 
200

 
(200
)
 

Cincinnati
 

 
300

 
(300
)
 

Indianapolis
 

 
300

 
(300
)
 

New York
 

 
300

 
(300
)
 

San Francisco
 

 
500

 
(500
)
 

 
 
$

 
$
2,000

 
$
(2,000
)
 
$

 
 
 
 
 
 
 
 
 
2015
 
 
 
 
 
 
 
 
Dallas
 
$

 
$
200

 
$
(200
)
 
$

San Francisco
 

 
225

 
(225
)
 

 
 
$

 
$
425

 
$
(425
)
 
$

 
 
 
 
 
 
 
 
 
2014
 
 
 
 
 
 
 
 
Atlanta
 
$

 
$
70

 
$
(70
)
 
$

Chicago
 

 
150

 
(150
)
 

Dallas
 

 
60

 
(60
)
 

San Francisco
 

 
150

 
(150
)
 

 
 
$

 
$
430

 
$
(430
)
 
$


At December 31, 2016 and 2015, the interest income and expense related to these transactions was immaterial.

Note 21 — Subsequent Events

In 2017, the Bank entered into a settlement agreement with a certain defendant in the Bank's private-label MBS litigation for $21 million (after netting certain legal fees and expenses). The net settlement will be recorded as additional income in other income (loss) in the Bank's Statements of Income for the quarter ended March 31, 2017.

135


SUPPLEMENTARY FINANCIAL DATA (UNAUDITED)
Selected Quarterly Financial Information

The following table presents a summary of our Statements of Condition (dollars in millions):
 
2016
Statements of Condition
December 31,
 
September 30,
 
June 30,
 
March 31,
Cash
$
223

 
$
245

 
$
460

 
$
242

Investments1
41,218

 
42,851

 
44,143

 
45,666

Advances
131,601

 
125,828

 
116,294

 
101,157

Mortgage loans held for portfolio, net2
6,913

 
6,792

 
6,640

 
6,667

Total assets
180,605

 
176,074

 
167,860

 
154,056

Consolidated obligations
 
 
 
 
 
 
 
Discount notes
80,947

 
84,481

 
92,521

 
103,699

Bonds
89,898

 
82,454

 
66,599

 
42,459

Total consolidated obligations3
170,845

 
166,935

 
159,120

 
146,158

Mandatorily redeemable capital stock
664

 
675

 
698

 
732

Total liabilities
173,204

 
169,069

 
161,356

 
148,420

Capital stock — Class B putable
5,917

 
5,658

 
5,241

 
4,607

Additional capital from merger
52

 
92

 
128

 
163

Retained earnings
1,450

 
1,294

 
1,220

 
988

Accumulated other comprehensive income (loss)
(18
)
 
(39
)
 
(85
)
 
(122
)
Total capital
7,401

 
7,005

 
6,504

 
5,636


 
2015
Statements of Condition
December 31,
 
September 30,
 
June 30, Revised4
 
March 31,
Cash
$
982

 
$
765

 
$
483

 
$
342

Investments1
40,167

 
37,911

 
42,754

 
27,059

Advances
89,173

 
74,484

 
68,181

 
63,562

Mortgage loans held for portfolio, net
6,755

 
6,878

 
7,029

 
6,544

Total assets
137,374

 
120,360

 
118,758

 
97,732

Consolidated obligations

 
 
 
 
 
 
Discount notes
98,990

 
77,247

 
70,227

 
60,420

Bonds
31,208

 
36,488

 
41,974

 
32,031

Total consolidated obligations5
130,198

 
113,735

 
112,201

 
92,451

Mandatorily redeemable capital stock
103

 
106

 
119

 
24

Total liabilities
131,749

 
115,242

 
113,774

 
93,445

Capital stock — Class B putable
4,714

 
4,126

 
3,885

 
3,428

Additional capital from merger
194

 
221

 
246

 

Retained earnings
801

 
770

 
731

 
729

Accumulated other comprehensive income (loss)
(84
)
 
1

 
122

 
130

Total capital
5,625

 
5,118

 
4,984

 
4,287


1
Investments include interest-bearing deposits, securities purchased under agreements to resell, Federal funds sold, trading securities, AFS securities, and HTM securities.

2
Includes as allowance for credit losses of $2 million at December 31, 2016 and September 30, 2016, and $1 million at June 30, 2016 and March 31, 2016.

3
The total par value of outstanding consolidated obligations of the FHLBanks was $989.3 billion, $967.7 billion, $963.8 billion, and $896.8 billion at December 31, 2016, September 30, 2016, June 30, 2016, and March 31, 2016.

4
Certain June 30, 2015 balances were revised for immaterial errors related to hedge ineffectiveness calculations on swapped AFS investments. These errors were corrected in the September 30, 2015 financial statements and footnotes.

5
The total par value of outstanding consolidated obligations of the FHLBanks was $905.2 billion, $856.5 billion, $852.8 billion, and $812.2 billion at December 31, 2015, September 30, 2015, June 30, 2015, and March 31, 2015.



136


The following tables present a summary of our Statements of Income (dollars in millions):
 
For the Three Months Ended
 
2016
Statements of Income
December 31,
 
September 30,
 
June 30,
 
March 31,
Net interest income
$
135

 
$
117

 
$
94

 
$
103

Provision (reversal) for credit losses on mortgage loans
1

 
1

 
1

 

Other income (loss)1, 2
77

 
(5
)
 
192

 
132

Other expense3
36

 
28

 
27

 
27

AHP assessments
19

 
9

 
26

 
21

Net income
156

 
74

 
232

 
187

 
For the Three Months Ended
 
2015
Statements of Income
December 31,
 
September 30,
 
June 30, Revised4
 
March 31,
Net interest income
$
81

 
$
88

 
$
80

 
$
68

Provision (reversal) for credit losses on mortgage loans

 
1

 
1

 

Other income (loss)1
(15
)
 
(12
)
 
6

 
(9
)
Other expense3
29

 
32

 
56

 
20

AHP assessments
4

 
4

 
3

 
4

AHP voluntary contributions
2

 

 

 

Net income
31

 
39

 
26

 
35


1
Other income (loss) includes, among other things, net gains (losses) on investment securities, net gains (losses) on derivatives and hedging activities, net gains (losses) on the extinguishment of debt, and gains on litigation settlements, net.

2
During the three months ended March 31, June 30, and December 31, 2016, other income (loss) was primarily driven by net gains on litigation settlements. The Bank did not record any litigation settlements during the three months ended September 30, 2016. In addition, during the three months ended December 31, 2016, other income (loss) was impacted by net gains on derivatives and hedging activities. The Bank recorded net losses on derivatives and hedging activities during the three months ended March 31, June 30, and September 30, 2016.

3
Other expense includes, among other things, compensation and benefits, professional fees, contractual services, merger related expenses, and gains and losses on REO.

4
Certain amounts for the three months ended June 30, 2015 were revised for immaterial errors related to hedge ineffectiveness calculations on swapped AFS investments. These errors were corrected in the September 30, 2015 financial statements and footnotes.

137


Investment Portfolio Analysis
The following table summarizes the carrying value of our investment portfolio (dollars in millions):
 
December 31,
 
2016
 
2015
 
2014
Trading securities
 
 
 
 
 
Other U.S. obligations1
$
216

 
$
237

 
$
256

GSE and Tennessee Valley Authority obligations
1,611

 
3,077

 
1,532

Other2
273

 
276

 
280

Mortgage-backed securities
 
 
 
 
 
GSE multifamily
453

 
457

 
462

Total trading securities
2,553

 
4,047

 
2,530

Available-for-sale securities
 
 
 
 
 
Other U.S. obligations1
3,529

 
3,985

 
164

GSE and Tennessee Valley Authority obligations
1,351

 
2,115

 
1,012

State or local housing agency obligations
1,009

 
1,047

 
36

Other2
278

 
278

 
184

Mortgage-backed securities
 
 
 
 
 
Other U.S. obligations single-family1
3,838

 
2,270

 
1,976

GSE single-family
1,261

 
1,605

 
2,009

GSE multifamily
11,703

 
9,688

 
7,003

Total available-for-sale securities
22,969

 
20,988

 
12,384

Held-to-maturity securities
 
 
 
 
 
GSE obligations and Tennessee Valley Authority obligations
397

 
401

 
305

State or local housing agency obligations
688

 
956

 
60

Mortgage-backed securities
 
 
 
 
 
Other U.S. obligations single-family1
26

 
47

 
3

Other U.S. obligations commercial1
4

 
6

 
2

GSE single-family
3,543

 
4,655

 
817

Private-label residential
16

 
20

 
25

Total held-to-maturity securities
4,674

 
6,085

 
1,212

Interest-bearing deposits
2

 
2

 
2

Securities purchased under agreements to resell
5,925

 
6,775

 
5,091

Federal funds sold
5,095

 
2,270

 
1,860

Total investments
$
41,218

 
$
40,167

 
$
23,079



1
Represents investment securities backed by the full faith and credit of the U.S. Government.

2
Represents Private Export Funding Corporation and/or taxable municipal bonds.








138


The following table summarizes the carrying value and yield characteristics of our investment portfolio on the basis of remaining terms to contractual maturity at December 31, 2016 (dollars in millions):
 
Due in one year or less
 
Due after one year through five years
 
Due after five years through 10 years
 
Due after 10 years
 
Total
Trading securities
 
 
 
 
 
 
 
 
 
Other U.S. obligations
$

 
$

 
$
111

 
$
105

 
$
216

GSE and Tennessee Valley Authority obligations
1,351

 
200

 

 
60

 
1,611

Other1

 
74

 
93

 
106

 
273

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
GSE multifamily

 

 
424

 
29

 
453

Total trading securities
1,351

 
274

 
628

 
300

 
2,553

Yield on trading securities
0.80
%
 
1.70
%
 
2.55
%
 
4.58
%
 
 
Available-for-sale securities
 
 
 
 
 
 
 
 
 
Other U.S. obligations

 
119

 
3,389

 
21

 
3,529

GSE and Tennessee Valley Authority obligations
131

 
279

 
577

 
364

 
1,351

State or local housing agency obligations
3

 
97

 
296

 
613

 
1,009

Other1

 

 
186

 
92

 
278

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family

 

 

 
3,838

 
3,838

GSE single-family

 

 

 
1,261

 
1,261

GSE multifamily

 
563

 
11,107

 
33

 
11,703

Total available-for-sale securities
134

 
1,058

 
15,555

 
6,222

 
22,969

Yield on available-for-sale securities
3.36
%
 
3.18
%
 
1.88
%
 
1.41
%
 
 
Held-to-maturity securities
 
 
 
 
 
 
 
 
 
GSE and Tennessee Valley Authority obligations

 

 
268

 
129

 
397

State or local housing agency obligations
10

 
62

 
100

 
516

 
688

Mortgage-backed securities
 
 
 
 
 
 
 
 
 
Other U.S. obligations single-family

 

 

 
26

 
26

Other U.S. obligations commercial

 
3

 
1

 

 
4

GSE single-family

 
50

 
103

 
3,390

 
3,543

Private-label residential

 

 

 
16

 
16

Total held-to-maturity securities
10

 
115

 
472

 
4,077

 
4,674

Yield on held-to-maturity securities
1.00
%
 
1.00
%
 
3.22
%
 
1.70
%
 
 
Total investment securities
1,495

 
1,447

 
16,655

 
10,599

 
30,196

Interest-bearing deposits
2

 

 

 

 
2

Securities purchased under agreements to resell
5,925

 

 

 

 
5,925

Federal funds sold
5,095

 

 

 

 
5,095

Total investments
$
12,517

 
$
1,447

 
$
16,655

 
$
10,599

 
$
41,218



1
Private Export Funding Corporation and/or taxable municipal bonds.

At December 31, 2016, we had investments with a carrying value greater than 10 percent of our total capital with the following issuers (excluding GSEs and U.S. Government agencies) (dollars in millions):
 
Carrying
Value
 
Fair
Value
Cantor Fitzgerald & Co.
$
1,500

 
$
1,500

Daiwa Capital Markets America Inc.
1,750

 
1,750

Total
$
3,250

 
$
3,250



139


Loan Portfolio Analysis
The following table presents supplemental information on our mortgage loans held for portfolio (dollars in millions):
 
December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Past due 90 days or more and still accruing interest1
$
14

 
$
14

 
$
11

 
$
10

 
$
5

Non-accrual mortgage loans2
$
60

 
$
78

 
$
59

 
$
71

 
$
89

Allowance for credit losses
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
1

 
$
5

 
$
8

 
$
16

 
$
19

Charge-offs3
(2
)
 
(6
)
 
(1
)
 
(2
)
 
(3
)
Provision (reversal) for credit losses on mortgage loans
3

 
2

 
(2
)
 
(6
)
 

Balance, end of year
$
2

 
$
1

 
$
5

 
$
8

 
$
16

Non-accrual mortgage loans
 
 
 
 
 
 
 
 
 
Gross interest income that would have been recorded based on original terms during the year
$
3

 
 
 
 
 
 
 
 
Interest actually recognized into net income during the year

 
 
 
 
 
 
 
 
Interest shortfall
$
3

 

 
 
 
 
 
 

1
Represents government-insured mortgage loans that are 90 days or more past due.

2
Represents conventional mortgage loans that are 90 days or more past due and troubled debt restructurings.

3
The ratio of net charge-offs to average mortgage loans outstanding was one percent or less for the years ended December 31, 2016, 2015, 2014, 2013 and 2012.

Short-Term Borrowings
Borrowings with original maturities of one year or less are classified as short-term. The following table summarizes our short-term borrowings for the years ended December 31, 2016, 2015, and 2014 (dollars in millions):
 
Discount Notes1
 
Bonds2
 
2016
 
2015
 
2014
 
2016
 
2015
 
2014
Outstanding at end of the period
$
80,947

 
$
98,990

 
$
57,773

 
$
35,361

 
$
10,059

 
$
4,954

Weighted-average rate at end of the period
0.49
%
 
0.31
%
 
0.09
%
 
0.65
%
 
0.36
%
 
0.18
%
Daily-average outstanding for the period
$
93,282

 
$
70,818

 
$
53,136

 
$
28,344

 
$
11,078

 
$
6,255

Weighted-average rate for the period
0.44
%
 
0.15
%
 
0.08
%
 
0.55
%
 
0.27
%
 
0.13
%
Highest outstanding at any month-end
$
110,175

 
$
98,994

 
$
64,422

 
$
38,018

 
$
19,300

 
$
14,700


1 Values are derived using the carrying value of discount notes.

2 Values are derived using the carrying value of bonds.

140


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management is responsible for establishing and maintaining disclosure controls and procedures designed to ensure that information required to be disclosed in reports we file or submit under the Securities Exchange Act of 1934, as amended (the Exchange Act) is (i) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms; and (ii) accumulated and communicated to our management, including our President and chief executive officer (CEO), and chief financial officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
Management, with the participation of our President and CEO, and CFO, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the annual period covered by this report. Based on that evaluation, and management's identification of the material weakness described below, our President and CEO, and CFO have concluded that our disclosure controls and procedures were not effective as of December 31, 2016.
Report of Management on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our 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 GAAP. Our 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 our assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are made only in accordance with authorizations of management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our 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.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016, based on the framework established in "Internal Control - Integrated Framework" (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.
As of December 31, 2016, management identified the following material weakness in our internal control over financial reporting. We did not maintain effective controls over spreadsheets used in our financial close and reporting process. Specifically, we identified multiple failures with the operating effectiveness of controls over key spreadsheets used in our financial close and reporting process. There were no material misstatements identified in our annual and interim financial statements as a result of this material weakness. However, this material weakness could result in misstatements of various account balances or disclosures given its pervasive nature that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Because of this material weakness, management concluded that we did not maintain effective internal control over financial reporting as of December 31, 2016.
Additionally, the effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. Refer to "Item 8. Financial Statements and Supplementary Data - Report of Independent Register Public Accounting Firm" for their audit report.


141


Previously Identified Material Weaknesses
As disclosed in our 2015 Annual Report on Form 10-K, our management concluded that we had material weaknesses in our internal control over financial reporting as a result of ineffective controls over (1) responding to changes within our business environment during 2015, including certain implications of the Merger, based on the criteria established in the COSO framework, Principle 9 (COSO 9), (2) the effectiveness of logical access controls to the Bank’s information technology systems, and (3) the design and operating effectiveness of controls over key spreadsheets.
Remediation of Previously Reported Material Weaknesses in Internal Control over Financial Reporting
Management is committed to improving our overall system of internal control over financial reporting and has taken steps to remediate the identified material weaknesses. The following briefly describes certain actions we have taken to fully remediate two of the material weaknesses identified as of December 31, 2015:

1.
To remediate our COSO 9 material weakness, we made changes to the governance of our internal control infrastructure and processes to facilitate timely, recurring evaluations of internal controls over financial reporting for known and/or expected changes in our business environment during each calendar year. This process included a complete review and assessment of our system of internal control over financial reporting. This assessment resulted in the implementation of enhancements to certain internal controls over financial reporting. The Bank also added staff to lead and support this business function. After completing our testing of the design and operating effectiveness of these controls, our management concluded that we have remediated the material weakness.

2.
To remediate the logical access controls material weakness, management designed and implemented enhancements to access controls over key IT applications used in the financial reporting and close process. This included strengthening existing controls, adding controls, and adding staff to the information technology department to support the effective execution of these controls. After completing our testing of the design and operating effectiveness of these controls, our management concluded that we have remediated the material weakness.
Plan for Remediation of Material Weakness in Internal Control over Financial Reporting
We continue to take steps to remediate the remaining material weakness related to spreadsheet controls. These steps include streamlining certain spreadsheets, providing additional training to our personnel, and beginning to reduce our reliance on spreadsheets.These actions are subject to ongoing review by our senior management, as well as oversight by the audit committee of our board of directors. We have placed a high priority on the remediation process and are committed to allocating the necessary resources to the remediation efforts.
During 2016, we designed and implemented enhanced controls surrounding spreadsheets used in the financial reporting and close process. Such controls are designed to provide reasonable assurance to management as to the completeness and accuracy of inputs, assumptions, and formulas included in certain spreadsheets used in the preparation and analysis of accounting and financial information. After completing our testing of these controls, our management concluded that while the enhanced controls are expected to remediate the material weakness, the enhanced controls have not yet operated consistently for a period sufficient to conclude the material weakness is remediated as of December 31, 2016.
Changes in Internal Control over Financial Reporting
Other than the actions described above, there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
  



142


ITEM 9B. OTHER INFORMATION

PricewaterhouseCoopers LLP (PwC) serves as the independent registered public accounting firm for our Bank. Rule 201(c)(1)(ii)(A) of 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 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.”
PwC has advised our Bank as of December 31, 2016 and December 31, 2015 that it, along with certain PwC staff, including members of the audit engagement team, have a borrowing relationship with a Bank member (referred below as the “lender”) who owns more than 10 percent of our capital stock, which under the Loan Rule, could call into question PwC’s independence with respect to the Bank. We are 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 our Bank.
PwC advised our Audit Committee 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 have 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 borrowings are in good standing and the lender does not have the right to take action against PwC, as borrower, in connection with the financings;

the debt balances outstanding are immaterial to PwC and to the 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, our Audit Committee assessed PwC’s ability to perform an objective and impartial audit, and continue to conclude that PwC has maintained objectivity and impartiality in connection with its audit of our financial statements. The conclusion is based on the unique nature and status of our Bank, and due to our ownership structure and limited voting rights of our members. In addition to the above listed considerations, the Audit Committee considered the following:
as of December 31, 2016 and December 31, 2015, no officer or director of the lender served on the Board of Directors of the Bank; and

the lender is subject to the same terms and conditions for conducting business with the Bank as any other member.

Based on the Audit Committee’s 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.


143


PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The Board of Directors is responsible for monitoring our compliance with Finance Agency regulations and establishing policies and programs that carry out our mission. The Board of Directors adopts, reviews, and oversees the implementation of policies governing our advance, mortgage loan, investment, and funding activities. Additionally, the Board of Directors adopts, reviews, and oversees the implementation of policies that manage our exposure to market, liquidity, credit, operational, and strategic risks, as well as capital adequacy.
Our Board is comprised of Member Directors elected by our member institutions on a state-by-state basis and Independent Directors elected by all of our members. Our Board currently includes fifteen Member Directors and ten Independent Directors, four of whom serve as public interest directors. Under the FHLBank Act, the only matters submitted to shareholders for votes are (i) the annual election of our Directors and (ii) any proposed agreement to merge with one or more FHLBanks. Finance Agency regulations require all of our Directors to be elected by our members. No member of management may serve as a director of an FHLBank.
Pursuant to the passage of the Housing Act, both Member and Independent Directors serve four-year terms. If any person has been elected to three consecutive full terms as a Member or Independent Director of our Board of Directors, the individual is not eligible for election to a Member or Independent Directorship for a term which begins earlier than two years after the expiration of the last expiring four-year term.
Member Directorships are allocated by the Finance Agency to the 13 states in our district and a member institution is eligible to participate in the election for the state in which it is located. Candidates for Member Directorships are not nominated by the Board. As provided for in the FHLBank Act, Member Directors are nominated by the members eligible to participate in the election in the relevant state. A member is entitled to cast, for each applicable Member Directorship, one vote for each share of capital stock that the member is required to hold as of the record date for voting, subject to a statutory limitation. Under this limitation, the total number of votes that each member may cast is limited to the average number of shares of our capital stock that were required to be held by all members in that state as of the record date for voting.
Member Directors are required, by statute and regulation, to meet certain eligibility requirements to serve as a director. To qualify as a Member Director an individual must (i) be an officer or director of a member institution in compliance with the minimum capital requirements established by its regulator and located in the state in which there is an open directorship and (ii) be a U.S. citizen. We are not permitted to establish additional qualifications to define eligibility criteria for Member Directors or nominees. Because of the structure of FHLBank Member Director nominations and elections, we may not know what factors our member institutions considered in selecting Member Director nominees or electing Member Directors.
Independent Directors are nominated by our Board of Directors after consultation with our Advisory Council, and then voted upon by all members within our 13 state district. For each Independent Directorship, a member is entitled to cast the same number of votes as it would for a Member Directorship.
In order to be eligible to serve as an Independent Director on our Board, an individual must (i) be a U.S. citizen and (ii) maintain a principal residence in a state in our district (or own or lease a residence in the district and be employed in the district). In addition, the individual may not be an officer of any FHLBank or a director, officer, or employee of any member institution or of any recipient of our advances. By regulation, we are required to have at least two public interest Independent Directors, each of whom must have more than four years of personal experience in representing consumer or community interests in banking services, credit needs, housing, or financial consumer protection. Each Independent Director, other than a public interest Independent Director, must have knowledge of, or experience in, financial management, auditing or accounting, risk management practices, derivatives, project development, organizational management, or the law.
On an annual basis, our Board of Directors performs an assessment that includes consideration of the directors’ backgrounds, expertise, qualifications, and other factors. The Board of Directors also annually reviews its Corporate Governance Principles, which include a statement of the skills and qualifications it desires on the Board of Directors. Furthermore, each director annually provides us a certification that the director continues to meet all applicable statutory and regulatory eligibility and qualification requirements. In connection with the election or appointment of an Independent Director, the Independent Director completes an application to serve on the Board of Directors. As a result of the annual assessment and as of the filing date of this Form 10-K, nothing has come to the attention of the Board of Directors or management to indicate that any of the current directors do not continue to possess the necessary experience, qualifications, attributes, or skills expected of the directors who serve on our Board of Directors, as described in each director’s biography.

144


Information regarding our current directors and executive officers is provided in the following sections. There are no family relationships among our directors or executive officers. The table below shows membership information for the Bank’s Board of Directors at February 28, 2017:
 
 
 
 
 
 
 
 
Expiration of
 
 
 
 
 
 
 
 
 
 
Current Term As
 
 
 
 
 
 
Member or
 
 
 
Director as of
 
Board
Director
 
Age
 
Independent
 
Director Since
 
December 31
 
Committees
Dale E. Oberkfell (chair)
 
61
 
Member
 
January 1, 2007
 
2017
 
a, e, f, h
Michael J. Blodnick (vice chair)
 
64
 
Member
 
June 1, 2015
 
2019
 
a, c, g, h
Ruth B. Bennett
 
64
 
Independent
 
June 1, 2015
 
2020
 
d, g
David P. Bobbitt
 
69
 
Member
 
June 1, 2015
 
2018
 
c, g
Steven L. Bumann
 
63
 
Member
 
January 1, 2015
 
2017
 
b, e
Marianne M. Emerson *
 
69
 
Independent
 
June 1, 2015
 
2019
 
d, g, h
David J. Ferries
 
62
 
Member
 
June 1, 2015
 
2018
 
b, d
Chris D. Grimm
 
58
 
Member
 
January 1, 2010
 
2019
 
a, d, f
Eric A. Hardmeyer
 
57
 
Member
 
January 1, 2008
 
2018
 
a, e, f, h
W. Douglas Hile
 
64
 
Member
 
January 1, 2015
 
2018
 
a, b, c, h
Teresa J. Keegan
 
54
 
Member
 
January 1, 2012
 
2019
 
a, c, g
Michelle M. Keeley
 
52
 
Independent
 
January 1, 2015
 
2018
 
e, f
John F. Kennedy, Sr. *
 
61
 
Independent
 
May 14, 2007
 
2020
 
c, g
Ellen Z. Lamale
 
63
 
Independent
 
January 1, 2012
 
2019
 
a, b, c
Russell J. Lau
 
64
 
Member
 
June 1, 2015
 
2017
 
a, c, f, h
James G. Livingston
 
51
 
Member
 
June 1, 2015
 
2017
 
a, e, f
Michael W. McGowan
 
48
 
Independent
 
June 1, 2015
 
2019
 
e, g
Elsie M. Meeks *
 
63
 
Independent
 
January 1, 2015
 
2018
 
b, d, h
Cynthia A. Parker *
 
63
 
Independent
 
June 1, 2015
 
2017
 
e, f
J. Benson Porter
 
51
 
Member
 
June 1, 2015
 
2020
 
b, c,
John H. Robinson
 
66
 
Independent
 
May 14, 2007
 
2019
 
d, g
Joseph C. Stewart III
 
47
 
Member
 
January 1, 2008
 
2017
 
d, f
Robert A. Stuart
 
48
 
Member
 
January 1, 2017
 
2020
 
c, b
Robert M. Teachworth
 
63
 
Member
 
June 1, 2015
 
2017
 
b, e
David F. Wilson
 
70
 
Independent
 
June 1, 2015
 
2018
 
d, f

a)
Executive and Governance Committee

b)
Audit Committee

c)
Risk Committee

d)
Mission, Member and Housing Committee

e)
Finance and Planning Committee

f)
Human Resources and Compensation Committee (Compensation Committee)

g)
Business Operations and Technology Committee

h)
Nominating Committee

*
Public Interest Independent Director

The following describes the principal occupation, business experience, qualifications, and skills, among other matters of the 25 directors who currently serve on our Board of Directors. Except as otherwise indicated, each Director has been engaged in the principal occupation indicated for at least the past five years.

145


Dale E. Oberkfell, the Board's chair, has served in a variety of banking positions during his 30 years in the financial services industry. Mr. Oberkfell currently serves as president and CFO of Midwest BankCentre and treasurer and CFO of Midwest BankCentre, Inc. in St. Louis, Missouri, positions he has held since February 2017. Mr. Oberkfell joined Midwest BankCentre in 2012 as the executive vice president and CFO of Midwest BankCentre and treasurer and board secretary of Midwest BankCentre, Inc. During 2011 and 2010, he served as executive vice president and CFO of Reliance Bancshares, Inc. in Des Peres, Missouri, and as executive vice president and CFO of Reliance Bank, FSB in Fort Myers, Florida. Mr. Oberkfell was also a partner at the certified public accounting firm of Cummings, Oberkfell & Ristau, P.C. in St. Louis, Missouri. He is a licensed certified public accountant (CPA) and is a member of the American Institute of Certified Public Accountants. He has held board positions for numerous charitable organizations, including Good Shepherd Family and Children's Services, the West County YMCA, St. Louis Children's Choir, and Young Audiences. Mr. Oberkfell's position as an officer of a member institution and his involvement in and knowledge of accounting, auditing, internal controls, and financial management, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Executive and Governance Committee.
Michael J. Blodnick, the Board’s vice chair, is currently serving as a director of Glacier Bancorp and Glacier Bank, in Kalispell Montana. Mr. Blodnick previously served as president, CEO, and a director of Glacier Bancorp from 1998 to 2016 and as CEO and director of Glacier Bank from 2012 to 2016. During his tenure he served in a variety of positions at Glacier Bank, Glacier Bancorp, Inc., and a number of bank subsidiaries owned by the company prior to its 2012 organizational restructuring. His performance as president and CEO of Glacier Bancorp, Inc. earned Mr. Blodnick recognition as American Banker’s Community Banker of the Year for 2014. Mr. Blodnick was appointed to the Seattle Bank's board on April 1, 2015 and served on the Seattle Bank's board until the Merger in 2015. Mr. Blodnick's forty years of financial management experience in all aspects of banking, as indicated by his background, supports his qualifications to serve on our Board of Directors. He currently serves as the vice chair of the Executive and Governance Committee.
Ruth B. Bennett has served as principal of RB Bennett Enterprises LLC, a real estate brokerage firm in Vancouver, Washington, since 2008. From 1973 to 2007, she served in various capacities at the Bonneville Power Administration, a federal electrical utility in Portland, Oregon, including chief operating officer (COO) from 2003 to 2007. Ms. Bennett serves on the boards of Vancouver Affordable housing and Pacific Northern Environmental. She is a former board member of First Independent Bank, the regional Columbia-Willamette YMCA, and Pacific Health SW Medical Center where she was a hospital board chair for three years. Ms. Bennett was elected to the Seattle Bank's board in 2014 and served on the Seattle Bank's board until the Merger in 2015. Ms. Bennett's experience in strategic planning, organizational and enterprise risk management, finance, and accounting, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors.
David P. Bobbitt has served as chair and CEO of Community 1st Bank in Post Falls, Idaho, since 2007. Mr. Bobbitt previously served as president of Sterling Savings Bank in Spokane, Washington, from 2004 to 2006. His banking career has also included positions with Idaho First National Bank and West One Bank. Mr. Bobbitt serves as chair of Pacific Coast Banking School and is on the boards of Kootenai Electric Cooperative, currently audit chair, and chair of Coeur d' Alene Chamber of Commerce. Mr. Bobbitt was appointed to the Seattle Bank's board in 2012 and later elected to the Seattle Bank's board from the state of Idaho in 2014. He served on the Seattle Bank's board until the Merger in 2015. Mr. Bobbitt’s experience in financial and risk management and his leadership and management skills, as indicated by his background, support his qualifications to serve on our Board of Directors.
Steven L. Bumann has served as CFO at BankWest, Inc. in Pierre, South Dakota, since 1995. Mr. Bumann has more than 30 years of banking experience and had held various leadership roles within the financial industry, including vice president and senior vice president roles at BankWest, Inc. He also earned his CPA while working for a local CPA firm and spent time working for the South Dakota Department of Legislative Audit. Mr. Bumann currently serves on the board of directors of the South Dakota Bankers Association and its Legislative Committee. He also serves on his local church Board of Elders, and the Board of Avera Foundation in Pierre, South Dakota. Mr. Bumann's position as an officer of a member institution and his involvement and knowledge of accounting, auditing, and financial management, as indicated by his background, support his qualifications to serve on our Board of Directors.
Marianne M. Emerson, served from 2007 to 2012 as chief information officer (CIO) for the Seattle Housing Authority, a public corporation providing affordable housing to more than 25,000 low-income Seattle residents. She retired from the Seattle Housing Authority in 2012. From 1982 to 2007, she served in a number of information technology positions at the Federal Reserve Board in Washington, D.C. including CIO from 2002 to 2007. She has also served as president of the Ray Solem Foundation since 2007, a foundation that donates money to organizations that creatively help immigrants become productive citizens. From 1998 to 2003, she also served as secretary of the board of directors of the FRB Federal Credit Union. Ms. Emerson was elected to the Seattle Bank's board in 2008 and served on the Seattle Bank's board until the Merger in 2015. Ms. Emerson’s knowledge of financial, organizational, and risk management, project development, and information technology, support her qualifications to serve as a Public Interest Independent Director on our Board of Directors.

146


David J. Ferries is president, CEO, and director of First Federal Bank & Trust, in Sheridan, Wyoming, a position he has held since 2002. Prior to joining First Federal in 2002, he served as senior vice president of First Interstate Bank, where he held a variety of increasingly responsible positions during his service there. Mr. Ferries is a director of the Whitney Benefits Educational Foundation and the Big Sky Chapter of Risk Management Association. He has also served as a director of other national, civic, and professional organizations, including the Fannie Mae National Advisory Board, Northern Wyoming Community College Foundation, Wyoming Bankers Association, Forward Sheridan, Inc., and the Sheridan Economic and Educational Development Authority Joint Powers Board. He recently completed a multi-year appointment by the Office of the Comptroller of the Currency to the Mutual Savings Association Advisory Committee. Mr. Ferries was elected to the Seattle Bank's board from the state of Wyoming in 2011 and served on the Seattle Bank's board until the Merger in 2015. Mr. Ferries’ experience in strategic planning and risk management, and his leadership and management skills, as indicated by his background, support his qualifications to serve on our Board of Directors.
Chris D. Grimm joined BANK, Burlington, Iowa, as its president and CEO in 2001. Prior to accepting his current role at BANK, Mr. Grimm held a number of positions unrelated to the financial services industry. Mr. Grimm's position as an officer of a member institution and his involvement in and knowledge of financial management, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Mission, Member, and Housing Committee.
Eric A. Hardmeyer joined the Bank of North Dakota in Bismarck, North Dakota, in 1985 as senior vice president of lending before becoming president and CEO in 2001. Mr. Hardmeyer is the past chair of the North Dakota Bankers Association and currently serves on the board of directors of the Bismarck-Mandan Chamber of Commerce and the Missouri Valley YMCA. Mr. Hardmeyer’s position as an officer of a member institution and his involvement in and knowledge of financial management, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Nominating Committee.
W. Douglas Hile has served as president and CEO of KleinBank in Chaska, Minnesota, since July of 2009. Mr. Hile has more than 35 years of banking experience and has held executive roles in money center, super regional, and community banking organizations, including roles as president and CEO of Minnesota banks since 1993. He has demonstrated board leadership in community involvement with emphasis on affordable housing initiatives and the work of the Salvation Army. His banking industry service includes serving on the board of directors for the FHLB San Francisco and the Minnesota Bankers Association. He currently serves on the Independent Community Bankers of America FHLB Task Force. Mr. Hile's position as an officer of a member institution and his involvement in and knowledge of housing finance and financial management, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Audit Committee.
Teresa J. Keegan has served as the senior vice president and CFO of Fidelity Bank in Edina, Minnesota since 2002. Ms. Keegan has over 30 years of financial management experience in the areas of finance, information technology, human resources, audit, and compliance. She serves on the board of Habitat for Humanity of Minnesota, and previously served on the Minnesota Bankers Association Insurance and Services, Inc. board and chaired the Minnesota Bankers Association Operations and Technology Committee. Ms. Keegan's position as an officer of a member institution and her involvement in and knowledge of financial management, as indicated by her background, support her qualifications to serve on our Board of Directors. She currently serves as chair of the Business Operations and Technology Committee.
Michelle M. Keeley retired from her position as executive vice president of equities and fixed income investments for RiverSource Investments, LLC, a division of Ameriprise Financial Services in Minneapolis, Minnesota, in 2010. Prior to joining RiverSource, Investments, LLC, Ms. Keeley held a number of different investment and leadership positions, including managing director and senior management team member at Zurich Global Assets in New York. In addition to serving on our Board of Directors, Ms. Keeley is a director of the Bridge Builder Trust mutual funds, an Edward Jones affiliated company. Ms. Keeley's involvement in and knowledge of financial management, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors. She currently serves as vice chair of the Human Resources and Compensation Committee.
John F. Kennedy, Sr. is the president and CEO of St. Louis Equity Fund, Inc., a position he has held since June, 2015 and has served as executive vice president and CFO for the St. Louis Equity Fund, Inc. in St. Louis, Missouri from June of 2012 to June of 2015. From 2007 to June of 2012, he served as senior vice president and CFO. St. Louis Equity Fund, Inc. invests in affordable rental housing developments financed through corporate and bank investment in cooperation with federal, state, and local governments. Mr. Kennedy has been with the St. Louis Equity Fund, Inc. since 1998 and has more than 30 years of experience in affordable rental housing development and financing, residential homebuilding, public accounting, auditing, financial management, and representing low income individuals and families through the St. Louis Equity Fund, Inc. and the Gateway Community Development Fund, Inc., a certified CDFI. Mr. Kennedy’s involvement in and knowledge of accounting, auditing, financial management, and representing community interests in housing, as indicated by his background, support his qualifications to serve as a Public Interest Independent Director on our Board of Directors. He currently serves as vice chair of the Risk Committee.

147


Ellen Z. Lamale retired from her position as senior vice president and chief risk officer (CRO) of The Principal Financial Group (The Principal Financial Group is a registered trademark) (Principal) in March of 2011. Prior to her retirement, she served as senior vice president and CRO of Principal since 2008. Ms. Lamale held executive positions at Principal for more than 10 years, and her responsibilities during her 34 year career at Principal included risk management, financial analysis, capital management, strategic planning, and internal audit. Ms. Lamale has served on several community boards, including West Des Moines Youth Soccer Club, Iowa United Soccer Club, Des Moines Symphony Second Strings, and Des Moines Public Library Foundation. Currently, she is a volunteer with the West Des Moines Youth Justice Initiative. Ms. Lamale's involvement in and knowledge of accounting, auditing, finance, and risk management, as indicated by her background, support her qualifications to serve as an Independent Director on our Board of Directors. She currently serves as chair of the Risk Committee.
Russell J. Lau has served as vice chair and CEO of Finance Factors, Ltd., an FDIC-insured depository financial services loan company in Honolulu, Hawaii, since 1998. In addition, Mr. Lau served as president and CEO of Finance Enterprises, Ltd., the parent company of Finance Factors, Ltd., since 2004. Further, in connection with his service with Financial Enterprises, Mr. Lau holds the position of vice chair and CEO of Finance Insurance, Ltd., a Hawaiian independent insurance agency and director of Finance Realty, Ltd., a real estate investment and management company. Mr. Lau is a director of the Hawaii Bankers Association and was president of the association from March 2013 to March 2015. Mr. Lau is active in Honolulu’s non-profit community, serving as co-chair of the East West Center Foundation, treasurer/trustee of Assets School, treasurer of American Judicature Society - Hawaii Chapter, director of Palolo Chinese Home, and trustee for St. Andrews Priory and director of the Chinese Chamber of Commerce in Hawaii. Mr. Lau was elected to the Seattle Bank's board from the state of Hawaii in 2005 and served on the Seattle Bank's board until the Merger in 2015. Mr. Lau’s experience in strategic planning, asset/liability management, financial analysis, regulatory compliance, leadership, and management skills, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Human Resources and Compensation Committee.
James G. Livingston has served as senior vice president at Zions Bank, a division of ZB, N.A., located in Salt Lake City, Utah, since 2011. From 2005 to 2011, Mr. Livingston served as vice president of Zions Bank. Prior to joining Zions in 2005, Mr. Livingston worked for Ziff Brothers Investments, in New York City. He has also been an assistant professor of accounting at Southern Methodist University in Dallas, Texas. Mr. Livingston was elected to the Seattle Bank's board from the state of Utah in 2007 and served on the Seattle Bank's board until the Merger in 2015. Mr. Livingston’s position as an officer of a member institution and his involvement and knowledge of auditing, accounting, derivatives, as well as, financial, organizational, and risk management experience, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as chair of the Finance and Planning Committee.
Michael W. McGowan has served as chair and CEO of Daniel Capital Management Limited, a global business and information technologies consulting firm, since 2007. He is also currently a principal in two software development companies, General UI, Seattle, Washington and BuildCapture.com, Missoula, Montana. He was the primary founder of Nova Biosource Fuels, Inc. a publicly traded renewable energy company and continues to be involved in developing sustainable resource companies. Prior to entering the technology sector, from 1997 to 2007, Mr. McGowan worked in the banking and financial management industry as an investment advisor and trust officer. Mr. McGowan was elected to the Seattle Bank's board in 2012 and served on the Seattle Bank's board until the Merger in 2015. Mr. McGowan’s experience and knowledge of capital markets, information technology (cybersecurity), and strategic business planning support his qualifications to serve as an Independent Director on our Board of Directors. He currently serves as vice chair of the Business Operations and Technology Committee.
Elsie M. Meeks served as state director of the United States Department of Agriculture (USDA) in South Dakota from July of 2009 to 2015. Prior to joining the USDA, Ms. Meeks was the president and CEO of First Nations Oweesta Corporation. She was active in the development and management of Lakota Funds, a small business and microenterprise development financial institution on the Pine Ridge Indian Reservation in South Dakota and has served as its board chairwoman since 2015. Ms. Meeks served on the U.S. Commission on Civil Rights, completing a six-year term. She is a recent past director of the Northwest Area Foundation based in St. Paul, Minnesota. She has served as a director or council member of several national Native American organizations and currently is chair of the Advisory Council for the Federal Reserve Bank of Minneapolis' Center for Indian Country Development. Ms. Meek's involvement in and knowledge of economic development and community management, as indicated by her background, support her qualifications to serve as a Public Interest Independent Director on our Board of Directors. She currently serves as vice chair of the Mission, Member and Housing Committee.

148


Cynthia A. Parker has served as president and CEO of BRIDGE Housing Corporation, one of the nation’s largest owners and developers of affordable housing, headquartered in San Francisco, California, since 2010. Previously, Ms. Parker served as regional president for Mercy Housing Inc., a nonprofit organization that develops affordable housing, from 2008 to 2010, and as senior vice president of the affordable housing and real estate group of the Seattle-Northwest Securities, an investment banking firm, between 2002 and 2008. She is currently a director of the National Affordable Housing Trust, the Housing Partnership Network, and Stewards of Affordable Housing for the Future. Ms. Parker was elected to the Seattle Bank's board in 2008 and served on the Seattle Bank's board until the Merger in 2015. Ms. Parker’s involvement in and experience in representing community interests in housing, and knowledge of human resources and compensation practices, as indicated by her background, support her qualifications to serve as a Public Interest Independent Director on our Board of Directors.
J. Benson Porter has served as president and CEO of Boeing Employees’ Credit Union (BECU), a not-for-profit financial corporation in Tukwila, Washington, since April 2012. Prior to joining BECU in April 2012, he served as president and CEO of First Tech Credit Union in Palo Alto, California, from February 2007 to March 2012. He also served in several positions at Washington Mutual Bank, most recently as executive vice president and chief accounting officer (CAO), from May 1996 to February 2007. Mr. Porter has also held positions as regulatory counsel at Key Bank and as staff director for the Washington State Senate Banking Committee. He is a former director of FHLB San Francisco and is currently a member of the board of Overseers of Whitman College, the board of CO-OP Financial Services, the board of Northwest Credit Union Association, and the board of CU Direct. Mr. Porter was elected to the Seattle Bank's board from the state of Washington in 2012 and served on the Seattle Bank's board until the Merger in 2015. Mr. Porter’s knowledge of financial management and strategic planning, and his leadership and management skills, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as vice chair of the Audit Committee.
John H. Robinson has served as chair of Hamilton Ventures, LLC, a consulting and investment company in Kansas City, Missouri, since 2004. Mr. Robinson is an engineer with international experience as chairman of EPCglobal Ltd in Sheffield, England, from 2003 to 2004, and executive director of Amey Plc in London, England, from 2000 to 2002. He was managing partner and vice chair of Black & Veatch, Inc. from 1989 to 2000. He serves on the board of directors of Olsson Associates, Alliance Resources MLP, and Coeur Mining. Mr. Robinson's involvement in and knowledge of financial management, project development, and organizational management, as indicated by his background, support his qualifications to serve as an Independent Director on our Board of Directors.
Joseph C. Stewart III has served as CEO and director of Bank Star in Pacific, Missouri since 2004. Mr. Stewart has worked in various other capacities since joining the Bank Star Companies in 1994. Mr. Stewart currently serves on the board of directors for the Missouri Independent Bankers Association, as well as the government relations committee of the American Bankers Association. Mr. Stewart's position as an officer of a member institution and his involvement in and knowledge of accounting, risk management, and financial management, as indicated by his background, support his qualifications to serve on our Board of Directors.
Robert A. Stuart has served as president and CEO of OnPoint Community Credit Union in Portland, Oregon, since 2006. Prior to his current role, Mr. Stuart spent 15 years serving in various executive positions with Bank of America. Most recently, he served as senior vice president, consumer banking for the Portland metropolitan Oregon market. Mr. Stuart currently co-chairs the Northwest Credit Union Association Oregon Governmental Affairs Committee. He also serves on the boards of PSCU Financial Services and Oregon Wildlife Heritage Foundation. Mr. Stuart previously served on the Federal Reserve Bank of San Francisco District Community Depository Institutions Advisory Council, the board of the Community Credit Union of America and the advisory boards of the Credit Union National Association Cabinet, Fiserv (XP) Financial Services Platform and Filene Research Institute. Mr. Stuart's position as an officer of a member institution and his involvement in and knowledge of auditing and accounting, as well as, financial, organizational, and risk management experience, as indicated by his background, support his qualifications to serve on our Board of Directors.
Robert M. Teachworth has served as president and CEO of Denali Federal Credit Union in Anchorage, Alaska, since 1986. Mr. Teachworth has been in the financial services industry for more than 42 years. Mr. Teachworth has served as a board member of the National Association of Credit Union Service Organizations. He is a former chair of the Alaska Credit Union League and Alaska Credit Union League Governmental Affairs Committee. Mr. Teachworth was elected to the Seattle Bank's board from the state of Alaska in 2014 and served on the Seattle Bank's board until the Merger in 2015. Mr. Teachworth’s position as an officer of a member institution and his involvement in and knowledge of strategic planning, organizational management, financial analysis, and compliance, as indicated by his background, support his qualifications to serve on our Board of Directors. He currently serves as vice chair of the Finance and Planning Committee.

149


David F. Wilson is currently, and has been, the CEO of Wilson Construction, LLC, a residential and commercial development company in Ketchum, Idaho, since 1977. Mr. Wilson served on Idaho Housing and Finance from 2004 until 2016, and was chairman of the board from 2010 until 2016. He has developed affordable housing in Idaho. Mr. Wilson served as mayor of City of Sun Valley from 1999-2004 and was a City of Sun Valley Council Member from 1990-1999. He is also an active member of the National Association of Home Builders (NAHB) and served as the organization’s president in 2005. Currently, he is a NAHB senior life director and chair of the Home Building Industry Disaster Relief Fund. Mr. Wilson was elected to the Seattle Bank's board in 2007 and served on the Seattle Bank's board until the Merger in 2015. Mr. Wilson’s experience in representing community interests in housing support, as indicated by his background, support his qualifications to serve as an Independent Director on our Board of Directors.
Executive Officers
The following persons currently serve as executive officers of the Bank:
 
 
 
 
 
 
Position Held
Executive Officer
 
Age
 
Position Held
 
Since
Michael L.Wilson
 
60
 
President and Chief Executive Officer
 
April 2016
Joseph E. Amato
 
58
 
Executive Vice President and Chief Financial Officer
 
May 2016
Daniel D. Clute
 
51
 
Executive Vice President and Chief Business Officer
 
October 2012
Dusan Stojanovic
 
57
 
Executive Vice President and Chief Risk Officer
 
February 2010
William R. Bemis
 
38
 
Senior Vice President and Treasurer
 
August 2014
Nancy L. Betz
 
58
 
Senior Vice President and Chief Human Resources Officer
 
June 2016
Joelyn R. Jensen-Marren
 
51
 
Senior Vice President and Director of Portfolio Strategy
 
August 2014
Ardis E. Kelley
 
49
 
Senior Vice President and Chief Accounting Officer
 
June 2012
Shawn P. Laird
 
42
 
Senior Vice President and Chief Business Technology Officer
 
April 2016
Aaron B. Lee
 
44
 
Senior Vice President, General Counsel, and Corporate Secretary
 
March 2013
Sunil U. Mohandas
 
57
 
Senior Vice President and Market Risk Officer
 
June 2016
Kelly E. Rasmuson
 
54
 
Senior Vice President and Chief Audit Executive
 
June 2016
Glen D. Simecek
 
51
 
Senior Vice President and Director, Western Office
 
June 2015
Jodie L. Stephens
 
54
 
Senior Vice President and Senior Credit Risk Officer
 
July 2016
Michael L. Wilson has been President and CEO of the Bank since April 2016. He has over 22 years of Federal Home Loan Bank experience. Mr. Wilson joined the Bank in June of 2015 as President after the Merger. Previously Mr. Wilson was President and CEO of the Seattle Bank from 2012 until its merger into the Des Moines Bank in June 2015, and from 2006 to 2012 he was executive vice president and the chief business officer (CBO) of the Des Moines Bank. During his prior role as CBO, Mr. Wilson was responsible for business activities that served the Bank’s members and their communities. Before joining the Des Moines Bank in 2006, Mr. Wilson was a senior executive vice president and the COO of the Federal Home Loan Bank of Boston (Boston Bank), where he worked for 12 years. In addition, he served as the Boston Bank’s executive vice president for finance from 1997 to 1999 and senior vice president for planning and research from 1994 to 1997. Prior to his service at the Boston Bank, he was the director of the Office of Policy and Research at the Federal Housing Finance Board in Washington, D.C. Mr. Wilson currently serves on the Board of Directors of the Federal Home Loan Bank Office of Finance, the fiscal agent for the FHLBank System. Mr. Wilson has a B.A. in economics and political science from the University of Wisconsin-Milwaukee and a M.S. in economics from the University of Wisconsin-Madison.
Joseph E. Amato has served as executive vice president and CFO since May of 2016. In his role, Mr. Amato has management responsibility for accounting and financial reporting, treasury and capital markets, and portfolio strategy. Mr. Amato has nearly 30 years of experience in a variety of senior finance and capital market roles. Prior to joining the Bank, Mr. Amato was at Freddie Mac from 2001 until 2016, most recently serving as senior vice president, CFO investments and financial planning. At Freddie Mac, Mr. Amato also held senior roles in financial planning and analysis, finance, capital management, and equity finance. Prior to joining Freddie Mac, Mr. Amato served as CEO and co-founder of NextFinance, an e-commerce company from 2000 to 2001. From 1987 to 2000, Mr. Amato served in various capacities at Fannie Mae including vice president for financial transactions and portfolio strategy, along with roles in regulatory policy and treasury. Mr. Amato received a B.A. degree in business administration from the University of Maryland in 1984 and received his MBA from the George Washington University, District of Columbia in 1987.

150


Daniel D. Clute has served as executive vice president and CBO since October of 2012. Mr. Clute is responsible for the Bank's credit and mortgage sales, marketing communications, community investment, government and external relations, and member financial services. He joined the Bank in August 2011 as senior vice president and director of communications and external relations. Prior to joining the Bank, his career included senior roles in treasury, corporate finance, public affairs, and elected public service. From 2007 to 2011, he served as vice president and treasurer of Wells Fargo Financial, Inc., a unit of Wells Fargo & Company, where he was responsible for funding, treasury operations, and asset-liability management. From 2000 to 2007, Mr. Clute served in several roles at Citigroup, including as the senior finance and administrative officer for a Citi Cards operations center and the state director of public affairs for Citigroup businesses in Iowa. From 1989 to 2000, he served in several management roles at Wells Fargo Financial, Inc. in its treasury operations. Mr. Clute served as an elected member of the Iowa House of Representatives from 2007 to 2009 and prior to that was an elected member of the Clive, Iowa, City Council from 2002 to 2007. He also has a long history of non-profit board of director leadership, including president of the board of directors of Habitat for Humanity of Iowa, Inc. He was re-appointed by the governor of Iowa in 2016 to a second four-year term on the Board of Directors of the Iowa Student Loan Liquidity Corporation. Mr. Clute received his undergraduate and Masters of Business Administration degrees from the University of Iowa in 1988 and 1989, respectively.
Dusan Stojanovic has served as executive vice president and CRO since February 2010. Mr. Stojanovic joined the Bank as financial risk officer in March 2008. He has management responsibility for enterprise risk management, including credit risk, market risk, operational risk, and model risk. Prior to joining the Bank, Mr. Stojanovic held a variety of regulatory risk management and model validation positions with the Federal Reserve Bank of Chicago from 2006 to 2008, Federal Reserve Bank of Richmond from 2005 to 2006, and Federal Reserve Bank of St. Louis from 1995 to 2003. From 2003 to 2004, Mr. Stojanovic served as the vice governor for banking supervision at the National Bank of Serbia. Mr. Stojanovic received his undergraduate degree in Economics from the University of Belgrade and his M.A. and Ph.D. degrees in Economics from Washington University in St. Louis, Missouri. He also holds the Chartered Financial Analyst (CFA) designation from the CFA institute.
William R. Bemis joined the Bank in May of 2013 as vice president and treasurer and became senior vice president in August of 2014. Mr. Bemis has management responsibility for the Treasury Department. Prior to joining the Bank, Mr. Bemis worked in securitized product research and portfolio management at AmerUs Capital Management and Aviva Investors, in Des Moines, Iowa. During his tenure at AmerUs and Aviva, he held a variety of capital market positions, most recently as vice president and senior portfolio manager of securitized products. Mr. Bemis received his undergraduate degree in finance from the University of Nebraska and his MBA degree from the University of Iowa. He holds the CFA designation, and is a member of the CFA Society of Iowa.
Nancy L. Betz has been with the Bank since April of 2004 and is currently serving as senior vice president and chief human resources and administrative officer and office of minority and women inclusion. Ms. Betz joined the Bank as director of human resources and became senior vice president in September of 2007. Ms. Betz has management responsibility for the Human Resources Department, facilities administration, diversity and inclusion, and employee communications. Prior to joining the Bank, she worked as director of human resources at Wells Fargo Home Mortgage and DuPont Pioneer. During her tenure at DuPont Pioneer, she held a variety of positions, including global human resources for the sales and marketing division and had oversight responsibilities for corporate learning and development. Her leadership responsibilities have involved aligning human capital and workforce strategies, including diversity and inclusion with the business strategy. Ms. Betz received her undergraduate degree in Business Management and an M.S. in Adult Education/Learning and Development from Drake University.
Joelyn R. Jensen-Marren has been with the Bank since April of 1999 and is currently serving as senior vice president and director of portfolio strategy, a position she has held since August of 2008. Ms. Jensen-Marren has management responsibility for the Portfolio Strategy Department. Previously, she held a number of different roles in capital markets from 2007 to 2014 and market risk management from 1999 to 2007 at the Bank, including interim financial risk officer in 2007. She became Director of Portfolio Strategy in March of 2008. Prior to joining the Bank, Ms. Jensen-Marren was the investment portfolio manager at RBC-Centura in North Carolina from 1997 to 1999. From 1991 to 1997, she held various roles in investment portfolio management at CoBank, a member of the Federal Farm Credit System in Colorado. Ms. Jensen-Marren received an undergraduate degree from Iowa State University and her M.S. degree in finance from the University of Colorado.
Ardis E. Kelley has been senior vice president and CAO since she joined the Bank in June of 2012. Ms. Kelley has management responsibility for the Accounting Department. Prior to joining the Bank, Ms. Kelley worked as assistant vice president of accounting and reporting at CNA Insurance in Chicago, Illinois. Previous experience includes senior manager of transaction support and accounting policy at Accenture in Chicago, Illinois as well as accounting and audit positions in Cedar Rapids, Iowa, New York City, New York, and Los Angeles, California. Ms. Kelley received her undergraduate degree in psychology and linguistics from the University of California, Los Angeles and a Master of Accounting degree from the University of Southern California.

151


Shawn P. Laird has been with the Bank since December of 1999 and is currently serving as senior vice president and chief business technology officer, a position he has held since April of 2016. Mr. Laird has management responsibility for the Information Technology Department. Previously, he held a variety of roles within this department, most recently as an applications development manager. Prior to joining the Bank, he worked as an Iowa State University research assistant for the Mayo Clinic. There, he developed web-based medical systems. Mr. Laird has a B.A. in Computer Analytical Systems and Mathematics from William Penn University in Oskaloosa, Iowa and a M.S. in Computer Science from Iowa State University.
Aaron B. Lee is currently serving as senior vice president, general counsel and corporate secretary, a position he has held since March of 2013. Mr. Lee joined the Bank in August of 2005 as associate general counsel and became general counsel and corporate secretary in March of 2010. In this role, he has direct responsibility for the Legal Department. Prior to joining the Bank, Mr. Lee worked in private practice as an associate attorney with the law firm of Harris, Mericle & Wakayama PLLC in Seattle, Washington. He received his undergraduate degree from the University of Iowa and his Juris Doctor degree from DePaul University College of Law in Chicago, Illinois.
Sunil U. Mohandas has served as senior vice president and market risk officer since June of 2016. In his role, Mr. Mohandas is responsible for directing the Bank's market risk oversight activities. Mr. Mohandas has nearly 20 years of experience in a variety of senior risk management roles in the banking industry.  Prior to joining the Bank in September of 2015 as vice president and market risk officer, Mr. Mohandas served as senior vice president and chief risk manager at Sumitomo Mitsui Trust Bank in New York City from February of 2014 until August of 2015. Mr. Mohandas also held various risk management positions during his 11-year tenure with the Federal Home Loan Bank of Indianapolis, including three years as senior vice president and chief risk officer from January 2011 to January 2014. In addition, he worked at Citibank and Dai-Ichi Kangyo Bank (now Mizuho Bank), in the risk management area in New York City from April of 1995 until November of 2002. Mr. Mohandas is a Chartered Financial Analyst (CFA) and has a Bachelor’s degree in Mechanical Engineering from the Indian Institute of Technology in Bombay, India. Mr. Mohandas earned a PhD in Mechanical and Aerospace Engineering from the University of Missouri.
Kelly E. Rasmuson joined the Bank in September of 2006 and is currently serving as senior vice president and chief audit executive. Mr. Rasmuson joined the Bank as director of internal audit and became senior vice president in September of 2007. Mr. Rasmuson has management responsibility for the Internal Audit Department. Prior to joining the Bank, Mr. Rasmuson held positions of increasing responsibility with the internal audit and mergers and acquisition teams at Principal Financial Group in Des Moines, Iowa from 1997 to 2006. Before moving to Iowa, he worked in a variety of positions at several companies in Columbus, Ohio, including audit roles with the accounting firm Coopers & Lybrand. Mr. Rasmuson received his undergraduate degree from the University of Northern Iowa and his MBA from Xavier University. He is also a Certified Internal Auditor and CPA.
Glen D. Simecek joined the Bank in June of 2015 as senior vice president and director for the Western Office of the Bank. Mr. Simecek has management responsibility over the Western Office of the Bank and credit sales for the Des Moines district. Prior to joining the Bank, he served as the senior vice president and CBO for the Seattle Bank from mid 2011 to May 2015. From January 2009 to mid-2011, Mr. Simecek served as first vice president and CBO at the Seattle Bank. Previously, Mr. Simecek worked for JPMorgan Chase/Washington Mutual Bank as first vice president for term debt management and treasury investor relations from December 2005 to January 2009. From 1993 to 2005, Mr. Simecek held a number of different roles at the Seattle Bank including vice president and manager of the Member Services Group and funds manager in the Seattle Bank Treasury Group. Mr. Simecek received an undergraduate degree from the University of Washington in business administration with a concentration in finance.
Jodie L. Stephens is currently serving as senior vice president and senior credit risk officer, a position she has held since July 2016. Mrs. Stephens has management responsibility for the Credit Risk Management functions. Ms. Stephens joined the Bank in 2000 and has held various credit risk management leadership roles. Prior to joining the Bank, Ms. Stephens was the Director of Investor Relations for MidAmercian Energy Holdings Company and held similar credit risk management roles at Firstar Bank Iowa (U.S. Bank Iowa). Ms. Stephens holds a Masters of Business Administration from Drake University and a Bachelors of Business Administration/Finance from the University of Iowa.
Code of Ethics
We have adopted a Code of Ethics that sets forth the guiding principles and rules of conduct by which we operate and conduct our daily business with our customers, vendors, shareholders, and fellow employees. The Code of Ethics applies to all of our directors, officers, and employees. The purpose of the Code of Ethics is to promote honest and ethical conduct and compliance with the law, particularly as it relates to the maintenance of our financial books and records and the preparation of our financial statements. The Code of Ethics can be found on our website at www.fhlbdm.com. We disclose on our website any amendments to, or waivers of, the Code of Ethics. The information contained in or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC.

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Audit Committee
The purpose of the Audit Committee is to assist the Board of Directors in fulfilling its review and oversight responsibilities for (i) the integrity of the Bank's financial statements and financial reporting process and systems of internal accounting and financial reporting controls, (ii) the independence, scope of audit services, and performance of the Bank's internal audit function as well as the appointment or replacement of the Bank's chief audit executive, (iii) the selection and replacement, qualifications, independence, scope of audit, and performance of the Bank's external auditor, (iv) the Bank's compliance with laws, regulations and policies, including the Code of Ethics, (v) the procedures for complaints regarding questionable accounting, internal accounting controls, and auditing matters, and oversight of fraud investigations, and (vi) the Bank's and Audit Committee's compliance with the Finance Agency's Examination Guidance for the examination of accounting practices. The Audit Committee has adopted a charter outlining its roles and responsibilities, which is available on our website at www.fhlbdm.com. The information contained in or connected to our website is not incorporated by reference into this annual report on Form 10-K and should not be considered part of this or any report filed with the SEC. The members of our Audit Committee for 2017 are W. Douglas Hile (chair), J. Benson Porter (vice chair), Steven L. Bumann, David J. Ferries, Ellen Z. Lamale, Elise M. Meeks, Robert A. Stuart, and Robert M. Teachworth. The Audit Committee held a total of six in-person meetings and nine telephonic meeting in 2016. As of February 28, 2017, the Audit Committee has held one in-person meeting and is scheduled to hold four in-person meetings and eight telephonic meetings throughout the remainder of 2017. Refer to Exhibit 99.1 of this 2016 Annual Report for the Audit Committee Report.
Audit Committee Financial Expert
Our Board of Directors determined that the following members of its Audit Committee qualify as audit committee financial experts under Item 407(d)(5) of Regulation S-K: Steven L. Bumann, David J. Ferries, W. Douglas Hile, Ellen Z. Lamale, Elsie M. Meeks, J. Benson Porter, Robert A. Stuart, and Robert A. Teachworth. Refer to “Item 13. Certain Relationships and Related Transactions, and Director Independence” for details on our director independence. For information concerning the experience through which these individuals acquired the attributes required to be deemed financial experts, refer to the biographical information in this Item 10.

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ITEM 11. EXECUTIVE COMPENSATION

COMPENSATION DISCUSSION AND ANALYSIS

This Compensation Discussion and Analysis section provides information related to the administration of our executive compensation policies and programs. We believe we have historically taken a prudent and effective approach to executive compensation with practices aligned with the Finance Agency's guidance on FHLBank executive compensation.
 
This Compensation Discussion and Analysis includes the following parts:
 
i.
Compensation Philosophy - provides detail on the framework we use when making executive compensation decisions.
 
ii.
Elements of Executive Compensation - provides a discussion of each element of compensation payable to our named executive officers (NEOs), comprised of our President and CEO, former CEO, CFO, COO (former CFO), CRO, CBO, and Director, Western Office and provides greater detail on our approach, structure, and practices with regard to executive compensation.

iii.
Finance Agency Oversight - Executive Compensation - provides detail on the Finance Agency regulations relating to executive compensation.
 
iv.
Roles and Responsibilities of the Human Resources and Compensation Committee (Compensation Committee) and Management in Establishing Executive Compensation - provides detail on the role of the Compensation Committee and management in making executive compensation decisions and explains why we determined executive compensation payouts in 2016 were appropriate.
 
v.
Analysis Tools the Compensation Committee Uses - provides detail on how the Compensation Committee utilizes information and tools to arrive at executive compensation decisions.
 
vi.
Compensation Decisions in 2016 - describes the compensation paid and the benefits made available to our NEOs during 2016.

 vii.
Benefits and Retirement Philosophy - provides detail on the retirement programs offered to NEOs.

viii.
Potential Payments upon Termination or Change of Control - provides information on the termination payments and benefits that would be payable to each NEO, as applicable.

 ix.
Director Compensation - provides detail on the compensation paid to the members of our Board of Directors in 2016 and the director fee schedule for 2017.

x.
Compensation Committee Report - outlines the Compensation Committee's recommendation to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K.

Compensation Philosophy
 
Our compensation philosophy, practices, and principles are an important part of our business strategy. Our philosophy assists us in attracting, retaining, and engaging employees with the skills and talent we need to create and implement strategies necessary to demonstrate value for our members, which is critical to our long-term success. Our executive compensation practices provide a framework to ensure an appropriately balanced approach to compensation through a combination of base salary, benefits, and annual and deferred cash incentive awards. Although we refine our compensation programs as economic conditions and competitive practices change, we strive to maintain consistency in our philosophy and approach with respect to executive compensation.
 
We believe our current employees and those individuals in our potential talent pool are highly marketable and can be attracted to opportunities across a broad spectrum of U.S. financial services businesses. Our competition for talent primarily includes FHLBanks, commercial banks, and other financial services companies, such as insurance companies.
 
We have designed our incentive opportunities to motivate our NEOs to achieve our objectives for delivering value to our members, as customers and as shareholders, without taking undue risk.
 

154


Our executive compensation program is designed to do the following:
 
i.
Attract, reward, retain, and engage experienced, highly-qualified NEOs critical to our long-term success and enhancement of our member value.
 
ii.
Link executive compensation to Bank performance while monitoring the Bank's exposure to risk.
 
iii.
Structure our total compensation package for NEOs so that it consists of a balance of competitive annual base pay and incentive pay that defers 50 percent of the total incentive award into future periods and is earned only upon satisfaction of a long-term performance goal. Thus, a deferred payout calibrated to the long-term value of the Bank, as measured by our Economic Value of Capital Stock (EVCS), is a critical component of our compensation. This approach aligns with the principles for executive compensation required by the Finance Agency.

In 2016, we implemented our executive compensation philosophy to provide competitive compensation to our NEOs that was linked to the achievement of objectives of the Bank performance.

Elements of Executive Compensation

Our executive compensation program is comprised of the following elements: (i) base salary, (ii) an incentive plan (IP) that generally includes a 50 percent annual cash award and a 50 percent deferral of the incentive award, (iii) retirement benefits, (iv) health and welfare benefits, (v) the potential for payments in the event of termination, and (vi) limited perquisites. The following discussion provides more detail for each of these elements.
 
BASE SALARY
 
Base salary is a fixed component of our NEOs' total compensation that is intended to provide a level of compensation necessary to attract and retain highly-qualified executives. The Compensation Committee reviews the level of base salaries annually and approves and recommends to the Board adjustments to base salaries for our NEOs.

Each NEO's minimum base salary is established by their respective employment agreement with us, except for the Director, Western Office. The Director, Western Office does not have an employment agreement with us and his base salary is established by the CBO. For further information regarding base salary and the terms of the employment agreements, see the narrative discussion following the "Summary Compensation Table" in this Item 11.

INCENTIVE PLAN
 
In December 2015, the Compensation Committee approved the 2016 Incentive Plan (IP). In January 2016, the Compensation Committee approved the Bank-wide Goal measures. The IP includes an annual cash incentive and a deferred cash incentive. Under the IP, our NEOs are required to defer 50 percent of their total cash incentive for three years following the end of the performance plan period. The 2016 deferred opportunities are payable in 2020. The deferred awards are not finally earned until completion of the respective performance periods and are subject to the quarterly average of our EVCS in 2019 and approvals by the Compensation Committee and Board of Directors in 2020. We define EVCS as the net present value of expected future cash flows of our assets and liabilities (excluding mandatorily redeemable capital stock), discounted at our cost of funds, divided by the total shares of capital stock (including mandatorily redeemable capital stock) outstanding. This measurement reduces the impact of day-to-day price changes that cannot be attributed to any of the standard market factors, such as movements in interest rates or volatilities. Thus, EVCS provides an estimated measure of the long-term value of one share of our capital stock. We believe tying the amount of the final awards to the level of our EVCS ensures that our participating NEOs continue to operate the Bank in a profitable, prudent manner without taking unnecessary or excessive risk. It also discourages our NEOs from taking short-term measures in 2016 that could negatively impact longer-term Bank performance. We received a non-objection letter from the Finance Agency for our 2016 IP in February of 2016.

For additional information about our Bank-wide Goals, see “Establishment of Performance Measures for the IP ” in this Item 11. For more information relating to estimated IP awards, see “Components of 2016 Non-Equity Incentive Plan Compensation" in this Item 11.


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RETIREMENT BENEFITS
 
As a result of the Merger, we acquired the Seattle Bank's health, welfare, and retirement benefit plans. The Des Moines and Seattle Banks' health and welfare benefits merged effective January 1, 2016. The non-qualified retirement benefit plans, the Seattle Bank Thrift Benefit Equalization Plan, Retirement Fund Benefit Equalization Plan, and Executive Supplemental Retirement Plan (SERP) merged effective January 1, 2016 into the Benefit Equalization Plan (BEP). The Des Moines and Seattle Banks' qualified defined contribution benefit plans, the Pentegra Defined Contribution Plan for Financial Institutions, and the Federal Home Loan Bank of Seattle 401(k) Savings Plan, were integrated effective March 1, 2016 into the Federal Home Loan Bank of Des Moines 401(k) Savings Plan (DC Plan). The two banks' qualified defined benefit plans remain separate as two qualified defined benefit plans (DB Plans) under the same multiple-employer plan, the Pentegra Defined Benefit Plan for Financial Institutions (Pentegra DB Plan). In 2016, our Board of Directors elected to freeze the DB Plans effective January 1, 2017. The decision was driven by the volatility and cost of the DB Plans, the determination that the DB Plans are no longer a differentiator in attracting talent, and the understanding that our total compensation is very competitive compared to our peers. After the plan freeze, participants do not accrue any new benefits under the Pentegra DB Plan.

Our President and CEO, and Director, Western Office participate in the former Seattle Pentegra Defined Benefit Plan for Financial Institutions (Seattle DB Plan). Our former CEO, COO (former CFO), and CRO participate in the Des Moines Pentegra Defined Benefit Plan for Financial Institutions (Des Moines DB Plan). All of our NEOs participate in the DC Plan to the same extent as our other employees. In addition, certain NEOs participate in the BEP which is a non-qualified plan that allows the NEOs to receive amounts they would have been entitled to receive under the DB Plans and/or the DC Plan had the plans not been subject to Internal Revenue Code contribution limitations. Our President and CEO, former CEO, COO (former CFO), and CRO participate in the defined benefit component of the BEP (BEP DB Plan) as well as the defined contribution component of the BEP (BEP DC Plan). Our CFO and CBO participate in the BEP DC Plan. In 2016, our Board of Directors elected to freeze the BEP DB Plan effective January 1, 2017. The decision was driven by the freeze of the DB Plan. After the plan freeze, participants do not accrue any new benefits under the BEP DB Plan.

HEALTH AND WELFARE BENEFITS
 
Our NEOs are eligible for the same medical, dental, life insurance, and other benefits available to our full-time employees.
 
PAYMENTS IN THE EVENT OF TERMINATION
 
The employment agreements we entered into with certain NEOs governed their compensation for 2016 and provide for payments in the event of termination based on certain triggering events. For additional details, see "Potential Payments Upon Termination or Change of Control" in this Item 11.

PERQUISITES
 
Our NEOs, except the Director, Western Office who does not have an employment agreement with us, are eligible to receive perquisites in the form of financial planning assistance. In addition, our President and CEO receives a monthly car allowance. These perquisites are provided as a convenience associated with the NEOs overall duties and responsibilities.
 
Finance Agency Oversight - Executive Compensation
 
Beginning in November of 2008, the FHLBanks were directed to provide all compensation actions affecting their five most highly compensated officers to the Finance Agency for prior review.

Section 1113 of the Housing Act amended the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (Housing Enterprises Act) and requires the Director of the Finance Agency to prohibit any 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.
 

156


On October 27, 2009, the Finance Agency issued a bulletin entitled Principles for Executive Compensation at the Federal Home Loan Banks and the Office of Finance, which established the following principles for executive compensation:
 
i.
executive compensation must be reasonable and comparable to that offered to executives in similar positions at comparable financial institutions;
 
ii.
executive compensation should be consistent with sound risk management and preservation of the par value of the FHLBank's capital stock;
 
iii.
a significant percentage of an executive's incentive-based compensation should be tied to longer-term performance and outcome-indicators and be deferred and made contingent upon performance over several years; and
 
iv.
the Board of Directors should promote accountability and transparency in the process of setting compensation.
 
On April 14, 2011, the Finance Agency issued a proposed rule (reissued May 2, 2016) along with six other federal financial regulators that could impose additional requirements and restrictions on incentive compensation arrangements.

On January 28, 2014, the Finance Agency issued a final rule, effective February 27, 2014, that implements Section 1113 of the Housing Enterprises Act and continues the requirement that the Director of the Finance Agency approve any agreements or contracts of executive officers that provide compensation in connection with termination of employment to determine if the FHLBanks overall compensation of executives is reasonable and comparable. The final rule also ensures that the FHLBanks comply with processes used by the Finance Agency in its oversight of executive compensation. A final rule amending the Finance Agency's rule on golden parachute payments was also issued by the Finance Agency on this date.
 
Roles and Responsibilities of the Compensation Committee and Management in Establishing Executive Compensation
 
The Compensation Committee, with the assistance of our President and CEO, approves and recommends to the Board of Directors all compensation decisions for our NEOs. Our President and CEO makes recommendations to the Compensation Committee concerning all elements of compensation for our NEOs. Throughout the year, our President and CEO, and the Compensation Committee review, on an informal basis, the performance of our NEOs, future management changes, and other matters relating to compensation. Any employment or severance agreement for our President and CEO is also approved by the Board of Directors.

Throughout the year, the Board of Directors reviews our Bank-wide Goals and achievement levels. When final numbers for a calendar year are determined, the Compensation Committee reviews the performance results to determine the level of performance that has been achieved for purposes of making compensation decisions for our NEOs. Our Compensation Committee recommends the incentive awards comprised of Bank-wide Goals to the Board of Directors for their approval.
 
Merit increases are based upon an evaluation of an NEO's overall performance. Because of our size and the number of NEOs involved, our President and CEO recommends to the Compensation Committee merit increases for the other NEOs. The Board of Directors completes an evaluation of our President and CEO's performance and the Compensation Committee recommends compensation for our President and CEO to the Board of Directors. The Compensation Committee and our President and CEO consider overall performance in the areas of key role responsibilities, our shared values, and strategic responsibilities established for the year, and NEO compensation relative to the market, in analyzing merit increases.

Analysis Tools the Compensation Committee Uses
 
For 2016, the Compensation Committee engaged McLagan Partners to advise them on executive compensation decisions. This included an analysis of McLagan Partners' broad-based executive compensation benchmarking survey data to evaluate and advise our Compensation Committee and Board of Directors on whether the objectives of our executive compensation program were being met. This analysis compares the compensation of our NEOs to similar positions in commercial banks, the FHLBank System, and proxy data from publicly traded banks with assets between $10 billion and $20 billion. The market data is calculated with and without the proxy data. Their analysis considers all components of the NEOs' total compensation except benefits.
 

157


When using commercial bank comparisons, our NEOs are compared to divisional positions. For example, a divisional CFO role is compared to our CFO role versus the overall commercial bank CFO role which is larger and broader in scope and responsibility. When using FHLBank System comparisons, our NEOs are compared to the same position within the FHLBanks. For example, our CFO role is compared to other CFO roles in the FHLBank System. When using proxy data comparisons, our NEOs are compared based on their salary rank within the Bank to the market's top paid incumbents regardless of position.

Compensation Decisions in 2016
 
How we compensate our NEOs sets the tone for how we administer pay throughout the entire Bank. For 2016, our Compensation Committee considered numerous factors (including those previously discussed) before deciding on the appropriate total compensation for our NEOs, in the context of the current business, operating, and regulatory environment, which are more fully described in the following narrative.

BASE SALARY LEVELS
 
The Compensation Committee followed its historical practice of adjusting base salaries after a review of individual performance and current compensation of our NEOs compared to survey data. The Compensation Committee determined increases in our NEOs' base salaries between zero percent and 11.1 percent for 2016 were appropriate based on (i) our NEOs' individual performance, contributions to the Bank, length of time in position, and changes in responsibilities, if applicable, (ii) a review of the compensation data paid by other FHLBanks, and (iii) a review of the McLagan Partners' executive compensation survey data.

For 2016, the Compensation Committee approved increases for our NEOs effective January 1, 2016, with the exception of our Director, Western Office whose increase was effective March 1, 2016 and approved by our President and CEO since the Director, Western Office was not an NEO in 2016. These increases were reviewed by the Finance Agency. The 2016 increases in base salary for our President and CEO, Michael L. Wilson, former CEO, Richard S. Swanson, COO (former CFO), Steven T. Schuler, CRO, Dusan Stojanovic, and CBO, Daniel D. Clute, were zero percent, zero percent, 3.0 percent, 11.1 percent, and 7.7 percent of 2015 base salary, respectively. Our President and CEO and former CEO recommended to the Compensation Committee that their base salary remain the same for 2016 due to the Merger. Our CBO recommended an increase of 5.5 percent to our President and CEO for the Director, Western Office, Glen D. Simecek. Our CFO was not an employee of the Bank at the time 2016 merit increase decisions were made. Mr. Amato's base salary was established in his employment agreement that is further discussed in "Employment Agreement between the FHLB Des Moines and Joseph Amato."

In December 2016, the Compensation Committee approved increases in base salaries between zero percent and 11.8 percent for the NEOs effective January 1, 2017. The larger increases of 9.1 and 11.8 percent include a merit and market adjustment for our Director, Western Office and President and CEO, respectively, whose compensation as determined by the Compensation Committee was low compared to the market data for similar positions. These increases were reviewed by the Finance Agency and a non-objection was received on January 4, 2017.
 
ESTABLISHMENT OF PAY TARGETS AND RANGES
 
IP pay targets established for our NEOs take into consideration total compensation practices (base salary and incentives) of the survey data reviewed. Under the IP, our NEOs are assigned target award opportunities, stated as percentages of base salary. The target award opportunities correspond to the determination made by our Compensation Committee and our President and CEO on each NEO's level of responsibility and ability to contribute to and influence overall Bank performance. For 2016, the Compensation Committee increased the incentive target payout opportunity for the President and CEO and former CEO. The IP target award opportunities were the same as 2015 for the other NEOs. As a result of the merger integration, the Director, Western Office's IP target award was reduced to 40 percent from 50 percent in 2016.

Awards are paid to our NEOs based upon the achievement level of Bank-wide Goals as determined by the Compensation Committee. In addition, 50 percent of the incentive award for participating NEOs, is deferred for three years following the end of the performance period, and subject to our achievement of requisite EVCS levels and Compensation Committee and Board of Directors' approvals at the time of payment.

158


The annual and deferred IP award opportunities for our NEOs in 2016 were a percentage of base salary as follows:
Named Executive Officer
 
Incentive
Plan
 
Threshold
 
Target
 
Maximum
Michael L. Wilson
 
Annual
 
25.0%
 
42.5%
 
50.0%
 
 
Deferred
 
25.0%
 
42.5%
 
50.0%
Richard S. Swanson
 
Annual
 
25.0%
 
42.5%
 
50.0%
 
 
Deferred
 
25.0%
 
42.5%
 
50.0%
Joseph E. Amato
 
Annual
 
20.0%
 
30.0%
 
40.0%
 
 
Deferred
 
20.0%
 
30.0%
 
40.0%
Steven T. Schuler
 
Annual
 
20.0%
 
30.0%
 
40.0%
 
 
Deferred
 
20.0%
 
30.0%
 
40.0%
Dusan Stojanovic
 
Annual
 
20.0%
 
30.0%
 
40.0%
 
 
Deferred
 
20.0%
 
30.0%
 
40.0%
Daniel D. Clute
 
Annual
 
20.0%
 
30.0%
 
40.0%
 
 
Deferred
 
20.0%
 
30.0%
 
40.0%
Glen D. Simecek
 
Annual
 
10.0%
 
20.0%
 
30.0%
 
 
Deferred
 
10.0%
 
20.0%
 
30.0%

ESTABLISHMENT OF PERFORMANCE MEASURES FOR THE IP
 
In December 2015, the Compensation Committee approved the Bank-wide Goal measures for 2016, which are summarized below:

i.
Core Product Utilization is a measure of the usage of the Bank's core products (advances, LOCs and MPF/MPP/MPF Xtra) by its members.

ii.
Advance Penetration is a measure of the average advance to assets ratio of the Bank's depository institution members.

iii.
Operation Risk Management is a measure of the effectiveness of the Bank's efforts to improve internal operations.

iv.
Financial Risk Management as measured by the effectiveness of the Bank's efforts to manage market risk, credit risk, and liquidity risk.

v.
Spread between Adjusted Return on Capital Stock and average 3-month LIBOR is a measure of profitability in which GAAP net income is adjusted for certain volatile and non-recurring items as disclosed in the Bank's SEC reporting documents on Form 10-K and Form 10-Q. For additional information on our adjusted earnings measure, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Executive Overview — Adjusted Earnings."

vi.
Market Value of Capital Stock is a measure to ensure the Bank can always redeem capital stock at par.

The Bank’s IP design has historically included Bank-wide Goals. This plan design has resulted in positive results for the Bank and reasonable payouts to our participating NEOs. We believe this plan design has accomplished and driven the behaviors of all employees, including our NEOs, in accordance with our Board of Directors' expectations.
 
For 2016, NEO incentive awards are tied entirely to achievement of Bank-wide Goals. This weighting was determined by the Compensation Committee based upon the relative need for our NEOs to focus on certain strategic imperatives and/or strategies contained in our Strategic Business Plan. The Compensation Committee determined not to include an Individual/Team Goal component of the Bank's IP design because it was subjective.

When establishing the Bank-wide IP performance goals, the Compensation Committee and the Board of Directors anticipated that we would reasonably achieve the target level of performance aligned with objectives contained in our Strategic Business Plan. The maximum level provides a goal that is anticipated to be more challenging to reach, based on the previous year's performance results and current market trends and conditions. The Bank-wide Goal incentive awards are paid based on the actual results we achieve. The weightings for each goal area are generally aligned with our Strategic Business Plan and areas of key focus, such as delivering member value and managing risk.


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The 2016 to 2018 Strategic Business Plan was approved by the Board of Directors in December of 2015, and included the following strategic imperatives for which strategies and action items were developed:
 
i.
Financial Risk Management
 
ii.
Member Focus
 
iii.
People and Culture

iv.
Public Policy

v. Operational Excellence

The Bank-wide performance goals were aligned with the focus areas of Financial Risk Management, Member Focus, and Operational Excellence.

2016 IP PERFORMANCE RESULTS
 
On a regular basis during 2016, management provided an update to the Board of Directors on the status of performance relative to Bank-wide Goals. The following table provides the 2016 IP Bank-wide Goals approved by the Board of Directors in January 2016 as well as our performance results for 2016:
Bank-wide Goals
 
 2016 Results
 
Threshold
 
Target
 
Maximum
Core Product Utilization (15% Weight)
 
65.7
%
 
60.2
%
 
65.0
%
 
66.6
%
Advance Penetration (15% Weight)
 
2.87
%
 
1.94
%
 
2.60
%
 
2.78
%
Operational Risk Management (20% Weight)1
 
3/5

 
3/5

 
4/5

 
5/5

Financial Risk Management (10% Weight)
 
4/5

 
3/5

 
4/5

 
5/5

Spread between Adjusted Return on Capital Stock and average 3-month LIBOR (25% Weight)
 
4.37
%
 
3.05
%
 
4.60
%
 
6.15
%
MVCS (15% Weight)
 
$
117.9

 
$
100.0

 
$
108.6

 
$
117.1


1
The Board of Directors approved a result of 2.75/5 for the NEOs and a result of 3/5 for the remainder of the Bank's employees.

At its January 2017 conference call meeting, the Compensation Committee determined the Bank-wide Goals achievement results for the incentive awards that would be paid out to participating NEOs for the 2016 performance year. The incentive awards were based on the pay targets, ranges, and performance measures established by the Board of Directors and management, as appropriate, for 2016.

The overall weighted achievement of the Bank-wide Goals was 93.75 percent of target for our President and CEO, and 100.95 percent for the CFO, COO (former CFO), CRO, and CBO, and 103.93 percent for the Director, Western Office. As a result of the Bank's performance based on achievements related to Bank-wide Goals, the Compensation Committee awarded each NEO the amounts identified in the following table:
Named Executive Officer
 
Bank-wide Performance Award
Percent of Base
Salary
Michael L. Wilson 
 
$
573,804

80
%
Richard S. Swanson1
 
411,778

80

Joseph E. Amato2
 
181,740

61

Steven T. Schuler
 
233,839

61

Dusan Stojanovic
 
212,030

61

Daniel D. Clute
 
212,030

61

Glen D. Simecek
 
107,601

42


1
Mr. Swanson's employment with the Bank was terminated effective June 30, 2016. His Bank-wide performance award was based off his eligible earnings for his period of employment with the Bank, from January 1, 2016 through June 30, 2016.

2
Mr. Amato's incentive was prorated based on his period of employment with the Bank from May 2, 2016 through December 31, 2016.



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The following table provides compensation information for our NEOs for the years ended December 31, 2016, 2015, and 2014:
Summary Compensation Table
Name and Principal Position
 
Year
 
Salary
 
Bonus
 
Non-Equity Incentive Plan Compensation1
 
Change in Pension Value and Non-Qualified Deferred Compensation Earnings2
 
All Other
Compensation3
 
Total
Michael L. Wilson4
 
2016
 
$
720,000

 
$

 
$
751,012

 
$
664,000

 
$
70,610

 
$
2,205,622

President and CEO
 
2015
 
420,000

 

 
329,412

 
222,250

 
175,943

 
1,147,605

Richard S. Swanson5
 
2016
 
516,693

 
1,125

 
602,034

 
1,299,000

 
2,556,170

 
4,975,022

Former CEO
 
2015
 
720,000

 

 
565,910

 
394,000

 
72,677

 
1,752,587

 
 
2014
 
695,000

 

 
593,780

 
1,004,000

 
68,513

 
2,361,293

Joseph E. Amato6
 
2016
 
300,000

 
192,500

 
181,740

 

 
212,482

 
886,722

CFO
 
 
 
 
 
 
 
 
 
 
 
 
 


Steven T. Schuler8
 
2016
 
386,000

 
1,125

 
332,388

 
413,000

 
32,266

 
1,164,779

COO (former CFO)
 
2015
 
374,400

 

 
234,336

 
229,000

 
29,494

 
867,230

 
 
2014
 
360,000

 

 
244,417

 
463,000

 
30,152

 
1,097,569

Dusan Stojanovic
 
2016
 
350,000

 

 
295,524

 
281,000

 
26,826

 
953,350

CRO
 
2015
 
315,000

 

 
198,907

 
112,000

 
24,867

 
650,774

 
 
2014
 
305,000

 

 
205,536

 
291,000

 
24,467

 
826,003

Daniel D. Clute
 
2016
 
350,000

 
750

 
287,311

 

 
38,027

 
676,088

CBO
 
2015
 
325,000

 

 
208,256

 

 
36,347

 
569,603

 
 
2014
 
275,000

 

 
186,502

 

 
32,435

 
493,937

Glen D. Simecek7
 
2016
 
258,906

 

 
157,602

 
154,000

 
15,626

 
586,134

Director, Western Office
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1
The components of this column for 2016 are provided in the “Components of 2016 Non-Equity Incentive Plan Compensation” table on the following page.

2
Represents the change in value of the DB Plans and the BEP DB Plan. All earnings on non-qualified deferred compensation are at the market rate.

3
The components of this column for 2016 are provided in the “Components of 2016 All Other Compensation” table on the following page.

4
Mr. Wilson's 2015 salary, non-equity incentive, and change in accrued pension value, non-qualified deferred compensation earnings and all other compensation are based on the period of his employment with the Bank, from June 1, 2015 through December 31, 2015.

5
Mr. Swanson's employment with the Bank was terminated effective June 30, 2016. His salary, non-equity incentive, change in pension value, and non-qualified deferred compensation earnings are based on the period of his employment with the Bank from January 1, 2016 through June 30, 2016. All other compensation includes Mr. Swanson's termination of employment compensation. Refer to "Post-Employment Compensation of Richard S. Swanson" in this Item 11 for additional details on Mr. Swanson's termination of employment compensation.

6
Mr. Amato's 2016 salary, non-equity incentive, and change in accrued pension value, non-qualified deferred compensation earnings, and all other compensation are based on the period of his employment with the Bank from May 2, 2016 through December 31, 2016. Mr. Amato also received a one-time bonus related to the start of his employment with the Bank.

7
Mr. Simecek was not an NEO prior to 2016.

8
Mr. Schuler retired effective January 13, 2017.






161


COMPONENTS OF 2016 NON-EQUITY INCENTIVE PLAN COMPENSATION
Named Executive Officer
 
Annual Incentive
 
Deferred Incentive1
 
IPIP2
 
Total
Michael L. Wilson
 
$
286,902

 
$
286,902

 
$
177,208

 
$
751,012

Richard S. Swanson
 
205,889

 
205,889

 
190,256

 
602,034

Joseph E. Amato
 
90,870

 
90,870

 

 
181,740

Steven T. Schuler
 
116,919

 
116,919

 
98,550

 
332,388

Dusan Stojanovic
 
106,015

 
106,015

 
83,494

 
295,524

Daniel D. Clute
 
106,015

 
106,015

 
75,281

 
287,311

Glen D. Simecek
 
53,801

 
53,801

 
50,000

 
157,602


1
The deferred incentive amounts were earned as of December 31, 2016, but will not be paid until 2020, and remain subject to modification and forfeiture under the terms of the IP. For the NEOs, the deferred incentive is 50 percent of the total incentive earned in 2016.

2
The Integration Performance Incentive Plan (IPIP) was approved by the Bank's Compensation Committee in 2014 to reward contributors involved in the Bank's contemplated Merger. For additional details refer to "Merger Integration" in the Bank's 2015 Form 10-K.

COMPONENTS OF 2016 ALL OTHER COMPENSATION
 
 
Bank Contributions to Vested Defined Contribution Plans
 
 
 
 
 
 
 
 
 
 
Named Executive Officer
 
DC Plans
 
BEP DC Plan
 
Termination of Employment1
 
Gross-ups or Other Amounts Reimbursed for the Payment of Taxes
 
Perquisites and Other Personal Benefits2
 
Other
 
Total
Michael L. Wilson
 
$
13,179

 
$
48,339

 
$

 
$

 
$
9,000

 
$
92

 
$
70,610

Richard S. Swanson1
 
15,120

 
28,235

 
2,500,734

 

 
12,081

 

 
2,556,170

Joseph E. Amato
 
10,600

 
21,202

 

 
15,125

 
165,463

 
92

 
212,482

Steven T. Schuler
 
15,429

 
14,747

 

 

 
1,998

 
92

 
32,266

Dusan Stojanovic
 
9,625

 
16,861

 

 

 
248

 
92

 
26,826

Daniel D. Clute
 
22,600

 
15,335

 

 

 

 
92

 
38,027

Glen D. Simecek
 
15,534

 

 

 

 

 
92

 
15,626


1
Refer to Post-Employment Compensation of Richard S. Swanson below for additional details on Mr. Swanson's termination of employment compensation.

2
Perquisites and other personal benefits were less than $25 thousand and less than 10 percent of total perquisites for all NEOs with the exception of Mr. Amato. Perquisites include a car allowance for Mr. Wilson, a car allowance, financial planning, and wellness reimbursement for Mr. Swanson, financial planning for Mr. Schuler, and wellness reimbursement for Mr. Stojanovic. Perquisites and other personal benefits for Mr. Amato included relocation expenses of $165,266 and a wellness reimbursement of $237.




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The following table provides estimated potential payouts under our IP of non-equity incentive plan awards:
2016 Grants of Plan-Based Awards
 
 
 
 
Estimated Future Payouts Under
Non-Equity Incentive Plan Awards
Named Executive Officer
 
Incentive Plan
 
Threshold
 
Target
 
Maximum
Michael L. Wilson
 
Annual
 
$
180,000

 
$
306,000

 
$
360,000

 
 
Deferred
 
180,000

 
306,000

 
360,000

Richard S. Swanson
 
Annual
 
146,396

 
219,595

 
292,793

 
 
Deferred
 
146,396

 
219,595

 
292,793

Joseph E. Amato
 
Annual
 
60,000

 
90,000

 
120,000

 
 
Deferred
 
60,000

 
90,000

 
120,000

Steven T. Schuler
 
Annual
 
77,200

 
115,800

 
154,400

 
 
Deferred
 
77,200

 
115,800

 
154,400

Dusan Stojanovic
 
Annual
 
70,000

 
105,000

 
140,000

 
 
Deferred
 
70,000

 
105,000

 
140,000

Daniel D. Clute
 
Annual
 
70,000

 
105,000

 
140,000

 
 
Deferred
 
70,000

 
105,000

 
140,000

Glen D. Simecek
 
Annual
 
25,891

 
51,781

 
77,672

 
 
Deferred
 
25,891

 
51,781

 
77,672


EMPLOYMENT AGREEMENTS

The employment agreements provide, with respect to each of our NEOs, except the Director, Western Office who does not have an Employment Agreement, that we shall initially pay the respective NEO an annualized base salary of not less than the amount set forth in the respective agreement. In each case, base salary may only be adjusted upward from the 2016 base salary based on an annual review by the Board of Directors and may not be adjusted downward unless such downward adjustment is part of a nondiscriminatory cost reduction plan applicable to our total compensation budget.

Additionally, the respective agreements provide that each NEO is entitled to participate in the IP. Each agreement provides that the incentive targets for the IP are to be established by our Board of Directors and that the target for the IP shall not be set lower than the designated percentage of base salary set forth in the employment agreement unless as a result of Board action affecting all NEOs. The agreements further provide that each NEO is entitled to participate in all eligible retirement benefit programs offered by the Bank.

Refer to the discussion of IP under “2016 IP Performance Results” in this Item 11 for additional information on the levels of awards under the IP. Actual non-equity incentive award amounts earned for the year ended December 31, 2016 are included in the non-equity incentive plan compensation column under the “Summary Compensation Table” in this Item 11.
 
The 2016 IP provides that unless otherwise directed by the Compensation Committee, payments under Bank-wide Goals shall be made in a lump sum through regular payroll distribution, as soon as possible after the Board of Directors approves the payout of a particular award, but in no case more than 75 days after the end of the calendar year for which the performance or deferral period is ended.

Under the IP, the Compensation Committee may determine a participating NEO is not eligible to receive all or any part of the deferred incentive if the respective NEO (i) has not achieved a performance level of “meets expectations” or higher evaluation of overall performance during a performance period or deferred performance period, (ii) has not achieved a “meets expectations” or higher evaluation of overall performance at the time of payout, (iii) is subject to any disciplinary action or probationary status at the time of payout, or (iv) fails to comply with regulatory requirements or standards, internal control standards, professional standards or any internal standard, or fails to perform responsibilities assigned under our Strategic Business Plan.

In addition, under the IP, the Compensation Committee may also consider a variety of other objective and subjective factors to determine the appropriate payouts such as (i) operational errors or omissions that result in material revisions to the financial results, information submitted to the Finance Agency, or data used to determine incentive payouts, (ii) whether submission of information to the SEC, Office of Finance, or Finance Agency is untimely, and (iii) whether the organization fails to make sufficient and timely progress, as determined by the Finance Agency, in the remediation of examination, monitoring, and other supervisory findings and matters requiring attention.

163



If one of the above occurs, the Compensation Committee shall consider the facts and circumstances and reduce incentive awards commensurate with the materiality of the exception relative to our financial and operational performance and financial reporting responsibilities.

Each employment agreement provides that we or the applicable NEO may terminate employment for any reason (other than good reason or cause) on 60 days written notice to the other party. An applicable NEO may be entitled to certain payments upon termination or change of control. For more information, see “Potential Payments Upon Termination or Change of Control" in this Item 11.

Benefits and Retirement Philosophy

We consider benefits to be an important aspect of our ability to attract and retain qualified employees and therefore we design our programs to be competitive with other financial services businesses. The following is a summary of the retirement benefits that our NEOs were eligible to receive, except the CFO, CBO, and Director, Western Office in some cases.

QUALIFIED DEFINED BENEFIT PLANS
 
All employees who have met the eligibility requirements participate in our DB Plans, administered by Pentegra. In 2016, our Board of Directors elected to freeze the DB Plans effective January 1, 2017. After the plan freeze, participants no longer accrue any new benefits under the Pentegra DB Plan. The Boards of Directors of both the Seattle and Des Moines Banks previously approved amendments to the DB Plans which excluded new hires from participating in the DB Plans. In 2010, the Bank approved an amendment to the Des Moines DB Plan. Under the amendment, new employees hired on or after January 1, 2011, including any NEO, were not eligible to participate in the Des Moines DB Plan. In 2004, the Seattle Bank Board of Directors approved an amendment to the Seattle DB Plan. Under the amendment, new employees hired on or after January 1, 2005, including any NEO were not eligible to participate in the Seattle DB Plan. All of our NEOs, with the exception of our CFO, and CBO participate in our DB Plans.

The pension benefits payable under the Des Moines DB Plan for the former CEO, COO (former CFO), and CRO were determined using a pre-established formula that provides a retirement benefit payable at age 65 or normal retirement under the plan. The benefit formula is 2.25 percent per each year of the benefit service multiplied by the highest three consecutive years' average compensation. Average compensation is defined as the total taxable compensation as reported on the IRS Form W-2 (excluding deferred award payouts). In the event of retirement prior to attainment of age 65, a reduced pension benefit is payable under the plan. Upon termination of employment prior to age 65, participants meeting the five-year vesting and age 55 early retirement eligibility criteria are entitled to an early retirement benefit. The regular form of retirement benefits provides a single life annuity, with a guaranteed 12-year payment, or additional payment options are also available. The benefits are not subject to offset for Social Security or any other retirement benefits received.

The benefit formula under the Seattle DB Plan for our President and CEO and Director, Western Offices, as amended in August 2013 by the Seattle Bank, was 2.0 percent per each year of the benefit service multiplied by the highest three consecutive years’ average compensation. Compensation is defined as base salary plus overtime, bonuses and incentive compensation, excluding the amounts earned under Long-Term Executive Plans. Early retirement benefit payments are available to vested participants at age 45. However, early retirement benefit payments will be reduced by 3 percent for each year the participant is under age 65 when payments commence. If a participant has a combined age and service of at least 70 years (rule of 70) with a minimum age of 50, this reduction is 1.5 percent for each year the participant is under age 65 when benefit payments commence. The Rule of 70 only applies to benefits accrued prior to August 1, 2013. Our President and CEO and Director, Western Offices are eligible for the Rule of 70.

NON-QUALIFIED DEFINED BENEFIT PLANS
 
Certain NEOs participating in the BEP also participate in the BEP DB Plan. Our BEP DB Plan is an unfunded, non-qualified pension plan. Our President and CEO, former CEO, COO (former CFO), and CRO participate in the BEP DB Plan. The BEP was amended in March of 2011 and states that NEOs hired on or after January 1, 2011 were not eligible to participate in the BEP DB Plan. Although our President and CEO joined the Bank in 2015, he previously participated in the BEP DB Plan when he was employed as CBO of the Bank, and also participated in the Seattle Bank Thrift BEP, and Retirement BEP, which merged into the BEP effective January 1, 2016. In 2016, our Board of Directors elected to freeze the BEP DB Plan effective January 1, 2017. After the plan freeze, participants no longer accrue any new benefits under the BEP DB Plan.
 

164


In determining whether a restoration of retirement benefits is due to our participating NEOs, the BEP DB Plan previously utilized the identical benefit formulas applicable to our DB Plans; however, the BEP DB Plan did not limit the annual earnings or benefits of our participating NEOs. Rather, if the benefits payable from the DB Plans were reduced or otherwise limited, our participating NEOs' lost benefits were payable under the terms of the BEP DB Plan. As a non-qualified plan, the benefits received from the BEP DB Plan do not receive the same tax treatment and funding protection as with our qualified plans. Payment options under the BEP DB Plan include a lump-sum distribution, annuity payments, or installment payment options.

CURRENT ACCRUED RETIREMENT BENEFITS

The following table provides the present value of the current accrued benefits payable to our participating NEOs upon retirement at age 65 from the DB Plans and BEP DB Plan, and is calculated in accordance with the formula currently in effect for specified years-of-service and remuneration for participating in those plans. Our pension benefits do not include any reduction for a participant's Social Security benefits. The vesting period for the pension plans is five years. See “Item 8. Financial Statements and Supplementary Data — Note 16— Pension and Postretirement Benefits” for details regarding valuation method and assumptions.
2016 Pension Benefits Table
Named Executive Officer1
 
Plan Name
 
Number of Years
Credited Service
 
12/31/15 Present Value of Accumulated Benefit
 
12/31/16 Present Value of Accumulated Benefit
 
Change in Present Value of Accumulated Benefit
Michael L. Wilson
 
Pentegra DB Plan
 
22.00

 
$
1,432,000

 
$
1,626,000

 
$
194,000

 
 
BEP DB Plan
 
10.33

 
939,000

 
1,409,000

 
470,000

Richard S. Swanson
 
Pentegra DB Plan
 
9.42

 
867,000

 
1,014,000

 
147,000

 
 
BEP DB Plan
 
10.42

 
2,450,000

 
3,602,000

 
1,152,000

Joseph E. Amato1
 
Pentegra DB Plan
 

 

 

 

 
 
BEP DB Plan
 

 

 

 

Steven T. Schuler
 
Pentegra DB Plan
 
9.25

 
817,000

 
957,000

 
140,000

 
 
BEP DB Plan
 
9.25

 
690,000

 
963,000

 
273,000

Dusan Stojanovic
 
Pentegra DB Plan
 
9.75

 
473,000

 
589,000

 
116,000

 
 
BEP DB Plan
 
9.75

 
278,000

 
443,000

 
165,000

Daniel D. Clute1
 
Pentegra DB Plan
 

 

 

 

 
 
BEP DB Plan
 

 

 

 

Glen D. Simecek1
 
Pentegra DB Plan
 
19.58

 
1,004,000

 
1,158,000

 
154,000

 
 
BEP DB Plan
 

 

 

 


1
Only employees hired prior to January 1, 2011 were previously eligible for the Des Moines DB Plan and BEP DB Plan. Mr. Amato and Mr. Clute were hired after January 1, 2011 and therefore were not eligible to participate in these plans in 2016. Mr. Simecek is a former Seattle Bank employee and is a participant of the Seattle DB Plan but is not eligible to participate in the BEP DB Plan as he became an employee of the Bank after January 1, 2011 and did not previously participate in the Thrift BEP, Retirement BEP, or SERP.

QUALIFIED DEFINED CONTRIBUTION PLANS

All employees who have met the eligibility requirements may elect to participate in our DC Plan, a retirement savings plan qualified under the Internal Revenue Code. Employees (including NEOs) may receive a match on employee contributions at 100 percent up to six percent of eligible compensation. Employees are eligible for the match immediately and all matching contributions are immediately 100 percent vested. Prior to January 1, 2017, employees hired on or after January 1, 2011 received an additional four percent Bank contribution of eligible compensation to the Des Moines DC Plan at the end of each calendar year. This change was made as a result of changes to the Des Moines DB Plan which excluded employees hired on or after January 1, 2011 from participating in the DB Plan. Effective January 1, 2017, in conjunction with the freeze of the DB plan, all employees now receive an additional four percent Bank contribution of eligible compensation to the DC Plan at the end of each calendar year. Vesting in the additional four percent contribution is 100 percent at the completion of three years of service.


165


NON-QUALIFIED DEFINED CONTRIBUTION PLANS
 
NEOs participating in the BEP are eligible to participate in the BEP DC Plan, a non-qualified defined contribution plan that is the same as the DC Plan. The BEP DC Plan ensures, among other things, that participants whose benefits under the Des Moines DC Plan would otherwise be restricted by certain provisions of the Internal Revenue Code are able to make elective pre-tax deferrals and to receive a matching contribution relating to such deferrals. The investment returns credited to a participating NEO's account are at the market rate for the NEO's selected investment. The selections may be altered at any time. Aggregate earnings are calculated by subtracting the 2015 year-end balance from the 2016 year-end balance, less the NEO's and Bank's contributions. The Bank immediately matches 100 percent of NEOs' contributions up to six percent of salary for salary and incentive deferrals.
2016 Non-Qualified Deferred Compensation Table
Named Executive Officer
 
Executive
Contributions
In Last FY1
 
Registrant
Contributions
In Last FY2
 
Aggregate
Earnings
In Last FY
 
Aggregate Withdrawals In Last FY
 
Aggregate
Balance
At Last FYE
Michael L. Wilson
 
$
90,621

 
$
48,339

 
$
34,540

 
$

 
$
795,995

Richard S. Swanson
 
257,953

 
28,235

 
98,055

 

 
1,987,689

Joseph E. Amato
 
300,870

 
21,202

 
(9,406
)
 

 
216,344

Steven T. Schuler
 
88,892

 
14,747

 
61,098

 

 
901,605

Dusan Stojanovic
 
281,015

 
16,861

 
9,222

 

 
429,244

Daniel D. Clute
 
37,861

 
15,335

 
7,058

 

 
155,287

Glen D. Simecek3
 

 

 

 

 


1
Amounts represent NEO’s contributions for 2016 which includes the base salary deferral into the BEP during 2016 as well as the amount of the 2016 incentive the NEO has deferred into the BEP in 2017. Amounts shown are included in both the “Salary” and “Non-Equity Incentive” columns of the “Summary compensation table” in this Item 11.

2
Amounts shown are included in the "All Other Compensation" column of the “Summary Compensation Table” in this Item 11.

3
Mr. Simecek is not eligible to participate in the BEP DC Plan.

Potential Payments Upon Termination or Change of Control

The following paragraphs set out the material terms relating to termination of each of our NEOs and the potential compensation that would be due to each upon termination under the current employment agreements or change in control agreements, as applicable. For purposes of the following discussion regarding potential payments upon termination or change of control, the following are the definitions of “Cause,” “Good Reason,” “Disability,” and "Change of Control." Mr. Simecek is a party to a change in control agreement, dated as of March 17, 2014, originally with the Seattle Bank (the "Simecek Change in Control Agreement"). As a result of the Merger, Mr. Simecek may be eligible to receive benefits under the Simecek Change in Control Agreement if his employment is terminated before June 1, 2017, for the reasons discussed below.

“Cause” generally means a felony conviction, a willful act of misconduct that materially impairs the Bank's business or goodwill or causes material damage, a willful breach of certain representations in the employment agreement, a willful and continued failure to perform material duties (other than for Mr. Simecek), a willful material violation of the Bank's Code of Ethics, or receipt by the Bank of any regulatory order that the NEO be terminated or the NEO's authority be materially reduced (other than for Mr. Simecek). "Cause" under the Simecek Change in Control Agreement also includes Mr. Simecek's failure to comply with valid and lawful directives from his supervisor or Board of Directors.

“Good Reason” generally means a reduction in the NEO's base salary or incentive plan bonus opportunity, unless as part of a nondiscriminatory cost reduction applicable to the Bank's total compensation budget, a reduction in the NEO's corporate officer title (other than for Mr. Simecek), a material change by the Bank in the geographic location in which the NEO is required to perform services or a material breach of the employment agreement or Simecek Change in Control Agreement, as applicable, by the Bank. "Good Reason" under the Simecek Change in Control Agreement also includes the assignment to Mr. Simecek of ongoing duties that are materially inconsistent with his position, a material diminution in Mr. Simecek's authority or responsibilities or those of the person to whom he reports or a material diminution in the budget over which Mr. Simecek has authority.

“Disability” means the NEO is receiving benefits under a disability plan sponsored by the Bank for a period of not less than three months by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than twelve months and which has rendered the NEO incapable of performing their duties. There is no definition of "Disability" under the Simecek Change in Control Agreement.

166



“Change of Control” means a merger, reorganization, or consolidation of the Bank with or into another FHLBank or other entity, a sale or transfer of all or substantially all of the business or assets of the Bank to another FHLBank or other entity, the purchase by the Bank or transfer to the Bank of all or substantially all of the business or assets of another FHLBank, or the liquidation of the Bank. Under the Simecek Change in Control Agreement, "Change of Control" also includes a sale of the stock of the Bank after which the holders of voting securities of the Bank immediately prior to such sale own less than a majority of the outstanding voting securities or a change in the composition of the Board such that individuals who were members of the Board prior to notice of a potential transaction cease to comprise a majority of the Board.

These definitions are summaries only and each respective employment agreement or Simecek Change in Control Agreement, between us and our NEOs, as applicable, provides the relevant definitions in full. A copy of the employment agreement for our President and CEO is filed as an exhibit to our current report on Form 8-K, filed with the SEC on June 1, 2015. Copies of the employment agreements for our CRO and CBO are filed as exhibits to our quarterly report on Form 10-Q, filed with the SEC on November 12, 2014, and copies of the employment agreement for our CFO is filed as an exhibit to our current report on Form 8-K/A, filed with the SEC on August 5, 2016. A copy of the Simecek Change in Control Agreement is filed as an exhibit to this annual report on Form 10-K.
 
TERMINATION FOR CAUSE OR WITHOUT GOOD REASON

If an NEO's employment is terminated by us for cause or by the NEO without good reason, the employment agreement entitles the respective NEO to the following:
 
i.
Base salary accrued through the date of termination;
 
ii.
Accrued but unpaid award(s) under any IP in an amount equal to that which the NEO would have received in the year of termination;
 
iii.
Accrued and earned vacation through the date of termination; and
 
iv.
All other vested benefits under the terms of our employee benefit plans, subject to the terms of such plans.

Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2016, the total amounts payable to our NEOs are outlined in the table below:
Named Executive Officer
 
Severance Pay1
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout2
 
Total
Michael L. Wilson
 
$

 
$

 
$

 
$
129,700

 
$
129,700

Richard S. Swanson3
 

 

 

 

 

Joseph E. Amato
 

 

 

 
8,076

 
8,076

Steven T. Schuler
 

 

 

 
39,342

 
39,342

Dusan Stojanovic
 

 

 

 
34,327

 
34,327

Daniel D. Clute
 

 

 

 
26,474

 
26,474

Glen D. Simecek4
 

 

 

 
41,187

 
41,187


1
Termination under these circumstances would not result in severance payments from the Bank but would result in salary earned through December 31, 2016, as reflected under the "Salary" column of the "Summary Compensation Table" in this Item 11.

2
This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.

3
Mr. Swanson's employment with the Bank was terminated effective June 30, 2016.

4
As of December 31, 2016, there is not an employment agreement in force between the Bank and Mr. Simecek. However, like all employees, Mr. Simecek is eligible to receive a payout in connection with unused vacation upon termination for cause.


167


TERMINATION WITHOUT CAUSE, FOR GOOD REASON, OR FOLLOWING A MERGER/CHANGE IN CONTROL

If, however, the NEO's (other than Mr. Simecek's) employment is terminated by us without cause, by the NEO for good reason, or following a merger/change in control, in addition to the payouts previously mentioned, the NEO would be entitled to severance payments equal to a multiple of the NEO's base salary and otherwise as follows:
 
i.
Two times the annual base salary in effect on the date of termination for the President and CEO and for Mr. Simecek, one times the annual base salary in effect on the date of termination for the CFO, COO (former CFO), CRO, and CBO, or, in the case that the termination occurs within 24 months following a Change of Control, 2.99 times the annual base salary in effect on the date of termination for the President and CEO and two times the annual base salary in effect on the date of termination for the CFO, COO (former CFO), CRO, and CBO;

ii.
One times the participating NEO's (other than Mr. Simecek's) targeted non-deferred IP award in effect for the calendar year in which the date of termination occurs, or, in the case that the termination occurs within 24 months following a Change of Control, 2.99 times the targeted non-deferred plan award in effect for the calendar year in which the date of termination occurs for the President and CEO and two times the targeted non-deferred plan award in effect for the calendar year in which the date of termination for the CFO, COO (former CFO), CRO, and CBO;
 
iii.
The IP award for the calendar year in which the date of termination occurs and prorated for the portion of the calendar year in which the NEO was employed. Under the Simecek Change in Control Agreement, Mr. Simecek would receive two times that amount, but only to the extent such amount would have been paid out in the first quarter of the succeeding calendar year;
 
iv.
The accrued but unpaid IP awards covering periods prior to the one in which the NEO's (other than Mr. Simecek's) employment was terminated, calculated in accordance with the terms of the IP as if termination was due to death or disability;
 
v.
Any benefits mandated under any applicable health care continuation laws, provided that the continuing bank will continue paying its portion of the medical and/or dental insurance premiums for the NEO for the one-year period following the date of termination; and

vi.
In the case of Mr. Simecek, a lump sum payment with respect to the pension benefits to which he would have been entitled under the Seattle DB Plan if he were to be credited with an additional two years of service, less any amounts to which he would be entitled to under the terms of the Seattle DB Plan as well as additional sums of $40,928 and to help defray amounts incurred for outplacement counseling services, $15,000.

Mr. Simecek is only eligible for the payments described above if his termination is without Cause or for Good Reason, and occurs within 24 months following a Change of Control.

 The IP award would be paid at target based on the calendar year actual results for Bank-wide Goals, and would be paid at the regular time that such payments are made to all employees enrolled in the plans. The base salary amount, the IP award for the calendar year in which the date of termination occurs, and the accrued but unpaid IP awards for any performance period ending prior to the year in which the date of termination occurs would be paid in a lump sum within ten days following the NEO executing a release of claims against us, which would entitle them to the payments described. Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2016, the total amounts payable to our NEOs are outlined in the table below:
Termination Without Cause or For Good Reason
Named Executive Officer
 
Severance Pay
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout1
 
Total
Michael L. Wilson
 
$
1,440,000

 
$
286,902

 
$
671,734

 
$
129,700

 
$
2,528,336

Richard S. Swanson2
 

 

 

 

 

Joseph E. Amato
 
900,000

 
90,870

 
90,870

 
8,076

 
1,089,816

Steven T. Schuler
 
772,000

 
116,919

 
468,821

 
39,342

 
1,397,082

Dusan Stojanovic
 
700,000

 
106,015

 
415,709

 
34,327

 
1,256,051

Daniel D. Clute
 
700,000

 
106,015

 
392,760

 
26,474

 
1,225,249

Glen D. Simecek3
 
522,366

 
53,801

 
53,801

 
41,187

 
671,155


168


Termination Without Cause or For Good Reason Following Change in Control
Named Executive Officer
 
Severance Pay
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout1
 
Total
Michael L. Wilson
 
$
2,152,800

 
$
857,837

 
$
671,734

 
$
129,700

 
$
3,812,071

Richard S. Swanson2
 

 

 

 

 

Joseph E. Amato
 
900,000

 
181,740

 
90,870

 
8,076

 
1,180,686

Steven T. Schuler
 
772,000

 
233,839

 
468,821

 
39,342

 
1,514,002

Dusan Stojanovic
 
700,000

 
212,030

 
415,709

 
34,327

 
1,362,066

Daniel D. Clute
 
700,000

 
212,030

 
392,760

 
26,474

 
1,331,264

Glen D. Simecek3
 
629,303

 
107,601

 
53,801

 
41,187

 
831,892


1
This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.

2
Mr. Swanson's employment with the Bank was terminated effective June 30, 2016. Payments to Mr. Swanson are reflected in "Post-Employment Compensation of Richard S. Swanson"below.

3
As of December 31, 2016, there is not an employment agreement in force between the Bank and Mr. Simecek. However, Mr. Simecek does have a change in control agreement as noted below.

TERMINATION FOR DEATH, DISABILITY, OR RETIREMENT

If the NEO's employment is terminated due to death, disability, or qualifying retirement, in addition to the payouts previously mentioned under the section entitled "Termination For Cause or Without Good Reason", the NEO is entitled to the following:
 
i.
The IP award for the calendar year in which the date of termination occurs and prorated for the portion of the calendar year in which the NEO was employed;
 
ii.
To the extent not already paid to the NEO, the accrued but unpaid IP awards covering periods prior to the one in which the NEO's employment was terminated;
 
iii.
Other coverage continuation rights that are available to such employees upon death, disability, or retirement, as provided for under the terms of such plans; and

iv.
For the NEOs, in the case of a qualifying retirement (as defined in their respective employment agreements), any pro-rated award that such executive would have been entitled to receive under the IPIP, calculated by treating the date of the executive’s qualifying retirement as the date of such executive’s death.

Payment of all accrued amounts, other than IP award amounts, shall be paid in lump sum within ten days or no later than the first payroll date on or after the NEO's date of termination. Payment of all IP award amounts, if any, shall be paid as otherwise provided under the applicable IP.


169


Assuming one or more of the previously discussed events for the receipt of termination payments occurred as of December 31, 2016, the total amounts payable to our NEOs are outlined in the table below:
Termination by Death, Disability, or Retirement
Named Executive Officer
 
Severance Pay
 
Annual Incentive
 
Deferred Incentive
 
Vacation Payout1
 
Total
Michael L. Wilson
 
$

 
$
286,902

 
$
671,734

 
$
129,700

 
$
1,088,336

Richard S. Swanson2
 

 

 

 

 

Joseph E. Amato
 

 
90,870

 
90,870

 
8,076

 
189,816

Steven T. Schuler
 

 
116,919

 
468,821

 
39,342

 
625,082

Dusan Stojanovic
 

 
106,015

 
415,709

 
34,327

 
556,051

Daniel D. Clute
 

 
106,015

 
392,760

 
26,474

 
525,249

Glen D. Simecek3
 

 
53,801

 
53,801

 
41,187

 
148,789


1
This amount represents accrued but unused vacation and would be paid in a lump sum upon termination.

2
Mr. Swanson's employment with the Bank was terminated effective June 30, 2016.

3
As of December 31, 2016, there is not an employment agreement in force between the Bank and Mr. Simecek. However, Mr. Simecek does have his Change in Control Agreement, which does not provide Mr. Simecek with benefits for termination upon death, disability, or retirement. In addition, like all employees, Mr. Simecek is entitled to receive earned but not paid incentives upon termination for death, disability, or retirement.


Post-Employment Compensation of Richard S. Swanson

On April 14, 2016, the Board approved an Executive Transition Plan, appointed Mr. Wilson as President and CEO, and terminated Mr. Swanson’s employment agreement with the Bank without cause effective as of June 30, 2016. On July 8, 2016, the Bank and Mr. Swanson entered into a General Release (the “General Release”), which provides for a termination date of June 30, 2016 and included a release of all claims by Mr. Swanson. The General Release also provides for, among other terms, the following post-employment compensation:

i. The applicable severance benefits provided under section 10(e) of Mr. Swanson’s employment agreement with the Bank, dated May 31, 2015, previously disclosed in the Bank’s annual report on Form 10-K for the year ended December 31, 2015 (filed March 21, 2016), amounting to approximately $2,912,512;

ii. An award under the Bank’s Integration Performance Incentive Plan, previously disclosed in the Bank’s quarterly report on Form 10-Q for the three-month period ended September 30, 2014 (filed November 12, 2014), amounting to approximately $190,256;

iii. Additional age and service credits under the DB Plan.

vi. The continuation of certain health benefits.

Employment Agreement Between Michael L. Wilson and the Bank

The Bank entered into an employment agreement with Michael L. Wilson, effective on consummation of the Merger on May 31, 2015, in order to establish his duties and compensation and to provide for his employment as President of the Bank. In connection with the termination of Richard S. Swanson on June 30, 2016, Mr. Wilson was also appointed CEO.

The employment agreement provides that the Bank will initially pay Mr. Wilson a base salary of $720,000, subject to adjustment as described in the employment agreement.

Mr. Wilson’s incentive target will generally not be set lower than 75 percent of his base salary. The Bank will pay, or reimburse Mr. Wilson for, all reasonable relocation expenses incurred by Mr. Wilson in relocation to the Des Moines area up to a maximum of $125,000. Mr. Wilson will also be eligible for certain perquisites, including a car allowance in the amount of $750 per month.

170


Mr. Wilson’s employment agreement provides that:

the Bank or Mr. Wilson may terminate employment for any reason (other than Good Reason or Cause) following 60 days’ written notice to the other party;

the Bank may terminate for Cause immediately following written notice to Mr. Wilson; and

Mr. Wilson may terminate for Good Reason following written notice to the Des Moines Bank,
 
in each case, in accordance with the procedures set forth in the employment agreement.

Amounts payable under the employment agreement are subject to reduction in the event the amounts constitute an “excess parachute payment” under Section 280G of the Internal Revenue Code.

Termination for Cause or Without Good Reason

If Mr. Wilson’s employment is terminated by the Bank for Cause or by Mr. Wilson without Good Reason, the employment agreement entitles Mr. Wilson to the benefits set forth under the heading “Termination for Cause or without Good Reason”.

Termination Without Cause, for Good Reason, Following a Change of Control, or Within a Specified Period of Time Following the Effective Date of the Employment Agreement

If Mr. Wilson’s employment is terminated by the Bank without Cause or by Mr. Wilson for Good Reason, in addition to the payouts previously mentioned under “Termination for Cause or Without Good Reason,” the employment agreement entitles Mr. Wilson to additional amounts, including the benefits set forth under the heading “Termination without Cause, for Good Reason, or following a Merger/Change in Control”.

Termination for Death, Disability, or Retirement

If Mr. Wilson’s employment is terminated due to death, disability, or qualifying retirement, in addition to the payouts described in the section entitled “Termination for Cause or Without Good Reason,” he would also be entitled to the benefits set forth under the heading “Termination for Death, Disability or Retirement”.

Director Compensation
 
During 2016, the Board of Directors held 6 in-person board meetings and 37 in-person committee meetings. In addition, there were 4 telephonic board meetings and 23 telephonic committee meetings held throughout the year. The following table provides a summary of the number of meetings held by the Audit Committee, Compensation Committee, and Nominating Committee in 2016:
Committee
 
Number of In Person Meetings
 
Number of Telephonic Meetings
 
Total Number of Meetings Held
Audit Committee
 
6

 
9

 
15

Compensation Committee
 
5

 
4

 
9

Nominating Committee
 
2

 
3

 
5


Pursuant to our 2016 Director Fee Policy, Directors receive one quarter of the annual compensation following the end of each calendar quarter. If it is determined at the end of the calendar year that a Director has attended less than 75 percent of the meetings they were required to attend during the year, the Director will not receive one quarter of the annual compensation for the fourth quarter of the calendar year.


171


Directors are expected to attend all Board meetings and meetings of the Committees on which they serve, and to remain engaged and actively participate in all meetings. In addition to our right to withhold fourth quarter annual compensation from a Director, the Board of Directors directs the Corporate Secretary to make any other appropriate adjustments in the payments to any Director who regularly fails to attend Board meetings or meetings of Committees on which the Director serves, or who consistently demonstrates a lack of participation in or preparation for such meetings, to ensure that no Director is paid fees that do not reflect that Director's performance of his/her duties. To assist the Board in making such determinations, the Corporate Secretary will, on a quarterly basis and prior to payment of the most recently completed quarter's Director fees, review the attendance of each Director during the quarter and raise any attendance issues identified with the Board Chair. In the event the potential issue involves the Board Chair, the Corporate Secretary will raise such issue with the Board Vice Chair.

Directors are eligible to participate in the Bank's Deferral Plan for Directors. Under this plan, directors may elect to defer all or a portion of their directors’ fees. Amounts deferred under this plan accrue interest and become payable to the director upon the expiration of the deferral period, which is irrevocably established by the director at the time the director elects to defer director fees. No above-market or preferential earnings are paid on any earnings under the Bank's Deferral Plan for Directors. The former Des Moines directors were eligible to defer fees under this plan beginning in 2016.

The total expenses paid on behalf of the Board of Directors for travel and other reimbursed expenses for 2016 was $539 thousand and annual compensation paid to the Board of Directors, by position, for 2016 was as follows:
Board of Director Position
 
2016
Chair
 
$
125,000

Vice Chair
 
115,000

Audit Committee Chair
 
110,000

Committee Chairs
 
105,000

Other Directors
 
95,000



172


The following table sets forth each Director's compensation for the year ended December 31, 2016:
Director Compensation
Director Name
 
Fees Earned Or
Paid In Cash
Dale E. Oberkfell (Chair)
 
$
125,000

William Humphreys (Vice Chair)
 
115,000

Ruth B. Bennett
 
95,000

Michael J. Blodnick
 
105,000

David P. Bobbitt
 
95,000

Steven L. Bumann
 
95,000

Marianne M. Emerson
 
95,000

David J. Ferries
 
95,000

Van D. Fishback
 
95,000

Chris D. Grimm
 
95,000

Eric A. Hardmeyer 
 
105,000

W. Douglas Hile
 
95,000

Teresa J. Keegan
 
95,000

Michelle M. Keeley
 
95,000

John F. Kennedy, Sr.
 
110,000

Ellen Z. Lamale
 
105,000

Russell J. Lau
 
95,000

James G. Livingston
 
105,000

Mike W. McGowan
 
95,000

Elsie M. Meeks
 
95,000

Paula R. Meyer
 
105,000

Cynthia A. Parker
 
105,000

J. Benson Porter
 
95,000

Thomas Potiowsky
 
95,000

John P. Rigler
 
95,000

John H. Robinson
 
105,000

Joseph C. Stewart III
 
95,000

Robert M. Teachworth
 
95,000

David F. Wilson
 
95,000







173


In October of 2016, the Compensation Committee approved the Director Fee Policy for 2017, subject to the review and comment of the Finance Agency. This policy is filed as an exhibit to this annual report on Form 10-K. Refer to "Item 15. Exhibits and Financial Statement Schedules" for additional information. Under the policy, the 2017 Director compensation fees increased. The annual aggregate fees by position are as follows:
Board of Director Position
 
2017
Chair
 
$
129,000

Vice Chair
 
118,500

Audit Committee Chair
 
113,500

Committee Chairs
 
108,500

Other Directors
 
98,000


Compensation Committee Report
 
The Compensation Committee reviewed and discussed the 2016 Compensation Discussion and Analysis set forth in Item 11 with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this annual report on Form 10-K. The Compensation Committee includes the following individuals:
Compensation Committee
Russell J. Lau (Chair)
Michelle M. Keeley (Vice Chair)
Chris D. Grimm
Eric A. Hardmeyer
James G. Livingston
Dale E. Oberkfell
Cynthia A. Parker
Joseph C. Stewart III
David F. Wilson


174


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table presents members (or combination of members within the same holding company) holding five percent or more of our outstanding capital stock at February 28, 2017 (shares in thousands):
Name
 
Address
 
City
 
State
 
Shares of Capital Stock
 
% of Total Capital Stock
Wells Fargo Bank, N.A.
 
101 N Phillips Ave
 
Sioux Falls
 
SD
 
30,930

 
47.4
%
Superior Guaranty Insurance Company1
 
90 S 7th St.
 
Minneapolis
 
MN
 
270

 
0.5

Wells Fargo Bank Northwest N.A.1
 
299 S. Main St.
 
Salt Lake City
 
UT
 
14

 

 
 
 
 
 
 
 
 
31,214

 
47.9

All others
 
 
 
 
 
 
 
34,000

 
52.1

Total capital stock
 
 
 
 
 
 
 
65,214

 
100.0
%

1
Superior Guaranty Insurance Company and Wells Fargo Bank Northwest N.A. are affiliates of Wells Fargo Bank, N.A.

Additionally, due to the fact that a majority of our Board of Directors is nominated and elected from our membership, these member directors are officers or directors of member institutions that own our capital stock. The following table presents total outstanding capital stock owned by those members who had an officer or director serving on our Board of Directors at February 28, 2017 (shares in thousands):
Name
 
Address
 
City
 
State
 
Shares of Capital Stock
 
% of Total Capital Stock
ZB, National Association
 
One South Main St.
 
Salt Lake City
 
UT
 
1,200

 
1.84
%
Bank of North Dakota
 
1200 Memorial Hwy
 
Bismark
 
ND
 
457

 
0.70

Glacier Bank
 
49 Commons Loop
 
Kalispell
 
MT
 
225

 
0.35

Boeing Employees' Credit Union
 
12770 Gateway Dr.
 
Tukwila
 
WA
 
166

 
0.25

OnPoint Community Credit Union
 
PO BOX 3750
 
Portland
 
OR
 
100

 
0.15

Midwest BankCentre
 
2191 Lemay Ferry Road
 
Saint Louis
 
MO
 
91

 
0.14

KleinBank
 
19943 County Rd 43
 
Big Lake
 
MN
 
40

 
0.06

BankWest, Inc.
 
420 S Pierre St.
 
Pierre
 
SD
 
33

 
0.05

Finance Factors, Ltd
 
1164 Bishop St.
 
Honolulu
 
HI
 
27

 
0.04

Denali Federal Credit Union
 
440 E 36th Ave.
 
Anchorage
 
AK
 
16

 
0.03

First Federal Bank & Trust
 
46 W. Brundage St.
 
Sheridan
 
WY
 
6

 
0.01

Fidelity Bank
 
7600 Parklawn Ave
 
Edina
 
MN
 
6

 
0.01

BANK
 
409 Hwy 61 S
 
Wapello
 
IA
 
4

 
0.01

Community 1st Bank
 
707 North Post St.
 
Post Falls
 
ID
 
1

 

Bank Star
 
1999 W Osage St.
 
Pacific
 
MO
 
1

 

 
 
 
 
 
 
 
 
2,373

 
3.64

All others
 
 
 
 
 
 
 
4,148

 
96.36

Total capital stock
 
 
 
 
 
 
 
6,521

 
100
%

*
Amount is less than 0.01 percent.

175


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
DIRECTOR INDEPENDENCE
General
As of the date of this annual report on Form 10-K, we have 25 directors, all of whom were elected by our member institutions. Pursuant to the passage of the Housing Act, the Finance Agency implemented regulations whereby all new or re-elected directors will be elected by our member institutions. All directors are independent of management from the standpoint they are not our employees, officers, or stockholders. Only member institutions can own our capital stock. Thus, our directors do not personally own our stock. In addition, we are required to determine whether our directors are independent under three distinct director independence standards. Finance Agency regulations and the Housing Act, which applied Section 10A(m) of the Exchange Act to the FHLBanks, provide independence criteria for directors who serve as members of our Audit Committee. Additionally, SEC rules require our Board of Directors to apply the independence criteria of a national securities exchange or automated quotation system in assessing the independence of our directors.
Finance Agency Regulations
The Finance Agency director independence standards prohibit individuals from serving as members of our Audit Committee if they have one or more “disqualifying relationships” with us or our management that would interfere with the exercise of that individual's independent judgment. Disqualifying relationships considered by our Board are (i) employment with us at any time during the last five years, (ii) acceptance of compensation from us other than for service as a director, (iii) being a consultant, advisor, promoter, underwriter, or legal counsel for us at any time within the last five years, and (iv) being an immediate family member of an individual who is or who has been, within the past five years, one of our executive officers. The Board assesses the independence of all directors under the Finance Agency's independence standards, regardless of whether they serve on our Audit Committee. As of February 28, 2017, all of our directors, including all members of our Audit Committee, were independent under these criteria.
Exchange Act
Section 10A(m) of the Exchange Act sets forth the independence requirements of directors serving on the Audit Committee of a reporting company. Under Section 10A(m), in order to be considered independent, a member of the Audit Committee may not, other than in his or her capacity as a member of the Board or any other Board Committee (i) accept any consulting, advisory, or other compensation from us or (ii) be an affiliated person of the Bank. As of February 28, 2017, all of our directors, including all members of our Audit Committee, were independent under these criteria.
SEC Rules
In addition, pursuant to SEC rules, we adopted the independence standards of the New York Stock Exchange (NYSE) to determine which of our directors are independent for SEC disclosure purposes. In making an affirmative determination of the independence of each director, the Board first applied the objective measures of the NYSE independence standards to assist the Board in determining whether a particular director has a material relationship with us.
Based upon the fact that each of our Member Directors are officers or directors of member institutions, and that each such member routinely engages in transactions with us, the Board affirmatively determined none of the Member Directors on the Board meet the NYSE independence standards. In making this determination, the Board recognized a Member Director could meet the NYSE objective standards on any particular day. However, because the volume of business between a Member Director's institution and us can change frequently, and because we generally encourage increased business with all members, the Board determined to avoid distinguishing among the Member Directors based upon the amount of business conducted with us and our respective members at a specific time, resulting in the Board's categorical finding that no Member Director is independent under an analysis using the NYSE standards.
With regard to our Independent Directors, the Board affirmatively determined Ruth Bennett, Marianne Emerson, Michelle Keeley, John Kennedy, Ellen Lamale, Michael McGowan, Elsie Meeks, Cynthia Parker, John Robinson, and David Wilson are each independent in accordance with NYSE standards. In concluding our 10 Independent Directors are independent under the NYSE rules, the Board first determined all Independent Directors met the objective NYSE independence standards. In further determining none of its Independent Directors had a material relationship with us, the Board noted the Independent Directors are specifically prohibited from being an officer of the Bank or an officer or director of a member.

176


Our Board has a standing Audit Committee. All Audit Committee members are independent under the Finance Agency's independence standards and the independence standards under Section 10A(m) of the Exchange Act in accordance with the Housing Act. For the reasons described above, our Board determined none of the current Member Directors serving on the Audit Committee are independent using the NYSE independence standards. The Member Directors serving on the Audit Committee are W. Douglas Hile, J. Benson Porter, Steven Bumann, David Ferries, Robert Stuart, and Robert Teachworth. Our Board determined, however, the Independent Directors serving on the Audit Committee are independent under the NYSE independence standards.The Independent Directors serving on the Audit Committee are Ellen Lamale and Elsie Meeks.
Compensation Committee
The Board has a standing Compensation Committee. Our Board determined all members of the Compensation Committee are independent under the Finance Agency's independence standards. For the reasons described above, our Board determined none of the current Member Directors serving on the Compensation Committee are independent using the NYSE independence standards. The Member Directors serving on the Compensation Committee are Russell Lau, Chris Grimm, Eric Hardmeyer, James Livingston, Dale Oberkfell, and Joseph Stewart. Our Board determined the Independent Directors serving on the Compensation Committee are independent under the NYSE independence standards. The Independent Directors serving on the Compensation Committee are Michelle Keeley, Cynthia Parker, and David Wilson.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The Audit Committee pre-approves all audit and permitted non-audit services performed by PwC. However, services for fees payable by us of $10,000 or less may be pre-approved by the Audit Committee Chair with notification subsequently provided to the Audit Committee.
The following table sets forth the aggregate fees billed or to be billed by PwC (dollars in thousands):
 
 
For the Years Ended December 31,
 
 
2016
 
2015
Audit fees1
 
$
1,264

 
$
1,259

Audit-related fees2
 
48

 
95

All other fees
 
2

 
2

Total
 
$
1,314

 
$
1,356


1
Represents fees incurred in connection with the annual audit of our financial statements and internal control over financial reporting and quarterly review of our financial statements. In addition to these fees, we incurred assessments of $15 thousand and $40 thousand from the Office of Finance for audit fees on the Combined Financial Report for the years ended December 31, 2016 and 2015.

2
Represents fees related to other audit and attest services and technical accounting consultations.





177


PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements

The financial statements are set forth in Item 8 of this annual report on Form 10-K.

(b) Exhibits
3.1
 
Organization Certificate of the Federal Home Loan Bank of Des Moines, as amended and restated effective May 31, 20151
3.2
 
Bylaws of the Federal Home Loan Bank of Des Moines, as amended and restated effective February 10, 20162
4.1
 
Federal Home Loan Bank of Des Moines Capital Plan, as amended, approved by the Federal Housing Finance Agency on May 31, 20151
10.1
 
Employment Agreement with Joseph E. Amato, effective May 2, 20167
10.2
 
Employment Agreement with Richard S. Swanson, effective May 31, 20151
10.3
 
Employment Agreement with Michael L. Wilson, effective May 31, 20151
10.4
 
Employment Agreement with Steven T. Schuler, effective November 10, 20143
10.5
 
Employment Agreement with Dusan Stojanovic, effective November 10, 20143
10.6
 
Employment Agreement with Daniel D. Clute, effective November 10, 20143
10.7
 
Change in Control Agreement with Glen D. Simecek, effective March 17, 2014
10.8
 
Amendment to Change in Control Agreement with Glen D. Simecek, effective May 14, 2015
10.9
 
Second Amendment to Change in Control Agreement with Glen D. Simecek, effective September 30, 2015
10.10
 
Third Amendment to Change in Control Agreement with Glen D. Simecek, effective April 27, 2016
10.11
 
General Release with Richard S. Swanson, effective June 30, 20168
10.12
 
Integration Performance Incentive Plan, as amended, effective September 25, 20144
10.13
 
Severance Policy, effective September 18, 20143
10.14
 
Amended Severance Policy, effective November 10, 20143
10.15
 
Form of Indemnification Agreement, effective June 1, 20151
10.16
 
Lease Agreement for 801 Walnut Street, Des Moines Iowa between the Federal Home Loan Bank of Des Moines and Wells Fargo Financial, Inc., as amended, effective April 27, 20045
10.17
 
Joint Capital Enhancement Agreement, as amended, effective August 5, 20116
10.18
 
Federal Home Loan Bank of Des Moines Fifth Amended and Restated Benefit Equalization Plan, effective January 1, 20169
10.19
 
Federal Home Loan Bank of Des Moines 2015 Incentive Plan Document, effective January 1, 20154
10.20
 
2017 Director Fee Policy, effective January 1, 2017
10.21
 
Federal Home Loan Bank of Des Moines Deferral Plan for Directors, effective June 1, 20159
10.22
 
MPF Consolidated Interbank Agreement, effective July 22, 201610
12.1
 
Computation of Ratio of Earnings to Fixed Charges
31.1
 
Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
 
Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
 
Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
 
Certification of the Executive Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
 
Federal Home Loan Bank of Des Moines Audit Committee Report
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

1    Incorporated by reference to our Form 8-K filed with the SEC on June 1, 2015 (Commission File No. 000-51999).

2    Incorporated by reference to our Form 8-K filed with the SEC on February 17, 2016 (Commission File No. 000-51999).

3    Incorporated by reference to our Form 10-Q filed with the SEC on November 12, 2014 (Commission File 000-51999).

4    Incorporated by reference to our Form 8-K filed with the SEC on April 8, 2015 (Commission File No. 000-51999).

5    Incorporated by reference to our Form 10-K filed with the SEC on March 30, 2007 (Commission File No. 000-51999).

6    Incorporated by reference to our Form 8-K filed with the SEC on August 5, 2011 (Commission File No. 000-51999).

7    Incorporated by reference to our Form 8-K/A (Amendment No. 1) filed with the SEC on August 5, 2016 (Commission File No. 000-51999).

8    Incorporated by reference to our Form 8-K/A (Amendment No. 1) filed with the SEC on July 13, 2016 (Commission File No. 000-51999).

9    Incorporated by reference to our Form 10-K filed with the SEC on March 21, 2016 (Commission File No. 000-51999).

10    Incorporated by reference to our Form 10-Q filed with the SEC on November 10, 2016 (Commission File No. 000-51999).

178


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.
 
 
 
 
 
FEDERAL HOME LOAN BANK OF DES MOINES
(Registrant)
 
March 21, 2017
By:  
/s/ Michael L. Wilson
 
 
Michael L. Wilson
 
 
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 and on the date indicated.
March 21, 2017

Signature
 
Title
 
 
 
Principal Executive Officers:
 
 
 
 
 
/s/ Michael L. Wilson
 
President and Chief Executive Officer
Michael L. Wilson
 
 
 
 
 
Principal Financial Officer:
 
 
 
 
 
/s/ Joseph E. Amato
 
Executive Vice President and Chief Financial Officer
Joseph E. Amato
 
 
 
 
 
Principal Accounting Officer:
 
 
 
 
 
/s/ Ardis E. Kelley
 
Senior Vice President and Chief Accounting Officer
Ardis E. Kelley
 
 
 
 
 
Directors:
 
 
 
 
 
/s/ Dale E. Oberkfell
 
Chairman of the Board of Directors
Dale E. Oberkfell
 
 
 
 
 
/s/ Michael J. Blodnick
 
Vice Chairman of the Board of Directors
Michael J. Blodnick
 
 
 
 
 
/s/ Ruth B. Bennett
 
Director
Ruth B. Bennett
 
 
 
 
 
 
 
 

179


Signature
 
Title
 
 
 
 
 
 
/s/ David P. Bobbitt
 
Director
David P. Bobbitt
 
 
 
 
 
/s/ Steven L. Bumann
 
Director
Steven L. Bumann
 
 
 
 
 
/s/ Marianne M. Emerson
 
Director
Marianne M. Emerson
 
 
 
 
 
/s/ David J. Ferries
 
Director
David J. Ferries
 
 
 
 
 
/s/ Chris D. Grimm
 
Director
Chris D. Grimm
 
 
 
 
 
/s/ Eric A. Hardmeyer
 
Director
Eric A. Hardmeyer
 
 
 
 
 
/s/ W. Douglas Hile
 
Director
W. Douglas Hile
 
 
 
 
 
/s/ Teresa J. Keegan
 
Director
Teresa J. Keegan
 
 
 
 
 
/s/ Michelle M. Keeley
 
Director
Michelle M. Keeley
 
 
 
 
 
/s/ John F. Kennedy, Sr.
 
Director
John F. Kennedy, Sr.
 
 
 
 
 
/s/ Ellen Z. Lamale
 
Director
Ellen Z. Lamale
 
 
 
 
 
/s/ Russell J. Lau
 
Director
Russell J. Lau
 
 
 
 
 
/s/ James G. Livingston
 
Director
James G. Livingston
 
 
 
 
 
/s/ Michael W. McGowan
 
Director
Michael W. McGowan
 
 
 
 
 
/s/ Elsie M. Meeks
 
Director
Elsie M. Meeks
 
 
 
 
 

180


 
 
 
Signature
 
Title
 
 
 
 
 
 
/s/ Cynthia A. Parker
 
Director
Cynthia A. Parker
 
 
 
 
 
/s/ J. Benson Porter
 
Director
J. Benson Porter
 
 
 
 
 
/s/ John H. Robinson
 
Director
John H. Robinson
 
 
 
 
 
/s/ Joseph C. Stewart III
 
Director
Joseph C. Stewart III
 
 
 
 
 
/s/ Robert A. Stuart
 
Director
Robert A. Stuart
 
 
 
 
 
/s/ Robert M. Teachworth
 
Director
Robert M. Teachworth
 
 
 
 
 
/s/ David F. Wilson
 
Director
David F. Wilson
 
 
 
 
 


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